Ladies and Gentlemen, thank you for standing by. And welcome to the NACCO Industries Fourth Quarter and Full Year Earnings Conference Call. It is now my pleasure to turn the call over to your speaker today, Ms. Christina Kmetko. Please go ahead.

Good morning, everyone, and welcome to our 2020 Fourth Quarter Earnings Call. I am Christina Kmetko, and I'm responsible for Investor Relations at NACCO Industries. Thank you for joining us this morning. Joining me today are J.C. Butler, President and Chief Executive Officer of both NACCO and North American Coal; and Elizabeth Loveman, NACCO's Vice President and Controller. Yesterday, we published our fourth quarter and full year 2020 results and filed our 10-K. Copies of our earnings release and 10-K are available on our website. Anyone who is not able to listen to today's entire call, an archived version of this webcast will be on our website later this afternoon and available for approximately 12 months. Our remarks that follow, including answers to your questions, contain forward-looking statements. These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements made here today. These risks include, among others, matters that we have described in our earnings release issued last night and in our 10-K and in other filings with the SEC. We disclaim any obligation to update these forward-looking statements, which may not be updated until our next quarterly earnings conference call, if at all. In a moment, I'll discuss our fourth quarter and full year results. But first, let me turn the call over to our President and CEO, J.C. Butler, for some opening remarks. J.C.?

Thank you, Christy, and good morning, everyone. As we put 2020 behind us, I'm pleased to be looking forward to the future. That said, I'm a big believer that changes make us stronger. And I definitely believe that the challenges we faced in 2020 make both our team and our business stronger. I have to start today by recognizing our employees who are doing an incredible job for our customers and for the company. While a portion of our employees have been working remotely, a vast majority of our team has been coming to work to do their jobs every day since the pandemic started. As essential workers, they needed to come to work, and they did. And those working remotely seem to be putting in more hours and producing more output than ever before. I could not be more pleased with how well our entire team has managed through this situation and adapted to these constantly changing work environments. I truly appreciate our employees' commitment to supporting our customers while also working to keep themselves and others safe. I simply cannot thank our team enough for their great work. In addition to managing changes associated with the pandemic, we also dealt with disappointing news from some of our customers in 2020, which affected both our fourth quarter and full year results. Christy will cover this in more detail in a moment, but it's safe to say that our 2020 financial results were disappointing. In our Minerals Management segment, we expected lower royalty income due to the natural decline in production of existing natural gas wells in Ohio, but the COVID-related collapse in natural gas prices made this worse than expected. Prices have recovered quite a bit from the lows in early 2020, but the pace of new well development has slowed down quite a lot. We also experienced a significant reduction in earnings in our Coal Mining segment. Our Camino Real mine in South Texas and our Caddo Creek mine in East Texas ceased production in 2020, and we generally saw modestly lower levels of coal requirements from our customers. Some of the reduced demand for coal was COVID-related, which somewhat reduced demand for electricity, but it was perhaps even more so related to extremely low natural gas prices. Despite the challenges experienced in 2020, we continue to have a positive view of our long-term business prospects, given our strategies to grow and diversify a strong pipeline of business development opportunities and the quality of our team. We continue to believe that coal is going to be an important part of electric generation capacity in the U.S. I think the recent events in Texas show us how important it is to have generation capacity that is readily dispatchable. We're very actively engaged in helping our coal