NACCO Industries Q4 2023 Earnings Call Transcript

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March 7, 2024

There are 5 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the NACCO Industries 4th Quarter and Full Year 2023 Earnings Conference Call. At this time, all lines are in a listen only mode. Following the presentation, we will conduct a question and answer session. This call is being recorded on Thursday, March 7, 2024. I would now like to turn the conference over to Kristina Kmetko, Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you. Good morning, everyone, and welcome to our Q4 and full year 2023 earnings call. Thank you for joining us this morning. I'm Christina Kmetko and I'm responsible for Investor Relations at NACCO. Joining me today are J.

Speaker 1

C. Butler, President and Chief Executive Officer and Elizabeth Loveman, Senior Vice President and Controller. Yesterday, we published our 2023 Q4 and full year results and filed our 10 ks. This information is available on our website. Today's call is also being webcast.

Speaker 1

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 ks and other SEC filings. We may not update these forward looking statements until our next quarterly conference call.

Speaker 1

We'll 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 call over to J. C. For some opening remarks.

Speaker 1

J. C? C.

Speaker 2

Durrant:]

Speaker 3

Thank you, Christine. Good morning, everyone. As we put 2023 behind us, I'm pleased to be looking forward to 2024. We expected 2023 to be challenging and it ended up being more difficult than we expected. That said, challenges are what make us stronger and I definitely believe that we are entering 2024 in a very strong position.

Speaker 3

Our teams have delivered on our 2 key strategies to protect the core and grow and diversify, and we emerge from 2023 with a solid foundation for future growth. The unfavorable comparisons we experienced throughout 2023 should turn favorable in 2024 and lead to continuing improvement in the future. Before I get into our Q4 highlights, I'd like to recognize our outstanding employees. I'm extremely proud of the way these talented, dedicated and motivated individuals have worked to make our operations run efficiently despite any challenges they may face. They continue to find new and exciting ways to support our existing customers while growing and diversifying our company.

Speaker 3

I want to thank each of them for the hard work and many contributions that they put forth to strengthen us today and to secure new opportunities for our future. I am honored each and every day to work alongside such an amazing team. The most notable item this quarter is the impairment at Mississippi Lignite Mining Company. In mid December, MLMC received a force majeure notice from its customer. This notice was the result of an issue 1 of the 2 boilers at the Red Hills power plant.

Speaker 3

This one unit is still not functioning and the timeline for resolution is uncertain. This issue is expected to result in a significant decline in customer demand during 2024 while the power plant is running on just one unit. Without getting into all the accounting details, I'll just say it was this anticipated reduction in demand that contributed to the company taking a non cash impairment charge of $65,900,000 during the 2023 Q4. The combination of this non cash impairment charge substantially lower operating results on our Coal Mining and Minerals Management segments resulted in substantial consolidated operating and net losses for the Q4 and full year. Christy will go into more detail about our 4th quarter earnings and provide an overview of our outlook in a minute, But first, let me talk about some of our accomplishments during the year.

Speaker 3

I'll start with the coal mining segment. During 2023, MLMC successfully completed the move to a new mine area and overcame unfavorable mining conditions to remove the last remaining coal from the prior mine area. This move to a new mine area was a multi year project. We've known that a move to a new mine area would be required since the mine was built back in the late 1990s. So this was no surprise.

Speaker 3

The new mine area is just across the state highway from the prior mine area. So it will not change the economics of hauling the coal in a meaningful way. But we did have to get equipment to the new mine area. You'll see a photo of the drag line walking across the state highway in our upcoming annual report. As anticipated, MLMC's costs began to improve after the move to the new mine area, which contributed to improved 4th quarter results compared to the Q3.

Speaker 3

While this move was challenging and expensive, it sets us up nicely for the future. We expect production costs at MLMC to decline significantly in 2024 from recent levels. These costs, however, are expected to remain above historical levels through 2024 until the boiler issue at the power plant is resolved and a pit extension in the new mine area is complete. Shifting to minerals management, the Catapult Mineral Partners team, which oversees our minerals management segment, successfully negotiated and closed on a $37,000,000 acquisition in the Midland section of the Permian Basin. This acquisition of oil and gas mineral interest is Catapult's largest acquisition to date.

