NACCO Industries, Inc.

Thank you for standing by. My name is Tina, and I will be your conference operator today. At this time, I would like to welcome everyone to the NACO Industries Third Quarter 2025 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. To ask a question, press star 1 on your telephone keypad. To withdraw your question, press star 1 again. Thank you. It is now my pleasure to turn it all over to Christy Cometo with Investor Relations.

Please go ahead. Good morning, everyone, and thank you for joining us for today's third quarter 2025 earnings call. I'm Christina Cometo, and I oversee Investor Relations here at NACO. I'm joined by our president and CEO, J.C. Butler, and our senior vice president and controller, Elizabeth Lovman. Yesterday evening, we released our third quarter results and filed our 10-Q with the SEC. Both are available on our website for your reference. Before we get into the results, let me remind you that today's discussion will include forward-looking statements. As always, actual outcomes could differ materially due to various risks and uncertainties, which are outlined in our earnings release, 10-Q, and other findings. We undertake no obligation to update these statements. We'll also be referencing certain non-GAAP metrics to give you a clearer picture of how we think about our business. Reconciliations to GAAP can be found in the materials we posted online. Lastly, as a reminder, during the second quarter, we changed the names of our reportable segments. Coal mining was renamed utility coal mining. North American mining is now contract mining. And minerals management was renamed minerals and royalties. Segment composition and historical reporting are unchanged. With the housekeeping comments complete, I'll turn the call over to JC for his opening remarks. JC.

Thanks, Christy, and good morning, everyone. I'm happy to report that our third quarter operating profit of almost $7 million improved sequentially from very disappointing second quarter break-even results. Our Q3 2025 EBITDA increased to $12.5 million, up from $9.3 million in Q2. This sequential increase was driven by improvements in all segments and demonstrates solid progress in growing our businesses and boosting our profitability. I'm pleased we were able to overcome most of last quarter's temporary operational challenges to deliver these solid third quarter results. Our utility coal mining segment is the foundation of our business, anchored by our long-term mining contracts. We continue to have solid demand at our unconsolidated coal mining operations. However, Mississippi Lignite Mining Company's results continue to be impacted by contractual pricing mechanics that are creating a reduced per-ton sales price. The team is working diligently to run the mine as efficiently as possible to meet demand while keeping costs at a minimum, but they cannot outrun the contract mechanics. We anticipate that this contractual pricing anomaly will begin to rectify itself as we move into 2026. In our contract mining segment, which is operated by North American Mining, tons delivered grew 20% year over year and 3% sequentially. Higher customer demand and improved margins at the mining operations led to substantial improvements in both year over year and sequential results. These improved results stem in part from contracts negotiated in recent years and other growth initiatives for this business. Our contract mining segment is our growth platform for mining, and we continue to add long-term contracts to its expanding portfolio. We provide contract mining services for several of the top 10 US producers of aggregates, and our expanding pipeline of potential new deals is strong. We believe this positions our contract mining segment as a core driver of future growth. Just last week, North American Mining executed a multi-year contract to provide dragline services for an embankment dam construction project in Palm Beach County, Florida, that is expected to be accretive to earnings beginning in Q2 2026. We are excited about this contract as it advances our growth into large-scale infrastructure projects. It also provides an opportunity to showcase the efficiency and environmental advantages of the new electric drive M-TEC drag lines, a key factor in our selection for the project. These new M-TEC drag lines enhance efficiency and uptime for our customers. We're the exclusive dealer for M-TEC drag lines at all but two U.S. states. Turning to our minerals and royalty segment, Catapult completed a $4.2 million strategic acquisition in July, which expands our mineral interests in the Midland Basin. The acquisition includes a mix of producing wells as well as additional upside opportunities through future development with existing operators in that region. The Catapult team continues to look for additional investment growth opportunities that will be accretive to earnings. Mitigation resources A strong reputation and clear competitive strengths are supporting continued expansion into new markets. Although the business continues to be variable in performance due to permit and project timing, it is expected to achieve full-year profitability in 2026 and more consistent results over time as new projects are secured. Overall, I believe we are well positioned for meaningful growth. Our business model is built on long-term contracts and investments, delivering strong earnings and steady cash flows that will help us deliver compounding annuity-like returns over time. We followed this approach over the last decade and momentum continues to build. That's why I'm confident in these businesses and our ability to deliver solid 2025 fourth quarter operating results with continued progress into 2026 and beyond. Our long-term strategy is laid out in our latest investor presentation. A copy of that presentation is on our website, along with a recording from the end of August when we attended an investor conference in Chicago. In this presentation, we explain how we have built a portfolio of strong businesses focused on compounding growth, and we describe our strategies for achieving our long-term target of $150 million of annual EBITDA in the next five to seven years. If you've not seen that presentation, I encourage you to review it after this call. With that, I'll turn the call over to Liz to provide a more detailed view of our financial results and outlook.

