Q2 2023 NACCO Industries Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Nacco Industries Q2, 2020 fee earnings Conference call.
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After the Speakers' remarks, there will be a question and answer session.
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Christina <unk> Investor Relations you May begin your conference.
Thank you good morning, everyone and welcome to our 2023 second quarter earnings call. Thank you for joining us this morning.
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 Lovelan Senior Vice President and controller yesterday, we published our second quarter 2023 results and filed our 10-Q. This 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 several 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've described in our earnings release 10-Q, and other SEC filings.
We may not update these forward looking statements until our next quarterly earnings conference call will also 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 with the formalities out of the way I'll turn the.
<unk> over to JC for some opening remarks JC.
Thank you Christine and good morning, everyone.
Christie will go into more detail about our second quarter earnings and provide an overview of our outlook in a minute, but first let me provide a few thoughts on the quarter and our future expectations.
It is clear that our second quarter 2023 results were much lower than last year, but that was it.
As expected and discussed last quarter as well as at year end. So the decline you shouldnt come as a surprise a significant portion of the decrease was because 2022 results included $39 million of pre tax income received from the termination of fall Kirk's contract with Great River energy.
The absence of these 2022 termination payments however was not the only reason for our earnings decrease I will discuss our results business by business.
The aggregates mining part of this segment struggled during 2022.
I mentioned last quarter that we were implementing changes to drive improved future financial results and it is encouraging to see these improvements that said we're still early in this process. It is too soon to judge the full effect of these initiatives, but this is a good start we still want to see profit improvements incurred.
On a constant basis, but I am optimistic north American mining can build upon this momentum.
The decrease in Caddo Creek reclamation income is partly offsetting the improvement in results at North American mining aggregates business. We are no longer recognizing reclamation income at Caddo Creek, because we purchased a membership interest at the Marshall mine in March 2023.
Caddo Creek had been performing mine reclamation work.
We are considering development of utility scale solar project dislocation.
Wrapping up my North American mining comments, let me quickly mentioned saw tooth mining, which is the exclusive contract mining for minors for lithium Americas Backer pass lithium project in northern Nevada.
Instruction of factor past commenced last quarter and our customer tells us that they expect to begin phase one lithium production in the second half of 2026.
We began acquiring equipment for the project earlier. This year. We're also currently recognizing income related to this project and expect to continue to recognize moderate income through 2025 with higher levels of income expected when our customers start to production in 2026.
Moving to our mitigation resources of North America business. This team continues to advance existing mitigation projects and build on the substantial foundation. It has established over the past several years I am pleased to report that mitigation resources recognized income associated with credit sales this quarter, which contributed to a year.
Year over year earnings increase of 224, sorry, $2 4 million in the 2023 second quarter.
Mitigation resources results are included within unallocated results I'm very pleased with the level of growth mitigation resources has achieved in its first five years and I'm very pleased with their prospects. This business is achieving real success in growing faster than we'd expected. When we started just a few years ago.
The increases I, just discussed were not large enough to offset the decrease in earnings we experienced on our coal mining and minerals management segment, and the 2023 second quarter compared to 2022.
During our last two earnings calls we've discussed that we expected 2023 results to decrease significantly.
I'll first address the coal mining segment admits.
At Mississippi Lignite mining company, we're experiencing operational efficiencies as we complete final mining of the existing mine area and we're also incurring significant costs associated with moving to a new mine area.
<unk> Red Hills mine has also had to contend with significant rainfall during the first half of the year, which has impacted production and increased costs. These higher costs and inefficiencies inefficiencies are expected to continue into the third quarter, but then begin to moderate during the fourth quarter, when we anticipate being fully operational and.
The new mine area.
You'll recall that we've invested significant capital to open up this new mine area, which is necessary to access call needed for the remainder of the contract term.
These capital investments have resulted in increased depreciation expense that will continue over the remainder of the contract term.
The added depreciation will affect reported operating profit, but those effects are excluded from EBITDA, which we think is a better way to look at this part of our business, which we don't expect MLM seed to open additional mine areas through the remaining contract term mine.
Mine development capital expenditures should moderate from 2024 through the end of the contract in 2032.
Shifting the minerals management substantially lower natural gas and oil prices led to a significant decrease in the second quarter 2023 results compared with the 2022 second quarter, you'll remember that natural gas and oil prices were very high in 2022, we utilized market forecast for natural gas and oil prices.
Mrs, which predicts which.
Which project prices to remain below 2022 levels of course commodity prices are inherently volatile and changes in natural gas and oil prices could result in adjustments to our churn forecast.
The team at catapult mineral partners continues to look for opportunities to expand our portfolio through acquisitions of mineral and royalty interests. While also promoting development of our existing mineral and royalty interests. The group is targeting additional investments of up to $20 million in 2023.
On the upside the development of new wells on existing owned reserves beyond our forecasts or new investments could be accretive to future results. Overall, I expect 2023 to be a year of unfavorable compare comparisons for the reasons I discussed. Despite this I am still very optimistic about our outlook.
As we move beyond 2023.