Speaker 3

The Catapult team has done a great job of growing and diversifying our portfolio of mineral interests over the last few years. Prior to 2020, our income related to oil and gas mineral interest was highly concentrated in the Appalachian Basin, largely focused on natural gas. We still have these legacy interest and profit from owning them, but we now own oil and gas interest in other major basins across the country as well. We're also now more diversified in terms of operators and stages of development ranging from producing wells to undeveloped mineral interests. We think this business is well positioned for the future based on work done thus far and we continue to invest.

Speaker 3

In 2024, Minerals Management is targeting additional investments of up to $20,000,000 Future investments as well as development of new wells on existing owned reserves beyond those included in our current forecast would be accretive to future results. In 2023, North American Mining made significant progress on operational and strategic projects to improve profitability. While its 4th quarter operating results were down from the prior year, full year operating profit was up 52% compared with 2022. I think this improvement in results is a very positive sign that the team is making meaningful progress toward building North American Mining into a very successful business platform for us. North American Mining continues to grow.

Speaker 3

Our North American Mining team succeeded in winning a bid for a 6 year contract extension with its largest customer and secured a new 15 year contract to mine phosphate building on its goal to diversify into additional minerals. Wrapping up my North American mining comments, let me mention Sawtooth Mining, which is the exclusive contract miner for Lithium Americas Thacker Pass Lithium Project in Northern Nevada. Construction at Thacker Pass commenced in the 2023 1st quarter. With that, we began acquiring equipment for the project and have acquired $23,000,000 of equipment to date. We expect to continue to recognize moderate income prior to the commencement of Phase 1 lithium production.

Speaker 3

Moving to our Mitigation Resources of North America business, this team continues to advance existing mitigation projects and build on the substantial foundation it is established over the past several years. I'm very pleased with the level of growth mitigation resources has achieved since first starting 5 years ago, and I'm very enthusiastic about their prospects. During 2023, this business invested in people and data analytics to make even more informed decisions about which markets to target. We anticipate that Mitigation Resources will further expand and develop its business model in 2024 with a focus on generating a modest operating profit by 2025 and achieving sustainable profitability in future years. Our team continues to look for ways to create additional value by utilizing our core mining competencies, including reclamation and permitting.

Speaker 3

Among the ways we are doing that is through development of utility scale solar projects on reclaimed mining properties. In 2023, we formed Regen Resources to pursue such projects, including the potential development of a solar farm on reclaimed land at Mississippi Lignite Mining Company. I continue to be very optimistic about our outlook as we look past 2023. I have a lot of confidence in our team and 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 Kristie to cover our results for the quarter and our outlook in more detail.

Speaker 3

Kristie?

Speaker 1

Thank you, JC. I'll start with some high level comments on our consolidated 4th quarter financial results and then add detail on our individual segments. We reported a consolidated net loss of $44,000,000 or $5.88 per share loss compared with net income of $13,800,000 or $1.84 per share last year. As J. C.

Speaker 1

Mentioned, our 4th quarter results include a $65,900,000 pre tax asset impairment charge. I'd note that while the impairment relates solely to Mississippi Lignite Mining Company, we recorded $60,900,000 in the coal segment and $5,100,000 at Minerals Management because certain land assets were included within that business. We generated consolidated adjusted EBITDA of $7,100,000 compared with $23,600,000 in 20.22. Adjusted EBITDA excludes the impairment charge. These lower results were primarily due to significant decreases in our coal mining and minerals management earnings.

Speaker 1

Our coal mining segment reported an operating loss of $62,300,000 which includes the impairment charge of $60,800,000 This compares to a loss of $4,700,000 in Q3 2023 and operating profit of $3,700,000 in Q4 2022. We generated segment adjusted EBITDA of 3 point $2,000,000 this past quarter compared to $8,100,000 last year. The decrease in segment adjusted EBITDA was primarily due the substantial decline in Mississippi Lignite Mining Company results as well as a decrease in earnings at our unconsolidated operations because of lower customer requirements. Higher employee related expenses also contributed to the decline. Decrease in Mississippi Lignite Mining Company results was primarily the result of fewer tons delivered in part due to the issue affecting the power plant.

