Natural Resource Partners LP (NRP) 2018 Q3 法說會逐字稿

Ladies and gentlemen, welcome to the Natural Resource Partners L.P. Third 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, Stella. Good morning, and welcome to the Natural Resource Partners Third Quarter 2018 Conference Call. Today's call is being webcast and a replay will be available on our website. 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 risk 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 and other Securities and Exchange Commission filings. We understand -- 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 third 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 do we discuss pricing or sales with respect to our construction aggregates operations for competitive reasons.

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

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

Thank you, Kathy, and welcome, everyone, to our quarterly call. It's good to have you with us today. NRP continues to generate significant amounts of cash on the back of solid demand for metallurgical and thermal coal, a trend we have seen for some time now.

Over the last 12 months, we recorded $230 million of EBITDA, $148 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 while still retaining $67 million of earnings, resulting in a 37% increase in common equity before the beneficial impact of a new accounting standard.

As we've said previously, we are becoming more confident with each passing quarter that our past performance may be indicative of a sustainable run rate that we can plan on for the future. In addition, we are pleased to announce that early in the fourth quarter, which means it is not reflected in our third quarter results, that we received the initial payment of $25 million from Foresight Energy regarding the previously announced litigation settlements surrounding the Hillsboro and Macoupin mines.

This is the first of a total of $190 million of nonrecoupable payments Foresight has agreed to make to us over the next 15 years. We believe this mutually beneficial resolution to our legal disputes represents an important step and marks a new era of cooperation between our 2 companies, and we look forward to working together in the years ahead. With this litigation behind us, we can now focus all our energy on positioning our company for the future, a future that I'm pleased to say is looking brighter with each passing day.

We intend to use the proceeds from this settlement, along with the strong cash generation of our business, to continue strengthening our balance sheet and maintaining sufficient liquidity to provide a margin of safety for prudent business operations. We remain laser-focused on the goal we set 3.5 years ago to achieve a leverage ratio, defined as debt to EBITDA, of less than 3x, while maintaining minimum liquidity of $100 million. We continue to 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 5.3. And we ended the quarter with $118 million of liquidity, consisting of $63 million of cash and $55 million of available borrowing capacity. Our common unit distribution coverage ratio is 6.9x before taking into account the coupon on our preferred units, and 5.6x after taking the coupon into account.

Our coal segment reported another strong quarter as we continue to see robust export demand for both met and thermal coal, with approximately 2/3 of our coal revenues coming from met.

Our soda ash investment in Ciner Wyoming continues to pay us 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, continues to generate positive returns.

As we introduced last quarter, in addition to maximizing free cash flow and strengthening our balance sheet, we have increased our focus on the productivity of capital employed in our business. 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 at our soda ash segment.

With that, I'll turn the call over to Chris to review the specifics of our third quarter financial performance.

Thank you, Craig, and good morning, everyone. Our third quarter results continue to demonstrate the benefits of NRP's portfolio of met and thermal coal properties, along with our soda ash and construction aggregates assets.

During the third quarter, we generated $33 million of cash from operations and $29 million of net income, driven by the steady performance and strong cash collections from our coal royalty segment. Free cash flow was up $3 million over the prior year quarter, primarily due to having lower debt and paying less cash for interest, and also due to the timing of cash payments and receipts from our construction aggregates business. Basic and diluted earnings per common unit for the third quarter were $1.71 and $1.30, respectively.

Moving to our segment results. Our coal royalty segment continues to perform well, generating $49 million of revenue, $42 million of cash from operations and $43 million of free cash flow during the third 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 6 million tons of coal in our properties in the third quarter. Global demand for steel remained strong, and met coal from our properties in Appalachia made up 61% of our coal production and 67% of our coal royalty revenue during the third quarter.

In addition, continued strength in thermal coal demands and pricing resulted in study Q3 performance from our coal properties in Appalachia, the Illinois Basin and the Northern Powder River Basin.

In regards to our soda ash segment, operating results were consistent with the prior year quarter. We received $12 million of cash distributions from Ciner Wyoming in the third quarter, an amount consistent with what we received in the prior quarter and in the third quarter of last year.

