Q4 2020 NACCO Industries Inc Earnings Call
Please go on.
Good morning, everyone and welcome to our 2024th quarter earnings call I am Christina <unk> and I'm responsible for Investor Relations at Nacco industries.
You for joining us.
This morning.
Joining me today are J C Butler, President and Chief Executive Officer of both Nacco, and North American coal and Elizabeth Lovelan Nacco, as Vice President and controller yesterday, we published our fourth quarter and full year 2020 results.
And filed our 10-K.
Copies of our earnings release, and 10-K are available on our web site.
One who is not able to listen to today's entire call. An archived version of this webcast will be on our website. Later this afternoon and available for approximately 12 months.
Our remarks that follow including answers to your questions contain forward looking statements. These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed on the forward looking statements made here today. These risks include among others.
Matters that we have described in our earnings release issued last night and in our 10-K and in other filings with the SEC. We disclaim any obligation to update these forward looking statements, which may not be updated until our next quarterly earnings conference call if at all.
In a moment I will discuss our fourth quarter and full year results, but first let me turn the call over to our president and CEO of JC Butler for some opening remarks, Jason.
Thank you Christina and good morning, everyone.
We put 2020 behind us I'm pleased to be looking forward for the future.
Now the big believer the changes make us stronger definitely believe that the challenges we faced in 2020, both of our team of our business stronger.
I hope the stores today by recognizing our employees for doing an incredible job for our customers and for the company.
While a portion of our employees have been working remotely of vast majority of our team has been coming to work to do their jobs every day since the pandemic started.
As the central workers they needed to come to work on they did.
Of those working remotely seem to be putting it more hours of producing more output than ever before I cannot be more pleased with how well our entire team has managed through the situation and adapting to the constantly changing work environments by truly appreciate our employees' commitment to supporting our customers while also working to keep themselves.
Others say I simply cannot thank our team enough for their great work.
In addition to managing changes associated with the pandemic. We also dealt with disappointing news from some of our customers in 2020, which affected both our fourth quarter and full year results Christie will cover this more in detail.
The detail in a moment, but it's safe to say that our 2020 financial results were disappointing.
In our minerals management segment, we expected lower royalty income due to the natural decline in production of existing natural gas wells in Ohio that the COVID-19 related collapse of natural gas prices made this worse than expected prices of recovered quite a bit from the lows in early 2020, but the pace of new well development.
Development has slowed down quite a lot.
We also experienced a significant reduction in the earnings at our coal mining segment, our Camino real mine in South, Texas on our Caddo Creek mine in East, Texas ceased production in 2020, and we generally saw a modestly lower levels of coal requirements from our customers. Some of the reduced demand for coal was COVID-19 related.
Which somehow reduced demand somewhat reduced demand for electricity, but it was perhaps even more so related to extremely low natural gas prices.
Despite the challenges experienced in 2020, we continue to have a positive view of on long term business prospects, given our strategies to grow and diversify the strong pipeline of business development opportunities and the quality of our team.
We continue to believe the coal is going to be an important part of electric generation capacity in the U S. I think the recent events in Texas show US how important that is to have generation capacity that is readily dispatch for.
We are very actively engaged in helping our coal customers be competitive and we'll continue to do so but we are fully aware of the challenges faced by our legacy coal mining business.
It's why we continue to push forward on key initiatives to grow and diversify we are deliberately diversifying into other businesses that leverage our core skills or capabilities of our reputation.
North American mining has been growing quite rapidly over the last several years of I was pleased to see improved operating profits from this business in 2020, we've.
We've expanded the scope of North American mining business development activities to include a broad range of minerals and materials and by leveraging our core mining skills to expand the range of contract mining services, we can provide.
We can provide specialized services like operating draglines or other specialized piece of specialized pieces of equipment, but we can run an entire mine like we would do with the new lithium mine that we are developing for lithium Americas in Nevada.
There's no question that the pandemic slowed the pace of North American Mining's business development activities in 2020, but our outlook for growth in 2021, including growth outside of Florida is strong.
While the North American mining didn't close on any on many new projects in 2020 their pipeline of potential new projects is bigger and better than ever.
Shifting to our minerals management segment.
We're growing and diversifying by buying mineral and royalty interest in premier basins in the U S. While COVID-19 reduced our oil and gas income depressed oil and gas prices and the OPEC price war created a buyers market in 2020, making this a good time to large launch of our acquisition program.
