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Natural Resource Partners LP (NRP) Q4 2018 Earnings Conference Call Transcript

By Motley Fool Transcribers – Updated Apr 14, 2019 at 3:25PM

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NRP earnings call for the period ending December 31, 2018.

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Natural Resource Partners LP  (NRP 2.30%)
Q4 2018 Earnings Conference Call
March 07, 2019, 10:00 a.m. ET


Prepared Remarks:


Good morning, ladies and gentlemen. And welcome to the Natural Resource Partners L.P. Fourth Quarter and Full Year 2018 Earnings Conference Call. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host for today, Tiffany Sammis, Natural Resource Partners' Manager of Investor Relations. Ms. Sammis, you may begin ma'am.

Tiffany Sammis -- Manager of Investor Relations

Good morning. And welcome to the Natural Resource Partners fourth quarter and full year 2018 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 Zolas, Chief Financial Officer; and Kevin Craig, Executive Vice President of Coal.

Some of our comments today may include forward-looking statements reflecting NRP's views about future events. These matters involve risk 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 are also included -- our comments today also include non-GAAP financial measures. Additional details and reconciliations to the most directly comparable GAAP measures are included in our third quarter 2018 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 lessee or get into detailed market fundamentals. In addition, I refer you to Ciner Resources' public disclosures and commentary for specific questions regarding our soda ash business segment.

Now, I'd like to turn the call over to Craig Nunez, our President and Chief Operating Officer.

Craig W. Nunez -- President and Chief Operating Officer

Thank you, Tiffany, and welcome, everyone, to our quarterly call. 2018 was another transformational year for NRP, marked by significant cash generation, debt reduction and several noteworthy accomplishments. We sold our VantaCore construction aggregates business, which was only marginally profitable over the last year on a free cash flow basis for $205 million. We received $25 million as part of a settlement of a long-standing legal dispute surrounding our Hillsboro and the Macoupin mines, which was the first of $190 million of payments to be received over 15 years and we generated $183 million of free cash flow and $107 million of net income attributable to common unitholders.

Our long-term goal to drive our leverage ratio below 3 times is now within our sights. What seems like an audacious and unattainable objective when our ratio was at 5.3 is on the cusp of becoming reality. And throughout it all, we continue to maintain strong liquidity ending the year with $206 million of cash and $100 million of committed borrowing capacity. Last but not least, we continue to reward our common unitholders, 35% of whom are insiders with $22 million of distributions during the year.

Looking ahead, we continue to generate significant amounts of cash on the back of solid demand for coal and soda ash, a trend we have seen for some time now. Excluding our discontinued operations and one-time beneficial items, we recorded $158 million of free cash flow in 2018. We believe it's reasonable to assume that this level of consolidated free cash flow may be indicative of a sustainable run rate that we can plan on for the near future.

And thinking about the earning power and financial stability of our Company, one metric we focus on is what we call our cash flow cushion, which is the amount of free cash flow left over after payment of mandatory amortizations of our private placement notes, payment of our preferred unit dividend and the payment of our current common unit distribution. Cash flow cushion is an important metric for NRP and I encourage you to become familiar with the calculation, which you'll find on page 18 of our press release. The cushion, which was $16 million last year, excluding disco ops and one-time beneficial items, is the excess cash flow that we can use to pay off additional debt, redeem preferred units or raise distributions on our common units. While our cash flow cushion has shifted from negative to positive in recent years and is trending upward, it is still relatively modest in light of the historical volatility of our coal segment cash flows. We are committed to growing our cash flow cushion to provide a greater margin of safety for our business and maximize unitholder value.

Despite our solid operating performance and the dramatic improvement in our capital structure and liquidity, the bank and bond markets remain challenging for companies that derive a significant portion of revenues from coal-related sources, a trend we do not see improving. We are not immune to these challenges and believe it's important to address refinancing issues well in advance of the maturity date of our outstanding debt.

Our $100 million bank revolver matures in just over 12 months and we are currently working with our banks to extend that facility to provide the Company with adequate working capital in the future. Our $346 million of parent company bonds, the 10.5s (ph) of 2022 mature in 36 months and we are evaluating whether the opportunity exists to refinance early and extend the maturity date and reduce the interest cost of that security. We believe that successful management of the timing of debt is just as important as managing the amount of debt when it comes to derisking the balance sheet and we will remain laser focused on these issues in the coming year.

