Q2 2021 NACCO Industries Inc Earnings Call

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Good day and thank you for standing by welcome for the Nacco Industries second quarter earnings call.

At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.

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Thank you good morning, everyone and welcome to our 2021 second quarter earnings call. Thank you for joining US. This morning, I am Christina <unk> and I am responsible for Investor Relations at Nacco industries. Joining me today are J C Butler, President and Chief Executive Officer, and a list of Loveland, Vice President and controller.

Yesterday, we published our second quarter 2021 results and filed our 10-Q. This information is available on our website.

Days call as al but also being webcast. The webcast will be on our website. Later this afternoon and available for approximately 12 months.

Agreements between GRE and our.

Falkirk mine will be terminated.

We will receive of $10 million termination payment as well as certain other assets, but of described further in our release, while Kirk will continue to supply all of the coal requirements for coal Creek station under a management fee agreement for coal Creek station is expected new owner Rainbow energy similar.

Similar to our existing management fee contract with GRE, though will be responsible for funding all of mine operating costs and securing the all capital required to operate and reclaim the mine. This is very exciting news for everyone involved and I think it really highlights the kinds of things, we're trying to accomplish with our protect the core strategy.

Turning to North American mining our team signed 1 new contract in the second quarter of 2021 to develop and operate a new aggregates operations in Indiana.

Contract is with an existing customer who is of major U S producer of construction materials. The team further advanced our growth efforts in late July by signing 2 contracts with the leading supplier of construction materials of North America. The perform all mining operations achieve sand and gravel quarries located in Texas and Arkansas.

The last 2 new contracts, which are expected to be accretive to earnings and expand the range of contract mining services beyond the traditional scope of North American Mining's core limestone mining business to include responsibility for all the mining activities of these cores, but also further advanced our expansion outside of Florida.

I've said before there's a lot of growth potential in this business and I would note that north American mining's pipeline of potential new projects remains strong.

Our team of catapult mineral partners actively overseeing the performance of our own of royalty of mineral interest and continues to look for opportunities for us to invest for me.

Mitigation resources of North America team continues to advance the development of their existing mitigation projects and is evaluating a number of interest in new projects as well I'm very pleased with the way all of these businesses are advancing their strategies.

I would be remiss. However, if I don't mention that we were notified in mid June of the contract mining agreement between the Sty fuels company and the Navajo Transitional energy company will be terminated as of September 30 of this year.

And check will assume control of the responsibility for operation of the Navajo mine, while the termination of the contract mining agreement Amtech.

<unk> is responsible for all liabilities, including mine reclamation and under the agreement is required to pay us the termination fee, which is anticipated to be approximately $10 million. We're very proud of what we've accomplished over the last few years at the Navajo mine, we could dramatically change should improve the safety culture at the mine and we advanced work.

Mine reclamation, we also got to know and work with a lot of great people at the mine and in the community. We wish Nims <unk> continued success as they take over mine operations.

Finally, I want to talk about our new branding, which we announced last Friday My letter in the annual report mentioned that we were working on a plan to better describe our company and what we do the result of that work was announced last week. When we launched our new brand identity for our family of companies, which we referred to as Nacco natural resources.

Macro industries is still the name of the public company, we created back of natural resources to be the unifying brand name for our portfolio of natural resource to the natural resources businesses.

This new approach unifies, our identity and underscores our commitment to all of our businesses, while creating a new identity that will help us execute on our 2 key strategies, which are of protect the court and grow and diversify.

The introduction of match of macro for natural resources auditors are strong legacy as a leading 108 year old mining company and recognized as our success in growing strong and competitive new businesses that leverage our core skills.

The macro website contains overview information about match macro natural resources in each of our businesses and it also provides the investor information for Nacco industries.

Created new logos in the web sites for each of the operating businesses. So that each business now has its own unique identity. The can easily be linked back to our umbrella brand.

After the call. Please take some time to explore the websites and be sure to watch our branding launch video of that I was on the homepage of Nacco Dot com.

I am very optimistic about our future because I have a lot of confidence of our strategies to protect the core and to grow and diversify I believe that way of strong businesses with strong teams executing on sound business strategies.

The enthusiastic about how we can continue.