Thank you, JC. I'll start with some high-level comments about our consolidated third quarter financial results compared to 2024. Then I'll discuss the results at our individual segments. Consolidated revenues were $76.6 million, up 24% year over year. while gross profit of $10 million improved 38%. While consolidated earnings improved sequentially, as JC mentioned, they decreased compared with the prior year third quarter due to the 2024 $13.6 million benefit for business interruption insurance recoveries. Our third quarter 2025 operating profit was $6.8 million, down from $19.7 million last year. Excluding the insurance recovery income, the underlying consolidated operational performance overall was stronger with a net improvement in operating results. Substantial year-over-year operating profit improvements in our contract mining and minerals and royalties segments more than offset lower results in the utility coal mining segment and an increase in unallocated expenses. We reported third quarter 2025 net income of $13.3 million, or $1.78 per share. versus $15.6 million, or $2.14 per share, in 2024. Significant favorable tax effects in the current quarter helped minimize the decline in net income. EBITDA was $12.5 million versus $25.7 million for the same period last year. Moving to the individual segments. At the utility coal mining segment, the decline in operating profit and segment-adjusted EBITDA was primarily driven by the 2024 insurance recoveries that I've just mentioned. The underlying Mississippi Lignite Mining Company business results were also affected by a reduced contractually determined per ton sales price in 2025. Looking ahead, we anticipate steady customer demand for the remainder of 2025 and in 2026 at our unconsolidated mining operations. At Mississippi Lignite Mining Company, fourth quarter 2025 results are expected to improve over 2024 due to operational efficiencies. However, this improvement is not expected to offset the effect of the reduction in the 2025 contractually determined per ton sales price, causing Mississippi Lignite Mining Company and the utility coal mining segment's 2025 full year results to decline compared with 2024. We expect improving profitability in 2026, driven by anticipated improvements at Mississippi Lignite Mining Company in both sales price and cost per ton delivered, particularly as the customer's power plant is able to operate more consistently and formula-based pricing improves as expected. In the contract mining segment revenues, net of reimbursed costs rose 22%, driven by higher customer demand and increased part sales. Improved margins at the mining operations and increase in part sales and lower operating expenses led to significant increases in both operating profit and segment adjusted EBITDA. Operational efficiencies partly offset by elevated operating expenses are expected to lead to improved 2025 fourth quarter profits in the contract mining segment, with momentum accelerating into 2026. These factors, combined with earnings from the new contract JC mentioned, are expected to lead to a significant increase in year-over-year results. At the minerals and royalties segment, operating profit and segment-adjusted EBITDA increased year-over-year, primarily due to an improvement in earnings from an equity investment and increased royalty revenues, mainly driven by higher natural gas prices. Looking forward, minerals and royalties operating profit and segment-adjusted EBITDA for the 2025 fourth quarter are expected to decrease compared with 2024. primarily driven by current market expectations for natural gas and oil prices, as well as development and production assumptions. While fourth quarter 2025 results are projected to decline, full year operating profit is expected to increase over 2024, excluding a $4.5 million gain on sale recognized in the 2024 second quarter. In 2026, operating profit is expected to increase modestly over 2025, as income from Catapult's newer investments is expected to be mostly offset by reductions in earnings from legacy assets. Overall, we anticipate consolidated operating profits for the 2025 fourth quarter to be comparable to the prior year quarter. Full-year operating profit will be lower than 2024 due in part to the 2025 second quarter breakeven results. We're also terminating our pension plan during the fourth quarter, which will simplify our financial structure going forward. While the plan is overfunded, The termination will trigger a non-cash settlement charge. The pension settlement charge and lower operating profit are expected to lead to a substantial year-over-year decrease in net income and EBITDA compared with the 2024 fourth quarter and full year. We expect meaningful year-over-year improvements in both operating profit and net income in 2026. From a liquidity standpoint, at September 30th, we had total debt outstanding of $80.2 million down from $95.5 million at June 30th and $99.5 million at December 31st, 2024. Our total liquidity was $152 million, which consisted of $52.7 million of cash and $99.3 million of availability under our revolving credit facility. During the quarter, we paid $1.9 million in dividends, and as of September 30th, 2025, we had $7.8 million remaining under our $20 million share repurchase program that expires at the end of 2025. We are forecasting up to $44 million in capital spending for the remainder of this year and up to $70 million in 2026. Most of this is earmarked for new business development. As our returns from previous investments start to materialize, we expect cash flows to improve over the prior year. In 2026, we expect cash flows to be comparable to 2025. With that, I'll hand it back to JC for closing remarks.