With a debt-to-capital ratio still above 50% and over half of our cash subject to restrictions that require to be used to pay amortizations of our private placement notes over the next year, we plan to continue strengthening our balance sheet and maintaining sufficient liquidity to provide a margin of safety for prudent business operations. We remain focused on our long-term goal of driving down our leverage ratio below 3 times, while maintaining minimum liquidity of $100 million. We continue to believe the substantial delevering and derisking of the capital structure with internally generated cash is the quickest path to maximizing the intrinsic value and in turn the market value of our common units.

We are also continuing our relentless focus on the productivity of capital employed in our business. Our consolidated return on capital employed for the year was 14.5% after stripping out discontinued operations and the beneficial impact of one-time items. On a segment basis, ROCE was 16.2% for the coal segment and 14.5% for our soda ash investment.

With that, I'll turn the call over to Chris to review the specifics of our fourth quarter financial performance.

Christopher J. Zolas -- Chief Financial Officer and Treasuer

Thank you, Craig, and good morning, everyone. I'd like to start out summarizing the financial statement impact of the two significant fourth quarter events, Hillsboro litigation settlement and the VantaCore sale. First, the settlement of -- in October of our Hillsboro litigation with Foresight resulted in the receipt of $25 million of cash, which was recognized as other income in the fourth quarter. Second, we exited the construction aggregates operations business with the sale of VantaCore in December for $205 million and realized a gain of $13 million on the sale. Our construction aggregates business results, including this gain on sale are now presented within discontinued operations.

Regarding the use of proceeds from the sale, as of year-end, we paid off the remaining $94 million of outstanding borrowings on our bank credit facility, and in January of this year, we used an additional $49 million to prepay a portion of our OpCo senior notes at par, resulting in $143 million of debt reduction to-date. We will use the remaining net proceeds to continue to repay our OpCo senior notes at par as they amortize in 2019.

With that being said, let's discuss our overall fourth quarter and year-end results. During the fourth quarter, our continuing operations generated $80 million of operating cash flow and $35 million of net income. Full year amounts from continuing operations were $178 million of operating cash flow and $122 million of net income. Free cash flow was up $38 million over the prior year quarter and up $62 million for the full year. These results were driven by the steady performance and strong cash collections from our coal royalty segment, the Hillsboro litigation settlement in the fourth quarter and having lower debt and paying less cash for interest during the year. Basic and diluted earnings per common unit for the fourth quarter were $3.33 and $2.36, respectively, and for the full year were $8.77 and $6.76, respectively.

Moving to our segment results. Our coal royalty segment continues to perform well, generating $77 million of revenue and other income, $80 million of cash from operations and $81 million of free cash flow during the fourth quarter. Full year amounts were $230 million of revenue and other income, $220 million (ph) cash from operations and $215 million of free cash flow. These results were driven by continued strength in export markets throughout met and thermal coal that help to support the US domestic market.

Our lessees produced 7.6 million tons of coal In our properties during the fourth quarter and 27 million tons for the full year. Global demand for steel remained strong and met coal from our properties made up approximately 55% of our total coal royalty production and 65% of our coal royalty revenue during 2018. In addition, continued strength in thermal coal demand and pricing resulted in steady overall fourth quarter and full year performance from our thermal coal properties.

Regarding our soda ash segment, we saw improved production levels and increased international sales pricing during the fourth quarter. Full year 2018 net income increased $8 million, primarily because of the $13 million gain from a royalty dispute litigation settlement and continued strength in both domestic and international soda ash markets. These positive variances to net income were partially offset by production issues in the second and third quarters of 2018, driven by lower soda ash ore grade and unexpected maintenance downtime. These production issues were resolved by the start of the fourth quarter and both production and sales volumes reached over 700,000 tons during the fourth quarter. Full year production was 2.6 million tons, representing only a 3% decline from prior year.

