Q4 2021 NACCO Industries Inc Earnings Call
Yeah.
Good day, and thank you for standing by welcome to Nacco industries fourth quarter and full year earnings call. At this time, all participants are in a listen only mode.
After the speaker presentation, there will be a question and answer session to ask a question. During the session you will need to press star one on your telephone please.
Be advised that today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker today, Christy Quebec out. Thank you you may begin.
Good morning, everyone and welcome to our 2021 fourth quarter and full year earnings call. Thank you for joining us. This morning, I am Christina <unk> and I'm responsible for Investor Relations at Nacco industries.
Joining me today are J C Butler, President and Chief Executive Officer, and Elizabeth Feldman, Vice President Controller yesterday, we published our fourth quarter and full year 2021 results and filed our 10-K.
Information is available on our website today's call is also being webcast. The 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 in 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 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 addition, we will be discussing non-GAAP information that we believe is useful in evaluating the company's operating performance reconciliations for these non-GAAP measures can be.
Found in our earnings release and on our website in a moment I'll discuss our fourth quarter and full year results, but first let me turn the call over to our President and CEO J C. Butler for some opening remarks jaycee. Thank.
Thank you Christie.
Good morning, everyone.
As we look back on our fourth quarter and full year 2021 results I'm really pleased to report that our company delivered strong results generating much higher operating profit and net income in 2020.
The fourth quarter and frankly every other quarter in 2021 was strong for us comparisons to the prior year fourth quarter are a little more complex given the $11 $6 million of non operational charges, we recognized last year, but even excluding the impact of these charges I'm pleased to report our earnings improved significantly.
Given by our minerals management and coal mining segments.
Our minerals management segment had another outstanding quarter helped by income for more recently acquired mineral and royalty interest as well as legacy mineral and royalty interests.
Natural gas and oil prices helped as well.
Our team at catapult mineral partners continues to look for opportunities to expand our portfolio of mineral and royalty interests to acquisitions, while also promoting development of our own interests at our coal mining segment, our fourth quarter 2021 operating profit improved significantly over the prior year quarter. Despite the.
<unk> fuels contracts at the end of the third quarter. This increase in operating profit was primarily because of an increase in customer demand at Mississippi Lignite mining company.
Although the coal mining industry faces, increasing political and regulatory challenges. We believe the use of coal as a fuel source for electricity in the United States will continue for the foreseeable future.
The significant increase in natural gas prices in 2021 benefitted us on two fronts the.
It contributed to an increase in dispatch and coal deliveries in our coal segment as well as contributed to an increase in results at our minerals management segment. We continue to work diligently to support our existing customers. So that they can continue to produce affordable reliable energy.
Turning to our North American mining segment, the fourth quarter financial results for the segment did not meet our expectations.
We did grow income from new and existing contracts in 2021 , but we added costs by hiring additional experts to bolster our already strong maintenance and operational capabilities. We invested in the future of this business and feel that hiring. These people was the right strategic thing to do.
Throughout 2021, this business expanded its geographic footprint by entering into new contract mining services agreements or <unk> in Indiana, Texas, and Arkansas, North American mining also entered into a 15 year mining services contract with a new customer a lime stone quarry in central Florida, while this contract.
<unk> only modestly to 2021 results it aligns with our long term focus and is expected to contribute more significantly once the larger dragline is commissioned in the second half of 2022.
As I've said before there is a lot of growth potential in this business and North American mining continues to have a substantial pipeline of potential new projects in the works.
We can leverage decades of experience in our whole company of experts to provide specialized mining services or operate an entire minor Corey and we can apply our skills to meet a wide range of minerals. A great example of this is our work with lithium Americas, where we're working with them on their tacker past projected northern Nevada.
That project continues to advance as shown by their recent announcements that they've received all final key state permits as of February 25, we continue.
To provide support to lithium Americas as they move forward at maturity. This management fee contract is expected to deliver fee and come similar to a mid sized management fee coal mines.
The mitigation resources of North America team continues to advance development of their existing mitigation projects and is evaluating a number of interesting new projects as well.
Early in 2022 mitigation resources finalized an agreement to provide mitigation services for the Lake Ralph Hall projected North, Texas, We've established a joint venture related to this project with a partner that has expertise in risk and restoration and mitigation solutions.
This will be a great project for us and it's great to have a project that expands mitigation resources into Texas.
Generally and.
Importantly, I should note that the previously announced sale of GRE Coal Creek station to Rainbow Energy Center is expected to occur in the second quarter of 2022. Once the sale is complete we will operate the Falkirk mine to certain coal Creek station under a new management fee contract mining agreement with Rainbow energy.