To advance the ball with our new tagline of bringing natural resources to light.

With that I'll turn the call back over to Christina to cover our results for the quarter in more detail Christina.

Thank you Jason.

The consolidated credit of it and then provide additional details at the segment level.

The consolidated basis, our second quarter operating profit improved significantly.

And 93, 4% current.

$7 million for.

$5 million from 2020.

Our consolidated net income also increased ryzen 7.5% for $55 million of 91 cents per share from <unk>.

$1 million per.

For any 6 cents per share last year.

Consolidated adjusted EBITDA increased 39, 4% $15.3 million.

From the $11 million in the prior year second quarter.

These increases were primarily driven by improvement in all 3 of our operating segments.

Secondly, our minerals management segment.

The net income was not as significant as the other improvements because of higher income tax expense as the result of an increase in our estimated annual effective income tax rate in the 2021 second quarter.

At our coal mining segment operating profit and segment EBITDA increased primarily due to a reduction in cost for outside services at Centennial natural resources and the income associated with the mine reclamation of Caddo Creek, partially offset by a decrease in earnings of unconsolidated operations, primarily from the mining contracts that are no longer in place.

North American mining second quarter of 2021 of operating profit increased over the prior year, mainly due to favorable changes in the mix of customer requirement.

This improvement was partially offset by higher employee related costs, including the medical costs and an increase in business development expenses.

Adjusted EBITDA also increased due to the operating profit improvement and an increase in depreciation expense as a result of more equipment being placed in service.

For the activities related.

Related to newer contracts.

At the minerals management segment second quarter 2021 operating profit of segment adjusted EBITDA income.

Significantly over 2020, primarily due to increase of our fee income generated from newer wells on legacy, Ohio mineral interest as well for for income from the mainland of interest acquired in the fourth quarter of last year and in early May of 'twenty, 'twenty 2021 and I'm, sorry, an increase in natural gas and oil.

Prices also contributed to the improvement.

Those are the significant factors affecting the second quarter results now, let me turn to our outlook.

And the coal mining segment, we expect operating profit to increase significantly in both periods because of the anticipated cash receipt of approximately $24 million.

Weighted to the pending termination of the soccer kind of the sky feel of customer contracts, which Stacy mentioned.

The fourth quarter of 2020 also included charges totaling $4.6 million that are not expected to reoccur. Excluding these items. We expect our 2021 operating profit the decrease in the second half and full year from 2020 levels of.

A decrease was primarily attributable to substantially lower earnings expected at Mississippi Lignite mining company from the anticipated decline in profit per ton delivered and reduced earnings of the unconsolidated coal mining operations, excluding the $24 million termination related payments expected later this year and the $1.1 million.

Our asset impairment charge recognized in 2020 segment adjusted EBITDA for the second half of 2021 is expected to decrease from the prior year as a result of the reduction in operating profit.

Segment adjusted EBITDA for the full year is expected to be comparable to last year.

At North American mining, we expect tons delivered operating profit and segment adjusted EBITDA to increase in the second half of 2021 over last year, primarily as a result of increased production under existing contracts and contributions from new mining contracts, partially offset by an increase in operating expenses.

Mainly from higher employee related costs as well as anticipated higher business development expenses.

Full year 2021 operating profit is expected to decrease moderately from last year because of the lower first quarter 2021 results.

Segment adjusted EBITDA for the full year is expected to increase as the moderate reduction in operating profit will be more than offset by an increase in depreciation expense. The operating profit impact of the contracts that were executed in late July and discussed by Jay Z are not included in our discussion of outlook because of the timing of contract execution.

But our expected.

The expected to be accretive to earnings.

Finally, our minerals management segment operating profit for the segment adjusted EBITDA is expected to decrease significantly in the second half of 2021 compared to the prior year second half once you exclude the impact of impairment charges taken in the 2024th quarter.

These decreases are primarily the result of of the expected natural production decline curve of search.

Certain newer wells in Ohio.

Okay income generated from the mineral interest acquired in the fourth quarter of 2020 and in May of 2021 are expected to partly offset the reduced earnings and contribute to the expected increase in the full year operating profit in the segment adjusted EBITDA over last year.

