Natural Resource Partners LP (NRP) 2017 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Natural Resource Partners L.P. First Quarter 2017 Earnings Conference Call. As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Kathy Roberts, Natural Resource Partners' Vice President of Investor Relations. Ms. Roberts, you may begin.

Good morning, and welcome to Natural Resource Partners' First Quarter 2017 Conference Call. Today's call is being webcast, and a replay will be available on our website for 7 days. Joining me today will be Wyatt Hogan, President and COO; and Craig Nunez, CFO. Some of our comments today may include forward-looking statements reflecting NRP's views about future events. These matters involve risks and uncertainties that could cause our actual results to materially differ from our forward-looking statements. These risks are discussed in NRP's Form 10-K for the year ended December 31, 2016, and other Securities and Exchange Commission filings. We undertake no obligation to update or revise publicly any forward-looking statements for any reasons.

Our comments today are also -- will also include non-GAAP financial measures. Additional details and reconciliations to the most directly comparable GAAP measures are included in our first quarter 2017 press release, which can be found on our website.

Now I will turn the call over to Wyatt.

Thanks, Kathy, and thank you to everyone for participating in NRP's first quarter earnings call. As this is our first earnings call in 14 years as a public company, at the outset, I want to highlight that because a significant part of our business consists of royalties from coal operations, we value the relationships that we have with our lessees above everything else, and protecting the confidential nature of the communications that we have with our lessees is essential to our ability to manage our properties effectively. In addition, many of our lessees are public companies. As a result, on this call, we do not intend to discuss the operations or outlook for any particular operation or lessee. However, given NRP's unique perspective derived from the relationships with almost every major coal company, we will try to give you a big-picture sense of the trends we are seeing across the coal industry. This position also applies to our interest in Ciner Wyoming. As we are a minority owner in that operation and Ciner Resources is a public company, I would refer you to Ciner's public disclosures and commentary for specific questions regarding that business segment.

Finally, with respect to our aggregates business, while these are operations that we do control, for obvious competitive reasons, we will not be discussing any pricing or sales information as they relate to the specific markets.

With all of that being said, the first quarter of 2017 was a transformational quarter for NRP as we completed the recapitalization transactions that strengthened our balance sheet, extended our debt maturities and enhanced our liquidity. These transactions, which Craig will discuss in more detail in a moment, were the culmination of a 2-year strategy focused on reducing leverage and extending the debt maturities at NRP in the midst of an extremely difficult period in the coal sector.

The combination of the royalty nature of NRP's coal business, our diversification into the soda ash and construction aggregates businesses and, of course, the tireless efforts of our team have enabled NRP to emerge from this cycle with a stronger balance sheet and improved liquidity.

From an operational performance perspective, the first quarter results are highlighted by an improved coal market, particularly with respect to our metallurgical coal properties, and continued steady cash distribution from our soda ash investment in Ciner Wyoming. The metallurgical coal market and the performance of our low-cost Illinois Basin thermal properties are the primary drivers of the coal segment. Metallurgical coal accounted for 59% of NRP's coal royalty revenues and 38% of the coal produced from our properties in the first quarter.

China's production cutbacks in 2016 and the temporary global supply-demand imbalance, exacerbated in part by Cyclone Debbie in Australia, have combined to create a met coal market that is significantly stronger than last year. As a result, the revenue per ton we received for our Central and Southern Appalachian properties increased by 68% and 118%, respectively, compared to the first quarter of 2016.

While we don't anticipate that met coal prices will remain at the levels achieved in the first quarter, we do believe that the current global market dynamics supports a sustained price above the prices our lessees are receiving in early 2016.

With respect to our Illinois Basin properties, those results reflect higher tonnage, indicative of stronger export and domestic thermal markets as compared to 2016. As a data point, thermal exports from the United States increased to 11.5 million tons in the first quarter, an increase of 120% compared to the same period in 2016.

Regarding our soda ash business. We received another $12.25 million distribution from Ciner Wyoming in the first quarter. Although sales volumes were higher relative to the quarter of 2016, Ciner experienced several unplanned production issues at its surface operations during the quarter and sold the additional volumes out of inventory. With respect to the markets, Ciner benefited from stronger-than-anticipated prices on ANSAC sales in Asia.

In February, Chinese soda ash export prices peaked at the highest level since 2012. While the prices have normalized since then, they remain at levels above 2016. The markets in North and South America performed as expected, with aggressive action from European synthetic producers putting downward pressure on prices. These markets have stabilized, and Ciner expects the market to remain at Q1 levels for the remainder of the year. For more detail on this business segment, I would refer you to the Ciner Resources' press release.

