Good morning, ladies and gentlemen, and welcome to the NACCO Industries Second Quarter 2021 Earnings Conference Call. This call is being recorded on Thursday, August 1, 2024. I would now like to turn the conference over to Christina Kmetko. Please go ahead.

Thank you. Good morning, everyone, and welcome to our second quarter 2024 earnings call. Thank you for joining us this morning. I'm Christina Kmetko, and I'm responsible for Investor Relations at NACCO. Joining me today are J.C. Butler, President and Chief Executive Officer; and Elizabeth Loveman, Senior Vice President and Controller. Yesterday, we published our 2024 second quarter results and filed our 10-Q. This information is available on our website. Today's call is also being webcast. The webcast will be on our website later this morning and available for approximately 12 months. Our remarks that follow, including answers to your questions, contain forward-looking statements. These statements are subject to several 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've described in our earnings release, 10-Q, and other SEC filings. We may not update these forward-looking statements until our next quarterly earnings conference call. We'll also be discussing non-GAAP information that we believe is useful in evaluating the company's operating performance. Reconciliations for these non-GAAP measures can be found in our earnings release and on our website. With the formalities out of the way, I'll turn the call over to J.C. for some opening remarks. J.C.?

Thank you, Christie, and good morning, everyone. We're halfway through the year, and I'm pleased to be talking about another strong quarter. Our 2024 second quarter operating profit increased substantially from a year ago. Looking at the reported numbers, it's up 321%. I need to point out that within those results is a $4.5 million gain on sale of a legacy land asset. Excluding the gain, our operating profit still increased over 60% from last year's second quarter. This increase was driven by a significant improvement in results in our Coal Mining and North American Mining segments. Christie will go into more detail about our second quarter earnings and provide an overview of our outlook in a minute. But first, let me give you an update on our operations. I'll start with our Coal Mining segment, which saw the biggest year-over-year improvement. I'm pleased to report that customer repairs to the damaged boiler at the RedHill power plant are progressing, and we believe the boiler issue should be resolved and the plant is fully operational by the fourth quarter. As you can see from our financials, the Coal Mining segment's revenues decreased primarily due to fewer coal deliveries as a result of the plant running on only one boiler. We look forward to seeing deliveries increase as the plant returns to normal operations with two boilers. Despite lower customer demand, Mississippi Lignite Mining Company's Red Hills mine operated more efficiently this quarter than during 2023. If you recall, last year, we were in the midst of moving to a new mine area and contending with difficult mining conditions related both to the move and to adverse weather. This year, we are established in the new mine area, and mining conditions have improved, allowing us to operate more efficiently, which helped year-over-year results. Our production costs still remain above historical levels, and they're expected to stay high until deliveries return to normal later this year. I'd also like to note the improvement in our earnings and our unconsolidated coal mining operations. You may recall that when Rainbow Energy acquired the Coal Creek Station power plant in 2022, we provided temporary price concessions to help facilitate the transaction. At the end of May, these price concessions ended, which contributed to the increase in our Coal Mining segment results. Our North American Mining segment also delivered strong year-over-year earnings improvement. North American Mining's operating profit improved 39%, and segment adjusted EBITDA increased 36% compared with 2023. I am pleased with the progress the North American Mining team has made on operational and strategic projects that contributed to the improved 2024 second quarter results. This includes diversification into additional minerals such as mining phosphate for a new customer in Florida. Overall, I believe we are making meaningful progress towards building this segment into a very successful business platform. At Minerals Management, second quarter operating profit increased over the prior year because of the gain on sale I mentioned previously. Excluding the gain, Minerals Management's earnings were down year-over-year, primarily due to a 39% decline in Minerals Management revenues, largely driven by substantially lower natural gas and oil prices. The Catapult Minerals Partners team, which oversees this segment has done a great job of growing and diversifying our portfolio of mineral interest over the last few years. They have expanded our portfolio of mineral interest, and we are more diversified in terms of operators, geographic footprint, and stages of mineral development, ranging from producing wells to undeveloped mineral interest. The Catapult team is targeting mineral interest investments of up to $20 million in 2024. Finally, moving to our Mitigation Resources of North America business, results were down year-over-year due to a change in the mix of projects. However, this team continues to execute existing mitigation and reclamation projects and build on the substantial foundation it has established over the past several years. As I mentioned last quarter, Mitigation Resources is advancing its business plan more quickly than we anticipated. As this business matures, we believe it can provide solid returns on capital employed. Overall, I continue to be very optimistic about our outlook for the remainder of 2024 and beyond. I have a lot of confidence in our team, and I'm pleased with the way all of these businesses continue to advance their strategies, including efforts to protect our coal-mining business. With that, I'll turn the call back over to Christie to cover our results for the quarter and our outlook in more detail.