Speaker 1

The decrease in tons delivered contributed to an increase in the cost per ton sold and a $900,000 write down of coal inventory to net realizable value. Excluding the impairment, the primary reason behind the decline in Minerals Management's results is significantly lower natural gas and oil prices. With this more in context, current natural gas prices as measured by the Henry Hub average natural gas spot price declined 51% from 2022 and oil prices as measured by the West Texas Intermediate average crude oil spot price decreased 5% from the prior year. At North American Mining, improved Q4 2023 earnings at Sawtooth and North American Mining's active quarries were more than offset by a $500,000 loss on sale of the drag line. Dollars 400,000 of higher outside service costs compared with 2022 related to business development activities and the impact of the substantial completion of services at Caddo Creek in 2022.

Speaker 1

As a result, North American Mining's 4th quarter 2023 operating loss of $600,000 increased over the prior year. Segment adjusted EBITDA was positive and comparable to 2022 despite the higher operating loss because results at the mining operations improved when the impact of depreciation expense was excluded. Looking forward, at our Coal Mining segment, we expect strong 2024 operating profit compared with a significant 2023 loss and substantially higher segment adjusted EBITDA. These anticipated increases are primarily due to an improvement in results at Mississippi Lignite Mining Company and higher earnings at Falkirk and Coteau. We are expecting MLMC to incur a loss in 2024, but it is expected to be significantly less than in 2023.

Speaker 1

As J. C. Mentioned, we are anticipating lower production costs. However, while production costs are projected to decline significantly from recent levels, they are expected to remain above historical levels through 2024 when a pit extension in the new mine area is complete. Lower depreciation and amortization expense as a result of the lower depreciable value of MLMC's assets after the impairment is expected to contribute to the improved results.

Speaker 1

An extended delay in repairs to the Red Hills power plant could significantly affect the company's 2024 outlook. An anticipated increase in 2024 earnings at the unconsolidated coal mining operations is driven primarily by an expectation for increased customer requirements at Qutouton Falkirk as well as a higher profit per ton management fee at Falkirk beginning in June 2024 when temporary price concessions end. We expect operating profit to be higher in the second half of twenty twenty four compared with the first half due to anticipated improvements at MLMC, increased demand at the unconsolidated coal mining operations and the end of the fall curve price concessions in June of 'twenty four. As a result of the impact of the new and modified contracts J. C.

Speaker 1

Mentioned, we expect North American Mining to achieve consecutive quarterly growth in operating profit segment adjusted EBITDA in 2024 leading to significantly improved full year results over 2023. Finally, at Minerals Management, we expect 2024 operating profit and segment adjusted EBITDA to decrease moderately compared with the prior year, excluding the 2023 impairment charge. The forecasted reduction in profitability is primarily driven by current market expectations for natural gas and oil prices and modest expectations for development of additional new wells by third party lessees. Lower operating expenses are expected to partially offset the anticipated profit decline. Overall, at a consolidated level, we expect to generate net income in 2024 versus the 2023 net loss.

Speaker 1

Adjusted EBITDA is also expected to increase significantly over 2023. These improvements are primarily due to increased profitability at the coal mining segment from improved results at Mississippi Lignite Mining Company, Falkirk and Coteau. Growth at North America Mining is also expected to contribute to the higher 'twenty four net income. Lastly, from a liquidity standpoint, we ended the quarter with consolidated cash of $85,000,000 and debt of $36,000,000 We had availability of $105,000,000 under our revolving credit facility. During the Q4, we repurchased approximately 66,000 shares for $2,300,000 under an existing share repurchase program.

Speaker 1

In 2024, we expect cash flow before financing activities to be a moderate use of cash. We will now turn to any questions you may have.

Operator

Thank you. And ladies and gentlemen, we will now begin the question and answer Your first question comes from the line of

Speaker 2

Doug. Is it possible to say how much the sort of additional costs are per quarter for the work you're doing on the Mississippi lignite coal

Speaker 3

I'm not sure I understand the question.

Speaker 2

So in other words, as you're sort of operating dual mines and moving the equipment and so forth, once that process is completed, how much cost will just drop out of the quarters?

Speaker 3

Liz, I'll give this a shot and see what you think. So I mean, I'm not going to give you an exact dollar amount, but I would say that our costs are going to return to where they were prior us incurring these additional costs to move into the new mine area. We'd sort of doubled up on costs and it was less efficient while we were doing this. But I think once we get established over there and obviously are delivering full volumes, mining full volumes when the plants up and running again, I think we'll return to historical cost levels. Liz, is that fair?

