NACCO INDUSTRIES INC Q1 FY2025 earnings call

• Coal Mining Segment: Significant improvement in operating profit driven by coal mining segment where segment adjusted EBITDA more than tripled. Reasons include increased earnings in unconsolidated operations with higher pricing at Falkirk and moderate increase in customer demand at Coteau, and Mississippi Lignite Mining Company operating more efficiently. - Mitigation Resources: Reported second consecutive quarter of profitability and anticipates generating profit for the full year. - North American Mining: Operating profit decreased due to significant reduction in year-over-year ton sold and increase in operating expenses, partly offset by increase in part sales. Results improved compared with fourth quarter of 2024. - Sawtooth Mining: Exclusive contract miner for Thacker Pass lithium project. Lithium Americas and General Motors announced final investment decision for Phase I of the project. Phase I production estimated to begin in late 2027. - Minerals Management: Segment-adjusted EBITDA increased 10% over prior year. Investment in a company in Hugoton Basin drove improvement and expected to continue to be accretive. - Pension Plan: Expect to complete termination of defined benefit pension plan this year. Upon termination, obligations transferred to third-party insurance provider, but significant non-cash settlement charge anticipated leading to substantial decrease in net income compared to 2024.

Coal Mining Segment: In the 2025 first quarter, operating profit was $3.8 million and segment-adjusted EBITDA was $5.8 million. In 2024, the segment had an operating loss of $400,000 and segment-adjusted EBITDA of $1.8 million. North American Mining: Operating profit decreased to $2 million from $2.4 million in the prior year first quarter, while segment-adjusted EBITDA of $4.7 million was comparable to the prior year. Minerals Management: First quarter 2025 operating profit of $7.9 million was comparable year-over-year, while segment-adjusted EBITDA increased to $9.8 million from $8.9 million a year ago. Revenue contribution percentages were not explicitly stated in absolute terms but the financials for each segment were detailed.

• In 2025, expect moderate year-over-year increase in consolidated operating profit. - Coal mining segment expects 2025 customer demand to lead to modest increase in deliveries compared with 2024, benefit from absence of temporary price concessions at Falkirk, and Mississippi Lignite Mining Company to recover from inefficiencies. - North American Mining expected to deliver improved results in 2025, with anticipated lower first-half results offset by expected performance gains in second half. - Minerals Management expects first-half earnings comparable to prior year results, with significant improvement in second half given anticipated trends in oil and natural gas prices and projected volume. - Expect to complete termination of defined benefit pension plan this year, with significant non-cash settlement charge anticipated. Excluding the charge, net income expected to decrease moderately from 2024. - Project steady increase in annual cash flow generation beginning in 2025.

• Risks include matters described in earnings release, 10-Q, and other SEC filings that could cause actual results to differ from forward-looking statements. - Pension termination will result in significant non-cash settlement charge. - Index fluctuations (e.g., diesel prices over five years) can affect coal pricing. - Weather factors like hurricanes can disrupt North American Mining operations. - Mitigation resources business is lumpy with periodic credit releases and sales.

Q: Hey, good morning. I guess just starting with the coal segment and focusing on Mississippi lignite, I guess that continues to show gross profit losses, although I think there was a $3 million inventory charge in the quarter. Can you just explain a little bit what leads to those recurring inventory charges?

A: It's basically what is the cost of the coal on the pile, which is determined by regular inventory accounting compared to the sales price. One reason is last year was a pretty inefficient year with reduced plant load leading to high-cost coal in inventory. Also, price is influenced by a formula comparing current indices to past indices (e.g., diesel over five years). A coal mine has fixed costs, and operating at lower levels increases unit costs.

Q: In terms of regulatory, a more favorable regulatory environment, are there practical implications there? I know you had some pending EPA issues, so I assume that those are less of a concern. But are there other practical implications?

A: The President signed four executive orders focused on coal, including making sure people look at stability of grid before retiring coal-fired power plants, making coal a critical mineral, looking at regulatory biases against fossil fuels, and encouraging development of coal resources.

Q: Let's see. On North American Mining, is that going to be consolidated or unconsolidated?

A: It's consolidated.

Q: And then in terms of normal seasonality there, is the first quarter typically a soft quarter anyway? I mean, what would be the cadence of earnings for that segment?

A: In North American Mining, there isn't much seasonality largely because of where we operate (mostly in southern states). Only occasional hurricanes can disrupt operations.

Q: And was weather a factor, again, in the first quarter?

A: Not really. There were a few one-off situations like periodic outages on drag lines and customer pauses in operations, and some customers seeing modest decline in demand.

Q: I guess then on free cash flow, it looked like there were a number of puts and takes on working capital. I guess the biggest is you had a large item for mining supplies inventory, which you have a non-current asset, so I assume that's more than a year. Do you still expect working capital to be a source of cash this year? And I guess why that large step-up in that mining supplies inventory?

A: It really wasn't a step-up. We just reclassified a portion from current to long-term. It's about holding critical spares as an insurance policy for drag line outages. Working capital isn't a major driver, but we may increase inventory for outages. Also, there's a deposit with vendors expected to turn this year and a change in insurance renewal timing affecting working capital.

Q: On the balance sheet you have that assets held for sale line. What's in that?

A: It consists of some drive lines and a building in North Dakota that we got as part of the termination settlement with Great River Energy.

Q: And you expect to sell those this year?

A: They're all being actively marketed.

Q: And then I guess the last question would just be on the remediation. That, in my sense, is kind of lumpy as you get credits and realize proceeds on those. Is that right? Is that not a steady quarter-to-quarter business?

A: Mitigation resources is lumpy. The life cycle of a mitigation bank involves periodic credit releases and sales over time. The business is young but growing rapidly with different models of land ownership and credit generation.

Q: I guess also on the, you mentioned in the release, it sounds like you're making some progress on the solar initiative, any more color you might have on that?

A: That's our region resources business. We're looking at solar with backup options. Solar needs backup, and we're looking at projects on reclaimed mine land, particularly in Mississippi and Texas.