Thank you, J.C. Let me begin with some high-level comments about our consolidated second quarter financial results, and I'll provide some detail on our individual segments. For the 2024 second quarter, we reported consolidated income before taxes of $6.2 million and net income of $6 million or $0.81 per share. This compared to income before taxes of $3.3 million and net income of $2.5 million or $0.34 per share in 2023. EBITDA was $13.5 million, compared with $9.2 million last year. The $4.5 million pretax gain on sale that J.C. mentioned earlier is included in these results. While our operating profit increased even after excluding the gain, the same can't be said for income before taxes, net income, and EBITDA; a $2.6 million year-over-year unfavorable change in other expenses more than offset the operating profit improvement. This change was driven by higher net interest expense due to an increase in debt levels and lower cash levels, as well as unfavorable changes in the market value of equity securities. It is worth noting that neither of those unfavorable changes are tied directly to operations. Excluding the gain on sale, operating profit grew primarily due to significant improvements in earnings at our Coal Mining and North American Mining segments. These unfavorable items were partly offset by lower minerals management and mitigation resources gross profit, as J.C. already discussed and an increase in unallocated employee-related expenses. Our Coal Mining segment reported operating profit of $2.8 million and generated segment adjusted EBITDA of $5.7 million. This compares to an operating loss of $4.7 million and just below breakeven segment adjusted EBITDA in 2023. J.C. generally discussed the reasons for the higher coal mining segment results. I would note that in addition to the favorable Mississippi Lignite Mining Company results and higher Falkirk core pricing, an increase in customer requirements at the unconsolidated operations as well as higher Sabine reclamation earnings also contributed to the profit improvement. At North American Mining, operating profit of $3.1 million and EBITDA of $5.5 million increased significantly compared with last year. The second quarter improvements were due to several factors: an increase in customer requirements, favorable pricing and delivery mix, improved margins at the limestone quarries, resulting from mutually beneficial contract amendments, and the commencement of the new 15-year contract to mine phosphate that J.C. mentioned. Looking forward, we expect our Coal Mining segment operating profit to increase significantly in both the 2024 second half and full year compared with the respective 2023 period. This improvement occurs with or without the $60.8 million impairment charge taken in the fourth quarter of 2023. Higher segment adjusted EBITDA, which excludes the impairment charge, is also projected for both periods. These anticipated increases are primarily due to an expected substantial improvement in results at Mississippi Lignite Mining Company and higher earnings at the unconsolidated coal mining operations. The projected increase in second half 2024 earnings at the unconsolidated coal mining operations is driven primarily by an expectation for increased customer requirements at Coteau and Falkirk, as well as a higher per ton management fee at Falkirk due to the cessation of temporary price concessions. Second half 2024 results are also expected to increase significantly over the 2024 first half due to current expectations that the boiler issue at Mississippi Lignite Mining Company's customer plant will be resolved, and the plant will be fully operational by the fourth quarter of 2024. Turning to North American Mining, we expect operating profit and segment adjusted EBITDA to increase in both the 2024 second half and full year over the respective 2023 periods that decreased from the 2024 first half. The year-over-year improvements are primarily due to mutually advantageous limestone contract amendments, a scope of work expansion with another customer, and the second quarter 2024 commencement of mining at the new phosphate mine. Earnings in the second half are expected to moderate from the first half of the year due to anticipated lower customer requirements. Finally, at Minerals Management, we expect 2024 second half and full year operating profit and segment adjusted EBITDA to increase over the respective 2023 periods, excluding the fourth quarter impairment charge of $5.1 million. These improvements are primarily driven by current market expectations for natural gas and oil prices, as well as development and production assumptions on currently owned reserves. Based on current market expectations, operating profit in the second half of 2024 is expected to increase moderately compared with the first half, excluding the $4.5 million gain on sale recognized in the second quarter. As I've mentioned, our second half 2023 results included a pretax impairment charge totaling $65.9 million. My upcoming comments about our expected consolidated results exclude the effect of this charge. We expect our consolidated second half operating profit to increase compared with both the first half of 2024 and second half of '23. These improvements are primarily due to anticipated increases in profitability at the Coal Mining segment and contributions from North American Mining growth and profit improvement initiatives. We also expect consolidated net income in the 2024 second half and full year to increase compared with the respective 2023 period. This improvement is anticipated to be partly offset by higher income tax expenses and an increase in net interest expenses because of additional borrowings and lower cash levels. All that said, we are taking steps to terminate our defined benefit pension plan. We anticipate the termination will result in a noncash settlement charge in the 2024 fourth quarter, which is expected to partly offset the improvement in the second half operating profit. As a result, we are projecting that consolidated net income and adjusted EBITDA will decrease in the second half of 2024 compared with the first half of the year. While the company anticipates that third quarter net income will improve significantly over the second quarter, fourth quarter net income is expected to be substantially lower than both the third quarter and prior year fourth quarter, mainly as a result of the anticipated noncash pension settlement charge. Before I turn the call over to questions, let me close with some information about our balance sheet and cash flow. We ended the quarter with consolidated cash of approximately $62 million and debt of $61 million. We had availability of $89 million under our revolving credit facility. During the second quarter, we repurchased approximately 108,000 shares for $3.3 million under an existing share repurchase program. In 2024, we expect cash flow before financing activities to be a use of cash. We will now turn to any questions you may have.