Also.
Existing agreements between GRE, and Falkirk or terminate we will receive a $14 million termination payment from GRE and GRE will transfer ownership of certain other assets to us.
We look forward to the completion of this transaction.
Lastly, we are happy to have successfully completed the amendment and extension of our revolving credit agreements during the fourth quarter of 2021.
Looking back on 2021, it was a strong year of performance on our strategies to protect our core and to grow and diversify we also rebranded the company to better reflect the changing makeup of our businesses I continue to be very optimistic about our long term outlook because they have a lot of confidence that our strategies to protect our core and to grow and diversify I believe that we have.
Strong businesses with strong teams executing on sound business strategy strategies.
And I'm enthusiastic about the trajectory we're on as we pursue what we say in our tagline, bringing natural resources to life with that I'll turn the call back over to Christie to cover our results for the quarter in more detail Christy. Thanks Casey.
Start with the consolidated quarter results and then provide additional detail at the segment level on a consolidated basis, our fourth quarter operating profit rose significantly increasing to $10 $8 million from an operating loss of $8 million in 2020 consolidated net income also increased rising to $7 $8 million.
The $1 seven per share from a net loss of $5 $4 million or a loss of 77 cents per share last year as.
As Jason mentioned included in these results are $11 $6 million of charges taken in the prior year fourth quarter that did not reoccur in 2021.
Our fourth quarter consolidated adjusted EBITDA increased to $17 8 million from $4 $3 million last year. The increase in adjusted EBITDA was driven by improved results in our coal mining and minerals management segment and.
And our coal mining segment operating profit, excluding $4 6 million of prior year charges increased significantly as a result of substantially higher earnings at the consolidated mining operations, primarily Mississippi lignite mining company and a decrease in operating expenses from lower employee related costs. These improvements were partially.
Offset by a decrease in earnings of unconsolidated operations.
Segment adjusted EBITDA increased as a result of the improvement in operating profit as well as an increase in depreciation depletion and amortization expense at Mississippi Lignite mining company.
<unk> already discussed the primary driver of North American Mining's fourth quarter operating loss. So let me focus on North American Mining's fourth quarter 2021 segment adjusted EBITDA.
Segment, adjusted EBITDA was positive, but lower than the prior year fourth quarter as the 2021 operating loss was partially offset by substantially higher depreciation expense, resulting from the acquisition of additional equipment to support new contracts.
Finally minerals management operating profit and segment adjusted EBITDA for this quarter increased significantly over the prior year, even after excluding the $6 $7 million impairment charge realized in 2020.
The improvement was driven by increased production and higher natural gas and oil prices.
Those are the significant factors affecting the fourth quarter results now, let me turn to outlook.
In 2022, we expect the coal mining segment operating profit to decrease significantly from 2021, we expect results at our consolidated mining operations decreased significantly primarily due to substantially lower earnings at Mississippi Lignite lignite mining company driven by an anticipated reduction in customer demand from 2000.
21 levels, which contributes to an increase in the cost per ton.
It is possible that high natural gas prices could lead to increased power plant dispatch just as it did in 2021, but our forecast isn't it isn't assuming that will happen.
A reduction in earnings at the unconsolidated coal mining operations is expected to be mainly driven by lower earnings at Falkirk.
Got it and in part from our planned power plant outage prior to the expected closure of the Rainbow Energy transaction. In addition to support the transfer of coal Creek station. We have agreed to a reduction in the current per ton management fee from the effective date of the new coal sales agreements with Rainbow energy through May 31, 2024.
After may 2024, <unk> per ton management fee increases to a higher base in line with current fee levels and thereafter adjust annually. According to an index, which tracks the broad measure of U S inflation.
Termination of the Vista feels contract in late 2021 will also contribute to the expected decline in the earnings at the unconsolidated mining operations in 2022.
We also expect an increase in operating expenses, mainly from anticipated higher insurance costs and other professional fees.
Segment, adjusted EBITDA, which excludes the termination payments of $10 $3 million from this day fuels customer in 2021, and the anticipated $14 million contract termination pre feed from GRE. In 2022 is expected to decrease significantly in 2022, primarily as a result of the forecasts.
First a reduction in operating profit, partially offset by an increase in depreciation depletion and amortization expense.
In 2022, we expect North American mining full year operating profit to increase significantly over 2021 due to an anticipated increase in customer requirements and contributions from contracts executed during 2021.
Segment adjusted EBITDA for this.
For North American mining is expected to increase significantly over the prior year as a result of the improved operating profit and an increase in depreciation expense.
