Q3 2024 NACCO Industries Inc Earnings Call
Good morning, ladies and gentlemen and welcome to the NACO in the Streets 3rd Quarter, 2024 earnings conference call.
and the time of life are in listen only mode. Following the presentation, we will conduct a question and answer session, and you put any time during this call you require immediate assistance, please press star 0 for the operator.
Speaker Change: This call is being recorded on Thursday, October 31, 2024. I would now like to turn the conference over to our investor relations, Mrs. Christina Kmetko. Please go ahead.
Christina Kmetko: Thank you. Good morning everyone and welcome to our third quarter, 2024 earnings call. Thank you for joining us this morning.
Speaker Change: and I'm responsible for investor relations at NACO. Joining me today are J.C. Butler, President and Chief Executive Officer and Elizabeth Lovenman, Senior Vice President and Controller.
Speaker Change: Yesterday we published our 2024 third quarter results and followed our TENQ. 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.
Speaker Change: A remarks of follow including answers to your questions contains 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.
Speaker Change: These risks include among others matters that we've described in our earnings release, thank you and other SEC filings.
Speaker Change: We may not update these forward-looking statements until our next quarterly earnings conference call. We'll also be discussing non-gap information that we believe is useful in evaluating the company's operating performance.
Speaker Change: Reconciliation for these nine gap measures can be found in our earnings release and on our website. With the formalities out of the way, I'll turn the call over to J.C. for some opening remarks. J.C.
J.C. Butler: Thank you, Christine, the morning to those listening. Our 2020-4-3rd quarter was another strong quarter for us.
J.C. Butler: It was very much helped along by the $13.6 million of business interruption insurance income The recorded of Mississippi, midnight, mining company in relation to a boiler outage of the customer's power plant. The reduced customer demand for mid-December 2023 until the end of July.
J.C. Butler: However, even without the insurance recovery, I'm pleased to say our results were very strong, specifically in our coal mining and minerals management segments.
J.C. Butler: is excluding the insurance, our consolidated operating class had increased over a hundred and ninety percent from last year's third quarter loss. Christina will provide more detail about our third quarter income, and it all will be our outlook after my remarks on the operations.
J.C. Butler: I'll start with the positive operational news at our coal mining segment, which delivered the biggest year earlier improvement for the third quarter.
J.C. Butler: The Shemite of Surmeys for my previous insurance recovery comment, the Red Hills Power Plant completed the repairs to the damaged Portland during the quarter. That said, the resolution of this issue was only a small factor in the coal mining segments improved results.
J.C. Butler: Homemining revenues decline primarily due to fewer deliveries at the Red Hills Power Plant as compared with 2023 when the plant was operational for an entire quarter.
J.C. Butler: is despite this lower cost of the demand, Mississippi, Lignite, mining companies where it deals mine, operated more efficiently this quarter than a year ago.
J.C. Butler: in 2023, we were still finalizing the move to a new mining area and contending with difficult mining conditions related both to the move and to weather.
J.C. Butler: We're now established in this new mine area and mining conditions have improved. This contributed significantly to the improved results of this mine for the quarter.
J.C. Butler: and I'd also like to note the improved earnings are unconsolidated coal biting operations.
J.C. Butler: I mentioned last quarter the temporary price concessions put in place at Falkirk to help facilitate rainbow energy's acquisition of cool creature and to demand.
J.C. Butler: Our third quarter result reflects a full quarter of the higher pricing, which can surrogated to the increase at our coal mining segment results.
J.C. Butler: At Mineral's Management, I'm pleased to report that the investments we've been making in new mineral assets are delivering benefits. 3rd quarter 2024 operating profit for this segment increased over last year, largely due to higher production volumes from the assets acquired in late 2023.
J.C. Butler: We are very pleased with the work done by the California Mineral Partners team, which over-site sees this segment.
J.C. Butler: I've expanded our portfolio of mental interests and we are more diversified in terms of our oil gas mix, a wider range of operations, a greater geographic footprint, and various stages of mental development ranging from producing wells to undevelopment of mental interests.