customers be competitive, and we'll continue to do so, but we are fully aware of the challenges faced by our legacy Coal Mining business. That's why we continue to push forward on key initiatives to grow and diversify. We're deliberately diversifying into other businesses that leverage our core skills, our capabilities, and our reputation. North American Mining has been growing quite rapidly over the last several years, and I was pleased to see improved operating profits from this business in 2020. We've expanded the scope of North American Mining's business development activities to include a broad range of minerals and materials, and by leveraging our core mining skills to expand the range of contract mining services we can provide. We can provide specialized services like operating drag lines or other specialized pieces of equipment, or we can run an entire mine like we would do at the new lithium mine that we are developing for Lithium Americas in Nevada. There's no question that the pandemic slowed the pace of North American Mining's business development activities in 2020, but our outlook for growth in 2021, including growth outside Florida, is strong. While North American Mining didn't close on many new projects in 2020, their pipeline of potential new projects is bigger and better than ever. Shifting to our Minerals Management segment, we're growing and diversifying by buying mineral and royalty interest in premier basins in the U.S. While COVID reduced our oil and gas income, depressed oil and gas prices and the OPEC price war created a buyer's market in 2020, making this a good time to launch our acquisition program. In 2020, we were able to acquire mineral and royalty interest in the Permian Basin in Texas for a total purchase price of about $14 million. These acquisitions align with our strategy to grow and diversify where we're acquiring mineral and royalty interest in oil-rich basins with a balance of near-term cash flow yields and long-term growth potential. This offers diversification from our legacy mineral interests, which are predominantly in natural gas-rich basins, largely in Southern Ohio. Mitigation Resources of North America is making great progress, expanding its business model with a number of banks in development in the Southeast. We're finding that we can create real value by leveraging our company's strong environmental skills and reputation for doing quality work to preserve and protect streams and wetlands. Mitigation Resources has demonstrated good success in its first few years in business and has a very strong pipeline of potential new projects. We certainly will evaluate new coal mining projects, but I don't see a lot of those coming available. And even if they do, we will be very careful to stick with our management fee business model and think carefully about the risk and opportunities of any new project. I do want to mention the voluntary separation program that took place in the fourth quarter. This was focused on reducing employee costs at the headquarters level, which directly affects our total G&A costs. This came about in response to some of the challenges we faced in our Coal Mining segment, but also in recognition of the investments we've made in new information platforms and IT systems over the last several years. Between the VSP program and some voluntary departures, we've reduced our headcount by about 25% at the headquarters level. This wasn't an easy decision. All of our employees are important parts of our team, and many of these were very long-term employees, but it was what we needed to do. We'll end up filling a few of these positions, but overall, our plan is to leverage our new IT tools and modify processes to operate more efficiently. So with that, I'd just say again that while 2020 was not an easy year for us, I'm impressed by the tremendous accomplishments of our incredible team of employees, and I'm proud of the progress we made to advance our goals in spite of the challenges that 2020 threw us. And of course, all of us are excited about building on this progress in 2021. We're purposefully diversifying into three strong businesses that leverage our core skills, capabilities, and reputation. And I've got a lot of confidence in what these businesses can become in the future. Now let me turn the call back over to Christy to cover our results for the quarter.

