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spk00: Good day and thank you for standing by. Welcome to the Natural Resource Partners LP First Quarter 2022 Earnings Conference Call. At this time, all participants' lines are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to your first speaker today, Tiffany Sammons, Manager of Investor Relations. Please go ahead.
spk01: Thank you. Good morning and welcome to the Natural Resource Partners first quarter 2022 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 Dolis, 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 first 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 coalesce or detailed market fundamentals. In addition, I refer you to CISAJAM 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.
spk03: Thank you, Tiffany, and good morning, everyone. We generated $52 million of free cash flow in the first quarter, which is one of the best quarterly performances in the history of the partnership. And as representative of the run rate, we expect our consolidated business to deliver for the foreseeable future. We plan to take advantage of the improved financial performance we anticipate this year to accelerate our deleveraging and return additional cash to common unit holders. As a result, we announced today a 67% increase in our quarterly distribution from 45 cents per unit to 75 cents. Strong demand for steel and a relatively muted supply response for coking coal have driven global metallurgical coal prices to historically high levels. Despite rebounding significantly over the last year, U.S. met production has yet to reach pre-pandemic levels, and the same can be said for met exports from Australia and Canada. While the impact of COVID-19 lockdowns in China is starting to negatively impact steel production, We expect the supply-demand balance for met coal to remain tight for the foreseeable future, providing further support for prices. Thermal coal markets are benefiting from increasing electric power generation and restricted growth in thermal coal supplies. Labor shortages, supply chain disruptions, and pressure from governments, regulators, activists, and financial institutions are limiting the ability of operators to increase thermal production to meet demand. The war in Ukraine and corresponding boycott on Russian coal exports is further exacerbating market tightness, and strong demand for natural gas and LNG are providing additional support for thermal pricing. We expect these factors to keep thermal prices at elevated levels for the near term. Our investment in SysAjam Wyoming is also benefiting from historically high soda ash prices. Our average soda ash net realization has increased by more than 50% in the first quarter of 2022 compared to the previous year. Export prices in particular have been very strong, more than doubling on a year-over-year basis due to improving global demand and constrained supply. We believe the long-term outlook for Sysgem Wyoming remains favorable given the secular trends of renewable energy, the electrification of the global auto fleet, and urbanization. Our interest in CISAJAM Wyoming generated $13 million of free cash flow in the first quarter. You'll recall that CISAJAM had ceased paying distributions during the pandemic. They resumed distributions in November and we received $7 million at that time and $13 million in February. We continue working to identify opportunities on our large acreage footprint to capitalize on the transitional energy economy. As you'll recall, we announced our first timber CO2 sequestration transaction in the fourth quarter of last year and our first subsurface CO2 sequestration lease in the first quarter of this year. So, in summary, NRP generated $152 million of free cash flow over the last 12 months. 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, is rising significantly. While COVID-19 lockdowns in China and the war in Ukraine pose a risk to the global economy and our business lines, we are optimistic that the strong performance realized in recent quarters will continue for the foreseeable future. We remain committed to paying down debt, solidifying our capital structure, and paying common unit distributions. And with that, I'll turn the call over to Chris to cover the financial results.