Thank you. Ladies and gentlemen. Your first question comes from Doug Weiss from DSW Investments. Please go ahead.

Hi, good morning.

Good morning.

First question on North American mining. It sounds like you're optimistic about the growth prospects for that business. And I wondered if you could just talk a little bit about where you see the greatest opportunities to add customers both in terms of product lines and whether you're expanding business with existing customers or completely new customers?

That's a great question. We've successfully expanded our relationships with existing customers over the past several years as we've been growing this business, and we've also brought in a lot of new customers and entered new geographical areas. We've broadened the equipment range we operate as well. About eight or nine years ago, we focused on growing this business while operating draglines to mine limestone underwater for customers in Florida. We then realized it didn't have to be just draglines, limestone, or even Florida, and since then, we've been pushing to diversify successfully. We expect to see growth with our existing customers and anticipate adding new customers and contracts, along with expanding our equipment range. For instance, we're currently using a surface miner, similar to larger machines used for asphalt planting, to mine limestone successfully for a customer. It's a challenging piece of equipment, but we have expertise in its operation, which opens up many opportunities. We'll also continue to expand our dragline operations, which require specialized skills, as well as truck shovel operations. Overall, we see substantial opportunities across the board. Additionally, some of our customer relationships in the segment aren't generating significant profits yet. A prime example is the lithium operation in Northern Nevada, which is still in development but is expected to ramp up in the coming years, leading to increased production and profits. Some future growth is already contracted, while others are at various development stages. Is that helpful?

Yes, that's great. So when one of your aggregate customers is expanding business with you, is that because they feel like you're just better at those particular tasks, and it's cheaper for them to have you do it with themselves. Is that what's happening?

Yes. Yes. I mean this is what we do. I remember having dinner with one of the very large producers of aggregates, some of their regional senior leadership team and I - we are great at identifying the markets and understanding the products we need and figuring out how to capitalize on all of that. He said, we are not miners, and we need your expertise to make sure we've got the products we need in the quantities we need and the qualities we need when we need them. And this is our expertise, and we come in, and I think in every instance, we've improved productivity. We've improved cost positioning. We've helped our customers be successful in their business.

Do you see opportunity on the phosphate side, to bring on more phosphate customers?

Well. I mean as a guy who has worked in business development for a long time, I will say, absolutely, right? We're looking at all sorts of additional customers. But I will tell you, we've spent a number of years looking for the right opportunity to start providing mining services into that part of the mining world. So this is really very new and very fresh for us. But sure, there's no reason we couldn't buy more phosphates.

Okay. Great. Moving on to general management, I asked you a little bit last quarter about the reserve base. And another way I thought of asking a similar question is about the sense, if the goal were not to grow your inventory but just to replenish the depleted inventory or the drilled inventory. Do you have a sense of what the capital cost of that would be?

No, is the short answer. We're on a $20 million a year pace, which is a reinvestment pace, and that is growing the business. So it's going to be a number less than $20 million, but I don't know what that number would be.

Okay. And at a more granular level there, I was a little surprised to see the oil production down given the investments you made last year, I don't know if you're able to provide any sort of color on whether that was just short-term?

No, it's a good question. I would say part of this is because, unlike many other mineral investors who are backed by private equity, they are using a lot of leverage. They primarily acquire active producing wells to support their operations, whether to generate yield, manage their debt, or meet sponsor needs. We are focused on the long term and are open to purchasing both producing assets and those that may yield returns in 2, 5, 10 years, or even longer. Therefore, you shouldn't assume that a significant acquisition will immediately impact our bottom line. We evaluate these acquisitions by considering the entire range of offered assets, assigning values through a detailed NPV analysis and estimating development timelines, which informs our assessment of value and pricing. Not all acquired wells will produce immediate results on the bottom line.

Okay. Makes sense. On the coal operation, your projected capital spend for the second half is a little higher than the first half. And I think in some prior calls, you had commented that you were going to be limiting capital spend on your coal assets. So I was just curious whether that is a bit of a change in approach or whether there's just some one-time things that you need to spend on?