On the consolidated basis, we expect our full year net income to be significantly higher than 2020 with an anticipated effective income tax rate for 2021 of between 13% and 15% both resulting from the expected termination and relief settlements associated with the fall Kirk and the size.

Sales in the absence of prior year charges totaling $12.1 million.

Putting these items, we expect significantly lower net income.

As a result of substantially lower operating profit from lower earnings in the coal mining segment and higher unallocated employee related and business development costs.

We expect consolidated adjusted EBITDA to increase moderately over 2020, excluding the termination in our lease payments and prior year impairment charges.

Moving away from results expectations, Let me briefly provide for cash flow of information. We ended the quarter with the consolidated cash of $85 million and debt of $32 million compared with consolidated cash of $79.1 million and debt of $44.4 million at the end of the first quarter. In addition, we had available.

Ability of $109.9 million under our revolving credit facility.

As a result of the termination of the lease payments, we are anticipating a positive cash flow before financing activities in the 2021 full year as compared to the significant use of cash last year.

Consolidated capital expenditures are now expected to be approximately $61 million for the 2020 full year higher than we previously anticipated because of it now includes the mouth to support expansion of contract mining services beyond the North American Mining's historical dragline oriented model as well as expenditures related to moving to a new.

Mine area at Mississippi, Lignite mining company, which we have previously discussed.

Now, let me open up the call for your questions.

As a reminder, the Aussie question, you will need the press star 1 on your telephone.

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Yeah.

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Xena of your question.

<unk>.

Your first question comes from the line of Matt How you plan for it of Donovan energy.

Hi, Thanks can you hear me okay.

Yeah.

Thanks, so much thanks for the informative presentation now.

Matthew Kansas cancel the Donovan LNG, just hoping you can give us a little bit more color on the.

Mississippi lignite.

You know pretty thin profit margin in the long term contract how should we be thinking about.

Forward looking profitability for Mississippi lignite as it relates to the 2032 Anne day on the contract. Thanks.

Well the so the way the thanks for the question by the way.

<unk>.

So the the Mississippi lignite contract.

It's all requirements of <unk>.

My mouth of operation It is the 1.

1 operation of the where we pay all of the costs.

And we pay all of the capital we clearly over the last few years, including this year.

Investing quite a bit of capital.

Which we just had to do because we.

For moving from 1 area to another 1 for you just yet.

The advanced versus.

Do you need additional coal requirements to fulfill the contract.

The capex is adding pretty substantially to our forecast for depreciation going forward not surprisingly the matter.

It's going to.

We've disclosed that it's going to adversely affect the operating profit margins out of the business, but because if you think about the capital and of what we've said this we're going to spend a lot of capital in the last few years and this year and then there's really not of lot of capital going forward.

No.

Thanks for taking that business EBITDA, probably from that part of the business EBITDA becomes a better representation of what's really going on because you don't have to replace your depreciation with the additional capex.

So.

The operating profit is not going to be great, but I think ebitdas from the show you really the kind of the cash on cash returns sort of coming out of that business going forward. The.

The price that we sell the lignite to our customer.

Students settled of such a formula price, it's not a market price.

Which moves in line with the basket of indices like the.

Published indices, the sort of reflect general inflation.

So.

You look at everybody's got their own views of where we're headed and the installation.

Hum.

Even if you just assume a moderate level of inflation that the price will continue to go up.

We understand what our costs are in the new disruptive factor in this depreciation piece.

Helpful.

Yes, thanks, so much and just 1 quick follow up any of any views on the underlying credit worthiness of your customer of Mississippi lignite.

No I don't.

Of any concerns.

Thanks, so much.

Thank you.

Again to ask the question you May Press Star then the number 1 on your telephone keypad.

Yes.

It appears we don't have any further questions Dana.

J D.

J C. Do you have any wrap up comments.

Well I did ask this question alright. Thank you everyone for participating we do appreciate your interest and if you do have any follow up questions. My information is available on the earnings release and on the website. Thanks, so much and have a fantastic day.

The replay of this call will be available to 2 for hours from now.

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8005858367, or 8558592056 or internationally on for zero for 537, 3 for the 6 and enter the conference I'd number to listen.

This concludes today's conference call. Thank you for participating you may now disconnect.

Okay.

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