Natural Resource Partners L.P. (NYSE:NRP) Q2 2023 Earnings Call Transcript

Natural Resource Partners L.P. (NYSE:NRP) Q2 2023 Earnings Call Transcript August 4, 2023

Operator: Ladies and gentlemen, thank you for standing by and welcome to the Natural Resource Partners L.P. Second Quarter 2023 Earnings Call. I would now like turn the call over to Tiffany Sammis, Manager of Investor Relations. Please go ahead.

Tiffany Sammis: Thank you. Good morning, and welcome to the Natural Resource Partners second 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 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. Now I would like to turn the call over to Craig Nunez, our President and Chief Operating Officer.

Craig Nunez: Thank you, Tiffany and good morning, everyone. NRP generated $82 million of free cash flow in the second quarter and $308 million of free cash flow over the last year. Our strong financial performance enabled us to make further progress toward our goal of retiring our long-term debt and preferred equity, which we believe will in turn maximize future free cash flow available for common unitholders. During the second quarter, we permanently retired $81 million of our 12% preferred equity increasing our total preferred equity retirement for the year to $128 million and lowering our outstanding balance of preferred equity to $122 million. Following this redemption, our total obligations, which includes debt, preferred equity and warrants decreased over 10% since last earnings call down to about $385 million as of today.

Moving to our Mineral Rights business. While metallurgical coal prices declined during the second quarter and were well off the record levels seen in 2022, our Mineral Rights segment generated a solid $56 million of free cash flow during the quarter. We continue to believe that the supply-demand balance for met coal will remain well supported for the foreseeable future primarily due to long-term demand trends and the lack of investment in new met supply. Thermal coal prices also weakened in the second quarter due to relatively mild winter weather and inventories at many coal-fired power stations increased significantly as a result. While we believe North American thermal coal will face near-term headwinds and continue its long-term secular decline.

We also believe underinvestment in new sources of thermal coal production will likely provide price support at levels that are relatively strong when compared to historical norms. We continue to see significant index price movement across the coal markets quarter-over-quarter and year-over-year, but believe the strides taken to delever and derisk our business over the years position us well to generate robust free cash flow despite market volatility. Our soda ash investment in Sisecam Wyoming continues to be an important source of free cash flow generation as NRP receives $32 million in distributions this quarter from Sisecam Wyoming due to strong realized sales prices and early payment of the second quarter distribution normally received in the third quarter.

Softening soda ash demand coupled with new capacity from China has recently caused a significant drop in spot prices, which is likely to weigh on results for Sisecam Wyoming in the second half of the year. Despite these near-term pricing pressures, we believe the long-term fundamentals of the soda ash industry remain favorable. Sisecam Wyoming is well-positioned with its low cost of production and strong balance sheet. Turning to our carbon-neutral initiatives. We remain focused on exploring opportunities to expand our carbon-neutral portfolio with the goal of monetizing our assets through lease transactions for permanent underground CO2 sequestration, forest sequestration and the generation of electricity using geothermal wind and solar energy.

Additionally, we continue to evaluate other potential opportunities in the carbon-neutral space which may include soil and grassland sequestration, lithium production and methane destruction credits. We believe our potential long-term future cash flows related to carbon-neutral initiatives could be significant all while requiring no capital investment by NRP. And with that, I’ll turn the call over to Chris to cover our financial results.

Chris Zolas: Thank you, Craig and good morning, everyone. During the second quarter, we generated $81 million of operating cash flow and $70 million of net income. Our Mineral Rights segment generated operating cash flow of $55 million, free cash flow of $56 million and net income of $53 million in the second quarter of 2023. When compared to the prior year quarter, segment net income and free cash flow decreased $17 million and $15 million respectively, primarily due to the lower metallurgical sales prices. Although metallurgical pricing has declined over the past year, it remains relatively strong compared to historic norms. And we believe the many challenges operators face to increase production and sales that include transportation and logistics, labor and limited access to capital should provide ongoing price support.

In regard to our met thermal coal royalty revenue mix, metallurgical coal made up 70% of our coal royalty revenues and 55% of our coal royalty sales volumes for the second quarter of 2023. Moving to our Soda Ash business segment. Net income in the second quarter of 2023 was $27 million as compared to $15 million in the prior year period. This $12 million increase was primarily driven by strong soda ash demand and higher sales prices. Free cash flow from our Soda Ash business segment, in the second quarter of 2023, increased $22 million as compared to the prior year period. This increase was due to two main factors: the timing of distributions received from Sisecam Wyoming and the improved operating performance driven by higher sales prices.

Regarding the timing, during the second quarter of this year, we received an $11 million quarterly distribution related to the first quarter performance and a $21 million distribution related to the second quarter’s performance. In the past, we received quarterly distributions from Sisecam Wyoming approximately two months following the end of each quarter. Shifting to our Corporate and Financing segment. Costs for the second quarter of 2023 were $9 million compared to $17 million in the prior year period. This $8 million cost decrease was primarily due to lower interest expense in 2023 from our continued deleveraging and having less debt outstanding. In addition to this cost decrease, our Corporate and Financing segment free cash flow in the second quarter of 2023 improved $12 million as compared to the prior year period as a result of less cash paid for interest.