Speaker 4

I would agree. I would also say you mentioned we're operating at 2 mine areas. We've already moved over to the new mine area. We're not operating at the previous mine area.

Speaker 2

Okay, great.

Speaker 4

Right. We're working on the pit extension.

Speaker 3

Right. Yes, just to clarify the prior mine area, which we call mine area 1 is now in reclamation. And the costs when we're in reclamation is really more of a balance sheet exercise than it is a income statement exercise because we've accumulated reserves to cover reclamation of that mine area. So as we expend costs, those really just come out of that reserve. So at this point, the costs are really all attributable to normal operations in the new mine area.

Speaker 3

They're just not at the efficiency levels we expect because we're delivering it. We're mining at half rate because the power plants only running on 1 unit and we're getting this initial pit extended to the length we want it to be. Okay.

Speaker 2

Then do you have any visibility on when that second boiler will come up?

Speaker 3

Our guys at the mine site are in regular communication with the power plant as typical in all of our operations. They are certainly discussing the timeline. It's really entirely in our customers' control. But I would say, I think they are, from everything we can tell, they're handling this very professionally. And I expect they're going to get this thing back up and running during the year.

Speaker 3

But I'm not going to put any dates out there. I think it's really up to our customer to decide if they're going to talk about that publicly. But it's expected to be during the course of 2024.

Speaker 2

Okay. And in the coal division, the SG and A expense, does that should I think about that being applied to all your coal operations or just the consolidated coal operations? In other words, do the unconsolidated already include SG and A that's off income statement or is it or does it all flow into your income statement?

Speaker 3

Well, it's kind of a combination of the 2. With respect to the unconsolidated mines, which is really a majority of the coal mining segment, we the way the contracts work is we do receive some compensation in our fees to cover some overhead costs that we incur. You can't really see that split out because it's all just a part of the fee. But the fees that we receive are some of those are targeted directly towards SG and A costs that we incur in that segment. And so there's internally, we can see that there's a netting that covers a lot of those expenses.

Speaker 3

But externally, you can't really see that. Now some of the coal segment SG and A is related to our consolidated operations at Red Hills as well. So I'd really say you kind of have to just spread it across and think of the coal segment as a unit, think of it as a business and those SG and A costs are all attributable to that segment. However, some of those are by contract. We're doing the work like we're providing IT platforms and HR and benefits backbone and we're getting a G and A fee to cover that.

Speaker 2

Okay. Okay, makes sense. And just in terms of while the other boiler is offline, how do you think about the volume in those quarters? Is it because it looked like they're already operating subcapacity. So is it actually a 50% reduction or is it less than that because they were already not at full capacity?

Speaker 3

Well, I mean, it's the 2 units are similar inside, they're the same size, right? It's a fifty-fifty kind of proposition. I think, well, I know that the plant is operating at 50% of the level that it would probably be operating if both boilers were operating.

Speaker 2

Okay. Okay.

Speaker 3

It's not a because if the plant is going to be dispatched, they're going to probably dispatch it fully. And if it's not going to be dispatched, it's not. So I think it's kind of I think it's for the most part of fifty-fifty proposition.

Speaker 2

Okay. Okay, got it. So congratulations on that on the new phosphate contract. Is it possible to give some sense of how large that could be?

Speaker 3

It is not a major contract, but I think it's a very important step in our growth of that business. For years, we mined lime rock in Florida using drag lines underwater, drag lines digging lime rock that's underwater. The drag line of course was above the surface. So we've expanded into lithium. I think that's a very exciting development for us.

Speaker 3

We've expanded outside of Florida. We're mining other minerals. We're doing sand and gravel and other things. We've for a long time had our sites on trying to get into phosphate mining and we discovered an opportunity that really was several years in the making that we think gives us a nice entry into mining yet another mineral. Florida is a huge contributor to global phosphate production.

Speaker 3

So I think this new contract is a pretty exciting one for us. It is a drag it's a drag line operation, but of course it's dry. And we're very pleased to start up get that started up sometime this year.

Speaker 2

Okay, great. How much of the CapEx that you've given in your disclosures is for Thacker Pass this year?

Speaker 3

I don't know that, Liz.

Speaker 4

We did not call out specifically the SACRA pass, but we did last year for 2023 when it was material. So I think you can deduce from that, that it's not a material amount this year.