With respect to our construction aggregates business, I want to emphasize that the first quarter is typically the slowest and most volatile period of the year as the winter season impacts construction activity. As a result, you should not take the first quarter as an indicator of our projected annual performance. That all being said, our construction aggregates results were generally in line with our expectations for the quarter.

One final comment. Yesterday, entities controlled by the Robertson family acquired the remaining interest in our general partner from Chris Cline. In connection with the acquisition, Trey Jackson, who was Chris' nominee to our board, resigned. With Chris no longer in control of Foresight, we do not see a reason to continue the formal business relationship with Chris, and this presented an opportunity for the Robertson family to regain 100% ownership of our general partner. We have appreciated Chris' support and partnership over the years and, of course, still highly value our relationship with Foresight, which remains our largest lessee.

I will now turn the call over to Craig to review the specifics of our recapitalization transactions and our first quarter financial performance.

Thank you, Wyatt, and good morning, everyone. We have quite a lot of ground to cover today, and I'd like to begin with an overview of the preferred units and warrants that we issued as part of the recently completed series of recapitalization transactions. We issued $250 millions of perpetual convertible preferred units with a 12% coupon, up to 1/2 of which may be paid in kind, or PIK'd, at NRP's option. The holder of the preferred has the right to convert a portion of the preferred into common units beginning after year 5 and has the right to convert all of the preferred units after year 8. NRP has the right to force conversion after year 12. We also have the right to redeem the preferred with cash at any time in accordance with a specified redemption schedule.

The preferred security does not have a fixed conversion ratio or exercise price. Let me say that again: the preferred security does not have a fixed conversion ratio or exercise price. Instead, the holder will receive a number of common units with a value equal to the principal plus cumulative unpaid dividends, if any, at the time of the conversion; or in other words, the higher the price of NRP common unit at the time of the conversion, the fewer common units will be issued and vice versa. This mechanism has the practical effect of limiting the potential return of the preferred security to the coupon rate and preserving equity upside for common unitholders.

We also issued 4 million, 8-year warrants to purchase common units. The first tranche of 1.75 million warrants has an excise price of $22.81 per unit and the second tranche of 2.25 million warrants has an exercise price of $34 per unit. Upon exercise, NRP has the choice of settling the warrants with the issuance of NRP common units or cash. The warrants also provide for net settlements, which means that the holder will receive less units or cash than they would if the warrants were exercisable on a one-for-one basis. Instead, the warrant holder is only entitled to receive units or cash equal to the intrinsic value of the warrant when exercised.

So at the risk of getting too far into the details, let me give you an example with numbers of how the warrants work. If all 4 million warrants were exercised at a common unit value of $35, for example, NRP could settle by issuing only 674,000 common units, which is less than 17% of the 4 million warrants outstanding.

Let me give you those numbers again, just as a representative example. If all 4 million warrants were exercised when the common units were at $35, NRP could settle all 4 million units through the issuance of only 674,000 common units or less than 17% of the warrants outstanding. Kathy will be happy to work through the numbers with you on this because it is complicated, so feel free to give her a call if you'd like.

One of the most attractive features of these transactions for NRP is the flexibility we have to take out both the preferred and warrants with cash or common units at our option. If our business and liquidity are strong, we will use cash and avoid dilution. On the other hand, if times are tight, we can avoid a large cash outflow and safeguard the balance sheet by delivering units.

So now let's discuss the accounting for the transaction, which is equally complex. Generally Accepted Accounting Principles require us to record the value of the warrants as a liability on our balance sheet and recognize changes in that value as gains or losses on the income statement. If the value of the liability falls, as will generally be the case when our unit price declines, we will recognize a gain. If the value of the liability rises, as will generally be the case when our unit price increases, we will record a loss. On March 2, the date the warrants were issued, we recorded an initial liability of $78 million. By the end of the first quarter and primarily in response to a decrease in our unit price, the value of the liability had fallen to $61 million, resulting in a $16.6 million gain on the income statement.

Now, accounting for the preferred units is a bit more straightforward than the warrants. We simply reduced the $250 million preferred proceeds by the $78 million warrant value, and $13 million of issuance costs to arrive at a carrying value of $159 million on the balance sheet at closing of the transaction. Unlike the warrants, we will not be required to mark the preferred to market each period. However, the preferred balance will increase to the extent that we elect to PIK dividends.