We received $10 million of cash distributions from Ciner Wyoming in the fourth quarter, compared to $12 million we received in each of the last nine quarters. Regarding ongoing capital expenditures, Ciner Resources noted in their recent earnings release, they expect higher maintenance capital in 2019 and they are currently evaluating growth capital expenditure plans to increase production levels up from the current annual amount of 2.6 million tons to at least 3 million tons. We hope to be able to provide more details in the future on these projects and the impact they will have on cash distributions we receive from Ciner Wyoming.

Our corporate and financing segment costs in the fourth quarter were $23 million and $87 million for the full year, which is down 23% compared to full year 2017. This decrease in costs is primarily due to lower interest expense because of less debt in 2018 and $12 million of debt refinancing costs we incurred in 2017 related to our recapitalization transactions. Excluding the impact of our 2017 debt refinancing costs, our corporate and financing costs in full year 2018 were down 14% compared to prior year.

Regarding distributions, we paid $0.45 per unit to our common unitholders and $7.5 million to our preferred unitholders during the fourth quarter. Full year common unit distributions were $1.80 per unit and we paid $39 million of distributions to our preferred unitholders, which included $9 million to pay off paid-in-kind amounts that accrued in previous periods. Free cash flow was $81 million in the fourth quarter, and in February of this year, we paid common unitholders a cash distribution of $0.45 per unit and preferred unitholders $7.5 million in cash.

And with that, I'll turn the call back over to the operator for questions.

Questions and Answers:


(Operator Instructions) Our first question comes from the line of Nick Jarmoszuk from Stifel. Your line is open.

Nicholas Jarmoszuk -- Stifel Nicolaus -- Analyst

Hi. Good morning. Thanks for taking the questions. You did a good job addressing your thoughts on the capital structure, the 10.5s. I was curious, are there any restrictions in the cash balance in terms of how it can be applied to either the 10.5s or the preferreds to pay down some of the higher cost portions of the capital structure?

Christopher J. Zolas -- Chief Financial Officer and Treasuer

Sure, Nick. This is Chris. We do have restricted cash on our balance sheet as of year-end. It was about $104 million and that's from the proceeds from our VantaCore asset sale. We are required to use that -- those proceeds to repay debt and we plan to use those proceeds to repay debt. As I talked about, we paid $49 million of that cash in January of this year, which leaves us about $55 million leftover that we plan to use to pay OpCo notes as they amortize in 2019.

Nicholas Jarmoszuk -- Stifel Nicolaus -- Analyst

And then the regular cash balance can be applied to anything in the capital structure?

Christopher J. Zolas -- Chief Financial Officer and Treasuer


Nicholas Jarmoszuk -- Stifel Nicolaus -- Analyst

Okay. And then question on the -- some of the recently announced met coal expansion projects. Do you guys have -- are those your properties? Do you have any upside with those or are they not within the NRP portfolio?

Kevin Joseph Craig -- Executive Vice President, Coal

So, the recently announced, you may be referring to Arch's Leer project. Those -- that project is currently not on NRP reserves. Most recent and significant expansion we've seen on our properties are the Ramaco operations in Southern West Virginia that have come online and continue to expand.

Nicholas Jarmoszuk -- Stifel Nicolaus -- Analyst

Okay. And then final item, 2019 CapEx. Is there a number you can guide us toward?

Christopher J. Zolas -- Chief Financial Officer and Treasuer

We're not giving guidance, but if you look at the coal CapEx for last year, it was zero. And we don't expect much change from that.

Nicholas Jarmoszuk -- Stifel Nicolaus -- Analyst

Okay. Thank you.


(Operator Instructions) As there are no questions at this time, presenters, you may continue.

Craig W. Nunez -- President and Chief Operating Officer

Thank you, everyone, for joining our call. I want to appreciate you -- I want to thank you for your interest in NRP. Appreciate you following us and taking time with us, and we look forward to speaking with you in the months and quarters ahead.


This concludes today's conference call. Thank you for joining. Have a wonderful day. You may all disconnect.

Duration: 16 minutes

Call participants:

Tiffany Sammis -- Manager of Investor Relations

Craig W. Nunez -- President and Chief Operating Officer

Christopher J. Zolas -- Chief Financial Officer and Treasuer

Nicholas Jarmoszuk -- Stifel Nicolaus -- Analyst

Kevin Joseph Craig -- Executive Vice President, Coal

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