Natural Resource Partners LP (NRP) 2018 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Natural Resource Partners L.P. Second Quarter 2018 Earnings Conference Call. As a reminder, this conference call 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.

Thank you, Nora. Good morning, and welcome to the Natural Resource Partners Second 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 are Craig Nunez, our President and Chief Operating Officer; and Chris Zolas, our Chief Financial Officer.

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 our Form 10-K and other SEC Commission 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 second quarter 2018 press release, which can be found on our website.

I would like to remind everyone that we do not intend to discuss the operations or outlook for any particular coal lessee or get into detailed market fundamentals, nor will we discuss pricing or sales with respect to our construction aggregates operations, and those are 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 Nunez, our President and Chief Operating Officer.

Thank you, Kathy, and good morning, everyone. We have completed 5 full quarters since we recapitalized the partnership, and our business has stabilized and is generating substantial amounts of cash, a trend that we appear -- that appears likely to continue for the foreseeable future. Over the last 12 months, we recorded $233 million of EBITDA, $145 million of free cash flow and $89 million of net income attributable to common unitholders. This strong performance allowed us to pay out $22 million of distributions to common unitholders and retain $68 million of earnings, resulting in a 40% increase in common equity before the beneficial impact of a new accounting standard.

As we said on our last call, we are becoming increasingly comfortable with each passing quarter of stable results that our past performance may be indicative of a sustainable run rate that we can plan on for the future. We intend to use this strong cash generation to continue strengthening 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, along with the corresponding robust growth in common equity, is the quickest path to maximizing the intrinsic value and, in turn, the market value of our common units.

Our leverage ratio currently stands at 3.5x, down from a peak of 5.3x. And we ended the quarter with $108 million of liquidity, consisting of $53 million of cash and $55 million of available borrowing capacity, which is more than sufficient to manage the working capital needs of our business.

Our common unit distribution coverage ratio is 6.6x before taking into account the coupon on our preferred units and a robust 5.3x after taking the coupon into account.

Our coal segment continues to generate stable royalty income that is free of direct cost to mine and sell coal and other associated mining liabilities, with approximately 2/3 of our coal revenues coming from metallurgical coal. Our soda ash investment in Ciner Wyoming continues to pay us steady cash distributions each quarter as it benefits from owning one of the world's lowest-cost soda ash operations. And our construction aggregates business, although a relatively small contributor to our consolidated results, is having a solid year.

In addition to maximizing free cash flow and strengthening our balance sheet, we are increasing our focus on the productivity of capital employed in our business. For reference, our return on capital employed over the last 12 months was 15% after stripping out the benefit of a onetime gain on the settlement of a lawsuit in our soda ash segment.

So with that, I'll turn the call over to Chris Zolas to review the specifics of our second quarter financial performance.

Thank you, Craig, and good morning, everyone. Our second quarter financial performance represents another solid quarter of operating results. We generated $54 million of cash from operations during the quarter, up $19 million over the prior quarter year. Operating cash flow was favorably impacted by $13 million from steady performance and strong cash collections from our coal royalty segment and by $8 million less cash paid for interest as a result of our lower debt balance.

Second quarter net income was $39 million, which includes a $13 million gain in our soda ash segment from a litigation settlement. Excluding the impact of this gain and of our prior year debt restructuring costs and gains on asset sales, our second quarter adjusted net income was consistent with the prior year, demonstrating the benefits of NRP's diversified portfolio of met and thermal coal properties, along with our soda ash and construction aggregate assets.

Basic and diluted earnings per common unit for the second quarter were $2.46 and $1.75 per unit, respectively.

Moving on to our segment results. Our common -- our coal royalty segment continues to perform well, generating $54 million of revenue and $52 million of cash from operations during the second quarter. These results were driven by continued strong export markets for both met and thermal coal that helped tighten the domestic markets. Our lessees produced approximately 4 million tons of met coal on our properties in the second quarter, and sales prices remained strong. As a result, met coal made up 70% of our Appalachian coal production and 80% of our coal royalty revenue from this region during the second quarter.

