Q3 2023 NACCO Industries Inc Earnings Call
Thank you for standing by my name is dead and I will be a conference operate I'd stay at this time I would like to welcome everyone to the Nacco industry Conference call. All lines have been placed on mute to prevent any background nice after the speaker's remarks, there will be a question and answer session. If you would like to ask a question.
A stranger, Andy Stein simply press Star followed by the number one on your telephone keypad. If you would like to read through all your question Press Star. One again. Thank you I would now like to turn the call over to Christina <unk>. Please go ahead.
Thank you good morning, everyone and welcome to our 2023 third quarter earnings call. Thank you for joining us This morning, I'm Christian and tomato and I'm responsible for Investor Relations Echo industries, joining me today, a J C Butler, President and Chief Executive Officer, and Elizabeth Love Men, Senior Vice President and controller.
Yesterday, we published our third quarter of 2023 results and filed our 10-Q. This information is available on our website today's call being webcast. The webcast will be on our website. Later this afternoon and available for approximately 12 months.
Ah remarks that follow including answers to your questions contained forward looking statements. These statements are subject to several risks and uncertainties that could cause actual results to differ materially from those expressed in a forward looking statements made here today.
Risks include among other matters that we've described in our earnings release 10-Q, and other SEC filings, we may not update these and forward looking statements until our next quarterly earnings conference call well.
I'll also be discussing non-GAAP information that we believe is useful in evaluating the company's operating performance.
Conciliations for these non-GAAP measures can be found in our earnings release in on our web site and.
I'd also like to note that during today's remarks will provide information about the remainder of 2023 as well as a high level view of our 2024 expectations. We ask that you remember that the 2024 information is preliminary we are still in the process of reviewing our annual operating plan, we will provide more definitive 2024 information as part of our.
Fourth quarter of 2023 earnings release.
With the formalities out of the way I'll turn the call over to JC for some opening remarks Casey. Thank you Christine good morning, everyone.
Our third quarter of 2023 results were much lower than last year, but that was as expected and in line with the outlook, we provided last quarter.
To understand our results, it's best to discuss the quarter business <unk> business I'll also talked about our future expectations before turning the call back over to Christy.
Our first address the coal mining segments last quarter I talked about the temporary operational inefficiencies of Mississippi lignite mining company related to transitioning to a new mind area and contending with some short term adverse mining conditions caused by increased rainfall both of which reduced our production and the increased.
Cost this situation continued into the third quarter and for the same reasons we.
We do expect production costs at Mlm's C to declined significantly in 2024% from recent levels. However production costs are expected to remain above historical levels through 2024.
When is a pit extension and the new miner is complete.
To present to provide some background, we moved to this new mind area because the coal reserves were largely depleted and binary one where we've been mining since the late 19 nineties, we had to open a new mind area with additional reserves to meet our contractual coal delivery requirements, which run to 2032. This was not a surprise.
We have known that we'd need to move to a new mind area. Since we started mining over 20 years ago.
Move to a new mind area and the related costs are now behind US we expect to see modest improvement in the fourth quarter, which results improving further in 2024. However.
However, the biggest favorable favorable impact will occur in 2025 in future years as operations in this new mind area normalized.
You will recall that we've invested significant capital to develop this mind area. 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 this depreciation is excluded from EBITDA, which we think is a better way to look at this part of our business because we don't expect Mississippi lignite mining company to open additional mine areas through the remaining contract term.
Shifting the minerals management natural gas and oil prices are significantly lower than the very high prices experienced in 2022. These.
These lower prices have led to a significant decrease in minerals management third quarter of 2023 results compared with the prior year.
Natural gas and oil prices are expected to continue to remain below 2022 levels, resulting in a significant decrease in operating profit in the fourth quarter of 2023 compared with 2022 <unk>.
The team and catapult mineral partners is finalizing a $37 million acquisition anticipated closed during the fourth quarter that will provide additional diversification into the oil rich Permian Basin basin.
In 2024 minerals management is targeting additional investments of up to $20 million. These.
These investments as well as the development of new wells on existing owned reserves beyond those included in our forecasts would be accretive to future results.
Ah North American mining segment generated a moderate operating profit again, this quarter compared with a small loss and the prior third year quarter. The aggregates mining part of this segment struggled during 2022, but the challenges we implemented but to change sides of James's we implemented to drive improves future financial results are paying off.
