NACCO Industries, Inc.

Good morning and welcome to the NACO Industries 2023 first quarter earnings call. My name is Brica and I'll be your event specialist running today's call. At this time all participants are in a listen only mode and after the speaker's prepared remarks there will be a question and answer session. To ask a question at this time please press star followed by the number one on your telephone keypad. If you change your mind please press star two And for operator assistance, it's star zero. Thank you. I would now like to hand the conference over to Christina Kometko. So, Christina, you may proceed.

Thank you. Good morning, everyone, and welcome to the 2023 first quarter earnings call. Thank you for joining us this morning. I'm Christina Kometko, and I'm responsible for investor relations at NACO Industries. Joining me today are J.C. Butler, President and Chief Executive Officer, and Elizabeth Lubman, Vice President and Controller. Yesterday we published our first quarter 2023 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 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 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 issued last night in our 10Q and 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 addition, we'll 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. In a moment, I'll discuss our results for the quarter, but first let me turn the call over to our President and CEO, JC Butler, for some opening remarks. JC.

Thank you, Christy, and good morning, everyone. Our first quarter 2023 results were not as strong as the results we've reported in 2021 and 2022, but that was to be expected. Results in those prior quarters benefited from significantly higher natural gas prices and income generated by the early termination of two of our coal mining contracts. We explained on our last quarterly call that we expected 2023 results to decrease significantly due to those factors, as well as a reduction in earnings of Mississippi Lignite Mining Company as it moves into a new mine area. That is what played out in the first quarter. Christy will go into more detail about our first quarter earnings and provide an overview of our outlook in a minute. But first, let me provide a few thoughts on the quarter and our future expectations. As we described in the earnings release, significantly lower results of both our coal mining and minerals management segments drove the decrease in our first quarter operating results. We've talked quite a bit over the last few years about moving Mississippi lignite mining companies Red Hills Mine into a new mine area. That is one of the primary reasons for the substantial decrease in our coal mining segments operating profit. At Red Hills, we're dealing with operational inefficiencies as we complete final mining at the existing mine area, while we're also incurring significant costs associated with moving to the new mine area. These higher costs and inefficiencies are expected to continue through much of 2023, but these costs should moderate by the end of the year when we are fully operational in the new mine area. You recall that we've invested significant capital to open this new mine area, which is why we've been emphasizing that increased depreciation expense will be masking the underlying performance of Mississippi Lignite Mining Company. To me, EBITDA tells a better story since we don't have to keep investing in replacement capital at the same pace as the last few years. During our last quarterly call, I mentioned that the owner of the power plant served by our Sabine mine in Texas planned to retire the plant. I'm disappointed to report that the Perkey Power Plant was retired at the end of March, and we commenced mine reclamation activities on April 1st. This action did not affect our first quarter. In fact, tons delivered at Sabine rose in the 2023 first quarter versus 2022. Sabine is receiving compensation for providing final mine reclamation services, but that annual income will be much less than income received during active mining. Shifting to minerals management, we've benefited significantly from higher natural gas and oil prices over the last two years. Prices in Q1 were a lot lower than over much of the last two years. The combination of lower natural gas and oil prices and the expected production decline at existing wells led to a significant decrease in mineral management's first quarter 2023 results compared with the 2022 first quarter. Our team at Catapult Mineral Partners continues to look for opportunities to expand our portfolio through acquisitions, while also promoting development of our existing mineral and royalty interests. The team acquired approximately $12 million of additional mineral and royalty interests in 2022 and is targeting additional investments of up to $20 million in 2023. Our 2023 forecast assumes oil and gas market prices moderate to levels in line with 2022 averages. However, we all know commodity prices are inherently volatile, and changes in natural gas and oil prices could result in adjustments to our current forecast. On the upside, the development of additional wells on existing reserves beyond our forecasts or future acquisitions could be accretive to future results. Shifting to our North American mining segment, on the surface, operating profit declined year over year. However, the main reason for the decline is because final mine reclamation activities at Caddo Creek are largely completed. These activities were in full swing in the 2022 first quarter, which boosted our results. Once you remove the effect of Caddo, our aggregates operations had an increase in customer demand and earnings compared with the prior year first quarter. During the last quarterly earnings call, I mentioned that we are implementing changes that should drive future improvements to financial results of North American mining. It is too soon to judge the full effect of those initiatives, but I'm optimistic these initiatives can build upon the current quarter results. That said, until profit improvements incur on a consistent basis, we've narrowed our business development efforts at North American mining. Sawtooth mining, which is part of our North American mining segment, is the exclusive contract miner for Lithium America's Thacker Pass lithium project in Northern Nevada. Construction at Thacker Pass commenced during the 2023 first quarter, and phase one production is projected to begin in the second half of 2026. This is an important step forward in what is expected to be a key project for domestic lithium production. We are acquiring equipment for this project in 2023, We also expect to recognize moderate income in 2024 and 2025 with higher levels of income expected when our customer starts production, which as of now is planned for 2026. The mitigation of resources of North America team continues to advance existing mitigation projects and build on the substantial foundation it has established over the past several years. Mitigation resources ended the first quarter with eight mitigation banks and four pure mini responsible mitigation projects located in Tennessee, Mississippi, Alabama, and Texas. Mitigation Resources was recently selected to be a designated provider of abandoned mine land restoration by the state of Texas and recently completed its first project for the state. The Mitigation Resources team is hard at work pursuing additional abandoned surface mine restoration projects and mitigation banks during 2023. I am very pleased with the level of growth Mitigation Resources has achieved within its first few years of startup. Overall, I expect 2023 to be a year of unfavorable comparisons for the reasons I discussed in my opening remarks. Despite this, I'm still very optimistic about our outlook as we look past 2023. 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 Christy to cover our results for the quarter in more detail.