Moving to minerals management, we expect operating profit and segment adjusted EBITDA in 2022 to decrease significantly compared with 2021. These declines are expected to be driven primarily by reduced production from the natural decline curve on wells in Ohio, and the absence of $3 $6 million of settlement income recognized in 2000.
And in 'twenty one.
Our current expectation is that oil and gas market prices will moderate in 2022 and stabilize at levels more in line with averages over the second half of 2021.
To summarize on a consolidated basis in 2022, we expect consolidated net income and consolidated adjusted EBITDA to decrease significantly from 2021 lower operating profit in the coal mining segment and an anticipated reduction in income at the minerals management segment are expected to be partially offset by higher.
Operating profit in North American mining and lower income tax expense. Additionally, we expect to recognize the value of the North Dakota office building and the membership units in Midwest AG energy, which are expected to be received as part of the compensation from Jerry upon the closing of the transaction with Rainbow energy.
Obviously world events are causing increases in natural gas and oil prices at the moment, while we are not able to speculate how all of this might play out. It is worth noting that continued high natural gas and oil prices could enhance 2022 results in our minerals management segment as well as in our coal segment, if higher natural gas prices lead to generally higher.
Dispatch of customer power plants.
Moving away from results expectations, Let me briefly provide some cash flow information we ended the quarter with consolidated cash of $86 million and debt of $20 $7 million. In addition, we had availability of $116 $2 million under our newly refinanced revolving credit facility as a result of forecasted capital expenditures and the ant.
Dissipated decrease in net income cash flow before financing activities is expected to return to a significant use of cash in 2022.
We will now return now turn to any questions you may have.
As a reminder to ask a question. Please press Star then the number one on your telephone keypad to withdraw your question press the pound key please standby, while we compile the Q&A roster.
Your first question is from Andrew King with focused compounding.
Good morning, everyone.
Great quarter and great year.
Good morning, Andrew Good morning.
So my first question relates to your outlook.
Would a major move in natural gas prices.
They are doubling or being cut in half of the current natural gas price mean that your 2020 to outlook for the coal segment be way off or do you think your coal segment outlook is pretty reliable under a broad range of natural gas prices.
No.
We saw in 2021.
<unk> dispatch levels now do we know exactly.
What led to the increase in dispatch levels within the coal segment.
There's lots of factors there can be outages it can be.
Their power plants, it can be transmission congestion issues that focus.
Dispatch, but we think we believe that a very significant driver in 2021 was natural gas prices.
Particularly you know I mean, if you think about when we started 2021 right I mean, it's when everybody was still kind of locked down in the economy, not yet come roaring back.
So I think.
We as well as a lot of companies sort of had a conservative view of what played out during the course of the year, what we saw play out where.
Pretty rapidly increasing natural gas prices during the course of the year and it continued sort of throughout the year.
And we think that that supported a lot of dispatch decisions.
You know amongst a lot of our customers.
You also see in our outlook Youre right, we talk about the fact that we had a.
Our assumption about natural gas prices that they were going to moderate and move back to sort of the average of the last half of 2021.
Today's natural gas prices are far above that.
I think that that's likely to support dispatch, but exactly how much.
That will affect this dispatch is it's always hard to predict that but I think that.
The plan that we put together.
That's reflected on our outlook has a pretty conservative view of natural gas prices.
Even before.
The events of the last.
Week or so.
I think thats.
I think what's going on.
With the situation in Russia, and Ukraine has sort of got everybody that's in the energy industry.
Rethinking the way.
There are forecasting things like energy prices and reliability and dependability and all sorts of things are coming out of that.
Thats helpful. Yeah, No that's actually that's very helpful. Thank you.
And then your initial investments in oil royalties at catapult were made when oil prices were lower.
So if oil prices stayed at today's level.
Do you think you'd still be able to find oil investments in 2022 that could hit your double digit unlevered return target.
Yes, we think we can.
<unk>.
Yeah.
Yeah.
It's a market.
For buyers and sellers.
It doesn't necessarily fit into generalities.
Any.
Period in time.
Might find that there are more buyers that are interested in undeveloped reserves and at other times you might find buyers are more interested in.
Near term cash flow asset same thing goes with sellers right I mean people might be holding on to one category of assets and selling another one.
We also know that there's periods of time, when theres a lot of activity and very small.
Transactions or there could be activity and a lot of huge transactions you know hundreds of millions of dollars things that.
Make headlines in the newspaper.
We sort of take a.
We're taking sort of an opportunistic view here, we're being rather selective about what we buy.
We have not won every bid that we have put in which I think sort of.
Confirmed to me that we've got a pretty disciplined approach, we're not just chasing.