J.C. Butler: Technical Team continues to review additional investment opportunities.
J.C. Butler: Shifting to the North American mining segment, first let me say we are thankful that all of our Florida employees are saved and the impact to our operations from the recent hurricanes was not substantial.
J.C. Butler: The significant rain in Florida as well as planned customer outages did affect our 3-4 deliveries.
J.C. Butler: Despite this lower-custer demand and excluding the effective reimbursement costs, North American mining's revenue is still increased 24% year over year due to favorable pricing and delivery MIPS at the landstirt in quarries.
J.C. Butler: Looking at North American mining operating results, last quarter I mentioned that we had begun mining phosphate for a new customer in Florida. This customer temporarily ceased operations in the third quarter's work through business challenges.
J.C. Butler: Where I hope these challenges can be resolved, we established a $900,000 reserve against their receivable. Primero, he has a result of his charge, North American mining generated a modest operating loss in the 2024-3rd quarter compared with a prior year operating profit.
J.C. Butler: I'd also like to note that with human Americans continues to make progress on the Thacker Pass Project.
J.C. Butler: Early this week, they announced the closing of a significant loan from the Department of Energy.
J.C. Butler: which will help enhance the construction of the FACER pass with the improdjection northern data.
J.C. Butler: We're thrilled that our customer has reached this important milestone.
J.C. Butler: and what this latest development means for this project.
J.C. Butler: We continue to support the project by assisting with certain construction services and in addition in the fourth quarter of 2024, we and Lithuania America agreed to expand the scope of our work to include transportation of clay tailings once Lithium production commences.
J.C. Butler: Phase 1 lithium production is estimated to begin in 2027.
J.C. Butler: Finally, moving to mitigation resources of North America results for this business continue to fluctuate based on the mix about standing in projects.
J.C. Butler: However, this team continues to execute existing mitigation and reclamation projects and build on the substantial foundation as it is established over the past several years.
J.C. Butler: Based on current expectations for new projects, as well as time-setting, timing of permanent approvals and mitigation credit releases. This part of our business anticipates achieving a full year profit in 2025.
J.C. Butler: is a business maturation with the leave it can provide solid rates of return on capital and employed.
J.C. Butler: Overall I continue to be very optimistic about our business.
J.C. Butler: I have a lot of confidence in our trajectory and the team that I'm 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 Kristy to cover our quarterly results and outlook in more detail. Kristy.
Kristy: Thank you, Jay-C. I'll start with some high-level comments about our consolidated third quarter financial results, then I'll discuss the results that are individual segments.
Kristy: As a consolidated level, we reported operating profit of $19.7 million and net income of $15.6 million, which equated to $2.14 per share.
Kristy: For last year's third quarter, we reported an operating loss of $6.3 million and a net loss of $3.8 million or loss of $51 per share.
Kristy: EBITDA, increased to $25.7 million from $400,000 in 2023. As D.C., mentioned, these financial results include insurance recovery income of $13.6 million recorded in our coal mining segment results.
Kristy: with the National Co-Mining segment.
Kristy: That segment reported operating profit of $19.9 million and generated segment adjusted of $22.1 million.
Kristy: This compares to an operating loss of $4.7 million and close to break-even segment adjusted EBITDA in 2023.
Speaker Change: J.C. generally discussed the reasons for the higher coal mining segment results. I would note that in addition to the favorable MLNC results and higher fall curve pricing, improved results at Keto, another one of our unconsolidated mines, also contributed to the profit improvement.
Speaker Change: Since J.C. already provided the primary drivers of the Mineral's Management and North American Minuresults, I would just mention the financial numbers.
Speaker Change: and the Nose Management's third quarter of revenue of $204 revenues of $8.8 million, increased 54% from 5.7 million a year ago.
Speaker Change: Operating Profit, improved the 6.2 million, up 71% compared to 3.6 million in the 2023 third quarter.
Speaker Change: North American mining reported an operating loss of approximately half a million dollars, versus profit of $900,000 in 2023. Segment adjusted EBITDA was $2.2 million and down approximately 700,000 from last year.