In regards to the performance of our thermal coal properties, continued strength in thermal coal demand and pricing resulted in steady Q2 performance. Our lessees produced approximately 3 million tons of thermal coal during the second quarter on our properties in Appalachia, the Illinois Basin and the Northern Powder River Basin. In total, our lessees produced 7 million tons of coal and generated $38 million of coal royalty revenue in the second quarter, and we expect met and thermal coal markets to remain steady for the second half of the year.

Operating cash flow from our coal royalty segment was up $13 million over the prior year, primarily as a result of the timing of cash receipts from coal royalty minimum and production payments and property tax reimbursements.

In regards to our soda ash segment, we received $12 million of cash distributions from Ciner Wyoming in the second quarter and are consistent with what we received in the prior quarter and in the second quarter of last year. As noted earlier, our second quarter net income benefited from Ciner Wyoming recognizing a $12.7 million litigation settlement gain. Excluding the impact of this gain, our Q2 soda ash segment net income was down $4.6 million compared to the prior year, primarily as a result of unexpected plant repairs during its scheduled outage that resulted in lower production and sales. The repairs were successfully completed and operations resumed prior to the end of the second quarter.

Our construction aggregates segment generated $3 million of net income during the second quarter, which is consistent with the prior year quarter. Operating cash flow in the second quarter was $500,000, down $5 million compared to the prior year quarter, primarily due to the timing of our payment for delivery and haul costs in Q2, which we will get reimbursed for by our customers.

Our corporate and financing segment costs in the second quarter were $21 million, lower by $6 million compared to the prior year quarter, primarily due to a $4 million loss in our early extinguishment of debt in this prior year and $2 million of lower interest expense as a result of our lower debt balance in 2018.

During the second quarter, we paid distributions of $0.45 per unit to our common unitholders and $7.5 million to our preferred unitholders. Distributable cash flow for the second quarter was $53 million. And as recently announced, common unitholders will receive a cash distribution of $0.45 per unit and preferred unitholders will receive a total of $7.5 million in cash later this month.

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 of Seaport Global.

My question relates to free cash flow. Obviously, it was a very big quarter from a free cash perspective, much better than what it was in Q1. Maybe some thoughts on -- not looking for guidance, to be clear, but just some thoughts on how free cash flow might trend in Q3 and Q4 versus Q1 and Q2. Is there anything specific in the front half of the year versus the back half of the year that would change maybe the tenor of the way free cash flow looks?

Mark, this is Craig. I would answer it this way. We have a couple of factors that play into our free cash flow from quarter-to-quarter and that we don't have sometimes a lot of control over. There's the timing of, sometimes, receipts on -- especially on the coal side and also reimbursements of property taxes that we have property taxes that we had to pay that we didn't get reimbursed. And those are material amounts. And sometimes, the time -- the lag between the payment that we make and the reimbursement can cross quarter boundaries. And so it's not uncommon to see variations in free cash quarter-to-quarter as a result of these timing issues. We also -- in our construction aggregates business, we have some lag times again, costs that we pay that are reimbursable for customers there, such as fuel costs, delivery/haul costs, that type of thing, that we may pay in one period as our business ramps up and then we don't get reimbursed till the second period. So in order to smooth that out, I'd encourage you to look back at the trailing 4 quarters of results. And as best we can tell right now, I think that the last 4 quarters of results is pretty good proxy for what you're going to see going forward in the foreseeable future.

That's great. That's very helpful. Appreciate it. And then, obviously, the coal business EBITDA looks like it's been pretty steady. I mean, met prices have done their thing. They've remained at very robust levels, but they were down quarter-over-quarter. And yet the EBITDA from the coal business has remained relatively steady. Is there -- and I guess we could say that, more or less, over the last 4 or 5 quarters. Is there any reason to believe as you kind of look forward -- and, obviously, met prices play a role in this, but met prices have been moving. Have there been -- is there any reason to believe that this sort of kind of mid-40ish sort of rate would deviate massively over the next several -- I mean, is there anything in particular we should be thinking about?