The last accounting aspect of the recap transactions worth noting is the impact to our diluted earnings per unit. First of all, GAAP requires that we give effect back to the potential dilutive effect of the warrants and preferred units, even though we have the option to pay off both of these instruments with cash and avoid all dilution. Second, GAAP also requires us to strip out certain items from net income, which is the numerator of the earnings per unit fraction, that can have a material impact on the results. This was especially noteworthy this quarter, where removal of the $16.6 million gain on the warrant liability resulted in a significant difference between basic and fully diluted EPU. We've included a table in the 10-Q that illustrates the diluted EPU calculation, and we will make it a point to explain material differences between basic and diluted EPU in the future.

So with that, I'd like to move now to a summary of our first quarter financial results, and I will compare these sequentially to the fourth quarter and year-over-year to the first quarter of 2016.

Let me say at the outset, there is a great deal of noise in our results. The first and fourth quarter numbers were significantly impacted by costs associated with closing the recapitalization transactions, and last year's results were marked by impairment charges and gains on asset sales related to our deleveraging strategy. I will break each of these items out for you and attempt to explain the results in a way that will help you sort through the noise and understand the underlying operating performance of our businesses.

Specifically, I'll discuss our comparative results excluding the following items. In the first quarter of this year, we recorded $17.4 million of costs related to the recapitalization transactions, which was comprised of $7.8 million of debt modification costs, $5.7 million of warrant issuance expense and $3.8 million of performance-based awards that are included in general and administrative expense. These costs were offset in part by the $16.6 million mark-to-market gain on our warrant liability that occurred between the time the recapitalization closed and the end of the quarter. We also recognized $1.8 million of asset impairments in the first quarter of this year.

In the fourth quarter of last year, we incurred $9.2 million of impairment charges, $1.8 million of gains on asset sales and $3.7 million of performance-based awards related to the recap transactions. And in the first quarter of last year 2016, we incurred $1.9 million of impairment charges and $21.9 million of gains on asset sales.

So with that, let's review our results. Total company revenue for the first quarter was $89 million and net income attributable to common unitholders in the general partner was $14.3 million or $1.15 per basic common unit. Adjusting for the items discussed previously, total company revenue and net income delivered sequential increases of 3% and 15%, respectively, and delivered year-over-year growth of 20% and almost 400%, respectively. These results were driven by significant improvement in our coal segment and steady growth in our soda ash business.

Now for our segment results. Coal royalty and other revenue for the quarter was $51 million and operating income was $35 million. Adjusting for the previously mentioned impairment charges and gains on sales recorded in prior periods, revenue and operating income posted sequential increases of 16% and 21%, respectively, and year-over-year growth of 30% and 51%. Higher metallurgical coal production and prices as well as increased production on our Illinois Basin thermal coal properties were the primary drivers of improved results.

Now for soda ash. Equity in the earnings of our 49% equity investment in Ciner Wyoming were $10.3 million in the first quarter, representing a sequential increase of 10% and year-over-year growth of 5%. We received $12.25 million of cash distributions during the first quarter, which was unchanged from the previous quarter and the first quarter of last year.

As for our construction aggregates business. Revenue for the first quarter was $27 million and we recorded a net operating loss of $1.5 million, which was in line with our expectations for the quarter. This business is seasonal in nature, and the first quarter is typically the low point of the year as construction activity declines in the winter months.

Now for the corporate and financing segment. Total corporate and financing costs were $27 million for the first quarter, which were 12% lower than the fourth quarter and flat with the first quarter of 2016. These results were significantly impacted by the recapitalization transactions, however. Adjusting for those items, corporate and financing costs decreased 3% both sequentially and year-over-year. The decrease is being driven predominantly by lower interest expense.

Turning to cash flow. The partnership generated cash from operating activities in the first quarter of $20.2 million or $1.62 per common unit. There were several material nonrecurring items that had a significant impact on cash from operations in the current and comparative quarters. The first quarter of this year was negatively impacted by $9.2 million of interest expense that was paid in conjunction with the extension of our 2018 bonds. Since interest payments on the 2018 bonds were historically paid in the second quarter, the early payment distorts year-over-year comparison.

Second, we made cash payments of $7.5 million for performance-based awards associated with the recapitalization transactions in the first quarter of this year.

And lastly, the first quarter of last year included $3.9 million of cash from discontinued operations of our oil and gas segment. But for these nonrecurring items, cash from operations increased 46% from the fourth quarter to the first quarter and 63% compared to the first quarter of last year.

We incurred $2.1 million of capital expenditures in the first quarter or $0.17 per unit compared to $1 million in the fourth quarter and $1.4 million in the first quarter of 2016. We paid $5.6 million of distributions to common units in the first quarter or $0.45 per common unit. We ended the quarter with $113 million of cash and $180 million of available borrowing capacity under our Opco bank facility. Early in the second quarter, we used $94 million of cash to redeem $90 million of our 9 1/8% of 2018 bonds. We still have $94 million of the 2018 bonds outstanding that we plan to redeem in October at par.