Speaker Change: Looking forward, we expect our coal mining segment operating profit to increase in both the 2024 or fourth quarter and full year compared with both of the prior year periods. This improvement occurs with or without the $60.8 million dollar impairment charge that was taken in fourth quarter, 2023.
Speaker Change: Higher segment adjusted EBITDA, which excludes the impairment charge, is also projected for both periods.
Speaker Change: These anticipated increases are primarily due to higher earnings of the unconsolidated coal mining operations and an expected improvement in results in the city-legant mining company due to an increase in the index-based sales price, partly offset by a reduction in customer demand.
Speaker Change: The projected increase in fourth quarter 2024 earnings at the uncontrollable mining operations is driven primarily by an expectation for increased customer requirements, as well as the higher per ton management fee at Falker.
Speaker Change: Turning to North American mining, we expect both the 2024 fourth quarter and full year operating profit and segment adjusted EBITDA to increase year over year.
Speaker Change: Fourth quarter results are also anticipated to improve over this past quarter. These improvements are mainly due to mutually advantageous limestone contract amendments and a scope of work expansion with another customer that took effect earlier this year.
Speaker Change: Finally, at Minnell's Management, we expect operating profit and segment adjusted deba da to decrease in the 2024-4th quarter and 4-year compared with the prior year periods, excluding the 4th quarter 2023 impairment charge of $5.1 million.
Speaker Change: as well as the $4.5 million gain on sale, recognized in the 2020-4 second quarter, which affects the full year comparison.
Speaker Change: These declines are primarily driven by current market expectations for natural gas and oil prices, as well as development and production assumptions on currently owned reserves.
Speaker Change: As we've mentioned, our fourth quarter 2020 three results included a pre-tax impairment charge totaling $65.9 million. My upcoming results, comments about our anticipated consolidated results, exclude the effect of this charge.
Speaker Change: Overall, we expect fourth quarter and four year 2024 consolidated operating profit and adjusted EBITDA to increase significantly year over year.
Speaker Change: These improvements are primarily due to the anticipated increases in profitability at coal mining from improved results at Mississippi-Lignant mining company Falkirk and Kato. Also, North American mining's growth and profit improvement initiatives are expected to contribute to the improved earnings.
Speaker Change: Full Year 2024 net income is expected to increase significantly over 2023.
Speaker Change: Looking forward.
Speaker Change: to looking toward 2025. The company's businesses provide critical inputs for electricity generation, construction and development and the production of industrial minerals and chemicals, increasing demand for electricity, on-choring and current federal policies, are creating favorable macroeconomic trends within these industries.
Speaker Change: We anticipate solid customer demand at our coal mining operations in 2025 and will benefit from the absence of temporary price concessions at fall-curk. However, cost inflation is anticipated due effect, Mississippi-Legmate mining companies, 20-25 results.
Speaker Change: North American mining expects to build on its current 2024 momentum to deliver further improved results in 2025.
Speaker Change: Benefits from new and amended contracts and new business expansion opportunities are expected to generate improved 20-25 results on expectations for comparable year over year customer demand.
Speaker Change: Mineral Management's current high quality diverse afford portfolio provides a strong foundation of well-positioned assets that are expected to continue to deliver solid financial results. However, given current trends in oil and natural gas prices, and projected volumes, we anticipate a moderate production decline in 2025.
Speaker Change: In addition, we are taking actions to terminate our defined benefit pension plan, which will eliminate future volatility from changes in the pension obligation. Once complete, obligations into the terminated plan will be transferred to a third party insurance provider.
Speaker Change: and the other plan is currently overfunded. NACCO is anticipating a non-cash settlement charge in 2025 upon termination.
Speaker Change: Before I turn the call over to questions, let me close with some information about our balance sheet and cash flow. We ended the quarter with consolidated cash of approximately $63 million and debt of $70 million.
Speaker Change: During the third quarter, we also purchased approximately 68,000 shares for $2,000 under an existing share repurchase program.