In addition to debt repayment, we continue to make progress on the redemption of our preferred equity. As Craig mentioned, in the second quarter, we’re able to permanently retire an additional $81 million of our preferred units at par with cash, bringing our total preferred unit redemptions to $128 million and lowering the outstanding amount of preferred units to $122 million. We will save over $15 million annually in preferred unit distributions with these redemptions. Finally, regarding our quarterly distributions, in May of this year, we paid a first quarter distribution of $0.75 per common unit and $6.1 million cash distribution to our preferred unitholders. And this morning, we announced the second quarter distribution of $0.75 per common unit and $3.65 million cash distribution to our preferred unitholders.

With that, I’ll turn the call back over to our operator for questions.

Operator: The floor is now open for your questions. [Operator Instructions] We did receive a question from the line of Charles Fisher from Raffles [ph]. Please go ahead.

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Q&A Session

Unidentified Analyst: Yes. I saw there was a decrease in production in the Illinois Basin. I just — could you give a little color on that?

Chris Zolas: Sure. We’d be happy to. And what happened there in the Illinois Basin was there was a — as a part of the mine plan, there was — they were temporarily off of our coal and part of their mine plan as they go on and back off of our coal. And just during that period they were temporarily off of our coal for that period which — and it’s not uncommon.

Unidentified Analyst: Great. Thank you.

Operator: Our next question comes from the line of Nat Stewart. Please go ahead.

Unidentified Analyst: Yes. Thanks for taking my question. I just had — I was curious about the — I know I’ve seen this before and I actually think I’ve asked about it. But could you kind of explain the non — I believe it’s a non-cash charge related to the paydown of the preferred securities. I was just wondering if you could give us a little bit of explanation for that.

Chris Zolas: Sure. This is Chris. Happy to do that. Yes. Yes absolutely. And what’s happening there is that’s the difference between the par value that we’re paying for the preferred units and the book value that we have them — when we recorded them back in 2017. And when we entered into the preferred units, there were also warrants associated with those preferred units. And so the $250 million we received back in 2017 on our balance sheet that $250 million is allocated to both the preferred units and the warrants. And so, when we redeem our preferred units the amount of cash we pay is more than the book value that is being taken off and that was allocated to those preferred units. So there’s no impact to the income statement. It’s on the balance sheet. And there is an impact to the earnings per unit that’s calculated and allocated to the common unitholders.

Unidentified Analyst: Okay. Great. That makes sense. So what are the priorities? Obviously this has just been a tremendous paydown of diluted securities over the past couple of years. It looks like it’s going to leave a tremendous amount of ability to pay distributions and not all that long from now. What are the priorities for paying that down? Is anything changing? I think you surprised me a little bit with the magnitude of the paydown of preferred securities this year. I think it went above 33%. So how is that — what’s the thinking there for the next six months or maybe even beyond that?

Craig Nunez: This is Craig. Good question. We intend to continue to pay down our preferred and debt as rapidly as we can to the extent we can borrow on our credit revolver at a lower cost than the 12% on the preferreds and to the extent that we can have the preferred holders waive the make-whole premium, which is called a MOIC, M-O-I-C, so that we’re able to buy those bonds back at par. If we can replace 12% obligations with something more like 7% or 8% obligations, we’re going to do that as much as we can and then immediately begin paying down the revolver with cash that we generate as well. And our goal is to pay down the preferreds, the bank revolver and then of course continue paying down our private placement notes, which are on an amortization schedule and also by the time they settle in first quarter of 2025, settle our warrants that are outstanding. We’re going to want to get rid of all of those obligations as soon as we possibly can.

Unidentified Analyst: Great. Yeah, I think that’s what’s kind of remarkable about this is how rapidly that’s been able to occur. Do you know what the M-O-I-C is now?

Craig Nunez: Yeah I do. It’s in — it’s roughly — Chris I think it’s around 10% or so. Is it right now?

Chris Zolas: That’s correct.

Craig Nunez: Is it 10%? Something like that?

Chris Zolas: No, that’s correct Craig.

Craig Nunez: Yes. It’s enough. It’s just enough right now that you don’t want to — it’s not attractive to borrow on the credit facility to pay them back now. The implied return that you receive on paying a premium over par is just not attractive yet. But that MOIC goes down each time we make a preferred distribution. And so by the time we get to first quarter of next year or second quarter of next year, it will be such that the MOIC is nonexistent anymore. So when you buy it — when you buy off the preferreds, you get to 12% implied return essentially guaranteed return even if the preferred holders do not waive the MOIC. There’s no need for them to because it doesn’t exist anymore.