Whenever we can acquire we're thinking pretty carefully about it.
And I think in the current environment.
There are still opportunities that we're seeing and are actively bidding on that.
Fit our profile and provide in Africa.
An attractive return opportunity for us so I think.
I think theres still going to be good opportunities in 2022 to make acquisitions.
That's great to hear.
And then you mentioned you'll recognize some income on the transfer of the North Dakota Office building at the Midwest AG energy membership interests.
Do you expect that income to be material to full year 2022 earnings.
Well the so we'll recognize income when it's transferred to us.
I just wanted to be clear about that it's not that we are going to get it and sell it and youre going to recognize it that way I think we're going to wait we're going to get them.
Assuming all this closes in May is it should we will get.
Title to the property and then decide what we do with it.
Liz I'll, let you comment on.
Is it material.
Well look at the appraisal and it's an office building.
It's real estate.
We will get an appraisal on I don't know that it's super material to us but it's.
It's a look.
One story office building.
Hum sort of on the edge of Bismark, it's not.
A major office tower.
And a major development district.
Got it and just one other point that is going to be recognized below operating profit. It will be included in our other income.
Got it and then I have one more question and then I'll drop back in the queue.
But you said that capital expenditures in 2022 for mitigation.
Resources are going to be approximately $9 million I was wondering if you could kind of explained.
What that represents I guess I kind of thought about this being more of like a capital light segment. So.
If you could expand on that that would be great and I'll jump back in the queue.
Well it is generally a pretty capital light segment right, but we do.
We are acquiring some equipment.
In that.
That business, it's not a segment in that business.
So that we can perform.
Some of the dirt work that's involved in the stream and wetland mitigation business.
And we do from time to time acquire property.
But generally I think you can think of this as a pretty asset light business Blizzard up there that's correct.
And again, if you would like to ask a question. Please press Star then the number one on your telephone keypad.
Your next question is from Nought tea Canfor with Donovan in energy.
Hi, everyone.
Great quarter, thanks for the remarks.
Just a question on <unk>.
Coal Creek and the expected sale my understanding is that there remains an outstanding application to EPA for.
A different.
Type of treatment under the CCR rule.
<unk> Hasnt ruled on that.
Any of them.
Any.
Insider thoughts on if there's risk there.
How that might affect.
The closure of the sale or.
Operating performance post sale. Thanks.
So I am not aware of any challenges that that presents with respect to the.
With the transaction and I think the transactions headed.
Towards closing is expected.
And I don't believe that it's that anybody has any expectations that this is a real problem for the long term operation of the facility.
Okay, great. Thanks.
Mississippi quickly there was there was a question earlier about whether.
Weather.
Gas prices are.
Fundamentally are the major driver behind.
Discuss decisions whether increased dispatch a decrease dispatch and my understanding of your response to that was basically gas prices are a major driver, possibly not the only driver and for.
For the Red Hills plant I'm wondering if there are any plant specific or unique drivers there.
Given just.
The big difference between 2020 in 2021 and then the difference you are forecasting between 'twenty, one 'twenty two as well.
Yes, I mean look the big drivers of results for us right.
With respect to coal sales as coal dispatch coal dispatch is really made up of two things one of those is to what extent is the parent is the plant dispatched onto the grid, which is largely controlled by TVA and the other piece of that is mechanical availability of the plant.
Those two things work together to ultimately determine.
How that will play out I mean, if you end up with.
Tremendously high natural gas prices and TVA wanting to just patch the plant, but it's not mechanically available.
The same as if TVA is not dispatching the plant and vice versa, right, you're going to have a plant that's very mechanically available some great mechanical shape it doesn't have any issues.
But if TVA is not dispatching the plant it doesn't get dispatched when those planets align and it's mechanically available and you get high dispatch levels, which can be driven by natural gas prices you end up with a year like 2021.
That's helpful.
Thank you.
Thank you.
And there are no further questions at this time I will now turn it back over to Kristie can that go for closing remarks.
Thank you that will conclude our Q&A session J C. Do you have any closing remarks do not.
Alright.
I will close with a few reminders of replay of our call will be available online. Later. This morning, we'll also post a transcript on the Investor Relations website when it becomes available.
Have any questions. Please reach out to me you can reach me at the phone number on the earnings release I Hope you enjoy the rest of your day and now I'll turn it back to our operator to conclude the call.
This concludes today's conference call. This call will be available for replay beginning at 11 30, a M. Eastern time today through March 10 at midnight the number to dial for the replay is one 808.
<unk> 8006, seven or eight eight.
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Yeah.
Yeah.