Thanks, Liz. To wrap up, I have a lot of confidence in our trajectory and our future. We're operating in an increasingly favorable environment. There's strong and growing demand for energy and for the products and services that we provide. Recent government support is also helping to strengthen all of our businesses. I believe the building blocks for durable compounding growth at NACO are firmly in place. Our team is focused on execution, operational discipline, and driving long-term returns for shareholders. We remain confident in our ability to deliver sound fourth quarter 2025 operating results with momentum building as we move into 2026. With that, we'll now turn to any questions you may have.

Again, to ask a question, press star 1 on your telephone keypad.

That's star 1 to ask a question. and we'll pause for just a moment to compile the Q&A roster.

Our first question comes from the line of Doug Weiss with DSW Investment.

Hey, good morning. Morning, Doug. So congrats on a good quarter.

You know, I guess starting with the contract mining segment, I just look in your financial filings, you ascribe about 200 million of asset value to that segment. So it looks like at the moment the ROIC is a little below your targets of mid-teens ROIC. I'm just curious, is that a function of how the contracts were priced historically and going forward, you know, you think you've made changes that will address that or are there other factors you would point to?

Yeah, good question. I would say that there's a little bit of, I guess I'd call it timing. There's both past and future in there. You've got assets that are attributed to, you know, projects that we're working on, contracts we've got that are, you know, fully operational and delivering, you know, full levels of profitability. There's also assets in that segment with respect to things that are yet to deliver. You know, we talked about the long-term nature of these projects, and they tend to be invest and then harvest kind of projects, where if we do put capital up front, it's because we're going to earn returns later. I guess one place I would point in the contract mining segment is the Sawtooth mine in northern Nevada. where we've agreed to commit, you know, some of the initial capital for equipment. We get repaid for that over time. But, you know, that project isn't going to really fire up and start delivering full levels of profitability until, I think, end of 2027 is when we expect to start delivering lithium. You know, 28, 29, beyond that, I mean, this thing, this is going to be a great project for us. so some of the capital that you're seeing that in that total asset uh number includes things like that i mentioned sawtooth it's it's not the only one i guess the other one i'd point out is you know we just uh yesterday was it yesterday we released the announcement about The FAIL project? Tuesday. Tuesday. Two days ago already. We announced, issued a press release for a new project that we signed up in Florida, which we mentioned in our comments. You know, we got some capital committed there as well. And, you know, that's going to start delivering profitability early next year. So, you know, it's a bit of a mismatch between the assets that are there and the current profitability of the business. In all honesty, you know, I think that's a, given the way we're growing the business and continuing to grow the business with these long-term projects, I think there will probably always be a bit of this mismatch in those metrics when you look at them, you know, purely on a period basis. Liz, do you have anything you'd add to that?

No, I think that is a good description.

All right. Okay, that's all.

It does, it does. And then you've traditionally done dragline work, but you've, you know, sawtooth, I believe, is surface work. And I'm curious, are the economics any different as you move outside of dragline? And do you have a desire to, do you have a preference between dragline those types of projects?

