Natural Resource Partners LP (NRP) 2020 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Natural Resource Partners L.P. Second Quarter 2020 Earnings. (Operator Instructions)

I would now like to hand the conference over to Ms. Tiffany Sammis, Manager of Investor Relations. Ma'am, you may begin.

Good morning, and welcome to the Natural Resource Partners Second Quarter 2020 Conference Call. Today's call is being webcast, and a replay will be available on our website.

Joining me today are Craig Nunez, President and Chief Operating Officer; Chris Zolas, Chief Financial Officer; and Kevin Craig, Executive Vice President of Coal.

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 and other Securities and Exchange 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 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 detailed market fundamentals. In addition, I refer you to general 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, Tiffany. Good morning, all. I hope you and your loved ones are safe and healthy.

NRP continues to operate under CDC guidelines and government-imposed rules and company remote work protocols. Our employees are safe, and the partnership is conducting business as usual. Our management succession plans and delegations of authorities are in place should we need them.

The COVID-19 pandemic has had a significant negative impact on demand for steel, electricity and glass, which translates to lower demand for the coal and soda ash we produce. Year-to-date coal production in the United States is down 27% compared to 2019, and global soda ash production is down approximately 15% year-over-year.

The outlook for coal and soda ash markets remains uncertain as COVID-19 numbers continue to rise across the U.S. However, we believe that our liquidity, free cash flow generation and the fact that our parent company bonds do not mature until 2025, provide us with the financial flexibility to manage through a prolonged downturn.

At the beginning of the pandemic, and in order to best prepare for extreme adverse economic conditions, our Board reserved cash by suspending our first quarter common distribution and electing to pay in kind 1/2 of our preferred unit distribution. Based on the performance of our businesses since those decisions, we announced today that our Board has decided to pay a common distribution and pay in cash the full distribution on our preferred units for the second quarter. In addition, in June, we redeemed in cash the preferred distribution that was paid in kind for the first quarter.

Despite the negative economic backdrop, NRP continues to generate cash and pay down debt. We generated $112 million of free cash flow over the last 12 months, paid off $48 million of debt and added $40 million to common unitholders' equity before noncash accounting impairments. Our cash flow cushion, which is our free cash flow remaining after paying our private placement debt amortizations and distributions on our common and preferred units, was $18 million over the same period. It is likely our cash flow cushion will trend lower in the near future, absent a significant improvement in global economic activity. We ended the quarter with $211 million of liquidity, consisting of $111 million of cash and $100 million of unused borrowing capacity. We believe that metallurgical and thermal coal prices are near or below operators' cost of production in the United States.

While almost all of our lessees are currently operating, including those that had temporarily idled mines at the start of the pandemic, production levels are down and inventories are up. A significant positive development in our coal segment in the second quarter relates to our largest lessee, Foresight Energy. We worked with Foresight to help them develop a plan that enabled them to emerge from bankruptcy, and we entered into lease amendments pursuant to which Foresight agreed to make fixed payments to us totaling $49 million this year and $42 million next year. These fixed payments provide cash flow certainty for NRP at a level greater than had been anticipated as the coal industry manages through difficult market conditions compounded by the COVID-19 pending.

Beginning in 2022, pre-bankruptcy provisions of our leases will kick back in, providing economic upside if coal markets improve. Global ash -- soda ash prices are down roughly 25% from a year ago to levels that are below the cost of production of many of the world's synthetic soda ash producers near the cost of production for some of the natural soda ash producers. Although we've begun to see modest increases in activity in the global auto, container and construction industries, which should drive increased demand for soda ash, we expect the soda ash industry to face headwinds until the global economy gets back on track. Our investment in Ciner Wyoming has not been immune to these adverse economic forces, and Ciner announced earlier this week that it is suspending cash distributions until conditions improve. With that said, we believe our facility is competitively positioned as one of the lowest-cost producers of soda ash in the world, and we have a positive view of its long-term prospects.

In many respects, we now face the most uncertain business environment in decades. But I believe the numerous, transformative actions completed in recent years to rightsize our business, solidify our capital structure and build liquidity have positioned NRP to continue deleveraging and derisking the partnership by using internally generated cash to pay down debt.

And with that, I'll turn the call over to Chris to cover our financial results.

Thank you, Craig, and good morning, everyone.

I'd like to start out summarizing some significant items that are impacting comparisons between the second quarters of 2020 and 2019. First, we recognized $132 million of asset impairment expense in the second quarter of 2020, primarily related to weakened coal markets, compounded by the COVID-19 pandemic, and resulted in the termination of certain coal leases. As a reminder, asset impairment is a noncash expense and does not have an impact on our debt covenant compliance. And second, we recognized a $29 million loss on early extinguishment of debt in connection with the refinancing of our bonds and revolving credit facility in last year's second quarter. These refinancings reduced our ongoing interest costs, extended the maturity of our parent company bonds as a 2025 bond and significantly improved our liquidity and financial flexibility.