In 2020, we were able to acquire mineral and royalty interest in the Permian Basin in Texas for a total purchase price of about $14 million. These acquisitions aligned with our strategy to grow and diversify where we're acquiring mineral and royalty interest in oil rich basins with the balance of near term cash flow yields on loans.
Term growth potential this offers diversification from our legacy mineral interest, which are predominantly in natural gas rich basins largely in southern Ohio.
Mitigation resources of North America is making great progress expanding its business model with the number of banks and development in the southeast we're finding that we can create real value by leveraging our company's strong environmental skills and reputation for doing quality work to preserve and protect streams and wetlands mitigation resources is.
Demonstrated good success in its first few years in business and has a very strong pipeline of potential new projects.
We certainly will evaluate new coal mining projects, but I don't see a lot of those coming available and even if they do we will be very careful to stick with our management fee business model and think carefully about the risks and opportunities of getting new project Baidu.
I do want to mention the voluntary separation program that took place.
<unk> in the fourth quarter. This was focused on reducing employee costs at the headquarters level, which directly affects our total G&A costs.
This came about in response to some of the challenges we faced in our.
Our coal mining segment, but also in recognition of the investments we've made in new information platforms and systems over the last several years.
Between the VSP program and some voluntary departures, we've reduced our head kind of head count by about 25% at the headquarters level.
This wasn't an easy decision all of our employees are important part of our team and many of these were very long term employees, but it was what we needed to do well.
We will end up filling of few of these positions, but overall our plan is to leverage our new it tools and modified processes to operate more efficiency.
So with that I'd, just say again that while 2020 was not an easy year for us I'm impressed by the tremendous accomplishments of our incredible team of employees and I'm proud of the progress we made to advance our goals in spite of the challenges for 2020 through us.
And of course all of US are excited about building on this progress in 2000 22021, we're purposely diversifying in the three strong businesses that leverage our core skills capabilities and reputation and I've got a lot of confidence in what these businesses can become in the future now let me turn the call back over to Christie to cover our results.
<unk> for the quarter.
Thank you Casey I'll start with the consolidated quarter and full year results and then provide additional detail for the segment level.
Casey mentioned, we faced many challenges in 2020, which culminated and disappointing fourth product full year results for.
For the fourth quarter, we reported the consolidated operating loss of $8 million on the net loss of $5 4 million for 77 per share.
There were $9 $8 million of charges taken during the 2024th quarter, which I will cover in more detail on the individual segments. The contributed to the losses in the quarter for.
For the 2020 full year, we reported consolidated operating profit of $13 $4 million and net income of $14 $8 million for $2 10 per diluted share and that compared with consolidated operating profit of $38 $8 million on net income of $39 $6 million of $5 66.
66 cents per share for the 2019 for yet.
Now, let me provide a bit more detail on certain segment results.
And the 2024th quarter. The coal mining segment had an operating loss of $400000 compared with operating profit of $6 4 million in the 2019 fourth quarter the curve.
On a year operating loss includes for the following.
Our non cash charge of $2 million for the write down of Mississippi lignite mining company's call inventory to net realizable value of.
The $1 $5 million charge for cost associated with our voluntary separation program implemented in the fourth quarter of 2020.
And the $1 $1 million noncash asset impairment charge for a legacy database of acquired in the 19 nineties with information on Covid.
If we exclude these charges the coal mining segment operating profit declined from last year's fourth quarter, primarily because of substantially lower results at Mississippi Lignite mining company with with.
On the volume from a reduction in tons delivered during the fourth quarter.
This reduction in tons contributed to an increase on the cost per ton delivered.
Also contributing to the lower operating results for the additional wind down costs at Camino real fuels not covered by <unk> former customer.
Operating expenses and reduced earnings of unconsolidated operations.
And then on management segment reported an operating loss in 2020 compared with operating profit in 2019.
On an increase in fourth quarter of 2020 revenue.
During the fourth quarter, we wrote off of $6 7 million of capitalized leasehold costs on prepaid royalties on legacy coal reserves for our prospects for development.
<unk> ended in 2020.
Excluding the asset impairment charge, the 2024th quarter operating results on the minerals management segment increased over the 2019 fourth quarter, primarily because of new Io natural gas wells and an increase in natural gas price it.
Those are the significant factors affecting the fourth quarter results now, let me turn to our outlook in the.
<unk> segment, we expect 2020 coal deliveries for the comparable 2012.