Well, let me get to the preference piece at the end because I've got to think about that. So, you know, the contract mining segment is really mining services for things that are not coal or not coal related to energy generation. And you're right, there's one piece to business, you know, 15 years ago, we called it Florida Drag Line Operations, and it was using drag lines to mine aggregates that were underwater for aggregate producers. Over the last 10 years, we've been expanding that. But really, we can kind of do any kind of mining. When you think about the very comprehensive scope of what we do in our coal mining operation, we can run drag lines We can do truck shovel operations for people. We run surface miners. And as you get to Sawtooth, we're going to run, you know, the entire mine. There's no drag line at Sawtooth, and there won't be. But it's, you know, it's much more akin to one of our surface mines where we're doing everything from start to finish with respect to the mining. That's different than the drag line operations where we are just running a single piece of equipment. We're really happy to deliver whatever kind of services a customer needs. Really, our preference is that we find a partner that's a good long-term partner where we can really be an integrated part of their operations. When you think of all of those things that we do in the contract mining segment, we're part and parcel of what happens with each customer's project. And, you know, if that's running a drag line, that's fine. If it's running, you know, lots of equipment, that's fine, too. I would say that, you know, the more work we do at a given location, the more opportunities we have to get paid for our service, since we really are at the end of the day a service company. But You know, it's really more about finding the right partners and the right projects than having a strong preference for one model over the other. Happy to grow in any way.

I would also add that our fee would be commensurate if we bring capital to the table. We would, you know, structure our fee to cover the cost of that capital.

Yeah, that's fair. If we're operating somebody else's equipment. you know, we're going to have a lower fee there. If we bring capital, obviously we need to be compensated for the capital we're bringing. Good point.

Right. I mean, in terms of your new business development, do you have a sales force that, you know, like your typical person out there in the field, are they, do you have people who are entirely focused on aggregate and people who are focused on, you know, you know, non aggregate opportunities or does everyone sort of cover everything?

You know, we operate with sort of a one team approach, very much a one team approach. So anybody that's out in business development effort knows that they have specific things that they can offer as well as comprehensive things they can offer. uh because you know as a good example you know this fail project we just signed up in florida we're going to be operating drag lines there to build this embankment but to the extent that you know that project needs assistance or you know wants advice from any other part of the business you know we'll be there in a heartbeat no matter whether they're in the environmental part of the business mitigation resources or you know an expert from north american coal So, you know, our business development people really are very well informed and well educated about the range of capabilities that we have. And, you know, we approach each project and each potential customer with kind of a, it can be specific or it can be very broad in terms of what they need. Okay. sorry just one more thing on that we think that that approach uh helps us identify and secure more projects than if we're very specific you know if you're i don't really think of any of our people as salesmen given the long-term nature of it i think it's more like business development um but we believe that if they're if they're focusing broadly on solutions that we can provide for potential customers, we're more likely to come up with success as opposed to having somebody focused on one specific area. They might not be addressing the larger opportunities that might reside with that potential customer.

I mean, so if you were to just look out five years from today, I mean, I think today you're predominantly aggregate mining. you know, plus sawtooth and then, you know, you had the phosphate opportunity and this new opportunity. And maybe there are others that I'm not aware of. But, you know, if you look five to ten years from now, would you see the business as more diversified or would you still see iBrigates as the predominant end customer?

Well, you're really talking about the pie chart of what's the mix of business. i think five excuse me five ten years from now you know the pie chart's gonna be a lot bigger uh we're gonna have a lot more projects um given the you know the the opportunities that we're seeing uh on the horizon and i would just add that you know as we expand the areas of the country where we operate and we expand the range of equipment and the customers we have, well, that just creates more opportunities to touch people and get to know people in various areas. So I think we're going to see an increasing range of opportunities just because we're operating in more areas. I think that the aggregates piece is going to continue to be a substantial part of the business. We operate equipment for some of the very largest aggregates producers in the United States. And we continue to find new business for them, so I think that's going to continue to grow. I also think that we're going to continue to find more opportunities, perhaps even an increasing pace of new opportunities that are broader than just mining aggregates for aggregates production. You look at the FAIL contract, I mean, it's kind of got one foot in both camps, because in one respect, we're going to use a drag line to excavate aggregates, but the aggregate's going to be used to build this embankment, this dam. And it's really more of a civil earthworks project than it is delivering aggregates to an aggregates producer that's selling them for construction and cement and other things. So, you know, I think that's introducing a new market to us that we're very excited about. This happens to be a similar course project that we'll use as a drag line, but, you know, we now have our toe in a market where we could put the full range of skills that we have to work and find new opportunities. So I think five, I mean, I've got actually a fair amount of confidence that five to 10 years from now, you're going to see a lot more things inside this contract mining business that we're doing today. But I still think the limestone business is going to be a very important piece of that, given the strength of the customers that we work with.

