Q1 2021 NACCO Industries Inc Earnings Call

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Ladies and gentlemen, welcome to the <unk> industries first quarter earnings call.

Yeah.

Apologies, ladies and gentlemen, and welcome to the <unk> industries first quarter earnings call. My name is Katie and I'll be coordinating your call today, if you'd like to ask a question. During the presentation. You may do so by pressing star one on your telephone keypad.

I'll now hand, you average all highest Christina could begin Christina. Please go ahead.

Thank you good morning, everyone and welcome to our 2021 first quarter earnings call I am Christina from that trial and I am responsible for Investor Relations at Nacco industries.

For joining us this morning joining.

Joining me today are J C Butler, President and Chief Executive Officer of both Nacco and North American coal.

I believe it's useful in evaluating the companies operating performance.

Reconciliation for these non-GAAP measures can be found in our earnings release on on our website.

And I'm on our discuss our first quarter results first let me turn the call over to our President and CEO JC Butler from opening remarks Casey.

Good morning, everyone on very glad to be on the call was not.

On a lot of good news to report on mentioned that are year and call that I was optimistic about our future because I have a lot of confidence in our strategies to grow on diversify and the first four months of this year. We've already delivered some very positive developments north and entered into a 15 year mining services contract with a new customer.

On the line storm limestone quarry in Central Florida will operate a smaller dragline. This quarry until a larger draglines. It will increase production capacity is relocated and commission, we expect deliveries to be approximately one 5 million tons annually once mining commences with the larger drag line.

In 2023.

North American mining also amended a contract with an existing customer to operate an additional dragline at an existing line stone quarry in Florida and in April North American mining entered into a new mining services contract with an existing customer for greenfield sand and gravel quarry in Indiana. This.

Customer is hopeful the quarry will operate from multiple years, providing aggregates for a multiyear transportation infrastructure project near Indianapolis, We expect deliveries from this cory to be between 600000 1 million tons per year. All of these new or revised contracts are expected to be accretive two or 2021.

Items.

As I said before.

There's a lot of growth potential in this business in a note that north American Mining's pie quite a potential new projects is bigger and better than ever.

Our minerals management segment is also showing continued success in its efforts to grow on diversified catapult mineral partners, which is our business, but manages the oil and gas part of our minerals management segment completed a small acquisition in the Delaware basin for purchase price of $300000 on the larger acquisition in the Eagle.

Fort Mason vs.

Patients are available on our website at Nacco Dot com I encourage interested parties to read these documents with that I'll turn the call back over to Christie to cover our results for the quarter in more detail Christine. Thank you Jason.

I'll start with the consolidated quarter accounts, and then provide additional detail at the segment level.

On a consolidated basis, our first quarter operating profit improved nine 9% to $8 3 million up from $7 $6 million in 2020, driven by substantially higher earnings at our coal mining segment. This improvement was partly offset by lower earnings at our North American mining segment and an increase in unallocated.

Employee related expenses.

Our consolidated net income also increased significantly up 45, 3%.

$9 million from $1 25 per share from $6 2 million or 88 per share last year.

<unk> operating profit as well as favorable changes in the market value of equity Securities, which are reported in other income drove the significant improvement in net income.

It's a decrease compared with the prior year when you exclude prior year charges, a $4.6 million related to an asset impairment in inventory right down and our voluntary preparation program.

The decrease in operating profit is primarily attributable to substantially lower full year earnings expected to Mississippi, Lubec mining company and reduced earnings at the unconsolidated coal mining operations.

A decrease in employee related costs, resulting from low or head count primarily from our 2020 voluntary separation program is expected to be partially offset by higher insurance expense.

In addition, our coal mining segment EBITDA is expected to increase moderately over the prior year, excluding the $1.1 million asset impairment charge recognized in 2020.

At North American mining, we expect an increase in tons delivered operating profit and segment EBITDA for the 2021 full year over last year as a result of increased production under existing contracts and contributions from new mining contracts.

The increase in operating profit is expected to be partially offset by an increase in operating expenses, primarily due to higher employee related costs.

And Ah minerals management segment, we expect full year operating profit and segment EBITDA to decrease moderately from 2020, excluding the impact of seven $3 million of impairment charges taken last year and an income and any income related to acid acquisitions made after March 31, 2001 income.

Including the ones JC discussed.

And anticipated reduction on royalty income from existing Ohio mineral on royalty assets is expected to be partially offset by royalty income generated from the premium based on mineral interest acquired in 2020.

Taken into big into account the transactions entered into early in the second quarter minerals management is targeting an additional $5 million of investments in mineral on royalty interest during the remainder of 2021.

On a consolidated basis, excluding the prior year charges previously mentioned as well as the favorable impact of additional business development activity, we expect substantially lower net income as a result of lower operating profit and anticipated increase in interest expense and a reduction in interest income.

Consolidated EBITDA in 2021 is expected to increase moderately over 2020 adjusted for prior year acid impairment charges.

We also expect a tax benefit rate between 3%, 5% this year.

Moving away from results expectations, Let me briefly make some cash.

Flow information.

A lot of there.

A lot of that product goes into infrastructure and it also goes into cement plants that are used for all sorts of other products.

The aggregate industry.

Overall is.

It's kind of an infrastructure type of industry.

There's a lot of research.

Publicly available.