And that's encouraging.
I am est domestic north American mining can build upon this momentum and continue to show improvements profitability in the future.
A decrease in Caddo Creek reclamation income is partly offsetting the improvements in results at North American mining aggregates operations. We are no longer recognising reclamation income of Caddo Creek since we purchased a membership interest in the martial mind in March 2023 were Caddo Creek had been performing <unk>.
Reclamation work.
Wrapping up my North American mining comments, let me mentioned Sawtooth mining, which is the exclusive contract miner for lithium America's factor past lithium project in northern Nevada construction.
Construction attacker past commenced in the first quarter with that we began acquiring equipment for the project, we've acquired twenty-three $1 million of equipment to date, we expect to continue to recognize moderate income through 2025 with higher levels of income anticipated, what our customer commences phase one lithium <unk>.
<unk>, which is currently expected to begin in the second half of 2026.
[noise] moving the mitigation resources of North America. This team continues to advance existing mitigation projects and build on the substantial foundation and has established over the past several years I'm pleased to report that they added an additional mitigation bank during the third quarter mitigation.
Mitigation resources is still in what I prefer to is the startup phase, but I'm very pleased with the level of growth they've achieved since starting five years ago.
Even more excited about their prospects. They continue to look for additional projects and expect to achieve near breakeven earnings in 2024 with increasing profitability over the longer term.
I said this last quarter and I'll say it again, we expected 2023 to be a year of unfavorable confer comparisons for a few very specific temporary reasons and the year is played out as we expected.
Despite this I'm still very optimistic about our outlook as we look beyond 2023.
I have a lot of confidence in our team and I'm pleased with the way all of these businesses continued to advance their strategies, including efforts to protect our coal mining business with that I'll turn the call back over to Krispy to cover our results for the quarter and our outlook in more detail Christie and congestion.
Established in high level comments on a consolidated third quarter financial results and then at what color on our individual segments.
Reported a consolidated net loss at $3.8 million or 51 cents per share loss compared with net income is $10.6 million or one dollar and 45 cents per share last year.
We generated modest EBITDA of approximately $400000 compared with approximately $22.1 million in 2022.
Lower results are primarily data significant decreases in our coal mining and minerals management earnings.
Looking at the individuals segments are Coalmining segment had lower results compared with third quarter Twain Twain tail or plugging in operating lack of $4.7 million in a negative segment adjusted EBITDA $400000.
These decreases were primarily due to the substantial decline in Mississippi lately mining company results as well as lower earnings at our unconsolidated operations.
Our customer requirements and Khatab.
No employee related costs, apparently after taxes reduced fees reduced cut off.
The decrease in Mississippi Lakeland mining company results is driven by a significant increase in the cost per ton. So fidgety inefficiencies in additional costs associated with moving to time area to the new line area that JC mentioned.
At $2.4 million breakdown of unsigned cole inventory connect realizable value Arthur contributed to the significant increase in the cost per time.
JC discussed the primary reason behind the decline and minerals management results is significantly lower prices.
This more in context current natural gas prices as measured by the Henry have averaged natural gas spot price declines, 68% from 2020 tail.
Prices as measured by the West, Texas Intermediate average crude oil stock price decreased 12% from last year.
So like American mining Thirdquarter trained trained three operating profit and segment adjusted EBITDA increased significantly over the prior year there can treatment like primarily the lower play related costs.
As in 2022 operating expenses included.
100000 dollar tree voluntary retirement program.
Okay, That's American mining Arthur real life improved earnings at its aggregates Corey and attacked here.
Saved earnings were partly offset by reduced okay reduced cat Creek and counts.
Looking forward at our coal mining segment, we expect fourth quarter of 2023 operating results and segment adjusted EBITDA improved significantly compared with the 2023 third quarter, but declined substantially kind of 2022 fourth quarter as JC mentioned, we are anticipating lower production costs at Mississippi late night mining.
Company. However, oil production costs are expected to decline from recent levels. They are expected to remain about historical levels through 2024, when the new extension and the new line area is complaint.
We are also anticipating an increase in kind of severed which will contribute to a reduction in the cost per ton of salt and improve profitability mlm's, the beginning but the fourth quarter and continuing into 2024.
In 2024 weeks that call delivery to increase moderately from 2023 strong operating profit and significantly higher segment adjusted EBITDA.
Also anticipated and 24 compared to 23.