Speaker Change: We amended our revolving credit facility during Q3 to increase the revolving credit commitments to 200 million and extend the maturity to September 2028. Availability under the revolver, which approximately 131 million at September 30th, 2024.
Speaker Change: We expect cash will before financing activities to be a use of cash for the full year 2024. We will now turn to any questions you may have.
Speaker Change: Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment.
Speaker Change: Again, please press star 1 to ask the question and we'll post for the moment to allow everyone and the opportunities to signal for questions.
Speaker Change: Our first question comes from the line of dog ways from E.S. W. Investment, please go ahead.
Speaker Change: Good morning. Good morning, Doug. I'm starting with the protest customer. What happens when a customer?
Speaker Change: is facing financial difficulties. Do you stop doing work and then what happens to the equipment so on?
Speaker Change: Well, generally it completely depends on the situation, right? We're going to handle any of these specifically to the circumstances.
Speaker Change: If it's a place where we can pull people away so that we're not incurring costs. If it's a contract where we're actually paying the cost.
Speaker Change: and you know we'll pull our employees away, we'll reduce costs, do what we need to do secure equipment if it's our equipment, you know, button things up, you know, you know, in other situations.
Speaker Change: You know, it might be that, you know, a customer is paying all the costs and, you know, we'll make an assessment about the situation there as well. So it's really, it's very, very, very, very, very, very, very, very, very, very specific and contract specific.
Speaker Change: That makes sense. Are you able to see how many times that contract is?
Speaker Change: I will also tell you that
Speaker Change: One of the things that I've been thinking about anyway is as we start to diversify in more and more different kinds of minerals within the North American mining segment, is tons really useful statistic.
Speaker Change: While it's predominantly, predominantly limestone makes sense. As you start mixing in other things like potash and lithium and other things we'd like to mine in the future, it becomes the last meeting for the number.
Speaker Change: Okay. And by the way, I think I misspoke. I think I described as part of it, but it's fast feet, right? Yeah, I'm sorry, I'm sorry, fast feet. Yeah, I had me doing it too. I planted that in your head.
Speaker Change: So, um, okay, um, and I guess you don't want to characterize whether this is a contract where the customer is covering the cost.
Speaker Change: I mean, we took a charge that we thought, you know, you, I mean, you know, accounting works right if you're, you've got any concerns of all you need to take a charge.
Speaker Change: I think our statement was we're hopeful that this is going to get resolved here in the next, you know, a couple of quarters and at least guys are going to be moving forward.
Speaker Change: You know, that's our position as we stand here right now. We're obviously staying very close to it. They're being very transparent with us and we feel we feel overall pretty good about the situation. And we're excited but you know, we're not in control and we're a service provider and we're going to have to see how this plays out.
Speaker Change: Okay, and then the, the, thank you mentioned that the decline in tonnage for the quarter still on North American mining was,
Speaker Change: largely due to rain and customer maintenance. Would you expect that tonnish to bounce back for the levels in the second quarter in the fourth quarter and go on forward?
Speaker Change: Yeah, so normalings I think we would.
Speaker Change: The big wild card is a substantial amount of our operations on the dot all are in Florida and in particular we've got a number of queries where we operate in Central Florida. The one-two punch of the two hurricanes coming through there, both Haley and Milton.
Speaker Change: and...
Speaker Change: You know, really slowed down operations in that part of Florida and it's for a number of reasons. In some instances, their quarries that are just flooded out and it's impossible that I'm to get to work and show the water receipts.
Speaker Change: and other instances what typically happens in Florida after hurricane is you know we've all seen that pictures and newspaper videos online are on television and the vicious piles of debris and mattresses and sofes and...
Speaker Change: Theresa and also its a stuff everywhere. A lot of the aggregates that we mine and deliver to our customers are then hauled away from the customer side by independent truckers.
Speaker Change: after a hurricane a lot of truckers go to work for FEMA and the stage and other organizations that are...
Speaker Change: you know hard work trying to get things cleaned up and in addition a lot of construction projects where these aggregates we're going you know those things slow down as well so for a while there's a diversion of
Speaker Change: and the people that put Agriots to work while they're cleaning up from the hurricane. And that, you know, that varies based on the hurricane and the location and all that.
