Q4 2022 Natural Resource Partners LP Earnings Call
Speaker 2: Good morning, my name is Chris and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Natural Resources Partners LP, Fourth Quarter and Full Year 2022 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star, then the number one on your telephone keep that. To withdraw your question, please repress star one.
Speaker 3: Thank you, Tiffany Sanless, Manager Invest relations. You may begin. Thank you. Good morning and welcome to the Natural Resource Partners 4th quarter 2022 conference call. Today's call is being webcast and a replay will be available on our website. Joining me today are Craig Nunez, President and Chief Operating Officer, Chris Zollis, Chief Financial Officer, and Kevin Craig, Executive Vice President.
Speaker 3: Some of our comments today may include forward-looking statements reflecting NRPU views about future events. These matters involve risks and uncertain views that could cause our actual results to materially differ from our forward-looking statements. These risks are discussed in NRPU's Form 10K and other securities and exchange commission filing. We undertake no obligation to revise or update publicly any forward-looking statements for any reasons. Our comments today also include non-gab financial measures. Additional details and reconcilations to the most directly-comparable GAAP measures are included.
Speaker 4: to begin by thanking our employees for their outstanding contributions, executing our strategy to deliver and de-risk the partnership. I'd also like to thank our equity investors, bondholders, and banks for your enduring support. And a special word of appreciation is owed to our board of directors, for its wise guidance.
Speaker 4: and council. When we embarked on our new strategy seven years ago, the partnership was in a precarious financial position with almost $1.5 billion of debt, representing more than two-thirds of our capital structure. Our bonds were trading at $65 cents on the dollar, and our free cash flow was negative. Our future looked bleak.
Speaker 4: We responded by exercising extraordinary financial discipline to aggressively cut cost, eliminate capital expenditures, and sell off underperforming assets, with an incessant focus on delivering and de-risking the capital structure. Today, I'm proud to say that the partnership is dramatically healthier and financially stronger than it was seven years ago.
Speaker 4: We have right sized the business from four business segments down to two, both of which now are returns on capital well in excess of their cost of capital. Our operating and interest expenses are each more than 70% lower than they were when we began. And our free cash flow, which has been negative, exceeded a quarter of a billion dollars in 2022, a record for the partnership.
Speaker 4: Our debt, which has been almost one and a half billion dollars, had declined more than 80% to 169 million at year in. The financial profile of today's NRP is so remarkably improved from that of seven years ago that it would be hardly recognizable to anyone who hadn't followed the transformation. I am especially proud that these results have been achieved without the use of slide legal maneuvers, debt forgiveness or bankruptcy. Let it be known that NRP keeps its promises.
Speaker 4: pays its debts and does exactly what it says it will do. We have come a long way but there is still more work to be done.
Speaker 4: Our goal remains to retire all permanent debt, redeem all of our 12% convertible preferred equity, and eliminate all outstanding warrants. Take taken together, these commitments currently total approximately $465 million. If our business continues to generate free cash flow at the current run rate, I hope to reach this goal within two to two and a half years.
Speaker 4: Once these obligations are eliminated, free cash flow available for common unit hovers will increase, most likely in dramatic fashion. And with that, I'd like to summarize our recent operating performance. In our PGenerated $268 million of free cash flow in 2022, which is the best financial performance in the partnership's history. We paid off $269 million of debt during the year.
Speaker 4: And our leverage ratio now stands at 0.5 times. We paid out 34 million of common unit holder distributions during the year, which was a 52% increase over the previous year.
Speaker 4: We have now paid common distributions in every quarter in the 20 years since the partnership went public except for one quarter during the depths of uncertainty in the COVID-19 pandemic. But I'd also like to note that in 2022 we made no worthy progress on our carbon neutral initiatives with the signing of our first two.
Speaker 4: carbon sequestration leases with both denberry and oxy and our first geothermal energy lease in Texas.
Speaker 4: While the timing and success of these ventures is uncertain, the assets underlie these leases represent approximately 800 million metric tons of subsurface CO2 storage capacity and have the potential to generate 15 megawatts of green geothermal energy. Our mineral-right segment delivered exceptionally strong performance in 2022 with revenues up over 65% from the previous year.
Speaker 4: The metallurgical coal prices reached historical highs and were the primary driver of strong segment performance. Numerous factors continue to provide support for mad pricing as the post-COVID recovery continues.
Speaker 4: Supply chain disruptions, labor shortages, and years of underinvestment in new coal production capacity continue to undermine producer's ability to bring new production online to meet demand. While Met prices have pulled back from the peaks reached last year, we continue to believe that Met prices will remain well supported for the foreseeable.
Speaker 4: quality met coal into thermal markets at times. That situation no longer exists as thermal coal now sells at significant discounts to met.
Speaker 4: While we do not see thermal prices rebounding to next last year's record levels, many of the factors that provide support to prices over the last year still exist. Boycotts of Russian coal continue to force European buyers to source coal from other regions, including the U.S.
Speaker 4: Operators will continue to be burdened by labor shortages, pressure from governments, regulators, activists, and capital providers, which will limit ability to increase thermal production to meet demand. And it appears that China is beginning to relax its three-year ban on Australian coal imports with the recent approvals for several Chinese companies to buy Australian coal. Additional demand from a Chinese economy emerging from its zero COVID policy should also provide additional support for prices.