That concludes my prepared remarks. And with that, I'd like to turn the call back over to the operator for questions.

(Operator Instructions) Your first question comes from the line of Mark Levin from Seaport Global.

Obviously, a lot of noise, as you mentioned, in the numbers. But I want to kind of bring it back at least for now to bigger picture questions and how to think about debt reduction targets and goals from here on out versus the strategy toward growing the distribution or when you might consider growing the distribution again. Maybe you can kind of walk us through sort of the big picture and help us understand how you think about one versus the other.

Sure. Thanks, Mark. This is Wyatt. Over the near term, we're going to continue to focus on deleveraging the partnership, improving our cost structure as well as the balance sheet. However, we recognize that as an MLP, at some point we will be looking to grow the partnership and increase the distributions to the unitholders. At this point, we're not prepared to provide a time line for acquisition or distribution growth. But right now, it's essentially continue the strategy that we've had over the past couple of years, which is to focus on deleveraging and improving the balance sheet over the near term.

Wyatt, is there a target leverage ratio that we should be thinking about?

I don't think so, Mark. Right now, we're not commenting on future outlook. And so there's no specific target that I would like to communicate right now. We're just going to continue to try to drive it lower, with the idea that we get to a position where we're comfortable looking at growth again.

Got it. Got it. Got it. And related to that deleveraging question, are there any additional major asset sale opportunities? Or are you pretty comfortable with what you have right now?

Mark, there is one asset sale that we have. It's indicated, I guess, at least tangentially in our earnings release, where we have a definitive agreement to sell some timber assets in West Virginia. But beyond that, there's no significant acquisitions or divestitures on the horizon, and we're not going to comment on anything specific. But the timber sale is noted in the disclosure.

Sure, perfect. And then my last question, when you're kind of thinking about the trajectory of EBITDA or earnings over the course of this year, I realize you guys aren't giving guidance, but just from a modeling perspective, thinking about how Q2 might compare to Q1 and then Q3 and Q4, just to kind of give us an idea maybe of how you see the quarters breaking out over the course of the year maybe relative to Q1.

Yes. Again, Mark, I don't think we're going to -- we're not giving any guidance right now, so I can't comment on the future quarters.

Your next question comes from the line of Paul Forward from Stifel.

Wyatt, let's see. I guess, it sounds like you're really not going to give any sort of numerical guidance. But certainly you could talk about your lessees and how they're responding to current market conditions. I was just wondering if you could talk a little bit about the metallurgical coal business as it is right now. Are you seeing -- certainly this is a historic move upward that we've seen in pricing over the last 6 months or so. I was just wondering if you could talk a little bit about your lessees' activities and are there -- can we anticipate that you will continue to see -- or how can I ask this without having you really talk about guidance? Is there activity levels that -- with recent spot market weakness, are you concerned that if it continues that you will see a backing off of growth plans? And maybe as a follow-up to that, how weak would market pricing have to go relative to where we are now before we might see some sort of backing off of growth plans among lessees?

Sure. So I guess, first, Paul, maybe a few data points would be helpful for you. When you compare our first quarter of this year to the fourth quarter of '16, metallurgical coal tonnage from our properties increased by about 650,000 tons. About 530,000 of that came out of Central Appalachia and the remainder came out of Southern Appalachia. So we did see, from the fourth quarter of '16 through the first quarter of this year, an increase in the metallurgical coal produced from our properties. That led to met coal revenues increasing a little over $5 million as compared to Q4, so higher prices and increased production on met coal in the consecutive periods.

The average realized price per ton increased about $0.50 per ton for metallurgical coal in those periods. So we did see significantly increased production activity. Some of that is in response to market and some of it is in response to -- or some of it is caused by specific mines that may have had issues in the fourth quarter that came back on in the first quarter and vice versa. And of course, lessees also move on and off our property from time to time. So I do think -- and the other thing I'd point out as well in terms of where we are today that NRP receives our royalties and production a month after the actual coal is produced and sold. And so there's a lag effect that we have. And so we're still benefiting today from the prices from last month in terms of our numbers.

So in terms of specific prices that it might drop to, I don't really know. But just you guys follow all the other operators and their comments that they've made on their calls. I think the general sense is that metallurgical coal will settle back down a little bit, and it's already started that downward move. But as I indicated in my comments, I think it's going to settle out at a price that's above the numbers from last year, and that price is conducive to continued production and sale of met coal from our properties.

