Q1 2022 NACCO Industries Inc Earnings Call

We finalized the purchase of the coal Creek station power plant in North Dakota, and the adjacent high voltage direct current transmission line.

As a result of this sale the existing agreements between Great River energy in Falkirk terminated and the new coal sales agreement between fall Kirk and Rainbow energy became effective fall Kirk will continue supplying all coal requirements on coal Creek station GRE.

<unk> paid us $14 million transferred ownership of visit office building in Bismarck, North Dakota, and conveyed membership units in Midwest AG energy to Nacco. This is a great outcome and we're enthusiastic about this new relationship with Rainbow energy as our new customer is independently as independent privately held energy marketers.

I think they have a real understanding of the value of the power plants and its potential in the future.

In addition to this exciting news I am pleased to report strong 22 first quarter earnings driven primarily by improved results in our minerals management segment.

Minerals management had another outstanding quarter, mainly due to significantly higher natural gas and oil prices as well as $2 $1 million of settlement income recognized this quarter. Our team at catapult mineral partners continues to look for opportunities to expand our portfolio of mineral and royalty interests through acquisitions, while also.

<unk> development of our existing mineral interests in the first quarter of 2022, we completed a small acquisition of mineral interests and the new Mexico portion of the Permian Basin.

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Continues to look for attractive acquisitions of mineral and royalty interest to continue to grow and diversify this business.

Our North American mining segment also contributed to the improvement in earnings. Although this was offset by lower earnings in the coal mining segment and an increase in unallocated business development and employee related expenses.

First quarter earnings in our North American mining segment increased versus the prior year as higher reclamation income of Caddo Creek was partly offset by a reduction in earnings at our active operations as a result of higher employee related costs as I've said before there's a lot of growth potential in this business and North American mining continues to have a substantial pipeline.

Of a potential new projects in the works during.

During the first quarter of 2022, North American mining agreed to commission a second dragline at an existing quarry in Florida to to secure a contract extension through 2027. This dragline will supplement an existing dragline at this operation, resulting in an expected increase in deliveries in income over the next.

Five years.

At our coal mining segment, we continue to work diligently to support our existing customers. So that they can continue to produce affordable and reliable energy.

Although the coal mining industry faces ongoing political and regulatory challenges. We believe the use of coal as a fuel source for electricity in the United States will continue for the for the foreseeable future.

We think there are more reasons to be optimistic about coal fired power generation today than at any other time in the last several years.

The mitigation resources of North America team continues to advance development of existing mitigation projects and they are evaluating a number of interesting new projects as well early.

Early in 2022 mitigation resources finalized an agreement to provide mitigation services for the late graph Hall project in Northern Texas, We've established a joint venture related to this project with a partner that has expertise in restoration and mitigation solutions. This will be a great project for us and it was and it is great to Abbott.

<unk> that expands mitigation resources into Texas, which with that I'll turn the call back over to Christy to cover our results for the quarter in more detail. Thanks Casey.

I'll start with the consolidated results and then provide additional details at the segment level not already covered by <unk> and <unk>.

Consolidated basis, our first quarter operating profit was significantly increasing to $14 9 million from $8 $3 million in 2021 consolidated net income also increased rising to $12 6 million.

$1 72 per share from 9 million.

$1 25 per share last year.

Our first quarter consolidated EBITDA increased to $21 $4 million up 48% from $14 $5 million last year.

Greece in EBITDA was driven primarily by the improved results in this manner.

North American mining segment, and higher depreciation depletion and amortization expense.

At our coal mining segment operating profit and segment EBITDA decreased due to a reduction in earnings of unconsolidated operations as well as higher operating expenses the.

The decrease in earnings of unconsolidated operations is primarily the result of the termination of the <unk> contract on September 30 of 2021, a reduction in fees on that Liberty has the scope of final mine reclamation activity continues to decline and lower customer requirement that Sabine.

Decreases were partly offset by an increase in earnings resulting from contractual pricing escalation.

Jay CRA discuss the primary drivers of the increase in North American Mining's first quarter operating profit. So let me just focus on North American Mining's first quarter 2020 to segment EBITDA.

Segment EBITDA increased significantly as a result of the increase in the operating profit and by substantially higher depreciation expense, resulting from the acquisition of additional equipment to support new contracts.

Finally minerals management's first quarter 2022, operating profit and segment adjusted EBITDA more than doubled from the prior year results.

<unk> set the significant improvement was driven by higher natural gas and oil prices and settlement income related to the company's ownership interest in certain mineral rights.

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

In 2022, we expect the coal mining segment operating profit to decrease significantly from 2021, both including and excluding the contract termination fees from <unk> last year in January of this year, we expect results at our consolidated mining operations to decreased significantly primarily due to substantially lower earnings at Mississippi lignite mining.

Company, driven by an anticipated reduction in customer demand predominantly in the second half of the year from higher than average levels in 2021.

It is possible that continued high natural gas prices could lead to increased Powerplant did that just as it did in 2021, but our current forecast assumes dis best levels. This year will be below average 2021 dispatch level.

The reduction in earnings of unconsolidated coal mining operations is expected to be driven by the termination of the <unk> contract as of September 30th and lower earnings at Falkirk, primarily in the second half of 2022 compared with the second half of 2021.

