Q2 2020 Natural Resource Partners LP Earnings Call

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Ladies and gentlemen, thank you for standing by and welcome to the natural resource Partners LP second quarter 2020 earnings at this time all participants are in listen only mode. After the speaker presentation that won't be a question answer session ethical question during the says.

Can you will need to press star one on your telephone if required any further assistance. Please press star Zero I will now understand the conference over to Miss Tiffany's them. Its manager of Investor Relations Ma'am you may begin.

Good morning, and welcome to the natural resource Partners' second quarter 2020 conference call today's call is being webcast and a replay will be available on our website.

Joining me today are correct, you know president and Chief operating Officer, Chris Nolan, Chief Financial Officer, and Kevin Craig Executive Vice President of coal.

Some of our comments today may include forward looking statements, reflecting NRP views about future events.

These matters that involve risks and uncertainties that can cause our actual results to materially differ from a forward looking statements.

These risks are discussed in NRP used form 10-K, another securities and Exchange Commission filings.

We undertake no obligation to revise or update publicly any forward looking statements for any reason our comments today also include non-GAAP financial measures.

Additional details and reconciliations to the most directly comparable GAAP measures are included in our second quarter press release, which can be found on our website.

I would like to remind everyone that we do not intend to discuss the operations our outlook for any particular colette fee or detailed market fundamentals.

In addition, I are free to general resources public disclosures and commentary for specific questions regarding our Subash business segment.

No I would like to turn the call over to crack Nunez, our president and Chief operating officer.

[noise] [noise]. Thank you Stephanie good morning ill I hope you and your loved ones are safe and healthy NRP continues to operate under CDC guidelines government imposed rules and company remote word protocols, our employees are safe and the partnership is conducting business as usual.

Our management succession plans and delegations of authorities or employees should we need them.

The covert 19 pandemic has had a significant negative impact on demand for steel electricity in glass, which translates to lower demand for the coal in soda Ash, we produced year to date coal production in the United States is down 27% compared to 29 team.

Global soda ash production is down approximately 15% year over year.

The outlook for coal and soda ash markets remains uncertain.

Over 19 numbers wrong continue to rise across the U.S.. However, we believe that our liquidity free cash flow generation and the fact that our parent company bombs do not mature until 2025 provides us with the financial flexibility to manage through a prolonged downturn.

At the beginning of the pandemic and in order to best prepare for extreme adverse economic conditions our board.

<unk> cash by spending our first quarter common distribution and electing to pay in college and one half of our preferred unit distribution.

Based on the performance of our businesses since those decisions, we announced today that our board has decided to pay a common distribution and pay in cash the full distribution all our preferred units for the second quarter.

In addition in June we redeemed in cash the preferred distribution that was paid in kind for the first quarter.

Despite the negative economic backdrop, NRP continues to generate cash and pay down debt.

We generated 112 million of free cash flow over the last 12 months paid all $48 million of debt and added $40 million to common unitholders equity before noncash accounting impairment.

Our cash flow coaching.

Which is our free cash flow remaining after paying our private placement debt amortization and distributions on our common and preferred units was $18 million over the same period.

It is likely or cash flow cushion will trend lower in the near future absent a significant improvement in global economic activity.

We ended the quarter with $211 million of liquidity, consisting of 111 million of cash and 100 million of unused borrowing capacity.

We believe that metallurgical and thermal coal prices are near or below operators cost of production in the United States.

All almost all of our lessees are currently operating including those that have temporarily idled buys at the start of the pandemic production levels are down and inventories are up.

A significant positive development in our coal segment in the second quarter relates to our largest lessee foresight energy.

We worked with foresight to help them develop a plan that enabled them to emerge from bankruptcy and we entered into lease amendments pursuant to which for size agreed to make fixed payments to us totaling $49 million this year and 42 million next year.

They used fixed payments provide cash flow certainty for in RP.

The level of greater than had been anticipated as the coal industry manages through difficult market conditions compounded by the covert 19 pending.

Beginning in 2022.

