Earnings Call Transcript - NRP Q1 2023

Operator, Operator

Thank you for standing by. My name is Michelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the Natural Resource Partners LP First Quarter 2023 Earnings Conference Call. Thank you. Tiffany Sammis, you may begin your conference.

Tiffany Sammis, CEO

Thank you. Good morning and welcome to the Natural Resource Partners First Quarter 2023 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. 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 first 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 Sisecam 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. Craig?

Craig Nunez, President and Chief Operating Officer

Thank you, Tiffany, and good morning, everyone. NRP generated $73 million of free cash flow in the first quarter, which is one of the best quarterly performances in the history of the partnership. Performance over the last 12 months has been equally impressive, with our business generating $290 million of free cash flow. We continue to take advantage of this strong financial performance to make significant progress toward our goal of becoming debt-free and redeeming all of our preferred equity which will, in turn, maximize future free cash flow available for common unitholders. We redeemed $47.5 million of our 12% preferred equity in February, and our leverage ratio ended the first quarter at 0.5x, down from 4.5x just 24 months ago. We have about $440 million of obligations remaining to be settled, consisting of $174 million of debt, $202 million of preferred equity and warrants convertible into common units with a current settlement value of approximately $63 million. Metallurgical coal prices remained highly volatile, and while strong relative to historical price levels, they have declined significantly from the record levels reached last year. While we expect price volatility to continue, we believe the supply-demand balance for met coal will remain well supported for the foreseeable future, primarily due to the lack of industry investment in new metallurgical supply. Thermal coal prices also remained strong but have weakened significantly in recent months as unusually warm weather in North America and Europe has impacted electricity demand. While weather will always pose unavoidable uncertainty with thermal coal demand, we believe the same constraints that have prevented met producers from adding capacity are also affecting thermal producers. The lack of thermal supply additions is likely to provide support for thermal coal pricing at levels that are relatively high by historical standards for the foreseeable future, albeit with continued volatility. Soda ash demand growth continued to exceed new soda ash capacity in the first quarter of 2023. Consequently, international prices remained near record levels, which allowed Sisecam Wyoming to negotiate a strong domestic order book for 2023. Coupled with Sisecam Wyoming's global low-cost position, these robust prices generated a 29% increase in earnings versus the prior year quarter. We continue to believe that the long-term outlook for Sisecam Wyoming remains favorable due to its low-cost position and positive long-term demand characteristics for soda ash, driven in part by the ongoing increase in renewable energy, the electrification of the global auto fleet and urbanization. We remain committed to doing our part to address climate change by identifying opportunities to utilize our land, mineral and forest assets to reduce carbon in the atmosphere. In the first quarter, we expanded our portfolio of leases within our carbon-neutral initiatives by executing a new solar lease for the development of a solar project in Montana. This transaction, in addition to our previously announced transactions for CO2 subsurface sequestration, forest land CO2 sequestration and geothermal electricity generation, have expanded our potential future long-term cash flows related to carbon-neutral revenue, all while requiring no capital investment by NRP. We continue working to identify opportunities on our large acreage footprint to provide benefits to the environment, provide meaningful value for NRP and capitalize on the transitional energy economy. And with that, I'll turn the call over to Chris to cover our financial results.

Chris Zolas, Chief Financial Officer

Thank you, Craig, and good morning, everyone. In the first quarter, we generated $73 million in operating cash flow and $79 million in net income. Our Mineral Rights segment produced $74 million in operating cash flow and $69 million in net income during the first quarter of 2023. Compared to the same quarter last year, segment net income increased by $6 million, mainly due to higher metallurgical sales volumes and additional revenue from our carbon-neutral initiatives. Segment free cash flow rose by $26 million compared to the previous year, driven by these factors along with the timing of minimum and royalty payments and recoupments from the prior year. Many producing coal leases used their recoupable balances in 2022 when metallurgical and thermal coal prices were high, and we received royalty payments significantly above their lease minimums. Metallurgical coal made up 75% of our coal royalty revenues and 55% of our coal royalty sales volumes for the first quarter of 2023. As a result, the cash flow from our Mineral Rights segment is much more sensitive to fluctuations in metallurgical coal prices than thermal coal prices. Moving to our Soda Ash business segment, net income for the first quarter of 2023 was $19 million, compared to $15 million in the same period last year. This $4 million increase in net income was primarily driven by strong demand and higher soda ash sales prices in 2023. Free cash flow from our Soda Ash segment in the first quarter of 2023 was $11 million, down from $13 million the previous year, due to a slightly higher cash distribution received from Sisecam Wyoming during the first quarter of 2022. Turning to our Corporate and Financing segment, costs for the first quarter of 2023 were $9 million, compared to $14 million last year. This $5 million reduction was largely due to lower interest expenses in 2023 resulting from reduced debt. Our Corporate and Financing segment's free cash flow in the first quarter of 2023 fell by $3 million compared to the prior year, mainly due to increased incentive compensation in 2023 linked to improved business performance in 2022 and higher cash paid for interest because of the timing of payments on our credit facility borrowings in 2023. As we mentioned in our last earnings call, we received notice in February 2023 from holders of our preferred units exercising their right to redeem or convert $47.5 million of their preferred units at our discretion. After reviewing our liquidity position and the intrinsic value of our common units, we chose to exercise our redemption rights, redeeming these preferred units for $47.5 million in cash. Consequently, out of the original $250 million of preferred units issued, $202.5 million remains outstanding, which will save us $6 million annually in distributions. We anticipate our total annual interest payments and distributions to preferred unitholders to decrease as we continue to repay debt and redeem preferred units. Regarding common unit distributions, in February 2023, the partnership paid a fourth quarter 2022 distribution of $0.75 per common unit and a $7.5 million cash distribution to our preferred unitholders. In March 2023, the partnership paid a special cash distribution of $2.43 per common unit to assist common unitholders with their 2022 tax liabilities linked to owning our common units. Finally, we announced today the first quarter 2023 cash distribution of $0.75 per common unit and a $6.1 million cash distribution to our preferred unitholders. I will now turn the call back over to the operator for questions.

Operator, Operator

And at this time, I'm showing there are no questions.

Craig Nunez, President and Chief Operating Officer

Thank you, operator. Thank you, everyone, for participating in our call today, and thank you for your continued support of NRP. Goodbye.

Operator, Operator

Thank you. And this does conclude today's conference call. You may now disconnect.