Speaker 2

Okay. And sorry, I would

Speaker 3

just I would judge on your CapEx question. I would just add that

Speaker 2

there

Speaker 3

is a part of the CapEx. I'm not going to say how much, but there is a part of our 2024 CapEx that is CapEx from 2023 that wasn't spent. We're always looking for ways that we can defer capital spending. It's always a smart thing to do if you can figure out how to either spend less capital or spend it later from a present value standpoint makes good sense. So there's a piece of our 2024 CapEx that's a carryover from 2023.

Speaker 2

Okay. Got it. On Packer Pass, my sense is that's a kind of new scope of work for you. Is how do you think how do you kind of add the operational capabilities you need to do that? How different is it from the work you're doing, the drag line work you're doing?

Speaker 2

And are there operational risks there that you're sort of planning for?

Speaker 3

I mean, there's it's really very, very, very similar to the work that we do in our coal mining operations. We're going to run a full fleet of equipment. It's more similar to our coal mining operations as it is the Limerock business where we are really operating very specific pieces of equipment in kind of a specialized sort of thing. At the Thacker Pass project, we're going to we're doing all the work related to mining. It is very, very, very similar, almost identical to the work that we do.

Speaker 3

There's virtually no operating risk for us. We're operating the same types of equipment. We use it's a very similar contract structure. We apply the same disciplines that we do in our other operations. So we don't really see any operational risk in this operation at all, which is another reason why it's so exciting.

Speaker 2

Right. And then I know you reimbursed for the capital equipment. Do you keep that equipment after the project is complete?

Speaker 3

We do.

Speaker 2

Okay. Then just a really quick bookkeeping question. The EBITDA you report in your headline results of around $7,000,000 plus is slightly different than on your sub table where you break out EBITDA and it's sort of $6,000,000 plus could you say what that what the plug is between those two numbers? I can follow-up too if it's not an easy one.

Speaker 1

We're looking.

Speaker 4

I think the 6.4 is segment adjusted EBITDA. Is that the number you're referring to in the Yes. The 7.1 is on Page 10 of the release, that's consolidated adjusted EBITDA. So we have 2 different EBITDA metrics. 1 is segment adjusted and our segment adjusted stops at operating profit, whereas the consolidated adjusted is more of a traditional EBITDA.

Speaker 2

Okay. All right. Well, thanks.

Speaker 4

The round 7.1 is on Page 10 of the release.

Speaker 2

Okay. And just last question. There's no do you get any insurance recovery related to the force majeure?

Speaker 3

At the Red Hills Mine, Mississippi Lakeland Mine Company? Yes. Yes. So that's to be determined. I mean, we obviously cover business interruption insurance and we have a team of people that are working on that.

Speaker 3

I don't we're certainly not at the point we want to disclose what we think we're going to receive with respect to recoveries, but I will tell you that we've got a we have a team of people that are very focused on that right now.

Speaker 2

Okay. All right, great. All right. Well, thank you for all the answers and talk to you soon.

Speaker 3

Doug, I really appreciate the questions and your interest in the company. Thanks for calling.

Speaker 2

Yes, great. Have a good day.

Operator

Thank you.

Speaker 1

I don't think we're going to have any more questions. So thank you everybody for dialing in. We'll close with just a few reminders. A replay of our call will be available online later this morning. We'll also post a transcript on our website when it becomes available.

Speaker 1

If you 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 now I'll turn it back to Luthy to conclude the call.

Operator

Thank you, Christy. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.

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Key Takeaways

  • The Coal Mining segment took a non-cash $65.9 million impairment charge in Q4 due to a force majeure at the Red Hills power plant, driving a consolidated net loss of $44 million.
  • NACCO expects 2024 net income and adjusted EBITDA to increase significantly, led by lower production costs at MLMC, higher earnings at Falkirk and Coteau, and growth at North American Mining.
  • Catapult Mineral Partners closed on a $37 million acquisition in the Midland Permian Basin—its largest to date—and plans up to $20 million in additional mineral interest investments in 2024.
  • North American Mining’s full-year operating profit rose 52% year-over-year, and the segment secured both a 6-year contract extension with its largest customer and a new 15-year phosphate mining agreement.
  • The company ended Q4 with $85 million in cash, $105 million available under its revolver, and repurchased $2.3 million of shares, underscoring a solid liquidity position.
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Earnings Conference Call
NACCO Industries Q4 2023
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