Pre bankruptcy provisions of our leases will kick back in providing economic upside if coal markets improve.

Global asset soda ash prices are down roughly 25% from a year ago to levels that are below the cost of production of many of the world synthetic soda ash producers and near the cost of production for some of the natural soda ash producers.

Although we've begun to see modest increases in activity in the global auto container and construction industries, which should drive increased demand for soda ash, we expect to soda ash industry to face headwinds until the global economy gets back on track.

Our investment in June or Wyoming has not been immune to these adverse economic forces in general announced earlier. This week that it is the spending cash distributions until conditions improve.

With that said, we believe our facility is competitively positioned as one of the lowest cost producers of soda ash in the world and we have a positive view of its long term prospects.

In many respects, we now face the most uncertain business environment in decades.

But I believe the numerous transformative actions completed in recent years to rightsize, our business solidify our capital structure and build liquidity have positioned in RP to continue de leveraging and de risking the partnership by using internally generated cash to pay down debt.

And with that I'll turn the call over to Chris to cover our financial results.

Thank you, Greg and good morning, everyone.

I'd like to start out summarizing some significant items that are impacting comparison between the second quarter for 2000 22000 Nike.

First we recognized 132 million of asset impairment expense in the second quarter 2020.

Primarily related to weaken coal market pounded by the cobot 19th endemic.

Resulted in a termination of certain coli.

As a reminder, asset impairment is a non cat M. In did not have impact for debt covenant compliance.

And second we recognized that 29 million loss on early extinguishment of debt in connection with the refinancing of our on and revolving credit facility in last year's second quarter.

These refinancings reduced our ongoing interest.

Extended the maturity of our parent company bond has 2025 and significantly improved our liquidity and financial flexibility.

I'll now turn to our overall segment specifically, though.

During the second quarter 2020, we generated 20 million up operating cash flow and 7 million of net income from continuing operation.

Excluding the impact of assets.

Okay.

Our whole royalty and other segment generated 34 million of revenue and 32 million of operating cash flow during the second quarter 2020.

These results were lower as compared to prior quarter, primarily due to a weakened market for metallurgical coal because of the decline in global steel Nate.

Both sales volumes and prices for our metallurgical coal gold were lower in the second quarter 2020 compared to the prior year quarter.

In terms of our co royalties sales mix metallurgical coal made up approximately 70% of our total coal royalties sales volumes and approximately 80% or cold royalty revenue during the second quarter 2024.

In addition, weaker domestic and export thermal coal markets resulted in lower revenue from our thermal coal properties compared to prior year quarter.

Domestic and export thermal coal market remains challenged by lower utility demand continued low natural gas prices can a secular shifts to renewable energy.

The cobot 19 pandemic found it already weak coal pricing and demand in our co left the are having a difficult time.

With that being said I'd like to reiterate Craig's comments regarding the positive outcome for foresight energy our largest lumpy.

Fourth by continues to operate at Hillsborough, William computer get money complexes with longwall mining system.

Highly productive mining method, coupled with favorable coal Galaxy has resulted in these mine thing among the faces.

Productive and lowest cost underground coal mines in the U.S.

Fourth that emerge from bankruptcy in the second quarter 2020, with the significantly improved capital structure, well positioned to compete in the domestic and global for multiple market.

As Greg noted earlier, they will be paying over 49 million this year and 42 million in 2021.

Through the first six months to 2020, we received 21 million of the 49 million due to a this year.

Beginning in January 2022, fourth type payment obligations will be calculated in accordance with it for that provision of the original lease agreement.

Except with respect to the Macoupin.

Well the Macoupin markets idle fourth I will pay an annual fee to a 2 million each year through 2023.

We continue to leap forward there typically.

And finally as previously mentioned second quarter 2020 coal royalty steady results were impacted by 132 million noncash asset impairment.

Moving to our second business segment, so that we received $7 million of cash distribution from Genero made during the second quarter 2020.

Compared to 9 million in the prior quarter.

In the second half 2019 dinner, Wyoming decided to reduce annual cash distribution.