I want to clarify that we spend a considerable amount of time with our operations team and engineers determining the best way to invest capital effectively and efficiently. We strive to avoid overinvesting, aiming to find the right tools for capital expenditure. We would not restrict our teams by providing them only a fraction of what they need, as that would negatively impact their operations and efficiency. We carefully balance our investments. Currently, our capital expenditure in the coal mining segment is focused solely on MLMC. With the development of Mine Area 3 now fully operational, we anticipate a decline in capital expenditures over time. The variations between quarters, or between the beginning and end of the year, are likely linked to the timing of those investments or one-off expenditures. Overall, we expect capital spending in our coal mining business—primarily at the Red Hills mine MLMC—to decrease significantly over the coming years compared to past levels.

Okay. And then I had asked you earlier in the year whether you thought you would get an insurance recovery on the boiler outage. Do you have any more visibility on that?

I can provide a mixed response. Yes, we have better visibility on that, and we have a team that continues to work on it. However, I am not ready to make any statements about what that might entail.

Okay.

I think it would be very premature for me to throw out a number.

On free cash flow, it appears that working capital has been a hindrance to free cash this year. Will that change later in the year so that you can generate cash from operations, or was there a comment made at the end of the presentation that I missed?

Liz or Christie, have you got?

We did include in our disclosure that we expect to have a use of cash in 2024.

The operating cash line or...

We just had cash flow before financing, which is our operating cash minus CapEx.

Right. Okay.

Working capital for our business differs from that of a typical manufacturing company that constantly monitors metrics like days outstanding for receivables, payables, or inventory levels. Since we don't manufacture anything, our inventory levels may fluctuate. For instance, if we are preparing for a significant capital project on a dragline, we might acquire additional parts in advance to have them ready when we take down the dragline for the project. Those parts will go into the dragline and affect our working capital as they move through the normal cycle. Additionally, we build inventory at Mitigation Resources in North America as we generate mitigation credits. Overall, our working capital tends to normalize over time and doesn't experience the same fluctuations as that seen in typical manufacturing businesses due to supply chain issues and other quarter-to-quarter variances.

Right. That makes sense. Okay. So last question, kind of a broad one, but if you look at your three disclosed business lines as well as the mitigation work you're doing. Would you say that you feel one segment is offering you higher ROIs at this point and that there's some desire to invest more money into one of the segments versus others?

I would say that if you consider our management fee from unconsolidated coal mining operations, we have minimal capital invested in those, yet they yield significant returns, showing very high returns on total capital traditionally. There isn’t much chance to invest in expanding that area. We have existing contracts in the coal mining segment, and while there may be opportunities to enter more management fee contracts, I don’t foresee that happening soon. Therefore, this segment likely offers our highest return on total capital. The second highest return comes from our legacy natural gas assets in Appalachia and Southern Ohio, which we acquired over 40 years ago, resulting in a very low cost basis. With horizontal fracking and pipelines expanding in the area, the returns from our Minerals Management segment are substantial. Although we’re making investments that may lower the return on total capital in that business, we believe that’s acceptable as we aim to invest and grow. Your question pertains to capital allocation—whether we prefer to invest more in one segment than another. I can say we are satisfied with our portfolio and remain entrepreneurial, developing new businesses that we believe will become important in the future. Our goal is to build a portfolio of businesses that generate good returns without significant risk in any one area. A decade ago, we were heavily reliant on coal mining for power generation, which posed considerable political risk. Now, with a diversified portfolio, we believe all segments offer good returns on total capital, which seems to be the right approach overall. This strategy should yield substantial cash flows in the future, giving us many growth avenues, including those under development, making our company more diversified and larger over time. We’re not currently inclined to favor one business over others; we believe all have great potential, and we will continue to invest in them as we find suitable projects aligned with our business criteria, cultural fit, and attractive contract terms.

Right. That makes sense. All right. Well, that's all I got. I appreciate the time and talk to you next quarter.

I appreciate your questions. I'm glad it makes sense to you because we think it makes sense to us. So we appreciate your questions and your feedback.

Thank you. And there are no further questions at this time. I will turn the call back over to Christina for closing remarks.

Okay. With that, we will conclude our Q&A session. I would like to provide a few reminders before we end the call. A replay of our call will be available later this morning. We'll also post a transcript on the website when it becomes available. If you have any questions, please reach out to me. You can reach me at the phone number on the press release. I hope you enjoy the rest of your day, and I'll turn it back to Julie to conclude the call. Thank you.

Thank you. A replay of this call will be available until Thursday, August 8, 2024 at 11:59 p.m. by dialing 888660-6345 with the playback passcode 45083, followed by the pound key. Thank you. Ladies and gentlemen, this concludes today's conference call. You may now disconnect. Thank you.