Aggregates go.

So north American mining is focused on.

Mining all sorts of things that are not coal.

Aggregates as a key part of it and yes, we expect to do a lot more of that in the future. Now. We also were going to be mining lithium there are lots of other things that we can mine as well, but aggregate certainly are on a sweet spot for US. We think we've got a lot to bring to the table with.

On the aggregates producers across the country.

As far as infrastructure spending.

Yes.

It really determines.

<unk> of aggregates consumption quite a bit because as we all know rates you build highways.

You build roads and that leads to more commercial development or real estate development, which.

It takes more aggregates as well so I think it all feeds into.

The industry overall, and I think it's a positive I think more infrastructure spending as a positive.

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Factor for that industry.

Got it.

Can you talk about inflation protection like on your contract index to general price levels to wages that fuel costs, but.

But I'm curious if you think meaningful higher inflation would have a notable impact.

<unk> financial results.

Well so what are our.

On our management fee contracts, which is where a majority of our income comes from our coal segment.

All of those fees are tied to some sort of measurement of inflation whether it's.

GDP.

Some CPI metrics all of those fee levels are tied to inflation.

When you look at the Red Hills mine MLM see that as a fixed price contract.

But the things that make up that fixed price are all tied to a basket of indices that are all in one shape or another related to inflation.

It's really kind of more so the components as opposed to a single aggregate.

Index like CPI, it's more a component based on formula.

North American mining has got a combination of.

Contracts some are management fee.

Similarly structured.

They also have some fixed price agreements that are similarly structured as well.

Mitigation resources and minerals management does have completely different business models.

That art.

Tied to any kind of inflation index.

Inflation certainly effects.

Those businesses as well from a cost and revenue standpoint.

To answer your question.

No no.

Oh, Yes, I was wondering if you could help shareholders understand how much due decreases in total tons demanded by customer decrease your profit per ton at that mine. So for example, if a customer decides to operate a plant equally or youre on.

<unk> operate at a lower average dispatch level does that change the approach on profitability of that mine in a big way.

I mean, we don't disclose the.

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The individual fee levels at any of the mines.

Thank you can sort of look in general.

I think youre talking about the coal segment so.

Describe that.

We don't disclose the individual fee leathers levels. I think you can look at that segment in total and kind of get an idea.

What it is on average.

Some of the contracts.

You have.

Some of the contracts do have.

Tears in them.

Lower.

Levels of production and deliveries have a higher fee than another.

Higher level, its a lower fee.

And I think thats on that as good as I can do for you on the on the management fee mines at Red Hills, We do MLM say, sorry, we do run.

Everything that runs through a stockpile, we sell coal after stockpiled more obviously the more volume that we produce it reduces our costs.

Which reduces the cost and our inventory, which improves our profit is on that in the first quarter.

That is really a lot to regular manufacturing business, where you're kind of factory at a higher level and up low with lower average cost.

Got it.

And then what criteria the management look at core win mitigation resources of America will become its own reporting segment I'm. Just curious I mean is there like a heart that percentage of revenue hurdle.

It takes a certain level of revenue operating profit breakeven I'm, just kind of curious how management thinks about that.

I'll also hop back in the queue.

Okay.

I'm going to give you my take and then I'm going to hand, it over to Liz to give you a more technical.

Analysis.

The business right now is really it's a very young business.

Hey.

And it's a development stage, it's growing really nicely, we've got a terrific team.

Developing that business and they seem to have carved out.

On a pretty attractive niche in that industry that we think is going to be pretty successful.

It right now is too small.

To have its results be anything thats really meaningful to you.

The understanding of our business.

Which is why it's tucked inside on consolidated.

I would anticipate though at some point in the future, it's going to be big enough that it can turn into its own segment.

And.

We'll obviously be providing more reporting information on that.

When that happens I mean, it's it's hard to tell I would I would say that the earlier conversation we had about infrastructure also.

Relates to that business because.

Anytime there is highway construction or.

Any color on commercial development.

Can depending on what part of the country, you're in and what the.

Local.

Topography is like it can affect.

The demand for mitigation credits and so that can be good for that business as well.

But with that more general statement I'll hand, it over to Liz.

Yes, we do evaluate our segment.

At least annually and more offset things change, but we look at revenue operating profit net total assets.

From a GAAP perspective, and so and how management views the business on how we line up.

Until we have reached the level, where it's material we would reconsider how do we want to tell the story in our MD&A pressures on.

Changing on any segment reporting.

Got it cool thanks, a lot great quarter and thank you for the color that you provided in the annual report if shareholders haven't read it yet I encourage you to read it.

[laughter] Thanks for your questions and thanks for the.

The endorsement of the reported on this for presentation.

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Ladies and gentlemen, as a reminder to ask a question. Please press star followed by one.

One telephone keypad now and if you change your mind. Please press star followed by team.

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It appears we don't have any further questions is that correct Kelly.

I can confirm we currently have no questions.

Okay. Thank you again thank.

Thank you for joining us today, if you do have any follow up question free information is available on the press release, please reach out and have a wonderful day.

If you have missed any part of this call I would like to hear it again I reported will be ready shortly to access the telephone replay of today's call one.

<unk> nine full 586194.

By the access code one six day.

Zero day five three.

Thank you for joining today's call and have a lovely day.

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