A lot of confidence in our team and I am pleased with the way all of these businesses continue to advance their strategies, including efforts to protect our coal mining business with that I'll turn the call back over to Christy to cover our results for the quarter and our 2023 outlook in more detail Christi.
Jason I'll start with some high level comments on our consolidated second quarter financial results and then add detail on our individual segments.
On a consolidated basis income before tax decreased to $3 3 million from $45 1 million in the prior year.
Consolidated net income decreased to $2 $5 million or <unk> 34 per share compared with net income of $37 2 million or $5 <unk> per share last year.
EBITDA decreased to $9 2 million from $21 million in 2022. These decreases were primarily due to significantly lower coal mining and minerals management earnings and as JC discussed the absence of the 2022 contract termination settlement.
However, lower results were partly offset by the improvements in mitigation resources and North American mining earnings as well as lower unallocated in play of related expenses.
Higher other investment income.
And coal mining second quarter 2023, operating profit and segment adjusted EBITDA decreased significantly compared with second quarter 2022, primarily due to the substantial decrease in Mississippi lignite mining company results as well as lower earnings at the unconsolidated operations. These declines were partly offset by lower employee related.
<unk> costs.
The decrease in Mississippi Lignite mining company results was driven by a significant increase in the cost per ton. So due to the inefficiencies and additional costs incurred to establish the new mine area JC mentioned.
A $1 $8 million write down of onsite coal inventory to net realizable value also contributed to the significant increase in the cost per ton.
A number of factors contributed to the lower earnings of unconsolidated operations compared with 2022.
<unk> earnings decreased due to lower volumes and pricing soccer earnings declined due to lower customer requirements and a decrease in the per ton management fee and to be an earnings decrease because coal delivery ceased on March 31, and mine reclamation activities commenced on April 1st.
These lower earnings were partly offset by improved results at Coyote Creek due to increased customer requirements.
<unk> already discussed the primary reason behind the decline in mineral management results is significantly lower prices to put this more on context current natural gas prices as measured by the Henry hub natural gas spot price declined.
71% from 2022 and oil prices as measured by the West, Texas Intermediate average crude oil spot price decreased 32% from the prior year.
North American mining second quarter, 2023, operating profit and segment adjusted EBITDA improved over 76% and 48% respectively.
This improvement was primarily due to an increase in part sales and lower employee related expenses.
Overall consolidated results are expected to continue to decrease in the third quarter before improving in the fourth quarter. The improvement in fourth quarter 2023 results will not offset the anticipated third quarter decline.
Therefore earnings in the second half of the year are expected to be lower than both the first half of 2023 and the second half of 2022, primarily driven by the items we've already discussed.
In addition, we expect the earnings of unconsolidated operations to decrease and contribute to the decline in coal mining operating profit. This is primarily due to the early retirement of the perky Powerplant Devine is receiving compensation for providing final mine reclamation services, but at a lower rate than during active mining.
Funding for soybeans mine reclamation is the responsibility of the customer a decrease in earnings at Falkirk and Qatar is also expected to contribute to the lower earnings have on consolidated operations.
Shifting to North American mining, we expect to continue a continuation of improved operating results and segment adjusted EBITDA for the remainder of 2023 as well as for the full year compared with the prior year periods.
A second half increase is primarily because the second half of 2022 included an $800000 charge for a voluntary retirement program. However, these results are expected to decrease from the first half of 2023.
Looking beyond 2023, we continue to remain optimistic about our long term outlook. The coal mining segment expects increased profitability due in part to improvements at Falkirk once they're temporary price concessions and and as Mississippi Lignite mining company move to the new mine area as JC previously mentioned opportunities for growth.
Remained strong in the minerals management and mitigation resources businesses. In addition earnings from the Sochi as mining lithium project are also expected to contribute to improved results in 2024, and 2025 and more significantly when production commences at <unk> in 2026.
Lastly from a liquidity standpoint, we ended the quarter with consolidated cash of $117 million and debt of $24 million. In addition, we had availability of $117 million under our revolving credit facility for the 2023 full year, we expect full we expect cash flow before financing activities to remain.
Positive, but be significantly lower in 2022 because of anticipated high capital expenditures, primarily for Sanchez, We will now turn to any questions you may have.
At this time, if you would like to ask a question. Please press star followed by the number one on your telephone keypad.
For just a moment to compile the questions.
Again, if you would like to ask a question. Please press star one on your telephone keypad.
There are currently no questions at this time I will turn the call back to Christina <unk> for closing remarks.
Thank you very much I'll close with just a few reminder, a replay of our call will be available. Later. This morning, we'll also post a transcript on the Investor Relations website. When it becomes available. If you do have any questions. Please reach out to me you can reach me at the phone number on the press release I Hope you enjoy the rest of your day and I'll turn the call Josh.
To conclude the call.
Thank you a digital recording of this conference will be available for replay in approximately two hours live. According may be accessed until August 10, 2023 at 11 59 P. M. Eastern time to access the recording please dial one 870 70200 again.
One 870, 70200 and enter the conference I'd number to join the replay. Thank you very much. This does conclude today's call you may now disconnect.
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