NACCO Industries Inc (NC) 2018 Q1 法說會逐字稿

Good morning. My name is Kelly, and I will be your conference operator today. At this time, I would like to welcome everyone to the NACCO Industries First Quarter 2018 Earnings Analyst Conference Call. (Operator Instructions)

I would now like to turn the conference over to Christina Kmetko. Please go ahead.

Thank you. Good morning, everyone, and welcome to our 2018 first quarter earnings call. I'm Christina Kmetko, and I'm responsible for Investor Relations at NACCO Industries. I will be providing a brief overview of our quarterly results and business outlook, and then I will open up the call for your questions.

Joining me today are J.C. Butler, President and Chief Executive Officer of both NACCO and North American Coal; and Elizabeth Loveman, NACCO's Vice President and Controller.

Yesterday, we published our first quarter 2018 results and filed our 10-Q. Copies of our earnings release and 10-Q are available on our website at nacco.com. For anyone, who is not able to listen to today's entire call, an archived version of this webcast will be on our website later this afternoon and available for approximately 12 months.

As we begin, I would like to remind participants that this conference call may contain certain forward-looking statements. These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements made here today in either our prepared remarks or during the following question-and-answer session. We disclaim any obligation to update these forward-looking statements, which may not be updated until our next quarterly conference call, if at all. Additional information regarding these risks and uncertainties was set forth in our earnings release and in our 10-Q.

Now that I have the formalities done, let's talk about the quarter.

Yesterday, we reported consolidated income from continuing operations of $8.2 million or $1.18 per share for the first quarter of 2018. This compares to consolidated income from continuing operations of $8.2 million or $1.20 per share for last year's first quarter.

Our effective income tax rate for the quarter was 9%, within the range we provided at year-end.

At our North American Coal business, coal deliveries decreased to 9.2 million tons in the first quarter of 2018 from 9.9 million tons last year, primarily at our unconsolidated operations. However, limestone deliveries at our North American Mining Division increased to 9.3 million yards from 7.8 million yards in the first quarter of 2017, primarily at the unconsolidated limestone operations.

Operating profit was comparable between years at $11.3 million.

We recorded a $1 million favorable adjustment to Centennial mine reclamation liability. And the earnings of the unconsolidated operations increased 4% over the prior year, despite a decrease in results at our unconsolidated Bisti mining operation as a result of fewer tons delivered.

The increase in the earnings of the unconsolidated mines was the result of several factors: one, the increase in limestone deliveries I mentioned previously; two, higher compensation at Liberty Fuels during the mine reclamation period; and three, moderately increased earnings at other unconsolidated operations.

These favorable items were fully offset by higher operating expenses because of higher employee-related expenses, additional business development costs and an increase in professional fees.

We also had a decrease in earnings at Mississippi Lignite Mining Company resulting from an increase in cost per ton delivered.

Our North American Coal's first quarter 2018 operating profit was comparable to 2017. Its first quarter 2018 pretax income increased to $10.9 million from $10.6 million last year, primarily because of lower interest expense.

NACCO and other operating results were comparable between periods.

Looking forward, we continue to expect the consolidated effective income tax rate in the range of 9% to 12%.

We expect our 2018 consolidated pretax income to decrease modestly compared with last year as 2017 included $5.1 million of gains on sales of assets.

Excluding these gains, we expect 2018 pretax income to increase compared with 2017 primarily as a result of a reduction in full year operating expenses, improved income at our unconsolidated operations and reduced interest expense.

These improvements are expected to be partly offset by an anticipated substantial decrease in royalty and other income, and a decrease in income at Mississippi Lignite Mining Company.

Income from the unconsolidated operations is expected to be modestly higher in 2018, due in part to higher compensation at Liberty Fuels and increases in North American Mining's unconsolidated limestone operations as a result of new contracts signed in 2017 and increased customer demand.

Our Bisti Fuels' unconsolidated operation is experiencing a slower start to the year, while the owners of the power plant it serves installed additional environmental controls at the plant. Overall, we expect Bisti's full year 2018 pretax income to be comparable to last year as an increase in income in the second half is expected to offset the decrease in the income from the first half.