Our construction aggregates segment generated $3 million of net income, $7 million of operating cash flow and $3 million of free cash flow during the third quarter. Our net operating performance was consistent with the prior year period, as increased construction projects and energy sector activity were offset by higher operating cost. Operating cash flow increased $5 million compared to the prior year quarter, primarily due to the timing of payments and receipts. Free cash flow increased only $2 million compared to the prior year quarter because this increase in operating cash flow was partially offset by increased expansion CapEx.

Our corporate and financing segment costs in the third quarter were $21 million, $3 million lower compared to the prior year, primarily due to lower interest expense as a result of less debt in 2018.

During the third quarter, we identified a noncash error related to the new revenue recognition accounting standard we adopted at the beginning of this year. This error resulted in a material weakness in our internal control designed for the adoption of this new standard and resulted in a $2.7 million overstatement of year-to-date revenue on the prior period income statement, and an overstatement of the adoption adjustment on the balance sheet by $20 million, both of which have no impact on NRP's cash or cash flow. The deficiencies in this control have been remediated, and we've provided further descriptions and recasted first and second quarter numbers in our third quarter Form 10-Q.

In regards to distributions, we paid $0.45 per unit to our common unitholders and $7.5 million to our preferred unitholders during the third quarter. Distributable cash flow was $34 million in the third quarter. 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.

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

(Operator Instructions) Your first question comes from the line of Nick Gertsema with Stifel.

I was hoping you'd talk about the $25 million that's coming in from Foresight. Talked about strengthening the balance sheet, but how should we think about that? Paying down debt, open market purchases, you're just going to add it to liquidity? How do you think about that coming in?

It's initially added to liquidity, and then it will be used to pay down debt.

Are there any portions of the capital structure that we should think about? Whether it's the Opco bonds or Holdcos?

Well, the easy thing to pay off initially is the revolver and Opco.

Your next question comes from the line of Mark Levin with Seaport Global.

Couple of quick questions. One, does the receipt of cash from Foresight, and obviously, the almost the long-term-like annuity stream from that settlement, change your thought process with regard to what distribution increase -- how do you feel about distribution increases maybe versus the last quarter? It felt like the last quarter that just because -- maybe you get to 3x in 2019, but that didn't necessarily mean that we should all expect distribution increases. Does this legal settlement change that calculus at all?

No, it doesn't, Mark. It is certainly a benefit. And once we achieve our target, our goal that we've set 3 years ago of 3x, we will, at that point, assess the landscape and decide what we think is appropriate for a distribution policy going forward, and then we will give you some additional communication at that time. But right now, this doesn't move the needle in a direction that causes us to make a decision before we reach our target.

Yes. That's fine. And maybe you can remind me some of the needs for cash over the next year or so, some of the refinancing, the timing around certain refinancings, and why it would make sense to keep a lot of cash on the balance sheet.

Well, generally speaking, Mark, we think of it this way: If you look over the last 12 months as a good example, we generated about $148 million of free cash flow. That's cash from operations minus cash used in investment activities. $30 million of that had to go to pay the distributions on the preferred securities that we have, $22 million went to pay our current common distribution, and we had $81 million of mandatory principal amortizations on Opco private placement notes, which gave us a cushion of excess free cash flow of about $15 million, which could be used to pay down debt. That's a -- it's nice to have a $15 million cushion over your -- what we view as our mandatory commitments. But it's not a big cushion. And we -- as those Opco private placement notes get paid down, that cushion gets bigger as long as our free cash flow generation remains somewhat consistent, which the outlook now is it appears it will for some time. And so we'd like to see that cushion grow a bit before we start becoming more aggressive on the distribution.

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

Just -- most of my questions were already answered. Just a couple of quick questions. Just in terms of potential deal flow, kind of the different kind of assets you guys might be possibly looking at. I mean, with excess free cash and additional cash inflow with this Foresight resolution, you guys briefly talked about pay down debt and also tried to have additional liquidity on your balance sheet. Any possibility like we may see some deal flow on the horizon?

You mean deal flow in terms of acquisitions of new assets or businesses?

Right. Right.