<unk> agreed to a reduction in the per ton management fee from May one 2022 through May 31, 2024. After May 31, 2020 for Fokker 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.

We also expect an increase in operating expenses, mainly from anticipated higher outside services and professional fees.

Segment EBITDA for the coal mining segment, which excludes the termination payments of $10 3 million received from the <unk> customer in 2021, and the $40 million contract termination fee from GRE received this week is expected to decrease significantly in 2022 from last year, primarily as a.

Of the forecast a reduction in operating profit.

Offset by an increase in depreciation depletion and amortization expense.

At North American mining, we expect full year 2022 operating profit to increase over last year, primarily in the fourth quarter due to an anticipated increase in customer requirements and contributions from contracts executed during 2021, North American mining segment in 2022, North American mining.

Segment EBITDA in 2022 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 EBITDA increased significantly over last year, primarily driven by current expectations for natural gas and oil prices for the remainder of this year, partly offset by an anticipated reduction in production.

As a result of substantially higher oil and natural gas prices in the first half of 2022 compared with the respective prior year period, we expect a significant increase in operating profit in the first half of this year. This increase is anticipated to be partly offset by a modest decrease in the second half of this year as we expect increases in oil and gas prices.

To moderate and as a result of the absence of $3 $3 million of settlement income recognized in the third quarter of 2021.

To provide a bit more color to minerals management earnings outlook and why it increased from what we said in last last quarters release I wanted to point to some government forecast for natural gas and oil prices.

The United States Energy Information Administration April 2022, short term energy outlook projects Henry hub natural gas prices to average $5 23 per ml btu for the full year 2022.

Henry hub natural gas forecast would result in an increase of $1 32 per ml, btu or 34% compared with the less compared with last year.

AIA April 2022 short term energy outlook projects West, Texas intermediate crude oil prices to average $98 per barrel this year.

Forecast would result in an increase of approximately $30 per barrel, a 44% compared with last year.

To summarize on a consolidated basis for the 2022 full year, excluding the settlements associated with the GRE Rainbow energy transaction and the <unk> termination fee recognized in 2020 'twenty. One we expect consolidated operating profit net income and consolidated EBITDA to decrease lower.

Operating profit in the coal mining segment is expected to be partly offset by an anticipated significant increase in earnings at the minerals management segment and higher operating profit and North American mining. In addition, we recognized $3 4 million of gains associated with equity securities in 2021 that are not expected to recur this year.

Once we have the final appraisals, we will recognize the value of the North Dakota office building and the membership units in Midwest AG energy received as part of the settlement with GRE as a component of other income.

World events.

Causing continued volatility 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 continue to enhance 2022 results in our minerals management segment as well as in our coal segment as 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 $81 6 million and debt of $25 $5 million. In addition, we had availability of $113 $9 million under our revolving credit facility for.

For the full year, we expect cash flow before financing activities to be significantly lower than in 2021 as a result of anticipated higher capital expenditures, we will now turn to any questions you may have.

Thank you ladies.

Ladies and gentlemen.

If you would like to ask a question you made rich sorry, the number one on your telephone keypad. Once again, you May press star one to ask a question.

The first question is from Andrew Thank.

Thank you.

Thank you.

Good morning, everyone great quarter good morning.

Thanks.

So I only have one question today.

And Thats.

That you added a new line in your report.

That sustained higher natural gas prices could continue to result in increased demand for coal and that changes to expectations for customer power plant dispatch could affect the company's outlook for 2022 and over the long term.

So as we sit here today natural gas is up.

Mike 50 per side.

End of Q1.

And we know that minerals management will benefit from this but I'm curious if you're also seeing.

More demand.

For your coal business, given where natural gas prices or maybe even at the end of Q1.

I'll speak generally about the.

The relationship.

On the on the energy side.

<unk> gets dispatched Powerplants get dispatched generally based on economics.

There's other things that come into play like transfer.

Transmission congestion and things like that that will come into play but for the most part it's on economics and when you see natural gas prices as high as they are.

And the.

The grid needs Baseload generation.

Going to churn to lower cost resources and generally.

Especially when you look at that.

But the relationships that we have with our customer powerplants, where it's not.

The typical relationship as Powerplants are buying coal on the market.

They might contract for a year or two years and generally the relationship that we have is that they are buying the coal at a contracted price in all instances except one.

With our customers.

It's cost plus management fees, which are very low.

Predictable and known about.

And those are.

Every one of those is very very competitive on the grid versus high natural gas prices at this point in time.

Okay.

I'll go back in the queue. Thank you.

Once again, if you would like to ask a question you May press star one on your telephone.

We have a follow up question questions from Andrew.

Please go Cowen your line.

Just jumping back in the queue apologize for that.

Once again you May you May press star one to ask a question.

Well that appears to conclude our Q&A session for today. So Jason did you have any final closing remarks, thanks, Andrew for the question.

Well just a few reminders 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. If you have any questions. Please reach out to me my phone number is at the top of the press release I Hope you enjoy the rest of your day and I will turn the call back to the operator to conclude.

Thank you.

A reminder, this call is Gordon and will be available for an <unk> two hours. After the call has ended until May 13, 2022, you may dial 800, <unk> seven or <unk> <unk> nine.

2056, and enter the conference I'd 777.

7766 to listen.

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

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