Approximately 28 million in order to fund a multiyear capacity expansion project.

However, as Craig noted the coven 19 pandemic has caused a negative impact on the soda ash industries, and we expect significant headwinds until the global come they get back on track.

Our soda ash revenues and other income in the second quarter 2020, lower by 14 million compared to the prior year quarter and just in Wyoming suspended distribution the getting this model to conserve cash.

<unk> greater financial flexibility to whether these weaken market conditions.

While we were unable to predict the ultimate impact that coping 19 may have understood that business.

Interoil and has taken a number that reduced both operating and capital costs and maintaining financial flexibility amid the current market volatility and we remain confident it long term fundamentals.

Our corporate and financing segment costs declined 32 million ended the second quarter 2020 compared to the prior quarter.

Merely due to the 29 million loss on early extinguishment of debt in connection with refinancings ever bonds and revolving credit facility and last year's second quarter.

The remaining $3 million cost reduction.

I really do lower interest expense, because the 48 million to debt we have repaid over the last 12 month.

Operating cash flow was 7 million lower compared to prior quarter, primarily due to the timing of interest payments on the parent company bond refinancing the second quarter 2019.

Interest payments are now due in June in December for our nine and in one 8%.

Compared to do in March September on the previous tenant one half.

We have been and remain focused on the things we can control protecting your business with a clear priority on cash and liquidity.

And if it is certainly industry and global environment.

And with that I'll turn the call back over to the operator.

As a reminder to ask a question you wouldn't be superstorm one on your telephone to withdraw your question first a pound or Heskey. Please standby why we somehow they can win a roster.

Your first question Thats, one in line of Mark Levin with the benchmark.

Great. Thanks, very much congratulations on the quarter.

Some questions, let me start off it if I can with the distribution and the decision to resume the quarterly payment I guess it. It reflects several factors, but I guess, what coffee, but off guard was just given how how weak the underlying coal markets are and your decision or the board's decision to resume it maybe you can.

Give some color around what went into that decision and why why you decided to do it now.

Mark. This is this is Craig I would say that.

We considered the board board considers a variety of factors the the performance of the business since the Kobin.

Crisis hit and the near and intermediate term outlook that we have our liquidity.

Our cash generation that we currently have and and win weighing all those it a bit appeared that it was a prudent move to to make the distribution.

[noise] doesn't mean that Ah if there's.

Yes, there could be some significant event in the future that causes our results to come in considerably worse than than the run rates were currently generating could cause us to change our mine, but but at this point. It just it appeared like the a good moved to pay the distribution.

Got it and yeah I just you know it was something they sort of caught me a little off guard I guess, even in reference to Shneur, Wyoming, you know suspending that 7 million dollar distribution, but that's that's fantastic I assume the board wouldn't have done and if they weren't confident that they could keep it going in this type of market condition.

The other questions going ask is I think you referenced last quarter, maybe free cash flow cushion or free cash flow in general just.

Turning turning negative do you feel that way today it sounds like it would it's coming down but do you still echo those same settlements in terms of what you see today, Mark I said I think it it's very possible that our cash flow cushion could didn't as it friends lower could could go below zero at some point.

If you go negative absent some turnaround in dramatic improvement in the global economy in the near term.

But I was always balance the negative cash flow cushion with the amount of of liquidity that we actually have.

And I and look at those two things together, but yes, I think there's always a chance at least can to existing conditions extend out for a prolonged extended period that you're just you could see the cash position go negative.

[laughter] and related to that point is is there a minimum liquidity number that you guys would like to keep or have.

Oh Dan.

We don't have a target that where we're sharing mark as far as the liquidity.

It depends on the the facts and circumstances and the so more optimistic we are about the the outlook going forward. The the lower that number can be and vice versa.

Right now work, we're comfortable where we are with our our liquidity number now we think over 200 million of liquidity. So a with a over $100 million of cash. We think that's that's a good number in light of the market demand and our view of the market today.

Got it and then my last question just you know.

Maybe some color around the Illinois basin royalty rate I I notice that it.