spk04: Thank you, Craig, and good morning, everyone. During the first quarter, we generated 52 million of operating cash flow and 64 million of net income. Our mineral rights segment generated 48 million of operating cash flow and 63 million of net income in the first quarter of 2022, an improvement over the prior year quarter of 22 million and 42 million, respectively, driven by stronger demand and pricing for metallurgical coal which made up 50% of our total coal royalty sales volumes and 80% of our coal royalty revenues during the first quarter of 2022. Moving to our sodash business segment, net income in the first quarter of 2022 was 15 million, an improvement of 13 million as compared to the previous year quarter, primarily due to higher international pricing in 2022. Free cash flow in the first quarter of 2022 improved $9 million as compared to the prior year quarter because of CISAJAM Wyoming's decision to reinstate the regular quarterly distribution in November as a result of their improved financial performance. Our corporate and financing segment costs for the first quarter of 2022 were relatively flat as compared to the prior year quarter. Segment-free cash flow decreased 2 million as compared to the prior year quarter, primarily due to an increase in incentive compensation paid out in the first quarter of 2022 because of significantly improved operating results last year. However, this decrease was partially offset by lower cash paid for interest because of less debt outstanding. Regarding distributions, in February of 2022, we paid a quarterly 45 cents per common unit distribution and a quarterly cash distribution of 7.5 million to our preferred unit holders for the fourth quarter of 2021. In addition, we also redeemed all outstanding paid in kind preferred units at par during the first quarter of 2022. As Craig previously mentioned, today we announced an increase in the distribution to our common unit holders from 45 to 75 cents per common unit for the first quarter of 2022. We remain steadfast in our strategy to continue using cash flow to pay down debt and solidify our capital structure. The decision to increase common unit distributions was based on our substantial free cash flow generation, solid liquidity, and positive outlook for our business lines, coupled with higher expected common unit holder income tax liability for 2022, resulting from the improved financial performance. We plan to take advantage of this strong free cash flow generation to accelerate our deleveraging and return more cash to our get-holders. And with that, I'll turn the call back over to the operator for questions.
spk00: Thank you. And at this time, I would like to remind everyone, in order to ask for questions, please press star, then the number 1 on your telephone keypad. Again, that is star 1 to ask for questions. We'll pause for just a moment to compile the Q&A roster. Again, if you would like to ask questions, please press story, then the number one on your telephone keypad. Your first question comes from the line of Sean Furinacho from Rawson Equities. Your line is open.
spk02: Good morning. Thank you for taking my question. I'm just wondering how you guys are thinking about the outstanding 12% preferreds that you guys have. I know you guys paid down the PIC shares, but that's a pretty high cost piece of capital in the capital structure given the pre-cash flow generating capacity of the enterprise here. So I'm wondering if you guys are thinking about seeing if you can refinance that or have any perspective on whether that might be something you guys can address. And I had another question, but that's my main question.
spk03: Good morning. Thanks for the question. I'll take a stab at this, and then you can ask your following question. We have $417 million of debt outstanding at the end of the quarter, and then we have the $250 million preferred that you're referring to. We are focused primarily on reducing our debt balances and getting them to a point where we feel comfortable that, given the pressure and the difficulty that companies with exposure to coal such as us have in obtaining refinancing, we want to get to the point where we feel comfortable that we can either pay those bonds off or refinance them in 2025 when they mature. Once we reach that point, then I think we're clearly going to be interested in looking at those preferreds. One thing I'd like to point out about the preferreds is that there is a redemption, I call it a redemption premium for those, that over time, as we make preferred distributions, that redemption premium typically reduces and it goes down. If we were to redeem those preferreds today, for example, in order to redeem the $250 million, we would have to pay in excess of $300 million to buy them back. So there's some economic disincentive to tackle those preferreds initially in the near term. Furthermore, I would point out that the preferreds have very specific equity characteristics to them that give us significant flexibility in the event of a downturn in one or more of our business lines. And so we have to balance the 12% cost of those with the flexibility that having them versus having debt provides us. One of the benefits of the preferreds is there are no events of default with them. So whereas if we find ourselves in a difficult position in the future, as we've been in in the not too distant past, If we were in a position where we were unable to make an interest payment, for instance, that could trigger a default for the business. But if we are unable to pay the preferreds, it doesn't trigger a default, doesn't put us out of business, so to speak.
spk02: Got it. Got it. That makes a lot of sense, you know, in the context. I guess, obviously, you know, the bond coupon at nine and a half, you know, nine is still, you know, significant reduction in interest expenses. You guys are able to pay down various pieces of debt as long as it It's not one of the optical ones, especially 2025 is not too far off.