Speaker 4: We expect these factors to keep thermal prices elevated relative to historical levels for the foreseeable future. Turning to our soda ash investment, global soda ash demand has continued to grow due to China's emergence from its zero-covid policy, the continuing, secular growth in renewable energy, the electrification of the global law, though fleet, and urbanization. So, to ash supply, however, currently remains constrained, as new capacity has not kept pace with demand growth. Constraint supplies, combined with energy and raw material input cost inflation,
Speaker 4: Drove soda ash prices to record levels in most parts of the world during 2022. Strong sales prices coupled with SysAGMYL means a position as one of the world's low-cost producers of soda ash resulted in a 170 percent increase in SysAGMYL means operating profit compared to the prior year. We continue to believe this long-term outlook for soda ash remains favorable. Lastly, I'd like to note that a holder of our 12 percent convertible preferred equity issued a conversion notice to us on 47.5 million of preferred units last month.
Speaker 4: We have the option of settling preferred unit conversion notices by either paying cash or issuing common units. After considering our financial position, liquidity, and comparing the market value of NRP common units to our estimate of intrinsic value, our Board of Directors decided to settle this conversion notice with the payment of 47.5 million of cash instead of issuing NRP common units. As a result, the amount outstanding amount of our convertible preferred equity decreased from $250 million to $202.5 million. And with that, I'll turn the call over to Chris to cover off financial results. Thank you, Craig. During the fourth quarter, we generated 69 million of operating cash flow and 63 million of net income.
Speaker 4: For the full year, we generated 267 million operating cash flow and 268 million of net income, both more than twice the prior year full year amounts. These significant increases were driven by high net coal prices and increased cash distributions received from our SODAS business. Moving to our segment results, our mineral-ride segment generated 68 million of operating cash flow and 63 million of net income in the fourth quarter and 263 million of operating cash flow and 267 million of net income for the full year of 2022. Metological coal made up 65% of our coal royalty revenues during the fourth quarter of 2022 and 70% of our coal royalty revenues for the full year of 2022. When compared to the prior quarter, both segment free cash flow and net income were relatively flat.
Speaker 4: However, when compared to the prior full year, segment free cash will increase $104 million, and that income improved $124 million. As you may recall, we began to see the benefits of higher metallurgical pricing at the end of the third quarter of 2021. So while the mineral rights segment fourth quarter of 2022 results were relatively flat compared to the prior year quarter, there was a significant increase in free cash flow year over year driven by a full year of strong medical prices in 2022. Shifting to our sodash business segment.
Speaker 4: Net income in the fourth quarter and full year of 2022 was 16 million and 60 million respectively. These amounts were 5 million and 38 million higher compared to the prior year periods, both primarily driven by higher international soda sales prices. Free cash flow from our soda as business segment in the fourth quarter and full year of 2022 improved 3 million and 34 million respectively as compared to the prior year periods. These free cash flow increases were a result of the improved segment business performance in 2022 and CISGM Wyoming reinstating the regular quarterly cash distribution.
Speaker 4: in the fourth quarter of 2021. Moving to our corporate and financing segment, in 2022, we utilize the increased cash load generated from our strong business performance to make great strides in de-risking, de-leveraging, partnerships capital structure. In the third quarter of 2022, we refinance and extend our credit facility, increasing its capacity to $130 million and extending its maturity date to 2027. This brief financing enabled us to fully retire all of the outstanding $300 million 9 and 1 a senior notes to 2025 utilizing cash on hand and borrowings on our new credit facility. With the senior notes fully repaid, this will save over 25 million of cash from lower annual interest expense. 2022 strong business performance combined with our significant debt reduction.
Speaker 4: Resulted in our leverage ratio dropping from 2.7 times at the end of 2021 to 0.5 times at the end of 2022. Our total corporate and financing segment costs for the fourth quarter in full year of 2022 were relatively flat compared to the prior year periods. During 2022, we recognized loss on early extinguishment of debt associated with the retirement of our 300 million, 2025 senior notes, an increase in cent of compensation costs because of our significantly improved 2022 business performance. However, these costs increases were offset by lower interest expense because the plus debt outstanding in 2022, resulting in a relatively flat overall corporate and financing segment cost.
Speaker 4: Moving to 2023, the de-racing of our capital structure has continued with the cash redemption of $45.7.5 million of our outstanding preferred units. These preferred units were deemed a par and of the originally issued $250 million of preferred units, $202.5 million now remain. Regarding distributions, in November of 2022 and February of 2023, the partnership paid a quarterly distribution of 75 cents per common unit and a quarterly cash distribution of $7.5 million to our preferred unit holders. And today, we announced a one-time special cash distribution of $2.43 for common unit.
Speaker 2: to help unit holders cover their 2022 tax liability associated with owning our common units. And with that, I'll turn the call back over to the operator for questions. Thank you. As a reminder, if you would like to ask a question, please press star then one on your telephone keybed. I'm paused for just a moment to compile the Q&A roster. Again, that's star one if you'd like to ask a question. It appears that we have no questions, I'll turn it over to Craig Nunes for any closing comments. Thank you. The future remains uncertain. Commodity prices remain volatile and financial markets are going to remain unpredictable.
Speaker 2: However, due to the significant accomplishments of our team over the past seven years, along with our improved business performance, positive outlook, and most importantly, our stronger financial position, we believe we are now well prepared for future challenges. We are steadfast in our commitment to pay off all permanent debt, redeem all preferred equity, and settle all warrants.