Thank you, J.C. I'll start with the consolidated quarter and full year results and then provide additional detail at the segment level. As J.C. mentioned, we faced many challenges in 2020, which culminated in disappointing fourth quarter and full year results. For the fourth quarter, we reported a consolidated operating loss of $8 million and a net loss of $5.4 million or $0.77 per share. There were $9.8 million of charges taken during the 2020 fourth quarter, which I will cover in more detail in the individual segments that contributed to the losses in the quarter. For the 2020 full year, we reported consolidated operating profit of $13.4 million and net income of $14.8 million or $2.10 per diluted share, and that compared with consolidated operating profit of $38.8 million and net income of $39.6 million or $5.66 per share for the 2019 full year. Now, let me provide a bit more detail on certain segment results. In the 2020 fourth quarter, the Coal Mining segment had an operating loss of $400,000 compared with operating profit of $6.4 million in the 2019 fourth quarter. The current year operating loss includes the following: a noncash charge of $2 million for the write-down of Mississippi Lignite Mining Company's coal inventory to net realizable value, a $1.5 million charge for costs associated with our voluntary separation program implemented in the fourth quarter of 2020, and a $1.1 million noncash asset impairment charge for a legacy database acquired in the 1990s with information on coal reserves. If we exclude these charges, the Coal Mining segment's operating profit still declined from last year's fourth quarter, primarily because of substantially lower results at Mississippi Lignite Mining Company resulting from a reduction in tons delivered during the fourth quarter. This reduction in tons contributed to an increase in the cost per ton delivered. Also contributing to the lower operating results were additional wind-down costs at Camino Real Fuels, not covered by Camino's former customer, higher operating expenses, and reduced earnings of unconsolidated operations. The Minerals Management segment reported an operating loss in 2020 compared with operating profit in 2019, despite an increase in fourth quarter 2020 revenues. During the fourth quarter, we wrote off $6.7 million of capitalized leasehold costs and prepaid royalties on legacy coal reserves where prospects for development deteriorated in 2020. Excluding the asset impairment charge, the 2020 fourth quarter operating results in the Minerals Management segment increased over the 2019 fourth quarter, primarily because of new Ohio natural gas wells and an increase in natural gas prices. Those are the significant factors affecting the fourth quarter results. Now, let me turn to our outlook. In the Coal Mining segment, we expect 2021 coal deliveries to be comparable to 2020 based on current expectations of customer requirements. However, the Coal Mining segment's 2021 operating profit is expected to decrease significantly from 2020. This decrease is primarily because of substantially lower earnings expected at Mississippi Lignite Mining Company and a reduction in earnings at the unconsolidated coal mining operations. The lower Mississippi Lignite Mining Company results are due to an anticipated increase in the cost per ton of coal delivered in 2021 compared with last year, due in part to an increase in depreciation expense associated with the development of a new mine area. The anticipated reduction in earnings at the unconsolidated coal mining operations is expected to be mainly driven by a reduction in fee-based earnings at the Liberty Mine as the scope of final mine reclamation activities there have been reduced. This lower operating profit is expected to be partially offset by a decrease in operating expenses, primarily due to lower employee-related costs resulting from the 2020 voluntary separation program, partially offset by higher insurance expense. In 2021, we expect North American Mining's operating profit to increase moderately over this year with its existing customer contracts. However, we are pursuing a number of growth initiatives that, if successful, would be accretive to future earnings. In addition, I would like to highlight that in January of this year, the Thacker Pass project received a Record of Decision from the U.S. Bureau of Land Management, following the completion of the National Environmental Policy Act Process. This decision represents an important milestone in the development and permitting of the Thacker Pass project, and more permitting decisions are expected later in 2021 with production expected to begin in the second half of 2022. Excluding the impact of the $6.7 million write-off taken in 2020, we expect Minerals Management operating profit to be down substantially in 2021 from 2020. This decrease is primarily related to a reduction in royalty income from existing Ohio mineral and royalty assets as a result of expected lower natural gas prices, fewer expected new wells in Ohio, lower commodity prices, and the natural production decline that occurs early in the life of a well. Let me spend a minute talking about our investment plans for Minerals Management. As J.C. mentioned, we acquired approximately $40 million of mineral assets in 2020, and we are targeting an additional $10 million in investments this year. While we expect these investments to be accretive to earnings, each investment's contribution will be dependent on the timing, size, and stage of mineral development of the reserves acquired. On a consolidated basis, excluding the favorable impact of potential business development activities, we expect substantially lower 2021 pretax earnings as a result of lower consolidated operating profit, an anticipated increase in interest expense, and a reduction in interest income. These lower pretax results are expected to be partially offset by an increase in the benefit from income taxes, primarily due to a benefit from percentage depletion at certain mining operations. Consolidated pretax income and net income are expected to be higher in the second half of 2020 than in the first half of 2021, primarily due to current expectations on the timing of customer requirements in the Coal Mining segment. Overall, while we expect consolidated net income this year to decrease significantly from last year, as J.C. mentioned, we will still continue to view the long-term business outlook positively because of the strong pipeline of potential new projects. The COVID-19 pandemic closed certain business development initiatives in 2020, but the outlook for growth in the North American Mining and Minerals Management segment and in our Mitigation Resources of North America business remains strong. In addition, the voluntary separation program that occurred in the fourth quarter was substantially completed by the end of the year. As a result of this program, we are expecting estimated net benefits of between $1.5 million and $2.5 million annually beginning in 2021. Moving away from results, let me briefly provide some cash flow information. We ended the year with consolidated cash of $88.5 million and debt of $46.5 million compared with consolidated cash of $97.6 million and debt of $23.1 million at the end of the third quarter. In addition, at the end of the year, we had availability of $117 million under our $150 million revolving credit facility. We believe that a conservative capital structure and liquidity are important given our strategic initiatives to grow and diversify as well as the changing trends occurring in energy markets. That said, our cash flow before financing activities varies with changes in customer demand, particularly in the Coal Mining segment as well as changes in earnings of the Minerals Management segment, working capital changes, capital expenditures, investments, and royalty and mineral interests as well as changes in income taxes and other factors. For the 2020 full year, NACCO's consolidated cash flow before financing activities was a use of cash of $48.5 million and included a significant use of cash related to working capital, capital expenditures, and the acquisition of mineral royalty interest. We are anticipating positive cash flow before financing this year, but at a level still below the cash we generated back in 2019. Now, let me open up the call for your questions.