At the consolidated operations, Mississippi Lignite Mining Company's pretax income in the first half of 2018 is expected to decrease substantially from the first half of last year, primarily as a result of an increase in the cost per ton delivered.

To better explain, cost per ton delivered is lowest when the power plant requires a consistently high level of coal deliveries because we are then spreading the cost over more tons.

Historically, periods of reduced or fluctuating deliveries have adversely affected Mississippi Lignite tons delivered, resulting in an increase in cost per ton delivered and reduced profitability.

We are expecting pretax income in the second half of the year to improve compared with the second half of 2017, but this improvement is not expected to fully offset the decrease from the first half.

As a result, we expect Mississippi Lignite Mining Company's full year income to decrease compared with the prior year.

Customer demand in the second half of 2018 is expected to return to higher levels due to reduced plant outage dates. But if demand remains low, it could continue to unfavorably affect 2018 and future earnings significantly.

Before I wrap up, let me provide you with some cash flow and balance sheet information. We expect cash flow before financing activities to decrease substantially in 2018, due in part to an increase in capital expenditures at North American Coal. We ended the first quarter with consolidated cash on hand of $83.4 million and debt of $50.8 million, resulting in the net cash position of $32.6 million.

Also in February 2018, our Board of Directors authorized a stock buyback program to purchase up to $25 million of our outstanding Class A common stock. This program will expire on December 31, 2019.

We did not purchase any shares during the first quarter of 2018.

That concludes my prepared remarks. I will now open up the call for your questions.

(Operator Instructions) Our first question comes from the line of Mitchell Lolley from Goshawk Global Investments.

Can you talk about one of the mining contracts that I believe is coming for renewal this year?

You must be talking about the Camino Real contract?

Yes, that's the one.

Yes, so that contract is with a customer, we sell the coal -- we mine coal for them. It's a management fee arrangement. We -- it's their coal that we are mining for them and they sell that coal on to use in a power plant. So we're selling to them and they're selling on to somebody else that runs the power plant. That contract -- our contract will be extended when and if their contract is extended with their customer. That's really in their hands. It's not a negotiation that we are part of. We are operating the mine today as if it's going to continue to operate into the future, but we don't -- I mean, because it's our customer's negotiation with their customer, it's not really something we can comment on further.

Okay. The North American Mining Limestone business was kind of a bright spot in the quarter. And I was wondering is the margin profile on limestone operation similar to the margin you get on the coal side of your business?

Well, margin is a concept in our business that's not like other businesses -- other mining companies because you typically think of them, they mine coal at a cost and then they sell it at a price and they collect the margin that's between the 2. We really are a service business. We collect fees for services provided and the business in Florida operates the same way. But our traditional coal mining business, we're operating the whole mine soup to nuts. Everything from land acquisition through permitting, mine development, mining, reclamation, the whole bit. At our operation -- our North American mining operation, we maintain and operate draglines and recently we had at one shovel. So it's a much narrower scope of services that we're providing in that business.

Okay. But when I look at the unconsolidated financial statements and -- I understand you don't have price exposure. But when I just look at pretax profit for example as a percentage of revenue in that business, it's about 8% pretty consistently. Does it kind of net out the same way in the limestone business?

Are you talking about the unconsolidated financial statements we file as part of the 10-K? Is that what you're looking at?

Yes, yes.

Yes. I mean, again, you can't really look at that because among -- so the customer pays 100% of the cost. Revenues on the unconsolidated mines are -- the revenues on those financial statements are equal to 100% of the costs that are incurred at those mining operations plus our fee.

Okay.

And at the limerock operations, they're really just paying us a fee. I mean, they are paying our cost like for our people and the cost of the parts for repairs and maintenance items. But we are just collecting -- in both instances, we're collecting a fee. Although at the mining -- at the coal mining operations, it's a much larger scale operation. Where at the limerock business in North American Mining, we're doing something that's very specific. We're just maintaining and operating a dragline. You really can't look at -- said another way, you really can't look at this 8% margin and have that mean anything to you.