Step below $2 or ton I wasn't sure. If there was something funky from an accounting perspective going on or if that sort of the new run rate to think about because there's obviously a materially materially different from a royalty revenue per ton a perspective in the Illinois basin that it's been historically.

Well, there's couple of factors at play at that Chris you want to cover there to talk about that are Kevin.

Yeah, I I'd be happy too.

Greg and Mark you, absolutely we tried to make sure you time and in our remarks earlier, but it does it. This is driven by the agreement the that we entered into with foresight, where were now receiving a fixed amount.

Overtime.

That's the primary driver for four for TV.

The result here.

Got a change in the royalty rate say, it's just when you you can you do the calculations. It appears that the royalty rates changed and it's just gotta intervene. That's just makes sense just for this intermediate time of 2020 and 2021. When we have six times know that makes that makes perfect sense is there any sense I know you mentioned the distribution being.

Suspended.

As it relates to soda ash business. It any reason to believe that did it would presume in the fourth quarter or I mean, do you have any any color or thoughts on you know how does how to think about.

I mean actually that'll be a zero going forward until notified otherwise, but is there any any color maybe you can give on that.

I can't and we can't give you any color older than what Gener has announced and not you know just generally speaking they save analysis that their suspended until the market improves I will tell you. This I think you need to be prepared for a.

You know some some extended period multiple quarters for sure of continued tough sledding in the soda ash business I will say that there are definitely green shoots coming out if you look globally, especially global demand is starting to pick up a flat glass.

Yes, and container glass is as strong here in the U.S.

But I think it's going to take a little while for that market to come back and.

And so I think for the foreseeable future.

I think that business is still trying to get dislikes back underneath it but that's all I can I can share and I I'd suggest directing questions about distributions to generate.

And that makes makes perfect perfect sense, what final one just one for me.

And I think I've asked this in previous calls can you talk a little bit about the minimum structure and maybe how to think about that as as a floor from a revenue perspective for the business at least you know as you look across your portfolio for people who might be concerned about.

Negative net pricing sentiment all that kind of stuff, maybe just talk a little or about the revenue the floor revenue composition.

Well Mark as as we've talked before explained to you that the real key with the minimums.

He is the extent to which we had deficiency payments. So that if if we have a and obligation under a minimum obligation from a alessi to us under lease and they do not generate sufficient royalty income to cover that minimum then whatever the differences between the minimum.

And the amount that they actually paid us and royalty income is the deficiency and so is the deficiency payment.

We have typically if you look back over the last year couple of years, we've been scenes 15.

$20 million.

Roughly of deficiency payments that <unk> that we receive.

Across all of our portfolio combined.

Some of those of course have been associated with with four side a lot of that's with four side, because which in this environment now that we have a fixed payment structure was four side for this year. It next year, we won't be receiving deficiency payments per se from them. So I think the right way to think about it is that as you look forward sale.

Over the next year, so I think that.

Assuming that.

No. It gets really bad to maybe its days he gets met price and get even worse than we are now I think it's fair to think of it in terms of maybe something between 10 and $20 million of deficiency payments, but weve agrees. We've been received great. You have anything you want to add to that.

The only thing I'd like to add Greg I think I think that we summarized that well get that Mark. We will do include in the footnote Eric you a disclosure at the total amount contractual minimums. We have so if you wanted to get a perspective of what it that total minimum now we do have that.

Thank you.

Like the key thing.

Right now how much of those.

Good.

Yeah.

Okay.

15 to 20 million.

Yes.

Got it.

Got it very helpful. Thank you gentlemen, I'm very much and congratulations on the foresight agreement.

Thank you very much mark appreciate that.

[noise] at this time I would like to remind everyone in order to ask a question. Please press Star then the number one I got telephone de bad again that started and then number one.

At this time there are no further questions I would like to turn the call back over to Mr., Greg Nunez.

Well. Thank you everyone. I appreciate you taking time to join our call.

And appreciate you're interested in RP and I hope that you and your family stay safe and healthy.

And until next month take care.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

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