Natural Resource Partners L.P.
Q2 2018 Earnings Call Transcript

Published: 9 Aug 2018

[Operator:]

Good morning, ladies and gentlemen and welcome to the Natural Resource Partners LP Second Quarter 2018 Earnings Conference Call. As a reminder this conference call is being recorded. I would like to introduce your host for today's conference. Kathy Roberts, Natural Resource Partners, Vice President of Investor Relations. Ms. Roberts, you may begin.

[Kathy Roberts:]

Thank you, Nora. Good morning one and welcome to the Natural Resource Partners' second quarter 2018 conference call. Today's call is being webcast and a replay will be available on our website for seven days. Joining me today are Craig Nunez, our President and Chief Operating Officer and Chris Zolas, 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 our Form 10-K and other SEC 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 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 production [indiscernible] or get into detailed market fundamentals. Nor will we discuss pricing or sales with respect to our construction aggregate to operations and those are for competitive reasons. In addition I refer you to general resources public disclosures and commentary for specific questions regarding our soda ash business. Now, I would like to turn the call over to Craig Nunez, our President and Chief Operating Officer.

[Craig Nunez:]

Thank you, Kathy, and good morning everyone. We have completed five full quarters since we recapitalized the partnership and our business is stabilized and is generating substantial amounts of cash, a trend that appears likely to continue for the foreseeable future. Over the last 12 months, we recorded $233 million of EBITDA, $145 million of free cash flow and $89 million of net income attributable to common unit holders. This strong performance allowed us to pay our $22 million of distributions to common unit holders and retain $68 million of earnings, resulting in a 40% increase in common equity, before the beneficial impact of a new accounting standard. As we said on our last call, we're becoming increasingly comfortable with each passing quarter of stable results that our past performance maybe indicative of a sustainable run rate that we can plan on for the future. We intend to use this strong cash generation to continue strengthening our balance sheet while maintaining sufficient liquidity to provide a margin of safety for prudent business operations. We reiterate our previously stated goal to achieve a leverage ratio overtime defined as debt to EBITDA of less than three times while maintaining minimum liquidity of $100 million. We believe this substantial delevering and de-risking of the capital structure along with the corresponding robust growth in common equity is the quickest path to maximize in the intrinsic value and turn the market value of our common units. Our leverage ratio currently stands at 3.5 times down from a peak of 5.3 times. And we ended the quarter with $108 million of liquidity consisting $53 million of cash and $55 million of available borrowing capacity, which is more than sufficient to manage the working capital needs of our business. Our common unit distribution coverage ratio is 6.6 times before taking into account the coupon on our preferred units and a robust 5.3 times after taking the coupon into account. Our coal segment continues to generate stable royalty income that is free of direct cost to mine and sell coal and other associated mining liabilities. With approximately two thirds of our coal revenues coming from metallurgical coal, our soda ash investment in General Wyoming continues to pay a steady cash distributions each quarter as it benefits from owning one of the world's lowest cost soda ash operations. And our construction aggregates business all the way relatively small contributor to our consolidated results is having a solid year. In addition to maximizing free cash flow and strengthening our balance sheet, we are increasing our focus on the productivity of capital employed in our business. For reference, our return on capital employed over the last 12 months was 15% after stripping out the benefit of one-time gain on the settlement of a law suit at our soda segment. So with that, I'll turn the call over to Chris Zolas to review the specifics of our second quarter financial performance.

[Chris Zolas:]