And I guess maybe another point on that. I was just wondering, since you've got discussions with a whole host of lessees, you might give us a different perspective on this. But are you hearing any concerns among lessees about things like labor tightness that might be a limiting factor on growth? Or another point is that certainly the rails are important in the economic considerations of do you grow or do you stay put. How aggressive are the rails being in terms of claiming higher transport rates in response to this really tight international market?

I do think, Paul, that labor is a significant constraint on growth. With the deterioration of the coal industry over the last couple of years, the labor pool -- a lot of the labor pool has essentially moved out of Central Appalachia. And so I think production response to the current market will be muted to some degree by the inability of labor to -- or inability of the companies to find the labor to mine the coal. So that should be good from a pricing perspective in the market. It will limit the supply response to some degree. The rails are going to take their piece of the pie. When prices go up, I think they're going to charge more. So I think that's a battle that the operators have to face on a daily basis.

Yes. Switching over to thermal coal. I was just wondering if you could talk a little bit about -- obviously, you're well supported with -- I think today you've got about $3.30 natural gas prices; very helpful to the 2017 outlook for thermal coal. I was just wondering if you could talk about your lessees' mix of assets in thermal coal. And do you see, over time -- over the next, say, couple of years that plant retirements could have an effect on volumes over the next couple of years? Or is this likely to be more offset relative to the 2016 levels by where natural gas prices have gone relative to the low 2016?

Oh, we've seen, over the last 12 months or so at least, -- or 6 to 12 months, natural gas hold pretty firm, above $3, which enables most of the thermal coal from NRP's properties to remain competitive. In particular, our properties -- our largest exposure in thermal coal is with the Illinois Basin properties, and those properties are the lowest cost or some of the lowest cost properties around. And so they've been able to remain competitive even in a low pricing environment. And they've been further benefited by the export market this year, which has improved dramatically. And a lot of that Illinois Basin coal has been going export and so we've benefited from that as well. I think Central App thermal will continue to be challenged. It's just higher cost and it has difficulty competing with natural gas. Fortunately for us, we have relatively smaller exposure to Central App thermal. And over the long term, we think the Illinois Basin properties provide an opportunity for substantial revenue for us.

Great. And the -- I think you had mentioned this, that Chris Cline had sold his GP stake. I was just wondering, does this have any practical effect on NRP, any increased flexibility? Or is this not likely to be something that changes the outlook for the company?

No, it has no impact on us at all. He had -- he did have the right to nominate 1 director -- or 2 directors, 1 of which has resigned as of yesterday. So from a board perspective, we're 1 director fewer, but that doesn't change the governance of the company at all. In terms of the prospects going forward, with Chris kind of exiting the control of Foresight, there just wasn't a need to have that continued relationship with him going forward. And we're building on a very good relationship that we have with Foresight and Rob Moore and the Murray team.

Your next question comes from the line of George Wang from Citigroup.

So beyond 2017, without getting into the guidance specifically, just want to ask about the outlook for the revenue for the VantaCore and the cash distribution trend for the soda ash for the next couple of years. So my understanding is this year, the yield will slightly be flattish for the soda ash. and because of the seasonality for the VantaCore for the balance of the year, the revenue will be higher. But any sort of color on the trend in the next couple of years?

Again, George, we're not going to give future outlook or guidance. And with respect to market for soda ash and the coverage ratio from Ciner, I would refer you to their comments on their call regarding the outlook going forward for that business segment.

Okay. And also, one housekeeping item, just looking through the income statement. Just look at the SG&A and the operating expense, do you think it's a good run rate going forward, just based on the 1Q run rate? Or do you think that there could be some items that could change things around that we should be aware of?

As Wyatt said, this is Craig, we're not giving guidance per se. I will say that you need to look through the one-time items that we highlighted on the call today that occurred in Q1 that impacted G&A, and those would not be continuing costs. But other than that, there's no major changes that have taken place in our G&A cost structure over the last year and don't expect any in the near term.

There are no further questions at this time. I'd like to turn the call back to Mr. Wyatt Hogan.

Thank you, Nicole. The events of the first quarter marked the beginning of a new chapter in the life of NRP. We begin the second quarter of 2017 with strong liquidity, a solid balance sheet and strong cash flow generation. Our coal business is performing well, as evidenced by operating income growth, excluding asset impairments and gains on asset sales, of 21% from the previous quarter and 51% year-over-year. Ciner Wyoming continues to deliver a steady stream of cash distribution, and we expect our construction aggregates business to improve as we move into the summer construction season. Thank you again for participating in our call.

This concludes today's conference call. You may now disconnect.