2020 based on current expectations of current customer.
Climate.
However, the coal mining segment 2020 operating profit is expected the degree significantly from 2020.
This decrease was primarily because of substantially lower earnings expected at Mississippi Lignite mining company and a reduction in earnings at the unconsolidated coal mining operations.
While on Mississippi Lignite mining company results of because of an anticipated increase in the cost per ton of coal delivered in 2021 compared with last year due in part to an increase in depreciation expense associated with development of a new mine area.
The anticipated reduction in earnings at the non consolidated coal mining operations at <unk>.
<unk> to be mainly driven by a reduction in fee based earnings at the Liberty mine is the scope of final mine reclamation activities there have been reduced.
This lower operating profit is expected to be partially offset by a decrease in operating expenses.
Primarily due to lower employee related costs, resulting from the 2020 voluntary separation program, partially offset by higher insurance expense.
In 2021, we expect North American mining operating profit to increase moderately over this year with the with its existing customer contracts.
However, we are pursuing the number of growth initiatives that if successful would be accretive to future earnings.
And in addition, I would like to highlight that in January of this year. The <unk> project received a record of decision from the U S Bureau of land management. Following the completion of the National Environmental Policy Act process.
This decision represents an important milestone on the development and the permitting of the <unk> projects and the more permitting decisions are expected later in 2021 with production expected to begin in the second half of 2022.
Excluding the impact of the $6 $7 million write off taken in 2020, we expect minerals management operating profit to be down substantially in 2021 from 2020.
This decrease is primarily related to a reduction of royalty income from existing Ohio mineral and royalty assets as a result of expected lower natural gas prices pure expected new wells in Ohio, lower commodity prices and the natural production decline that occurred early in the life of a well.
Let me spend a minute talking about our investment plans for minerals management.
As Jason mentioned, we acquired approximately $40 million of mineral assets.
In 2020, and we are targeting an additional $10 million of investments this year.
While we expect these investments to be accretive to earnings each investments contribution will be dependent on the timing guidance.
On stage of mineral development of the reserves required on.
On a consolidated basis, excluding the favorable impact of potential business development activity we.
We expect substantially lower 2021 pre tax earnings.
As a result of lower consolidated operating profit and anticipated increase in interest expense and a reduction in interest income.
These lower pre tax results are expected to be partially offset by an increase in the benefit from income taxes, primarily due to a benefit from percentage depletion of certain mining operations.
Consolidated pre tax income and net income.
<unk> to be higher in the second half of 2020.
In the first half of 2021, primarily due to direct to current expectations on the timing of customer requirements in the coal mining segment.
Overall, while we expect consolidated net income this year to decrease significantly from last year as J P mentioned, we will still continue to view of the long we still continue to view of the long term business outlook positively because of the strong pipeline of potential new projects.
The COVID-19 pandemic flow certain business about the so the.
Development initiatives in 2020, but the outlook for growth in the North American mining and minerals management segment.
And then our mitigation resources in the North American business remained strong.
In addition, the voluntary separation program that occurred in the fourth quarter was substantially completed by the end of the year. As a result of this program. We are expecting estimated net benefit of between one five and $2 $5 million annually beginning in 2021.
Moving away from results, let me briefly provide some cash flow of information.
Ended the year with consolidated cash of $88 5 million.
And debt of $46 5 million compared with consolidated cash of $97 6 million and debt of $23 1 million at the end of the third quarter.
In addition at the end of the year, we had availability of $117 million under our $150 million revolving credit facility.
We believe that of conservative capital structure on liquidity are important given our strategic initiatives to grow and diversify.
All of the changing trends occurring in the energy market.
That said, our cash flow before financing activities varies with changes in customer demand, particularly on the coal mining segment as well as changes in earnings of the minerals management segment working capital changes capital expenditures investments on loyalty and mineral interest as well as changes in income taxes and other factors.
For the 2020 full year Nacco consolidated cash flow before financing activities was the use of cash of $48 5 million and included a significant use of cash related to working capital capital expenditures and the acquisition of mineral royalty interest.
Anticipating positive cash flow before financing this year, but at a level still below the cash we generated back in 2019 now let me open up the call for your questions.
As a reminder to ask a question. Please press Star then the number of one on your telephone keypad.
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Your first question comes from Andrew Cohen for.
Compounding your line is open.
Hello, Good morning.
Good morning.
Yes.
My first question.