Speaker Change: Chippicleing, I'm not saying that's exactly what's going to happen here, but typically then after a period of time when things start to return to normal.
Speaker Change: Normal demand picks up for the construction projects or other activities that run their way using aggregates, but there tends to be a little bit of an additional bump because municipalities and the state are in their fixing roads and bridges and beaches and other things that require aggregates.
Speaker Change: So, you know, it's hard to say exactly how that's going to play out quarter to quarter, but I wanted to give you a flavor for how the dynamics work in Florida, typically after hurricanes.
Speaker Change: Yes, that's helpful. And that brings me to another question, which is, you know, when...
Speaker Change: In a normal period on a typical aggregate mine, are you mining to your capacity or are you mining to the customers targeted volume?
Speaker Change: and I think it's all customary target and volume.
Speaker Change: Right, I would say the only time it goes the other way is if we're at capacity with the equipment that's there, which in some cases we are in in some cases there.
Speaker Change: [inaudible]
Speaker Change: Based on their demand, we've got some kind of some kind of strides that is customer requirements.
Speaker Change: Right. And I assume there's a certain, I mean, a fair bit of fixed cost leverage, right? So that, because you gotta have the people there and you gotta have the equipment there.
Speaker Change: I assume your costs are relatively fixed and then, you know, the demand spikes.
Speaker Change: and that's a lot more incremental margin is the right way to think about it.
Speaker Change: Well, it's very contract specific. There are some instances where the customer runs the drag line pays all of our cost and we receive a service fee and there are some contracts where we own the drag line and pay all of our cost and...
Speaker Change: Good-out.
Speaker Change: Provided to work at a C that covers our costs in capital.
Speaker Change: We have another contract structure that's a bit in the middle of that Where we only equipment, but the customer gives us a fixed monthly payment
Speaker Change: Related to the capital that we have invested and we get a fixed payment related to the fixed costs, the wing incurred, and then the service part of it operates on the margin.
Speaker Change: So it's a range of contracts structures that exist in this business.
Speaker Change: Hey, you're questioning about leveraging that's really about it.
Speaker Change: and regardless of who owns the equipment, who pays the fixed costs. You know, all of these businesses are, you know, it's a quarry with a fixed.
Speaker Change: and the customers invested in them, they have their processing plan. We, or they have the mining equipment. So for both sides, it's really a volume game.
Speaker Change: Ray, no, that makes sense. And does what you're describing have anything to do with how you categorize the businesses is consolidated and uncontrolled in that division or is that totally a separate issue? That is a great question for Liz Lovman.
Liz Lovman: That goes into, it's really, you know, the variable interest entity accounting relies on control. And so we evaluate each contract individually and based on the merits of that contract, we determine if it's
Speaker Change: I see. So the less so in situations where you don't own the equipment and you're more of a service provider that would be more likely to be on consultators at right car.
Speaker Change: Okay.
Speaker Change: OK, great. As you try to expand that business outside of Florida, are there other people who do the same thing you do? I'm curious if there would ever be M&A opportunities to sort of accelerate your diversification.
Speaker Change: So we actually are expanding pretty rapidly out of Florida. Let me know. We've got operations in Texas, Nebraska, Arkansas, Virginia.
Speaker Change: and you know, and continue to expand it and you know, the lithium mine up in Northern the ballots. So we continue to expand the footprint of this business.
Speaker Change: You know, pretty aggressively. We operate, we have relationships with...
Speaker Change: and I don't know how many, but a significant number of the top 10 aggregates producers in the country. And the word operating under a model that says...
Speaker Change: You know, their experts at their aggregate business, they know how to assess their customer base and size it and sell it in all those things and we're experts in mine which is not their core expertise. So we're leveraging that.
Speaker Change: that goes complementary skill sets and the relationships we have, most with current and
Speaker Change: and other customers in order to expand this as much as we can out of the state. You know, more diversification gives us less exposure to hurricanes, certainly, but it's also just good for the business.