Your first question comes from Andrew Kuhn from Focused Compounding.

My first question is, because you entered a new mine area, capital expenditures at Mississippi Lignite Mining Company were high in 2019, 2020, and will be high again in 2021. Since you're not expecting to enter another new mine area between now and the end of that contract, how much lower do you expect annual CapEx at MLMC to be starting in 2022?

I mean, the trick to the question is the how much, right? I mean we don't provide forecasts that far out with any specific numbers, but I will tell you that the spending that's been going on to develop that mine area has been very, very substantial, as you obviously know. If you look back to some prior years and sort out where we've called out some other capital projects, I think you can see the capital spending at Red Hills drops to a pretty low level. And as I've mentioned before, from time to time, you have to replace things. We don't see much of that once we get into this new mine area regarding equipment or anything else. But if you need to buy a new haul truck, I mean, they're expensive. And if you need to add a significant new piece of equipment, that takes a fair amount of capital. But otherwise, it's going to be pretty low maintenance capital expenditures going forward at Red Hills.

Got it. Next question is, you said you believe the current market for mineral and royalty interest in the U.S. is a buyer-friendly market. I was wondering if you could maybe tell us why you think that, maybe what you're seeing? And do you think that buyer-friendly market is reflected in the price you paid for your Permian Basin investment?

I’ll address the last question first. Yes, we believe the current market environment is better than it was a year ago. We are now over a year into the pandemic, so it's fair to reflect on the changes from two years ago as well. The impact of COVID on oil and gas demand, along with the OPEC price war, heavily affected prices and development in that sector. Additionally, the investment being made in oil and gas development in the U.S. has significantly decreased. Our strategy is to position ourselves differently from those pursuing large acquisitions worth hundreds of millions; we focus on smaller investments that are still larger than what individual investors typically seek. Our team may be small, but it is highly skilled, taking a strategic and thoughtful approach to acquisitions. Many investors tend to approach oil and gas opportunities with a more urgent, transactional mindset, often targeting assets with immediate production needs or debt pressures. However, our company takes a long-term perspective, allowing us to identify and acquire opportunities that may not appeal to other investors. Does that clarify things?

Yes. No, I think that's a great explanation, actually. And then my last question is, if you could talk a little bit about Mitigation Resources of North America, like what it does, its successes so far, and why you think it could grow. And whether you think that business will ever be material to NACCO's overall results? And then I'll jump back in the queue.

Mitigation Resources of North America is a company we established to develop stream and wetland mitigation banks. Whenever someone is building or expanding a road, constructing an apartment complex, or creating a shopping center that may affect a stream or wetland, they need to obtain stream or wetland mitigation credits to get the necessary permits. This requirement applies in most states and is overseen by the Army Corps of Engineers. We have a long-standing reputation for high-quality environmental work at our mining sites, and this business stemmed from our experiences when we or our clients needed to acquire stream or wetland mitigation credits. It’s a market that presents opportunities for those with strong technical skills and a commitment to serving customer needs. We established this business a few years ago and have received excellent feedback from potential clients and the Army Corps of Engineers regarding our role in the market. Mitigation Resources has three business models. The first involves acquiring land with degraded streams or wetlands, enhancing them in collaboration with the Army Corps of Engineers, and then permanently protecting those areas by placing conservation easements. We generate credits from these improvements and sell them. The primary model is similar to a merchant bank approach, where we develop and sell these credits through private transactions. Additionally, we can assist landowners in developing their own mitigation banks or provide services for those looking to create mitigation banks for their projects. Currently, we are primarily active in the southeastern United States, particularly in Mississippi and Tennessee, where many team members come from our mining operations. We have several banks under development, have started selling credits, and are experiencing success. I am optimistic about the growth potential of this business. Each venture we invest in has the potential to significantly contribute to our overall business. While timing is crucial, we aim for aggressive yet cautious growth to avoid risks we don't yet understand. I hope this business will eventually develop into its own segment, similar to our Minerals Management and North American Mining businesses, but for now, it is still a small part of our unallocated segment.

Your next question comes from Trey Henninger from DIY Investing.

I would like to ask my first question around your overall sentiment going into 2021. When I read the earnings release that you put out yesterday, if I had to describe the tone of it from an outsider's point of view, I would describe it with the word bleak. And so the first question is, do you consider the future of NACCO bleak? Or was I reading it wrong, or what am I missing there?

I understand why you might view the outlook as bleak, particularly when considering 2021 without looking beyond that year. Indeed, there are many factors that will be down in 2021. However, what is not reflected in our outlook are the potential opportunities from our business development initiatives. We're discussing significant transformations in our upcoming annual report, focusing on building three new businesses, all of which are already playing a crucial role in this transition. I see substantial growth potential in each of these sectors. North American Mining, for example, was profitable in 2020 and has grown considerably in recent years, overcoming the hurdle of covering overhead costs. Consequently, any gains in that area will primarily add value. It's important to note that the contributions from business development are not directly included in our outlook. Success in securing new projects for North American Mining, acquiring more reserves in Minerals Management, or expanding Mitigation Resources will all enhance the growth of our diversified business. The situation in Texas is still unfolding and it's too early to assess its full impact. However, I am optimistic that organizations managing regional grids will reconsider how they approach capacity reserves, which could positively impact coal. Many markets, not just ERCOT, are facing a shortage of remaining capacity. While you may describe the situation as bleak, I'm quite optimistic about the long-term prospects of our company, which we view with a long-term lens. Does that address your question?