Okay. I guess what I'm trying to get at is it seems like aggregates could already be, especially now versus a few years ago, more of a material aspect of your business. And I was just wondering if you expect kind of that to continue where growth is more on the limestone and other side.

Well, I mean, I will tell you as I certainly put in the annual report letter, we've been very successful. It's a wonderful thing. Over the last 7 or 8 years, we've been incredibly successful growing our coal business. We built 5 new coal mines, where we took over operation of a sixth coal mine in New Mexico and we've grown our limerock business pretty substantially. So I will tell you that we are working pretty hard on growth in lots of areas. And -- I mean, this is, I guess, something out of your industry, past performance is no indication of future performance, but we feel like we've done pretty well in the last several years. So we're continuing to work on those. I will tell you, most recently -- I mean, this is obvious from reading our statements, we've grown the limerock business pretty quickly. We've added a lot of new quarries, a lot of new customers in the last couple of years in that business. Certainly, it helps if the economy is booming. There's lots of construction and infrastructure business going on, so limerock businesses are looking for ways to expand their operations. So we think there is potential there as well. But again, we provide a very specific service inside the limerock industry. If you think about that business, you start with the reserves, you mine the reserves and then the limerock producers crush them, size them, sort them, wash it and sell it. Really what we are doing is the back end part of their business. And really just right now in Florida, where it's -- Florida limerock that we're mining, we're doing the mining part of their business and then they are doing the value-added parts of crushing, sorting, sizing, washing and selling.

Got you. If we could move to the balance sheet for a second. You're obviously sitting in a very strong net cash position. How do you plan on using your cash in the future?

Yes, I know this is in our investor presentation. Maybe -- I think it was in the annual report letter as well. Our priority is, of course, to exist -- invest in our existing businesses as is required. We think we have a very strong business model, and I want to make sure we do everything we can to preserve that. We're investing in growth. You certainly saw in the earnings release that one of the reasons operating expenses were up is because of business development. We're investing money in our business development activities. And if we have opportunities to prudently invest, we will. I mean, beyond that, we intend to maintain very conservative leverage. We like the fact that we don't have a lot of debt and we've been returning cash to shareholders. We've paid dividends for a very, very, very long time at North American Coal before NACCO Industries, and then NACCO Industries since 1986. And we've -- for the last -- geez, I've been around for 22 years. We've had a number of programs in place to buy shares back. Most recently, we announced one in February. So those are -- I mean, those are really our priorities in order.

Okay. And given the steadiness of your business model, I guess, I'm wondering why you don't choose to pay a large dividend because it looks like you could easily support even a mid-single-digit dividend yield on the current stock price and still have plenty of headroom for growth initiatives?

Well, we want to be prudent. We want to think about what dry powder might we need for something in the future. We don't -- it's impossible to predict what might come up in the future. We certainly have seen other mining companies -- albeit with a different business model, we've seen other mining companies have issues and we want to make sure we are prepared for those. I mean, we signed a 40-year contract to build the Liberty Mine, which was going to supply the Kemper County facility, that's southern operated. And we expect that to be in place till -- I think it was 2055. Well, you know what, their plant didn't work out and they shut down that facility. I mean, we expected to generate a lot of income and cash from that over the years to come. And that didn't pan out. So we just want to be cautious about how we think about our business. We think one of our advantages is we look at growth as growth is the fact that we are very stable. People don't have to worry about whether we're going to be here next year or not. When you are signing a 15, 20, 25, 30, 40-year contract, people want to know that you're pretty stable.

Does what you just said imply it all that you could be retaining capital for something like making an acquisition even?

I mean, it's -- like I said, it's impossible to predict the future. You just -- who knows.

(Operator Instructions) And there are no further questions at this time. I will now turn the call back over to Christina Kmetko for closing remarks.

All right. Well, thank you for joining us today. Do you have anything you want to add?

No. Thank you.

All right. Thank you very much. If you do have any further questions, you can reach me. My number is on the earnings release. Thanks so much, and have a great day.

Thank you for joining. If you'd like to ask -- access the replay of the call, please dial (855) 859-2056, and it will be available at 11:30 a.m. Eastern Standard Time. This concludes today's conference call. You may now disconnect.