These increases are primarily they're solid a significant improvements that M. L. M C and an increase in earnings consolidated operations improvement man consolidated operations is expected to be driven by increased customer requirements at can tell and Falkirk as well as a higher per time management fee at Falkirk beginning in June 2024.
Sure.
And the Latin American mining, we expect operating profit and segment adjusted EBITDA increased significantly in both the 2023 fourth quarter and full year versus the prior year period.
These increases are primarily due to anticipated earnings improvements in existing contracts, including type foods mining, partially offset by the completion of services at Caddo Creek full.
Full year 2024, operating profit and segment adjusted EBITDA I anticipated increase significantly over.
Over last year.
<unk> 2023, due to improved earnings under certain existing contracts, including <unk> findings and an anticipated reduction in operating expenses any new contracts should be accretive to north American mining future results.
Finally, we noticed management operating profit and segment adjusted EBITDA for the 2023 fourth quarter and full year are expected to continue to decrease significantly compared with last year.
Decreases are primarily driven by current natural gas and oil price market expectations. In 2024, we expect operating profit and segment adjusted EBITDA increased moderately over 2023, primarily due to current market expectations and limited forecasted development of additional new wealth by third party lessees.
Well, we're operating expenses are also anticipated to contribute to the profit growth.
Future investments, including the 37 million dollar investment anticipated to close before the end of 2023 are expected to be accretive to the current forecast.
Overall at a consolidated level, we expect the fourth quarter of 2023 improvements well produced operating profit and net income versus the losses incurred this quarter fourth quarter and full year 2023 consolidated operating results and adjusted EBITDA. However, I expect it to be down from the respective prior year period.
Due to the expected substantial decreases at the coal mining and minerals management segments. We expect these reductions to be partially offset by favorable changes in income taxes, leading to modest income for the 2023 full year.
In 2024, we expect a significant increase in consolidated net income and EBITDA over this year. These improvements are primarily due to increased profitability at the coal mining segment from improved results at M. L. M C <unk> and can tell.
North American mining and mitigation resources is also expected contributed to the higher 2024 net income.
Lastly from a liquidity standpoint, we ended the quarter with consolidated cache of $128 million in debt of 2022 $22.5 million, we had availability of $122 million under a revolving credit facility.
During the quarter, we repurchased approximately 24800 shares for $800000 under an existing share repurchase program for the full year, we expect cash flow before financing activities to be a moderate use of cash but.
But in 2024, we expect cash before financing activities to be positive.
Not to the level generated in 202022.
We will now turned any questions you may have.
At this time I would like to remind everyone in order to ask a question Press Star and then a number one on your telephone keypad, we they'll paused for just a moment to compile the Q&A roster.
Your first question comes from the line of anger cuts with focus compounding. Please go ahead.
Good morning, everyone.
Good morning Anders.
So.
My first question is actually on buybacks, which is what you guys did.
Your section with so you bought back 800000 installed in September.
And you did have the price of your stock is traded that before.
And you did it under a repurchase plan that was approved two years ago.
I'm just curious on how we should be thinking about this is the change here that you know feel that you have enough cash and ended up expected cash flows to fund diversification efforts.
Maintain a conservative balance sheet and still afford to do buybacks when they make sense should we expect more buybacks going forward I need color you can give out this would be great.
[laughter].
Well, we certainly have enough cash you've been watching us long enough to know that.
We're big believers in having a bulletproof balance sheet and I think the combination of a big pile of cash and not a lot of that.
Reinforces that.
I think your questions really around timing right. We've had this program for a couple of years why are we now.
Buying stock.
I think we've gone through.
What we knew was going to be a difficult 2023 for reasons that we expected going into the year, we signal this more than a year ago.
Sure you know.
And.
We're we're sort of at a 0.2 there when we're we've got a positive.
Outlook, where I live literally on the eve of 2024.
Future years, we feel good about where we're headed and so we bought stock.
Got it.
I mean, it sounds like something maybe we could expect and it's at.
The future.
More more more stock buybacks.
I'm, just not going to comment on that.
Sure.
And then moving to Mississippi like my mining company. So capex is expected to be $10 million for a full year 2023 of the 10 million again in 2024 Ah know there'll be some inflation over time in a year to year variations, but do you think 10 million a year in Capex is a realistic walk through average.
Four M L M C over the next nine years or so.
I mean actually you know I don't have the data.
