Natural Resource Partners LP (NRP) 2018 Q1 法說會逐字稿

Good morning, and welcome to the Natural Resource Partners Quarterly Earnings Conference Call. My name is Roshe, and I will be facilitating the audio portion of today's interactive broadcast. (Operator Instructions) At this time, I would like to turn the call over to Ms. Kathy Roberts, Vice President of Investor Relations. You may begin.

Thank you, Roshe. Good morning, everyone, and welcome to Natural Resource Partners' First Quarter 2018 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 Craig Nunez, President and Chief Operating Officer; Chris Zolas, Chief Financial Officer; and Kevin Craig, our Executive Vice President of our Coal Division.

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 described in NRP's Form 10-K and other SEC filings. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.

Our comments today also include non-GAAP financial measures. Additional details and reconciliations to the most directly comparable GAAP measures are included in our first quarter 2018 press release, which can be found on our website.

I would also like to remind everyone that we do not intend to discuss the outlook for production or pricing in our coal segment, because such information will be obtained from our lessees, and we are bound by contract to keep such information confidential. We will also not discuss pricing or sales with respect to our construction aggregates business for competitive reasons.

In addition, I refer you to Ciner Resources' public disclosures and commentary for specific questions regarding our soda ash business.

Now, I would like to turn the call over to Craig, our President and Chief Operating Officer.

Thank you, Kathy, and welcome, everyone, to our quarterly call. It's been more than a year since we completed the series of transactions that recapitalized the partnership. And we now have 4 full quarters of results with what I'll call the new NRP. Our coal royalty segment has stabilized after a multiyear period of extreme volatility, and our soda ash investment and construction aggregates business have held steady. NRP generated significant amounts of cash over these last 12 months, recording $235 million of EBITDA, $134 million of distributable cash flow and $128 million of free cash flow. In addition, we paid $22 million of distributions to common unitholders, and increased common unitholder equity by $50 million or over 30% before the beneficial impact of a new accounting standard Chris will discuss in a moment.

While the royalty nature of our coal assets means that we do not have as much visibility in the future performance as our lessees who are actually mining the marketing coal, we are becoming increasingly comfortable with each passing quarter, and our recent financial performance is indicative of a sustainable run rate that we can plan on for the future.

With that in mind, we remain laser-focused on continuing to strengthen our balance sheet while maintaining sufficient liquidity to provide a margin of safety for prudent business operations. We reiterate our previously stated goal to achieve a leverage ratio over time, defined as debt-to-EBITDA, of less than 3x, while maintaining minimum liquidity of $100 million. We believe this substantial delevering and derisking of the capital structure is the quickest path to maximizing the intrinsic value, and in turn, the market value of our common equity. With 35% of our common units owned by insiders, rest assured that our interests are fully aligned with yours in this regard.

Our leverage ratio is down to 3.5x from a peak of 5.3x, with the payoff of $640 million of debt since we announced our intention to delever the partnership back in 2015. We ended the first quarter with $76 million of liquidity, consisting of $21 million of cash and $55 million of available borrowing capacity, which although shy of our long-term target, is sufficient to manage the working capital needs of our business.

Our common unit distribution coverage ratio is 6x before taking into account the coupon on our preferred units, and it is 4.6x after taking the coupon into account.

We continue to benefit from the royalty nature of our coal business, which is free of direct cost to mine and sell coal and other associated mining liabilities. Our leases have fixed royalty rates supported by minimum payments that kick in if the price of coal falls below the floor. Roughly 2/3 of our coal royalty revenues currently come from metallurgical coal, which unlike thermal, does not face the threats posed by the environmental regulation of the power industry, low natural gas prices and renewable power sources. Our soda ash investment in Ciner Wyoming continues to generate steady cash distribution with production costs 25% to 50% less than competing synthetic processes. And our construction aggregates business, although a small contributor to our bottom line, continues to generate stable results.

With that, I will now turn it over to Chris to review the specifics of our first quarter financial performance.

Thank you, Craig. Good morning, everyone, and thanks again for joining us. The first quarter operating performance represents a good start to the year. We generated $20 million of operating cash flow during the quarter, which includes a semiannual interest payment on our parent company bonds of $18 million. Net income attributable to common unitholders and the general partner was $19 million, representing a $15 million increase compared to last year's first quarter, primarily due to $8 million of debt modification expense recognized last year related to our recapitalization transactions, and also due to $5 million of less interest expense in 2018 as a result of our lower debt balance.

Compared to the prior quarter, net income available to common unitholders and the general partner decreased $4 million, primarily due to the seasonal nature of our aggregates business. Basic and diluted earnings per common unit for the quarter were $1.49 and $1.15, respectively.

Before moving to our segment results, I'd like to briefly discuss the impact of adopting the new GAAP revenue recognition standard in Q1. While there was no impact to revenue from our soda ash or construction aggregates segments, the new standard did impact our coal royalty segment. Historically, we recorded minimum payments received as deferred revenue and did not recognize these payments as revenue until either recoupment occurred or the recoupment period expired. Under the new standard, we're required to recognize minimum payments as revenue when we believe that it is unlikely they will ever be recouped. While the adoption of the new standard will not have a material impact on our coal royalty segment revenue or the income statement, it did have a significant onetime adoption impact on our balance sheet. The cumulative effect of adoption reduced deferred revenue liability by $90 million with the corresponding increase to partner's capital.

Moving to our segment results. Our coal royalty segment performed well and generated $39 million of operating cash flow during the first quarter, representing a 2% increase compared to last year's first quarter. Operating cash flow decreased 15% compared to the prior quarter, primarily due to our payment of property taxes in Q1, the majority of which, we will get reimbursed for later in the year; and due to the timing of coal royalty minimum receipts.

