NACCO Industries, Inc.

Ladies and gentlemen, thank you for standing by and welcome to NACO Industries Q2 2023 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, please press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star one. Thank you. Christina Kometko, Investor Relations. You may begin your conference.

Thank you. Good morning, everyone, and welcome to our 2023 second 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 Lovman, Senior Vice President and Controller. Yesterday, we published our second 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, 10Q, 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 JC for some opening remarks. JC?

Thank you, Christine, and good morning, everyone. 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 provide a few thoughts on the quarter and our future expectations. It's clear that our second quarter 2023 results were much lower than last year, but that was as expected and discussed last quarter as well as at year end, so the decline shouldn't come as a surprise. A significant portion of the decrease was because 2022 results included $30.9 million of pre-tax income received from the termination of Falkirk's contract with Great River Energy. The absence of these 2022 termination payments, however, was not the only reason for earnings decrease. I'll discuss our results business by business. First, at our North American mining segment, operating profit increased substantially year over year and over the first quarter of 2023. The aggregates mining part of this segment struggled during 2022. I mentioned the last quarter that we were implementing changes to drive improved future financial results, and it's encouraging to see these improvements. That said, we're still early in this process and it is too soon to judge the full effect of these initiatives, but this is a good start. We still want to see profit improvements incurring on a constant basis. but I'm optimistic North American mining can build upon this momentum. A decrease in Caddo Creek reclamation income is partly offsetting the improvement in results of North American mining aggregates business. We are no longer recognizing reclamation income at Caddo Creek because we purchased the membership interest at the Marshall Mine in March 2023, where Caddo Creek had been performing mine reclamation work. We are considering development of a utility-scale solar project at this location. Wrapping up my North American mining comments, let me quickly mention Sawtooth Mining, which is the exclusive contract miner for Lithium America's Thacker Pass lithium project in northern Nevada. Construction at Thacker Pass commenced last quarter, and our customer tells us that they expect to begin phase one lithium production in the second half of 2026. We began acquiring equipment for the project earlier this year. We're also currently recognizing income related to this project and expect to continue to recognize moderate income through 2025, with higher levels of income expected when our customer starts production in 2026. Moving to our mitigation resources of North America business, this team continues to advance existing mitigation projects and build on the substantial foundation is established over the past several years. I'm pleased to report that mitigation resources recognized income associated with credit sales this quarter, which contributed to a year-over-year earnings increase of $2.4 million in the 2023 second quarter. Mitigation resources results are included within unallocated results. I'm very pleased with the level of growth mitigation resources has achieved in its first five years and I'm very pleased with their prospects. This business is achieving real success and growing faster than we'd expected when we started it just a few years ago. The increases I just discussed were not large enough to offset the decrease in earnings we experienced on our coal mining and minerals management segments in the 2023 second quarter compared to 2022. During our last two earnings calls, we've discussed that we expected 2023 results to decrease significantly. I'll first address the coal mining segment. At Mississippi Lignite Mining Company, we're experiencing operational efficiencies as we complete final mining at the existing mine area, and we're also incurring significant costs associated with moving to a new mine area. MLMC's Red Hills mine has also had to contend with significant rainfall during the first half of the year, which has impacted production and increased costs. These higher costs and inefficiencies inefficiencies are expected to continue into the third quarter, but then begin to moderate during the fourth quarter when we anticipate being fully operational in the new mine area. You'll recall that we've invested significant capital to open up this new mine area, which is necessary to access coal needed for the remainder of the contract term. These capital investments have resulted in increased depreciation expense that will continue over the remainder of the contract term. The added depreciation will affect reported operating profit, but those effects are excluded from EBITDA, which we think is a better way to look at this part of our business since we don't expect MLMC to open additional mine areas through the remaining contract term. Mine development capital expenditures should moderate from 2024 through the end of the contract in 2032. Shifting to minerals management, Substantially lower natural gas and oil prices led to a significant decrease in the second quarter 2023 results compared with the 2022 second quarter. You remember that natural gas and oil prices were very high in 2022. We utilized market forecasts for natural gas and oil prices, which project prices to remain below 2022 levels. Of course, commodity prices are inherently volatile, and changes in natural gas and oil prices could result in adjustments to our current forecasts. The team at Catapult Mineral Partners continues to look for opportunities to expand our portfolio through acquisitions of mineral and royalty interests, while also promoting development of our existing mineral and royalty interests. The group is targeting additional investments of up to $20 million in 2023. On the upside, the development of new wells on existing owned reserves beyond our forecasts or new investments could be accretive to future results. Overall, I expect 2023 to be a year of unfavorable comparisons for the reasons I discussed. Despite this, I'm still very optimistic about our outlook as we move beyond 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 and our 2023 outlook in more detail. Christy?