Speaker Change: Right. So you see an opportunity to, with those relationships you have to kind of, like if we just took like a Martin Marietta, I mean where they're obviously a national footprint, where you could start working with them in other states.
Speaker Change: Yep, absolutely.
Speaker Change: and we have done so with I'm in America.
Speaker Change: List of customers that we've done that with a number of customers.
Speaker Change: Okay, make sense.
Speaker Change: I guess moving to the mineral management. You know what I think there's it.
Speaker Change: A certain amount of optimism around gas prices next year, you know, that plays out with that change year forecast or your expectation in terms of production volume. Is that a very much a price dependent?
Speaker Change: That item...
Speaker Change: I mean it's sure it's the higher prices.
Speaker Change: The Wallways Effect
Speaker Change: Alpard.
Speaker Change: but I think the biggest impact for us would actually just be from the price effect.
Speaker Change: and that's you know that's we're always aware that that's great for our minerals management business given the significant amount of natural gas reserves that we own. It's also good for our coal business because it makes the coal generating assets more competitive than natural gas power generation.
Speaker Change: Right.
Speaker Change: Do you ever thought, or do you have the ability to sell forward gas? I know you don't take in physical possession of it, but...
Speaker Change: is there, you know, just as a financial kind of hedge.
Speaker Change: So the hedging strategies that we have looked at, one wouldn't meet hedge accounting.
Speaker Change: Requirements that we'd like to have. The other is that...
Speaker Change: You know, hedging has a cost. Everybody's always focused on the benefits of hedging. The hedging has a cost.
Speaker Change: and because we are operating our business, we're, you know, we own these minerals, we're buying minerals.
Speaker Change: Really with cash, we don't have debt, we don't have, you know, we're not a yield co, like some of the mineral companies out there. We're not funded by a private equity firm. We don't have to incur the cost of the hedges.
Speaker Change: and you know can just roll along with the prices as it moves and over the long term we think that's going to be more profitable. We think of their our short term pressures on us.
Speaker Change: We think if we had short-term crushers, you know, hedging can make sense because you've got to be assured of the timing of those income streams. But in our situation, we think we can avoid the cost of hedging and a little long-term will benefit from that.
Speaker Change: and then moving on to the call.
Speaker Change: My impression from the 10K is that those are all multi-decade, particularly I'll just post-Simon on the on-consolidated assets, that those are multi-decade reserves.
Speaker Change: I guess is that right and would you want to kind of put a general number on what the reserve life is, those unconsolidated assets.
Speaker Change: There's a lot of reserves there. Liz, I don't know what's disclosed in the technical parts of any of our documents, but there's lots of coal reserves in the un-consolidated coal mines.
Liz Lovman: Yeah, okay. All right, let's have a look at the 10K. We have some detail included that we update each year in the front section of the 10K.
Liz Lovman: Okay, I'll look at it. I would say the young consolidated minds right in North Dakota, and I can tell you that the coal reserves in North Dakota are vast.
Liz Lovman: Plenty of coal reserves that are probably going beyond what is described in our disclosures. Just my guess that's tied to the permanent area.
Liz Lovman: Rampso is you, you know, as you expand the permeant area there's more reserves there.
Speaker Change: Okay. All right, well, thanks so that's all I have for today and appreciate the time as always and talk to you next quarter.
Speaker Change: John, we appreciate your questions. It's great to see somebody digging into the business that's got an interest in what we're doing and where we're happy to take your questions on the call.
Speaker Change: and the other one.
Speaker Change: Again, please press star 1 to ask the question.
Speaker Change: The End
Speaker Change: Sir, no question of this time, please continue.
Speaker Change: Okay, and with that, we'll conclude our Q&A session. I'd like to provide a few reminders. A replay of our call will be available later this morning.
Speaker Change: will also post a transcript on our 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 our day. Your day, sorry. And now I'll turn it back to our operator to conclude the call.
Speaker Change: Thank you. This concludes today's conference call. You can listen to the replay by dialing plus 1888-6606345 and enter the past code 49.
Speaker Change: 480. Thank you everyone you may now disconnect.