I'll tell you what, at this point in time, our focus is on delevering the balance sheet. And as we explained to the -- to Mark's question previously, we don't have a lot of cushion in excess of what we -- the cash that we need to delever, that we're required -- the mandatory payments we're required to make and then to stay consistent with our equity distributions that we're currently making. We don't have much cushion right now. So any deal flow that we would use or any acquisitions we would make with excess cash flow, it would have to be quite small. I'm not sure -- unless we were to borrow money, and we're not interested in increasing leverage at this point in time. And the small size of deals that it would take for us to use only our excess free cash flow, I'm not sure they'd be worth our time. So I wouldn't put acquisitions high on the agenda at this point until we improve our liquidity position and our capital structure a little bit more.

Got you. And just the current yield at kind of mid-single digit, any thoughts on the possibility of tapping the capital markets for any sort of additional liquidity? Or do you think it's sort of off the table right now?

Well, I don't want to take a position on this call as to whether we think our equity is cheap or whether we think it's rich or anything along those lines. But suffice it to say, right now, we don't have much appetite to issue equity at these levels.

Your next question comes from the line of Bill Hyler with WDH Capital.

I appreciate you guys having these calls, by the way, they're very helpful. I was hoping you could remind us how the conversion features of the preferred units and warrants with Blackstone work. I believe NRP has the option to redeem these for cash under certain circumstances. Maybe what the key dates are we should be looking at over the next 3, 4, 5 years with these securities?

Sure, Bill. I'll take that one. So our preferred units can be redeemed at any time for cash. However, the unitholders aren't able to convert until 5 years. So in 2022, they'll have the option, they'll have the ability to convert up to 1/3 of the units beginning in 2022 if we meet the standard threshold for unit price. So that conversion process can begin. And upon issuing that notice, then we'll have the ability to issue common units or to redeem those units in cash. And I think a key thing to remember on those preferred units is that the value that they are going to convert into is fixed. So there's $250 million of preferred units out there and when there is a conversion, they will be converted into -- we'll be either providing cash or issuing units that have a value for $250 million.

And that's -- that is and what is -- as Chris points out, that is uniquely different than the traditional preferred, which gives the preferred holder common equity upside. The higher the equity -- per common equity price at the time of conversion, the more in the money the preferred is. These preferreds do not have a fixed strike price or conversion price or a conversion ratio set in them. It's simply, as Chris explained, that we deliver the number of units or cash that have a value equal to the value of the preferred at the time of the conversion. So there's no value dilution for current unitholders per se in that regard.

Right. And what about the warrants? Those, they can exercise at any time, I believe, and they are $22.50 a share and $30 a share? Is that the 2 tranches?

Yes, that's exactly right. You've got the ballparks there on the strike prices. And we have the ability to convert -- to settle those in either common units or in cash. And I think that second tranche is a $34 strike price.

Okay. And if you convert in cash, how does that work? You would just pay them the current stock price? I mean -- or the strike or their exercise -- how would that work?

Sure. We would pay the difference. So we'd pay the net difference between whatever the exercise price is on the date of exercise and the strike price in the warrant. So if they exercise when it's $40 and the strike price is at $34 on the warrants, then we pay a $6 difference per unit.

I got you. Okay. All right. Well, I guess that's another reason to focus on deleveraging over the next several years. It will just give you more flexibility to potentially limit the dilution here.

Agreed.

Your next question comes from the line of Amer Tiwana with Cowen and Company.

My question is, your results have been pretty stable. And from what I hear, you guys think that cash flow is going to be relatively stable in the near future as well. Just trying to understand your sensitivity to -- your met coal portfolio to met coal prices. Can you shed some light on how the contracts are structured? And what kind of sensitivity should we expect?

Yes. So it's a little bit tricky for us. We're not straight -- exactly straightforward in terms of sensitivity because of the way our coal leases are structured in terms of minimum payments and our royalty rights. But generally speaking, and this is guidance that we've provided in the past, as you have a 10% increase in the met index price, we have about a $2.5 million impact to our revenue.

On an annual basis.

And at this time, there are no further questions. Are there any closing remarks?

Thank you, everyone, for joining us today. Appreciate you following NRP, appreciate your interest in us, also appreciate your questions. And we look forward to talking to you again soon and for good times ahead. Everyone, have a great day. Take care.

Thank you. That does conclude today's conference. You may now disconnect.