spk03: I will say, let me add this though to that, that we are continuously evaluating the best use of our cash flow cushion, of our excess cash. Is it to pay down, is it to accelerate the debt pay down? Is it to pay off the preferreds? Is it to increase distributions? We're constantly, you know, is it to buy back units? We're constantly looking at every opportunity and considering the economic merits of those.
spk02: Yeah, it makes sense to me to be holistic because, you know, if you annualize the free cash flow generation of the company here, you know, relative to your guys' market cap, even though, you know, obviously the units have performed very well, you know, total shareholder return-wise, like The multiple applied under free cash flow, if you guys think that this type of performance could be sustained, it's not pretty high free cash flow yield on the stock here. But I understand that it's nice to be holistic about it. But I was also wondering about the – I know that last year – I know you're not going to comment on any specific coal lessee, but I know last year that we had this fixed agreement in place with the primary thermal coal lessee. And that, you know, expired and has now become a more conventional royalty arrangement with them. And I was wondering, like, you know, did the move up in, you know, thermal coal, like, has that entirely been reflected in payments that you might have received on your new, you know, arrangement with that overall thermal coal segment? Or can we expect, like, you know, a more substantial kind of P&L impact over the course of the year? on the thermal coal segment. I know it's a smaller proportion of the middle right segment revenue, but it's hard to quantify that specifically, but any sort of color on whether we can expect any other further gains as we go through the year relative to the fixed payment that we have received.
spk03: That's a good question. It's a smaller portion, but it's an important portion. Kevin, I'm going to let you take the first test habitat.
spk05: Sure. Thanks, Craig. And I would tell you that the fixed payment plan is in the past. That's back to a lease arrangement, a percentage of gross sales price. And oftentimes in this business, tons are contracted prior to upward moves or downward moves in the market. And I believe that's what we're seeing here, that a lot of this was under contract prior to the contract. robust move upward in thermal coal pricing. We believe over time across our Plessy portfolio that we will, the pricing will catch up with our royalties, but that'll be over some time. Makes sense to me. Does that make sense?
spk02: Yeah, completely. It just, you know, I could, I see the spot pricing on my terminal, all the significant buoyancy there, and I'm wondering when we can see that reflected.
spk05: We see that, too.
spk03: As a lessee, as a lessor, you don't have control, of course, over how your lessees contract and market and sell their coals. or other metals for that matter, and you receive a royalty off of that price that they sell it for. And sometimes a lessee feels in their best interest to contract it for an extended period of time, and sometimes that works to the advantage of the lessee and the lessor. Sometimes you look back and you say, wow, I wish we wouldn't have contracted that. But So we think it's going to be a little bit longer before those contracts roll off and we start to see better pricing.
spk02: Okay. That's great color. Thanks very much for that.
spk03: Yeah. That's principally in the Illinois basin, though.
spk02: Got it. Thanks very much for your time, Beth. I appreciate the color and, you know, awesome results and, you know, looking forward to the trajectory continuing.
spk03: You bet. Thanks. You bet.
spk00: And there are no further questions. I would now like to turn the call back to Craig Nunez. Please go ahead, sir.
spk03: Thank you, operator. And thank you, everyone, for joining our call. Appreciate you being with NRP. I know that most of you have been with us having stakes in our company for either on the equity or the fixed income side for quite a while now. And you've been quite faithful to the business And, uh, in our long-term, uh, turnaround story that we've had, uh, right now, uh, the wind is, is in our, in our sails, uh, winds in our back. And we are attempting to, um, make a hay, sorry to confuse the metaphors, but hay, as much hay as we can while the sun shines. And, um, right now it's a good time to be in our business lines and we're going to work to accelerate our plans to improve the partnership and, and, um, position as well for the future. So thanks for your time. Thanks for your support. And we will talk to you next quarter, if not before. Thank you.
spk00: And this concludes today's call. Thank you all for participating. You may now disconnect.
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