I will now turn to our overall and segment-specific results. During the second quarter of 2020, we generated $20 million of operating cash flow and $7 million of net income from continuing operations, excluding the impact of asset impairments. Our coal royalty and other segment generated $34 million of revenue and $32 million of operating cash flow during the second quarter of 2020. These results were lower as compared to the prior year quarter, primarily due to a weakened market for metallurgical coal because of the decline in global steel demand. Both sales volumes and prices for our metallurgical coal sold were lower in the second quarter of 2020 compared to the prior year quarter. In terms of our coal royalty sales mix, metallurgical coal made up approximately 70% of our total coal royalty sales volumes and approximately 80% of our coal royalty revenue during the second quarter of 2020.

In addition, weaker domestic and export thermal coal markets resulted in lower revenue from our thermal coal properties compared to the prior year quarter. Domestic and export thermal coal markets remain challenged by lower utility demand, continued low natural gas prices and a secular shift to renewable energy. The COVID-19 pandemic has compounded already weak coal pricing and demand, and our coal lessees are having a difficult time.

With that being said, I'd like to reiterate Craig's comments regarding the positive outcome for Foresight Energy, our largest lessee. Foresight continues to operate the Hillsbro, Williamson and Sugar Camp mining complexes with longwall mining systems. This highly productive mining method, coupled with the favorable coal geology, has resulted in these mines being among the safest, both productive and lowest cost, underground coal mines in the U.S. Foresight emerged from bankruptcy in the second quarter of 2020 with a significant improved capital structure, well positioned to compete in the domestic and global thermal coal markets. As Craig noted earlier, they will be paying us a total of $49 million this year and $42 million in 2021.

Through the first 6 months of 2020, we received $21 million of the $49 million due to us this year. Beginning in January of 2022, Foresight payment obligations will be calculated in accordance with the provisions of the original lease agreement, except with respect to the Macoupin mine. While the Macoupin is idle, Foresight will pay an annual fee to us of $2 million each year through 2023. This can continue to lease the full reserves at Macoupin. And finally, as previously mentioned, our second quarter 2020 coal royalty setting results were impacted by $132 million in non-GAAP asset impairment.

Moving to our second business segment, soda ash. We received $7 million of cash distributions from Ciner Wyoming during the second quarter of 2020 compared to $9 million in the prior year quarter. In the second half of 2019, Ciner Wyoming decided to reduce annual cash distribution to approximately $28 million in order to fund a multiyear capacity expansion project. However, as Craig noted, the COVID-19 pandemic has caused a negative impact on the soda ash industry, and we expect significant headwinds until the global economy gets back on track.

Our soda ash revenues and other income in the second quarter of 2020 were lower by $14 million compared to the prior year quarter, and Ciner Wyoming suspended distributions beginning this model to service cash and provide greater financial flexibility to weather these weakened market conditions.

While we are unable to predict the ultimate impact that COVID-19 may have on our soda ash business, Ciner Wyoming has taken a number of steps to reduce both operating and capital costs and maintain financial flexibility amid the current market volatility. And we remain confident in the long-term fundamentals of the business.

Our corporate and financing segment costs declined $32 million in the second quarter of 2020 compared to the prior year quarter, primarily due to the $29 million loss on early extinguishment of debt in connection with the refinancings of our bonds and revolving credit facility in last year's second quarter. The remaining $3 million of cost reduction was primarily due to lower interest expense because of the $48 million of debt we have repaid over the last 12 months. Operating cash flow was $7 million lower compared to the prior year quarter, primarily due to the timing of interest payments on the parent company bonds that were refinanced in the second quarter of 2019. Interest payments are now due in June and December for our 9.125% notes compared to due in March and September on the previous 10.5% notes.

We have been and remain focused on the things we can control in protecting our business with a clear priority on cash and liquidity in this uncertain industry and global environment.

And 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 Benchmark.

Great. Congratulations on the quarter. I've got some questions. Let me start off, if I can, with the distribution and the decision to resume the quarterly payment. I guess it reflects several factors. But I guess what caught me off-guard was just given how weak the underlying coal markets are and your decision or the Board's decision to resume it, maybe you can give some color around what went into that decision and why you decided to do it now.

Mark, this is Craig. I would say that we considered the -- Board considered a variety of factors. The performance of the business since the COVID crisis hit, and the near and intermediate-term outlook that we have, our liquidity, our cash generation that we currently have. And when weighing all those, it appeared that it was a prudent move to make the distribution. It doesn't mean that if there's -- there could be some significant event in the future that causes our results to come in considerably worse. And then the run rates we're currently generating could cause us to change our mind. But at this point, it just -- it appeared like a good move to pay the distribution.

Got it. And yes, just -- it was something they sort of come a little off-guard, I guess, even in reference to Ciner Wyoming, suspending that $7 million distribution, but that's fantastic. I assume the Board wouldn't have done it if they weren't confident that they could keep it going in this type of market condition.