Thank you Craig and good morning, everyone. Our second quarter financial performance represents another solid quarter of operating results. We generated $54 million of cash from operations during the quarter up $19 million over the prior quarter year. Operating cash flow was favorably impacted by $13 million from steady performance and strong cash collections from our coal royalty segment and by $8 million less cash paid for interest as a result of lower debt balance. Second quarter net income was $39 million which includes $13 million gain in our soda ash segment from a litigation settlement. Excluding the impact of this gain and of our prior year debt restructuring cost and gains on asset sales, our second quarter adjusted net income was consistent with the prior year demonstrating the benefits of NRP's diversified portfolio of met and thermal coal properties owned with our soda ash and construction aggregate assets. Basic and diluted earnings per common unit for the second were $2.46 and $1.75 per unit respectively. Moving onto our segment results. Our coal royalty segment continues to perform well, generating $54 million of revenue and $52 million of cash from operations during the second quarter. These results were driven by continued strong export markets for both net and thermal coal that helped tighten the domestic markets. Our lessees produced approximately 4 million tons of met coal on our properties in the second quarter and sales prices remain strong. As a result met coal made up 70% of our Appalachian coal production and 80% of our coal royalty revenue from this region during the second quarter. In regards to performance of our thermal coal prosperities continued strength in thermal coal demand in pricing resulted in steady Q2 performance. Our lessees produced approximately 3 million tons of thermal coal during the second quarter on our properties in Appalachia, the Illinois Basin and the Northern Powder River Basin. In total, our lessees produced 7 million tons of coal and generated 38 million of coal royalty revenue in the second quarter and we expect met and thermal coal markets to remain steady for the second half of the year. Operating cash flow from our coal royalty segment was up $13 million over the prior year primarily as a result of the timing of cash receipts from coal royalty minimum and production payments and property tax reimbursements. In regards to our soda ash segment, we received $12 million of cash distributions from General Wyoming in the second quarter and now consistent with what we received in the prior quarter and in the second quarter of last year. As noted earlier, our second quarter net income benefited from General Wyoming recognizing at $12.7 million litigation settlement gain. Excluding the impact of this gain our Q2, soda ash segment net income was down $4.6 million compared to the prior year primarily as a result of unexpected plan repairs during a scheduled outage that resulted in lower production in sales. The repairs were successfully completed and operations resumed prior to the end of the second quarter. Our construction aggregate segment generate $3 million of net income during the second quarter which is consistent with the prior year quarter. Operating cash flow in the second quarter was $500,000 down $5 million compared to the prior year quarter primarily due to the timing of our payment for delivering haul [ph] cost in Q2, which we will get reimbursed for by our customers. Our corporate and financing segment cost in the second quarter were $21 million, lower by $6 million compared to the prior year quarter primarily due to a $4 million loss on early extinguishment of debt in this prior year and $2 million of lower interest expense as a result of our lower debt balance in 2018. During the second quarter, we paid distributions of $0.45 per unit to our common unit holders and $7.5 million to our preferred unit holders. Distributable cash flow for the second quarter $53 million and as recently announced common unit holders will receive a cash distribution of $0.45 per unit and preferred holders will receive a total of $7.5 million of cash later this month. With that I'll turn the call back over to the operator for questions.

[Operator:]

[Operator Instructions] your first question comes from the line of Mark Levin of Seaport Global. Please ask your question.

[Mark Levin:]

Great, thanks and congrats on another good quarter, particularly out of the coal business.

[Unidentified Company Representative:]

Thank you.

[Mark Levin:]

Yes, you're very welcome. My question relates to free cash flow. Obviously it was a very big quarter from a free cash perspective much better than what it was in Q1. Maybe some thoughts on not looking for guidance to be clear, but just some thoughts on how free cash flow might trend in Q3 and Q4 versus Q1 and Q2, are there anything specific in the front half of the year versus the back half of the year that would change maybe the tenor of the way the free cash flow looks.

[Craig Nunez:]

Mark, this is Craig. I would answer it this way. We have a couple of factors that play into our free cash flow from quarter-to-quarter and that we don't have sometimes a lot of control over. There's the timing of sometimes receipts on especially on the coal side and also reimbursement of property taxes that we have property taxes that we have to pay that we didn't get reimbursed and those are material amounts and sometimes the time, the lag between the payment that we make and the reimbursement can cross quarter boundaries and so it's not uncommon to see variations in free cash from quarter-to-quarter as a result of these timing issues. We are also on a construction aggregates business, we have some lag times and cost that we pay that are reimbursables [ph] for customers there such as fuel cost, delivery haul cost that type of thing, that we may pay him one period as our business ramps up and then we don't get reimbursed till the second period. So in order to smooth that out, I'd encourage you to look back at the trailing four quarters of results. and as best we can tell right now, I think that last four quarters of results is pretty good proxy for what you're going to see going forward in the foreseeable future.

[Mark Levin:]

That's great. That's very helpful. Appreciated. And then obviously the coal business EBITDA looks like it's been pretty steady. I mean met prices have done their thing, they've remained at very robust levels but they were down quarter-over-quarter and yet the EBITDA from the coal business has remained relatively steady. And I guess we could say that, more or less over the last four or five quarters. Is there any reason to believe as you kind of look forward and obviously met prices play a role in this, but met prices have been moving? Have there been - is there any reason to believe that sort of kind of mid 40s sort of rate would deviate massively over the next several quarter - I mean is there anything in particular we should be thinking about.