Well, Mark, as you know, as a lessor of coal royalties and not a lessee, we do not operate mines and we don't market coal. So we're not out in the market every day interacting directly with customers. So we don't have the same visibility into the forward markets that our lessee coal mine operators do. So we just don't have as much visibility and cannot forecast as accurately with respect to pricing. We also don't have the same level of visibility with respect to the actual mining that is going to take place and the mine plans that these operators have. With all of that said, and with that caveat, right now, we don't see anything that -- in the foreseeable future that's going to change our results materially from what you've seen over the last year.

Got it. No, that's great. I'm going to -- and I know you're going to pump the question, but I'm going to ask it anyway. I believe Pinnacle -- the Pinnacle Mine is a lessee. And I know they've laid some workers off or not. It doesn't look to me like it would be terribly material. But I guess what I just want to confirm, if you're willing to do so, is Pinnacle a lessee of NRP still?

Yes, I'll confirm that Pinnacle is a lessee of NRP.

Okay. Perfect. And that was -- and then the final question, I was just interested in knowing -- and again, this may be a question you don't want to answer at this point, but I'll ask it anyway. Timing around litigation, not asking for how it may turn out or not, but just the calendar around litigation as it results to the Foresight issues.

I can tell you -- of course, as you know, we will not comment specifically on litigation, but (inaudible) there's a trial date set for the back half of October for the Hillsboro [issue].

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

Just got a few quick questions. Firstly, just in terms of balancing the debt paydown, deleveraging, maintaining a strong liquidity level versus distribution increase. I mean, you guys talk about the goal of delevering below 3x before you think about distribution increase. I just wanted to get any thought on this or any sort of criteria benchmark you guys are looking for before you'd actually look at a potential to increase distribution.

Thanks, George. No, at this point, we're not willing to -- we don't have anything in mind that we want to share publicly. I do want to reiterate, though, that this 3x goal that we set, we said actually -- we've said we want to delever down to a 3x leverage ratio. I want to make sure that there's no confusion here. We've not said that, that is our target leverage ratio. That's actually a goal, and we set that goal back in the spring of 2015 when our leverage was actually north of 5x and growing. And we actually were in a precarious financial situation. And we weren't sure, we had absolutely no idea how we were going to achieve the 3x goal. It was a very audacious goal at the time that we set out to try to tackle. Now that we're approaching that goal, our mission is still to reach it. Once we reach that goal, then we're going to assess the business, and we're going to determine what our target capital structure, what the optimal capital structure for our business will be going forward. And it may not be that we determine that given the cyclicality of our thermal coal business and the -- just the uncertainties of being a commodity business that's exposed to commodity price volatility, it may be that we decide that our appropriate leverage ratio is something south of 3x. So I don't want to send the signal that 3x is our target and that once we reach 3x, we're going to start raising the distribution. After we reach the goal of 3x, we're going to reassess, we're going to come out and identify what our target capital structure will be and then tell the market what our long-term plans are at that time after we've taken into consideration the performance of the business and the outlook at that time. Does that help?

Yes, that definitely helps. Secondly, just looking at the different geographies for kind of full coal production. In Central Appalachia kind of full screen higher, stronger production in second quarter. I don't know if you guys have any thoughts on the performance and sort of driver for higher performance sequentially in Central Appalachia.

Well, most of that Appalachian production is met, and there's strong demand for met and strong pricing. And as a result, volumes are up. And...

Well, got you. And also, just in terms of further asset rationalization, in terms of your noncore assets, do you guys have anything that you guys are looking at, just to sort of maybe help with the deleveraging just from kind of an asset disposal standpoint?

George, we've -- as you know, we've been -- we have been actively reviewing our portfolio since 2015 to identify those assets that we think would be worth more to others than they are to us. And we've conducted over the last several years a significant number of asset sales that have come actually from each of our segments, except soda ash. And we're continuing to do that, and we're continuing to -- as I mentioned in our prepared remarks, we're beginning to focus more on the productivity of the capital deployed in our business. And we're going to be looking at those assets that -- in those -- that are producing lower returns, and we're going to determine if those things are worth more to others than they are to us. And if so and if we can find buyers, we'll sell some.

(Operator Instructions) There are no further questions at this time. Please proceed, presenters.

Well, thank you, everyone, for joining our call. Appreciate your interest in NRP, and we look forward to speaking with you again next quarter. Have a great day.

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