Tell you if I think $10 million is the right average number I will tell you that it's going to be nowhere near what it's been over the last several years that we use as we've opened this new mine area.
You know going forward, it's really just going to be regular.
Equipment replacement that may be be needed.
And none of those should be extraordinarily large.
Is 10 million the right number I actually don't have enough data in front of me to to tell you what it is over the next nine years, but it.
It's gonna be a modest number for sure.
Got it great and then my.
My last question is around minerals management and your outlook. So in your earnings release, you have a line that says the company's forecast is based on currently owed reserves and you also say you're anticipating closing on a 37 million purchase and the Permian in the fourth quarter.
Does that mean that for now your estimates for 2024 don't include any cash flows from this expected purchase.
That's correct.
Got it that's very helpful. Thank you for answering my questions and I'll jump back in the queue.
Thanks for your questions. We appreciate your interest.
Your second question.
The line of service lines with D. S. W. A L. L. C. Please go ahead.
Hey, good morning.
Good morning.
Just a few questions I guess, the first son, the minerals and mining.
Results. So so I understand that prices are down from a year ago, but but they're actually up a bit from last quarter.
And yet the revenue was down quite a bit from the second quarter.
Is is that wells that are not being replaced or I don't know if you could just talk to why there was a sequential decline.
[noise] I mean the quarter over quarter.
Decline.
Is largely related to the fact that we've got a.
Very very large stake in wells that we've had assets that we've had in wells that we've had for a very long time.
Largely in Appalachia, and the Marcellus, New Utica and those you know.
Natural decline curve, it really from quarter to quarter month to month. It really just gets into you know what new production is coming on and how does that compare to to the decline curves on the things that are producing.
In all honesty I would say, we don't manage the business in a way that is.
You know too concerned about quarter to quarter moves, it's really a business that we're trying to build over the over the very long term.
Sure.
So is it reasonable.
To infer that.
With gas prices so low.
Those wells people just aren't drilling as much until you know are waiting for better prices and then the number of wells will increase again.
Well I think I think it's a combination of that.
Liz you've got to got to the point Yeah. We did have some settlement income in the second quarter of this year. So that also impacted the quarter over quarter results have you look at the 10 key and we have some discussion about that in the Mahouts management segment, Yeah, and I did that but that didn't look like that.
It looked like that was relatively small in the scheme of.
But it is good to hear.
<unk> yeah.
Yeah Yeah.
Go ahead.
It's it's.
We certainly are more sensitive to what's going on with natural gas and we are with oil at this point right. We're working to diversify this new a more balanced.
Portfolio, but we're we're not there yet so anything that's happening in the natural gas world, whether it's prices or.
Right with which new wells are being developed.
On our reserves.
Or.
Workovers that are being done on existing wells to increase production, we're going to be we're going to be more sensitive to that then.
Another minerals company that might be heavily oil waited so natural gas is going to affect us disproportionately more than than oil will at this point.
Okay, and then just Ah from an accounting standpoint, you you recognize it costs of goods and that division, but it is a royalty positions I was just curious what what is the sort of $1 billion a quarter first a good soldier.
It's related to that adoptions that we.
The cost that we're paying.
Off of some of the royalty income.
Okay.
Okay.
I mean I can follow up on that later too.
[laughter].
Okay, you still there.
Yeah.
Okay. So I guess it gets moving onto the solar.
Projects that you've talked about a little bit.
Can you give some kind of ballpark on how much capital you think you can allocate there and what kind of returns you anticipated.
[noise] well.
This is a very new thing for us. So you know just.
Speculate on how much capital we might allocate to it I think is is premature I think we're still exploring what that might be.
Turns.
We're seeing are are very.
Very nice we're seeing returns and the.
Hi, teens low twenties.
We measure that is.
Return on total capital return on equity. So we think these are these are pretty attractive.
Projects.
Mhm, Yeah, I know that that is that is attractive.
Yeah.
<unk> said that.
For projections purposes, you should think about that as a mid sized coal equivalent to a mid sized coal project.
I guess I'm not really sure exactly what that means you know can you give a little.
Context for that in terms of what I should think about.
Would that would be earning at full production.
Yeah, I mean, that's not.
We've never disclosed that kind of granular information with respect to our mind, obviously as you can imagine when you look at the volumes that come out of the show and fall Creek.
Quito and fall Kirk we're getting.
A lot of income out of us.