The other question I was going to ask because I think you referenced last quarter, maybe free cash flow cushion or free cash flow, in general, just turning negative. Do you feel that way today? It sounds like it would -- it's coming down, but do you still echo those same sentiments in terms of what you see today?

Mark, I think it's very possible that our cash flow cushion could -- as it trends lower, could go below 0 at some point, it could go negative, absent some turnaround and dramatic improvement in the global economy in the near term. But I would always balance the negative cash flow cushion with the amount of liquidity that we actually have and look at those 2 things together. But yes, I think there's always a chance that these existing conditions extend out for a prolonged, extended period that you could see the cash flow cushion go negative.

And related to that point, is there a minimum liquidity number that you guys would like to keep or have on hand?

We don't have a target that we're sharing, Mark, as far as liquidity. It depends on the facts and circumstances. And the more optimistic we are about the outlook going forward, the lower that number can be and vice versa. Right now, we're comfortable where we are with our liquidity number. Now we think over $200 million of liquidity with over $100 million of cash, we think that's a good number in light of the market and our view of the market today.

Got it. And then my last question, just maybe some color around the Illinois Basin royalty rate. I noticed that it stepped below $2 a ton. I wasn't sure if there was something funky from an accounting perspective going on or if that's sort of the new run rate to think about because there's obviously a materially different from a royalty revenue per ton perspective in the Illinois Basin than it's been historically.

Well, there's a couple of factors that play at that. Chris, do you want to talk about that or Kevin?

I'd be happy to, Craig. And Mark, yes, absolutely. We tried to mention this a few times in our remarks earlier, but this is driven by the agreements that we entered into with Foresight, where we're now receiving a fixed amount over time. That's the primary driver for the results here.

It's not a change in the royalty rate per se. It's just when you do the calculation, it appears that the royalty rate has changed. And it's just for this intermediate time of 2020 and 2021 when we have fixed payments.

No, that makes perfect sense. Is there any sense -- I know you mentioned the distribution being suspended as it relates to the soda ash business. Any reason to believe that it would resume in the fourth quarter? Or I mean do you have any color or thoughts on how to think about -- I mean I assume that will be a 0 going forward until notified otherwise, but is there any color maybe you can give on that?

I can't. We can't give you any color other than what Ciner has announced. And just generally speaking, they've announced that they're suspending it until the market improves. I will tell you this. I think you need to be prepared for a -- some extended period, multiple quarters, for sure, of continued tough sledding in the soda ash business. I will say that there are definitely green shoots coming out if you look globally, especially global demand is starting to pick up. Flat glass and container glass is strong here in the U.S., but I think it's going to take a little while for that market to come back. And so I think -- for the foreseeable future, I think that business is still trying to get its legs back underneath it, but that's all I can share. And I'd suggest directing questions about distributions to Ciner.

No, that makes perfect sense. One final one, just one for me, and I think I've asked this in previous calls. Can you talk a little bit about the minimum structure and maybe how to think about that as a floor from a revenue perspective for the business, at least? As you look across your portfolio for people who might be concerned about negative net pricing sentiment, all that kind of stuff, maybe just talk a little bit about the revenue, the floor revenue composition.

Well, Mark, as we've talked before, explained to you that the real key with the minimums is the extent to which we have deficiency payments. So that if we have an obligation under -- a minimum obligation from a lessee to us under lease, and they do not generate sufficient royalty income to cover that minimum, then whatever the difference is between the minimum and the amount that they actually paid us in royalty income is the deficiency. And so it's the deficiency payment. We have typically -- if you look back over the last year -- a couple of years, we've been seeing $15 million to $20 million roughly of deficiency payments that we receive across all of our portfolio combined. Some of those, of course, have been associated with Foresight. A lot of that's with Foresight because -- which, in this environment, now that we have a fixed payment structure with Foresight for this year and next year, we won't be receiving deficiency payments per se from them. So I think the right way to think about it is that, as you look forward, say, over the next year or so, I think that assuming that it gets really bad, maybe it stays -- you get net pricing gets even worse than we are now, I think it's fair to think of it in terms of maybe something between $10 million and $20 million of deficiency payments that we would receive. Chris, do you have anything you want to add to that?

The only thing I'd like to add, Craig, I think that you summarized that well, that, Mark, we do include in a footnote in our 10-Q a disclosure of the total amount of contractual minimums we have. So if you want to get a perspective of what is that total minimum now, we do have that in a disclosure in the 10-Q. But really the key thing, as Craig pointed out, is how much of those deficiency payments that is received. That $15 million to $20 million is really the important number to help us out.

Got it. Very helpful, and congratulations on the Foresight agreement.

Thank you very much, Mark. Appreciate that.

(Operator Instructions)

At this time, there are no further questions. I would like to turn the call back over to Mr. Craig Nunez.

Well, thank you, everyone. I appreciate you taking time to join our call, and I appreciate your interest in NRP. And I hope that you and your families stay safe and healthy. And until next month. Take care.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.