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spk01: Good day and thank you for standing by. Welcome to the Natural Resource Partners Second Quarter 2021 Earnings Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Ms. Tiffany Samas, Manager of Investor Relations. Please go ahead.
spk00: Good morning, and welcome to the Natural Resource Partners Second Quarter 2021 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 Zollis, 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 West Sea or detailed market fundamentals. In addition, I refer you to general resources, public disclosures, and commentary for specific questions regarding our Soda Ash business segment. Now, I would like to turn the call over to Craig Nunez, our President and Chief Operating Officer.
spk02: Thank you, Tiffany. Good morning, all. NRP continues to operate under CDC guidelines and company pandemic work protocols. I am pleased to report that our business continues to improve as the global economy recovers from the pandemic-induced shock that began last year. Demand for metallurgical coal, thermal coal, and soda ash is strong, and prices for those commodities have increased significantly since the beginning of the year. While the current resurgence of COVID-19 infections in the U.S. and various regions of the world highlights the ongoing risk that COVID-19 poses for the global economy, We remain cautiously optimistic that the worst impacts of the pandemic for our company are behind us. Furthermore, and as you've heard me say repeatedly in the past, we remain quite pleased with the partnership's durability during challenging economic environments, as demonstrated by its ability to generate free cash flow, continue paying down debt, and maintain strong liquidity throughout the past year and a half. We believe this durability will continue. Over the last 12 months, we generated $75 million of free cash flow and paid off $46 million of debt. Our cash flow cushion, which is the free cash flow remaining after paying our private placement debt amortizations and distributions on our common and preferred units, was negative by only $13 million. We continue to focus on and maintain robust liquidity and end of the quarter with $98 million of cash and $100 million of unused borrowing capacity. Demand and prices for metallurgical coal are up significantly from the beginning of the year. Resurgent steel demand, driven by global economic recovery, is more than offsetting continued pandemic-related challenges for met coal. The ongoing China-Australia political and trade dispute appears to have been a positive for U.S. producers as Chinese manufacturers realigned supply chains to procure MET coal from other regions, allowing North American coal to make its way to destinations previously served by Australian producers. International benchmark prices for MET coal have more than doubled since the beginning of the year amid significant volatility, fluctuating within a range of $103 to $215 per ton. NRP has yet to fully realize significant benefits from higher MET prices. but we expect that will change in the coming months. As you will recall, most of our lessees' met coal is sold pursuant to contracts of up to a year in duration, so we do not have much sensitivity to short-term price movements. We expect most of those sales contracts to renew in the third and fourth quarters of this year at higher levels, which should provide upside to our met cash flows in the year ahead. Thermal coal demand and prices are also showing significant strength, with API 2 prices recently topping $140 per ton, up over 100% since the beginning of the year. Increased electricity demand driven by a rebounding U.S. economy and a strong winter burn are the primary drivers behind the price run-up. The positive impact for us from recent thermal price increases have been modest so far, since the substantial majority of our thermal cash flows this year are fixed pursuant to our contract with Foresight Energy that went into effect as they emerged from bankruptcy in 2020. That fixed payment agreement terminates at the end of this year, and we will begin to receive traditional royalty payments starting January. As a result, we expect to benefit next year to the extent demand and prices for thermal coal remain strong. Turning to our investment in Jenner, Wyoming, global demand for soda ash has shown significant improvement this year and is at pre-pandemic levels. International stock prices have risen over 35% since the beginning of the year. Our joint venture in Green River, Wyoming is operating at pre-pandemic levels and customer demand for our product is strong. While Jenner, Wyoming's revenues and profitability have risen significantly over the course of the year, Increases in ocean freight rates have been a drag on the bottom line. Looking forward, new lockdowns around the world due to COVID-19 and supply chain constraints on auto production have the potential to weaken demand for soda ash in the coming months. We expect soda ash pricing and logistics costs to remain volatile into 2022 as the market attempts to find a new equilibrium amidst a rapidly changing economic environment. In light of these uncertainties, we do not expect Jenner-Wyoming management to resume regular cash distributions to us until market conditions stabilize. While the near-term outlook is uncertain, we are quite optimistic about the intermediate and long-term prospects for our soda ash investment. Our asset is one of the lowest cost producers of soda ash in the world, and we believe our operating partner, Jenner Resources, collectively with its parent, WeSoda, is the best and most capable operator of natural soda ash in the world. These factors position us well to generate attractive margins and robust cash flows over the long term. As mentioned on our last three earnings calls, we continue working to identify alternative revenue sources