Yes, that's helpful. Both Andrew and I dedicate a lot of time to thinking about this business. While you're involved in it and have insights that we may not possess, my next question ties into what you mentioned and concerns guidance. You have a long-term vision, yet you provide regular quarterly and annual forecasts based on the upcoming three months and the next twelve months. I’m curious about the purpose of this guidance. Who is the intended audience? Does it assist you in management planning, or could it be a distraction? From my perspective, it seems contradictory to emphasize a long-term focus while only forecasting for the next year. As an external shareholder, I’m more interested in your long-term strategies. What do you envision for this business in five or ten years? How many limestone and lithium mines do you aim to have? What are your mining goals? I’m simply trying to understand the rationale behind your current guidance strategy. Might you consider changing it, or do you think it’s appropriate as is? I hope this clarifies my question.

Yes, that's a good question. The short-term guidance is meant to help everyone understand what we are seeing and to avoid surprises, whether it's for the next quarter or the remainder of the year. A year ago, it was difficult for anyone to predict the pandemic's impact, but we can predict aspects of our business. Our near-term guidance aims to prevent surprises. In the Coal Mining segment, we have been clear that operating profit will decline due to increased depreciation at MLMC. We want to communicate that. We're also focused on cash flows, and we have been indicating that we are in a capital expenditure phase that will end. While operating profit may not look good, I prefer to look at EBITDA as a positive measure. Regarding the long-term outlook, it would be misleading for us to claim specific targets like having seven lithium mines or being in designated states. The development of these projects is unpredictable, and my experience in business development shows the importance of taking an opportunistic approach. We must see how one opportunity leads to another, like our lithium project, which has shifted how customers perceive us. Building relationships takes time, as we typically engage in long-term projects rather than transactional sales. Setting specific goals for the number of mines in particular locations could be unreasonable and may mislead our development teams. For example, if we set a goal for three mines in Texas but find better opportunities in New Mexico, focusing solely on Texas would be misguided. We will continue to discuss our business strategy more openly, and you will see more details in the annual report and other filings. We are evolving into a group of affiliated businesses in the mining and natural resources field, and I hope this clarifies my perspective.

That's very helpful. I want to clarify that I’m not asking for a forecast, as I don’t want you to limit your perspective. What would be beneficial for me and possibly for other outside investors is gaining insight into your vision. Instead of focusing on specific numbers, it would be useful to hear about your goals. While discussions about the future may seem vague at the moment, additional clarity on the direction of the business would be appreciated. To wrap up that point, I have a question regarding Thacker Pass. Can you provide any indication of the scale of its impact on the business? Are we considering something comparable to the Freedom mine, the Falkirk mine, or perhaps the Sabine mine in terms of its effect on the operating profit of North American Mining, if it goes into operation?

Once it is fully operational, it will resemble a modest midsized mine. It will not be comparable to Coteau or Falkirk, which are significantly larger. It will be a modest midsized mine in terms of its operations and its effect on our financials.

Okay. That helps. So last question, please go ahead.

No, go ahead.

Yes. I mean, if you have more color on that piece, feel free. But I'll just give the last question I had before jumping back in the queue, which was around the Mississippi Lignite Mining Company. And it's basically just, is there any prospect or interest on the side of management in selling the Mississippi Lignite Mining Company and only operating unconsolidated coal mines? Because you talk about how you wouldn't take on a new consolidated coal mine. And so I wonder if there's any interest in moving quicker to only operating unconsolidated coal lines?

I mean, with respect to Red Hills, which is our one operating consolidated coal mine, I would just say the nature of all of the contractual relationships that are in what is actually a pretty complex structure would make selling it nearly impossible. It is a very complex structure that makes the ability to do that very unlikely.

There is no further question at this time. You may continue.

Okay. Thank you very much for your interest. J.C., did you have any closing comments? Okay.

No. Thank you.

Thank you. If you guys have any follow-up questions, please feel free to reach out. My phone number is at the top of the earnings release. Have a great day.

Ladies and gentlemen, this concludes today's conference call. For encore replay, it will be available up until 11th of March, and you can access it by dialing (800) 585-8367 or (416) 621-4642, with conference ID 3263907. Again, thank you for joining. You may now disconnect.