This is going to be more like tired Creek Shebeen court sort of operation with respect to income.
My advice to you would be sort of look at what we're earning in our coal segment.
Goodbye to buy tons roughly to get some averages.
Uh-huh. Okay. This is going to be this is going to be a relatively small.
That's gonna be a modest operation I will say that as we've been involved with this project over the last several years.
We have had some nice.
Gains with respect to the work that we're going to be performing for lithium America's set factor past project.
We're currently performing.
Some some what I called dirt work construction activities for them with respect to the.
Processing plant.
Development.
So you know we think it's a good partnership and we're looking for ways that we can help them not only under the current scope of how we might expand that relationships in the future.
Okay.
The mine.
I was just curious when the contract ends in 2032 I mean.
The impression I get is that's sort of the end of the operation there but.
They're not you know secondary buyers that would still be interested in that coal, which would encourage continued production [noise] could you just explain that quickly.
Well the current the current contractual.
Relationship started in the mid to late 19 nineties and runs through 2032.
Certainly our coal reserves in the area that could be used.
In the future.
The power plant certainly should have life that goes beyond 2032. So you know one of the one of the things that were very interested in.
Looking for ways.
That we might be able to extend the life of the mind you know.
You know, who how that works with respect to the power plant and what the Powerplants doing and what other things might happen on that location or.
Yet to be determined, but we certainly would be interested in extending that further.
And.
Working on a number of things to that end.
Okay and my last question and you know so your your your.
Put in a lot of capital into the mineral and mining.
Business on the royalties said, but you have this expertise in aggregate mine and.
Which seems to be a very attractive areas, but particularly at the moment I was curious if you've given any thought to direct ownership of aggregates reserves.
[noise] well, okay. So then.
Interpret that as two questions one as you said aggregates reserves.
But I'm guessing you also mean with respect to the processing and sales of the average.
Yeah. So.
Where we have a long history in mining I think.
We're really really good of what we do.
I think we have a great ability to improve the economics for our customers by.
Utilizing our mining expertise.
That does not translate into processing.
The aggregates deciding what products you gonna manufacturer.
Or selling those into the market we have no experience. There we have no skills. You know there's always the question of can you go just acquire those and we could.
But we're sort of big believers in what's billed off the skills that we have rather then decided to go something completely different.
So as far as you know.
Integrating vertically into the the production and sales of the aggregates themselves for processing and sales.
I think that's a big reach for us.
With respect to owning.
The limestone reserves or or or.
Seeing a gap gravel reserves.
We've we've considered it.
I'd say.
Not in a tremendous amount of depth.
But it is something that we've thought about we've done well over.
You know our history by owning coal reserves and we've thought about whether that might be an interesting thing for us. The difference between the two is you know we're sort of experts and lignite and there are two very well defined lignite reserves in the United States and we knew where those are we focused on.
Operations on those.
When you get into aggregates of all types.
They are almost everywhere right. So it's just a vast amount.
Amount of minerals are out there and trying to decide which ones that we would invest in and how those would you know how we could leverage that into.
Increased opportunity in the future.
Harder to see the the economic justification for doing that so.
You know you look at.
Expanding.
[noise] words into buying the reserves or forwards into.
Getting into processing and sales you kind of get them back and say you know our expertise is really in the mining and that's where we're focused at this point.
By the way, we think we think we.
We think the mining peace is a huge market and it's not just.
As we've said for a long time right. It's not just limestone and it's not just operating draglines. There's there's lots of minerals out there that we combined.
Lithium projects a great example of that.
Pursuing opportunities to mind other minerals and.
And we can use lots of equipment historically, we've used draglines today, we're also operating in some truck shovel fleets.
And we are operating a surface mine are all in aggregate and.
Limestone.
Okay, great well well thanks, thanks for all the answers.
Yeah. We appreciate your questions thanks for calling.
Next question.
As angry.
Please go ahead.
Nope I was when I clicked start wanting to jump back in the queue. So no further questions for me.
Right.
Is that it.
So I will now turn the call back over to Christina.
Thank you.
With that we will conclude our Q&A session and I have no further comments at replay of our call will be available later this morning.
Post a transcript on the Investor relations website, when it becomes available.
Do you have any questions. Please reach out to me and my phone number is on the relief I Hope you enjoy the rest of your day and I'll turn the call back over to Dab to conclude the call.
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Mmm.
Mmm.