across our large portfolio of land, mineral, and timber assets. The types of opportunities we are exploring include the sequestration of carbon dioxide underground and in standing forests, and the generation of electricity using geothermal, solar, and wind energy. While the timing and likelihood of cash flows being realized from any of these activities is uncertain, we believe our large ownership footprint throughout the United States will provide opportunities to create value in this regard with minimal capital investment by NRP. The partnership's ability to continue generating free cash flow, reduce debt, and pay unit holder distributions during the COVID-19 downturn demonstrates that we have the right strategy in place to create unit holder value. Since 2015, when we embarked on our strategy of delevering and de-risking the partnership, NRP has paid down over $920 million of debt, paid over $125 million of common unit holder distributions, and worked to solidify our capital structure and ensure strong liquidity. We remain steadfast in our commitment to focus on maximizing unit holder value by continuing these efforts. And with that, I'll turn the call over to Chris to cover our financial results. Chris? Thank you, Craig, and good morning, everyone. During the second quarter, we generated $13 million of operating cash flow and $15 million of net income. Our coal royalty and other segment generated $32 million of operating cash flow and $26 million of net income during this period. Our coal royalty and other segment's second quarter free cash flow was flat quarter over quarter as improved coal royalty cash flow and stronger demand and pricing for coal in the second quarter of 2021 was offset by the timing of fixed payments from Foresight as they emerged from bankruptcy in the second quarter of last year. Our coal royalty and other segments second quarter net income improved $134 million as compared to the prior year quarter, primarily because of $132 million non-cash asset impairment expense in the second quarter of last year, resulting from weakened coal markets, which were compounded by the COVID-19 pandemic. Excluding asset impairments, net income improved slightly quarter over quarter as increases in coal royalty revenues and lower operating and maintenance expenses were partially offset by higher DDNA driven by increased production at certain Illinois Basin coal properties as well as certain one-time items in 2020. Metallurgical coal made up approximately 50% of our total coal royalty sales volumes and approximately 65% of our coal royalty revenue during the second quarter of 2021. Moving to our SODASH business segment, net income in the second quarter of 2021 improved $6 million as compared to the previous year quarter, primarily due to strengthened soda ash demand and increased sales volumes that were partially upset by increased ocean freight rates compared to the second year quarter of 2020. Free cash flow in the second quarter of 2021 was lower by 7 million as compared to the prior year quarter due to General Wyoming's decision to suspend their quarterly distribution in August of 2020. As Craig mentioned earlier, and we had mentioned on previous earnings calls, General Wyoming continues to evaluate on a quarterly basis whether to reinstate the quarterly distribution, but we do not expect General Wyoming management to resume regular cash distributions to us until market conditions stabilize. We remain encouraged by General Wyoming's ability to operate his business safely and effectively, and we're confident in the long-term earning power of our Sodash business. Our second quarter 2021 corporate and financing segment costs were $1 million lower and cash used was reduced by $500,000 compared to last year's second quarter, primarily due to lower interest expense as a result of less debt outstanding in 2021. Regarding distributions, in May, we paid a quarterly $0.45 per community distribution and a quarterly distribution of $7.7 million to our preferred unit holders, one half of which in cash and one half in kind. Additionally, today we announced a quarterly cash distribution of $0.45 per common unit and a quarterly distribution of $7.8 million to our preferred unit holders, also to be paid one-half in cash and one-half in kind, as required by our bond and venture. These preferred unit distributions include interest on previously paid in kind units, which will also be paid one-half in cash and one-half in kind. As we mentioned last quarter, the indenture governing our bonds restricts us from paying more than one half of the quarterly distribution on our preferred units in cash if our consolidated leverage ratio exceeds 3.75 times. And as of June 30th, 2021, our leverage ratio was 4.6 times. In addition, under the terms of our partnership agreement, if we have outstanding paid in kind preferred units in 2022, we would be required to temporarily suspend comm unit distributions until all paid and cod units have been redeemed. We expect our leverage ratio to now be in a sustained long-term decline as we continue to pay down debt and plan to redeem all outstanding paid and cod units once our leverage ratio drops below 3.75 times. And with that, I'll turn the call back over to the operator for questions.
spk01: Thank you. As a reminder, to ask a question, please press star 1 on your telephone keypad. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Again, to ask a question, please press star 1 on your telephone keypad. There is no further question this time. You may continue.
spk02: Thank you, Operator. And thank you all for listening to our call and reading our transcript. And thank you for your support of NRP. And we look forward to talking to you next quarter. Best regards.
spk01: This concludes today's conference call.
spk02: Thank you all for joining. You may now disconnect.
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