Operating income was $41 million, representing a 16% increase compared to last year's first quarter, primarily as a result of stronger metallurgical and thermal coal pricing. Compared to the prior quarter, our coal royalty segment operating income increased 3%, demonstrating the continued trends in the coal markets we realized in the second half of 2017. In particular, we continue to realize strong sales prices from our met coal properties in Appalachia. Met coal made up 77% of our production and 83% of our revenue in the region during the first quarter, and we expect demand for our met coal to stay strong as it remains an essential ingredient to steel making.

While all of our coal in the Illinois and northern Powder River Basin are thermal coal, and we recognize the decline in demand for U.S. thermal coal due to coal plant retirements, approximately 30% of U.S. electricity is currently generated from coal, and we believe thermal coal will remain an important component of the U.S. and global energy mix for many years to come.

In addition, we believe many of our thermal coal properties are well positioned to remain profitable due to their low-cost structure, high heat content and strategic locations.

In regards to our soda ash segment, we received $12 million of cash distributions from Ciner Wyoming in the first quarter and was identical to the amounts we received in the prior quarter and the prior quarter of last year. Our construction aggregates segment generated $3 million of operating cash flow during the first quarter and a net loss of $2 million. As a reminder, our construction aggregates business is highly seasonal due to the effect of weather conditions on construction activity levels. Our Q1 results were consistent with prior year despite challenging weather and higher-than-expected fuel costs. In addition, local markets in our aggregate, mining and production businesses served remains stable.

Our corporate and financing segment costs in the first quarter totaled $22 million, which was 41% lower than last year's first quarter, primarily due to prior year recapitalization transactions and also a result of debt repayment during 2017 that has lower interest expense. Compared to the prior quarter, corporate and financing costs decreased 6%, primarily due to lower interest expense.

During the first quarter, we paid distributions of $0.45 per unit to our common unitholders and $7.8 million to our preferred unitholders. In addition, we redeemed all of the outstanding paid in kind preferred units for 8.8 million. Distributable cash flow for the first quarter was $21 million, and as recently announced, common unitholders will receive a cash distribution of $0.45 per unit and preferred unitholders will receive $7.5 million in cash later this month.

As Craig mentioned earlier, our liquidity remain strong and we ended the quarter with total liquidity of $76 million, consisting of $21 million in cash and $55 million of available borrowing capacity under our bank capacity.

With that, I'll turn the call back over to the operator for questions.

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

A couple of quick questions. The impact of weather during Q1, whether it be on the coal business as it relates to logistics or even the aggregates businesses, any way you can help us quantify how weather might have impacted EBITDA?

Mark, this is Kevin Craig. We think in the coal segment, we did have an impact from weather at specific operations and then also rail network back up, probably in the range of a couple million dollars impact to the coal segment.

And in the aggregates segment, there was a -- river traffic was slowed up a bit, Mark. And -- but it's not a material amount, maybe $0.5 million of lower -- less EBITDA as a result of that.

Got it. Got it. And Craig, you made an interesting comment. I just want to pick up on this during your remarks about the coal business stabilizing. And if you go back and look, I guess, at the last maybe 3 or 4 quarters of EBITDA, from the coal business, it looks pretty -- in a pretty consistent, relatively narrow range, I know you guys don't give guidance, and I'm not going to ask you to give guidance, but you did make a comment specifically about meeting the stabilization or you've been seeing stabilization there. Maybe you can elaborate or expand a little bit on that comment?

Mark, I'm glad you picked up on that, because we do want to let you know that, in fact, we do feel that the market has stabilized and our business is stabilizing. We're not giving guidance per se, but we are looking at what's happened in recent quarters. And it does appear that in this current environment, that, that's looking more and more like a sustainable run rate. And so we're beginning to take that into account, as we do our planning.

That's great to hear. The last question I was going to ask just was around the $100 million liquidity target. Is there a specific reason why $100 million, is that number is -- I mean, why $100 million versus, let's say, $50 million or $75 million? What's the -- maybe what's the thought process between that -- around that $100 million number?

Well, a good benefit is judgment, Mark. As a single B credit with S&P and a CAA2 credit with Moody's, access to capital of the financing markets is never guaranteed. And so we feel that we need to have a cushion of additional liquidity above and beyond what we need for our month-to-month operating activities, just in case the market's not available to us when we needed to have them.

And your next question comes from the line of Nick Gertsema with Stifel.

I wanted to ask you about the 10.5% holdco notes. What are your thoughts in terms of the ability or opportunity to lower the cost of debt with the nearing coal date in March of 2019?

Well, on those notes, we have a coal premium on those every year until 1 year prior to the 2022 maturity. And it is difficult to make the math work to pay that call premium, and refinance and end up with a lower net cost and benefit for the company. But I assure you that if the math works and demand for the paper is there, we would certainly move forward on that if we had the opportunity.

Okay. So in terms of the outlook for the credit, you talked about taking leverage down from 3.5 to 3 turns. The strength of the free cash flow generation, my belief, is that it's completely underappreciated by the high-yield universe. So ideally, in the next several quarters, the high-yield market will wake up to the strength of the credit. That's all I have to say.

(Operator Instructions) And there are no further questions at this time.

Thank you, everyone, for joining our call. We thank you for your support and your interest in NRP. Things are moving along as I think we all would've expected, hoped they would have after we completed our recapitalization transactions last year. The company continued to generate significant amounts of cash, and for the foreseeable future, appears to be well positioned to continue doing so. So thanks again for your support. Have a good day. Goodbye.

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