[Craig Nunez:]

Well Mark as you know, as a lessor of coal royalties and not a lessee, we do not operate mines and we don't market coals. So we're not out in the market every day interacting directly with customers. So we don't have the same visibility and to the forward markets that are lessee coal mine operators do. So we just don't have as much visibility and cannot forecast this accurately with respect to pricing. We also don't have the same level of visibility with respect to the actual mining that is going to take place in the mine plants that these operators have. With all of that said and with that caveat, right now we don't see anything that in the foreseeable future this going to change our results materially from what you've seen over the last year.

[Mark Levin:]

Got it, that's great. I'm going and I know you're going to punt [ph] the question but I'm going to ask it anyway. I believe the Pinnacle Mine is a lessee and I know, they've laid some workers off for not, it doesn't look to me like it would terribly material. But I guess what I'm just - want to confirm if you're willing to do so, is Pinnacle a lessee of NRP, still?

[Craig Nunez:]

Yes, I'll confirm that Pinnacle is a lessee of NRP.

[Mark Levin:]

Okay, perfect. And that was - and then the final question, I was just interested in knowing and again this maybe a question you don't want to answer it at this point, but I'll ask it anyway. Timing around litigation, not asking for how it may turn out or not but just the calendar around litigation as it results to the four side issues.

[Craig Nunez:]

I can't tell you of course as you know, we will not comment specifically on litigation, but I can there is a trial date set for the back half of October for the [indiscernible] issue.

[Mark Levin:]

Great. That's perfect well again congratulations particularly on the free cash that came in this quarter.

[Craig Nunez:]

Thanks Mark.

[Operator:]

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

[George Wang:]

Just like few questions. Firstly, just in terms of balancing the debt pay down deleveraging maintaining strong liquidity levels versus distribution increase. I mean you guys talk about the goal for delevering below three times, before you think about distribution increase. I just wanted to get latest thoughts on any sort of criteria or benchmark you guys are looking for, before you guys [indiscernible] potential to increase distribution.

[Craig Nunez:]

Thanks George. No at this point, we're not willing to - we don't have anything in mind that we want to share publicly. I do want to reiterate though that, it is three times goal that we set, we said we want to de-lever down to three times leverage ratio. I want to make sure that there is no confusion here. We've not said that, that is our target leverage ratio, that's actually a goal and we set that goal back in the spring of 2015 when our leverage was actually north of five times and growing and we actually were in precarious financial situations and we weren't sure, we had absolutely no idea how we were going to achieve, the three times goal. It was a very audacious goal at the time that we set out to try to tackle. Now that we are approaching that goal, our mission is still to reach it. Once we reach that goal then we're going to assess the business and we're going to determine what our target capital structure, what the optimal capital structure for our business will be going forward and it may not be that we determine that given the cyclicality of our thermal coal business and the, just the uncertainties of being a commodity business that's exposed to commodity price volatility. It maybe that, we decide that appropriate leverage ratio is something south of three times. So I don't want to send the signal the three times is our target and that once we reach three times we're going to start raising the distribution, after we reach the goal of three times we're going to reassess, we're going to come out and identify what our targeted capital structure will be and then tell the market what our long-term plans are at that time after we've taken into consideration the performance of the business and the outlook at that time. Does that help?

[George Wang:]

Yes, that definitely helps. Secondly just looking at different geographies full coal production. The Central Appalachia kind of full screen higher stronger production second quarter. If you guys have any thoughts on the performance and sort of driver or higher performance sequentially in Central Appalachia.

[Craig Nunez:]

Well most of that Appalachian production is met and there is strong demand for met and strong pricing and as a result, volumes are up.

[George Wang:]

Got you. And also just income [indiscernible] further [indiscernible] rationalization in terms of non-core assets. Do you guys have anything - you guys looking at to sort of maybe help with the de-leveraging just from asset disposal standpoint?

[Craig Nunez:]

George as you know, we've been actively reviewing our portfolio since 2015 to identify those assets that we think would be worth more than to others than they are to us. And we've conducted over the last several years, a significant number of asset sales that come actually from each of our segments except soda ash. And we're continuing to do that and we're continuing to as I mentioned in our prepared remarks, we're beginning to focus more on the productivity of the capital deployed in our business and we're going to be looking at those assets that and those that are producing lower returns and we're going terminate those things are worth more others than they are to us and if so, and if we can find buyers, we'll sell something.

[George Wang:]

Got you. Cool, thanks so once again congrats on the quarter.

[Craig Nunez:]

Thanks George, appreciate your questions.

[Operator:]

[Operator Instructions] there are no further questions at this time. Please proceed presenters.

[Craig Nunez:]

Well thank you everyone for joining our call. Appreciate your interest in NRP and we look forward to speaking with you again next quarter. Have a great day.

[Operator:]

This concludes today's conference call. You may now disconnect.