Okay.

Sounds good. Let's see. On the utility coal segment, you know, you've had this pricing crisis. agreement that has pressured this year's results. In the case, it describes what sounds like a similar contractual structure in the unconsolidated operations. I'm just curious. Obviously, those are doing well. So I'm just curious how those two contracts differ and if there's any risk on the unconsolidated.

So you're asking about the difference between the unconsolidated mines and Red Hills? Yep. Entirely different contract structures. The unconsolidated mines are purely fee for service. The customers pay 100% of the costs at a mine and they provide all the capital in one form or another, either through guaranteeing loans or funding us directly. And we collect a fee for every ton of coal that we deliver. So it's purely a service business. At the MLMC, Mississippi Lignite Mining Company, Red Hills Mine, that is a more traditional contract. Generally, we own all the capital, we pay all the costs. Where it's a little different than a typical mining contract is the price that we sell the coal for is not market price. It's a price that's determined by a contractual formula. And this formula was devised in 1994-95, long before any of us were involved. It's got very particular mechanics with respect to how You know, we are able to charge for the coal that we deliver related to the change in indices, a basket of indices over time that reflect inputs that are used at mining. Think about things like diesel fuel and tires and labor. And so it's this set of indices that match those things, and you look how those change over time, both over a one-year and five-year period. And then you do a bunch of math. And, you know, we're going through a period right now where if you think about five years ago, right, five years ago was November of 2020. We were going through all the whipsaws of index indices related to COVID. And so we're seeing, you know, the five-year look back piece of the formula sort of jerking us around. At the same time, we've got you know, lower diesel prices. So, you know, it's an entirely different different contract structure. I guess I would point out that, look, the operating profit can get beat up by this. I tend to look at EBITDA for this contract because we even though we've spent a lot of capital in the past, that contract expires in 2020, 2032. So we're really not putting a lot more capital in there. So I think even with respect to that, that mind and actually the whole segment is a better metric for me to watch.

Right now, that makes sense. I guess what I was curious about is it sounds like the unconsolidated is just a fairly straightforward inflation adjuster. In other words, you just in terms of what fees it takes.

It's CPI and PPI for the most part. Maybe there's some other indices, but it's fee basically goes up by CPI and PPI.

Okay. Got it.

Got it. You had a little bit of a larger than normal unallocated expense line this quarter. Could you say why that was up?

Yes. There's,

few things in there that are causing that increase. Mainly employee related, and there's two components to that. We had higher medical expenses, and we also had our share based compensation. We had an increase in our share price if you look year over year. So when you include that component into our incentive compensation calculation, purely because of the increase in share price, we're going to have a higher incentive compensation expense. And we also had higher business development expenses running through the quarter.

Okay. Okay. Are you still moving ahead with your solar project? Yes. Yes, we are working.

pretty diligently right now on getting those projects that are in the pipeline safe harbored for tax credit purposes.

But yeah, we're working on those very diligently. And so it sounds like you're looking at multiple locations now for those?

Yes. Okay. Let's see.

That might be all I had. Well, I appreciate all the good work, and it really seems like things are moving in the right direction. So thank you, and talk next quarter.

Well, we appreciate your continuing interest and your great questions.

So thanks for calling.

Christine? Okay. I looked up for the questions in queue. I'll turn the call back over to Christina.

All right. With that, we'll conclude. Before we do, I'd like to provide a few reminders, a replay of our call. It will be available online later this morning. We'll also post a transcript on our website when it becomes available. If you do have any questions, please reach out to me. My number is in our press release, and I hope you enjoy the rest of your day. I'll turn it back to Tina to conclude the call.

As Christina said, an audio recording of this event will be available later this evening via the Echo Replay platform. To access the platform by phone, playback ID is 728-4609, followed by the pound key. This replay will expire on Thursday, November 13th at 1159 p.m. Thank you for joining us today. This does conclude today's conference call. You may now disconnect.