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Natural Resource Partners LP (NRP) Q1 2020 Earnings Call Transcript

By Motley Fool Transcribers – May 11, 2020 at 5:30PM

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NRP earnings call for the period ending March 31, 2020.

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Natural Resource Partners LP (NRP -4.50%)
Q1 2020 Earnings Call
May 11, 2020, 9:00 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Good morning, ladies and gentlemen. Thank you for standing by. And welcome to the Natural Resource Partners LP First Quarter 2020 Earnings Conference Call. [Operator Instructions]

I will now like to turn the conference over to our speaker today, Tiffany Sammis, Investor Relations. Please go ahead.

Tiffany Sammis -- Investor Relations

Good morning. And welcome to the Natural Resource Partners first quarter 2020 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 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 co-lessee 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.

Craig W. Nunez -- President and Chief Operating Officer

Thank you, Tiffany. Good morning all. I hope you and your loved ones are safe and healthy. COVID-19 has changed the way we live, work, and interact with others. It has familiarized us with telecommuting, contact tracing, and zooming. It has reminded us of the importance of the people and industries essential to our way of life, and the difficulties that result when those people and activities are threatened. Most importantly, it reminded us that we're all in this together.

I hope that in the years to come, everyone will look back with pride and how they responded to this challenge. And those who come after us will say that this generation of Americans, our generation, was as strong as any to come before or since. I'm pleased to announce that we, at NRP are doing our part. We continue to operate under CDC guidelines, government-imposed rules, and company remote work protocols. Our employees are safe and the Partnership is conducting business as usual.

Our succession management plans and delegation of authorities are in place should we need them. Our conservative financial approach, the hard work of our team and the support of our bank, debt, and equity holders in recent years are now paying off. We have robust liquidity, consisting of $107 million of cash and $100 million of available borrowing capacity. We continue to generate significant free cash flow and our parent company bonds do not mature until 2025, all of which provides us with a great deal of financial flexibility to manage through this pandemic.

We recorded $146 million of free cash flow over the last 12 months, paid off $93 million of debt, added $41 million to common unitholders equity before non-cash accounting impairments, and paid out $32 million of common unitholder distributions. 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 $35 million over the same period.

While the COVID-19 pandemic did not have a material impact on our first quarter results, we believe that declining demand for steel, electricity, and glass will negatively impact our cash flow in the months ahead. Falling prices for metallurgical and thermal coal are approaching the operators' cost of production. Nine of our lessees have idled operations on various NRP properties over the last month. While these idling have been characterized as temporary and most have already resumed operations. It's fair to say that our lessees are having a tough time.

The soda ash market has been hit by a significant drop in demand for flat glass, specifically glass used in automobile manufacturing and global soda ash prices have declined approximately 20% since the fall. While we cannot predict the extent to which our company will be impacted by these events. We do expect our cash flow cushion to go negative in the months ahead compared to the $35 million positive cushion realized over the last 12 months. Despite that, we believe that our significant liquidity buffer and continued free cash flow generation will provide us with the financial flexibility and the margin of safety necessary to continue operating business as usual, which includes paying our amortizing debt when due.

As you're aware, we announced two weeks ago that we are not going to pay the common unit distribution that would have been paid this month. That decision is consistent with the financial strategy we've employed in recent years to delever and derisk the Partnership. It is my hope that we will feel comfortable reinstating the distribution in August, but we must wait to see how the COVID-19 situation plays out over the coming months before making that decision.

In many respects, we now face the most uncertain business environment in a generation. But I am pleased and confident that the numerous transformative actions completed in recent years to right-size our business, solidify our capital structure, and build liquidity have positioned NRP well to weather the storm and continue executing on our multi-year plan to enhance unitholder value by delevering and derisking our capital structure.

And with that, I'll turn the call over to Chris to cover our financial results.

Christopher J. Zolas -- Chief Financial Officer and Treasurer

Thank you, Craig, and good morning, everyone. During the first quarter of 2020, we generated $30 million of operating cash flow from continuing operations and $19 million of net income. Basic and diluted earnings per common unit for the first quarter were $0.90 per unit and $0.52 per unit, respectively. Our Coal Royalty segment generated $27 million of net income and $31 million of operating cash flow during the first quarter of 2020. These results were lower as compared to the prior-year quarter, primarily due to a decline in global steel demand that resulted in a weaker market for metallurgical coal.

As a result, both sales volumes and prices from metallurgical coal were lower in the first quarter 2020 compared to the prior-year period. In terms of our Coal Royalty sales mix, metallurgical coal made up approximately 60% of our total Coal Royalty sales volumes and approximately 65% of our Coal Royalty revenue during the first quarter of 2020.

I'd also like to note that our largest lessee Foresight Energy continues to operate despite filing for bankruptcy in March of 2020. Prior to its bankruptcy filing, Foresight entered into agreements with its prepetition lenders to support its restructuring process. In addition, Foresight amended contracts with certain of its other key counterparties including NRP to support the restructuring plan.

We do not believe the amendments to our agreements with Foresight will have a material adverse effect on our financial condition or results of operations. In its bankruptcy filings, Foresight announced its intention to continue to operate the Sugar Camp, Williamson and Hillsboro mining complexes. While Foresight's filings announced idling of the Macoupin mine, Foresight also announced that they recommenced longwall production at its low-cost Hillsboro mine. We expect that adverse impacts from the idling of the Macoupin mine will be partially offset by the benefits we will receive from increased production at the Hillsboro mine.

With that being said, Foresight's ability to operate profitably and emerge from bankruptcy will continue to be impacted by weakened demand for thermal coal in the global COVID-19 pandemic. And at this time, we can't be certain that Foresight's bankruptcy restructuring plan as currently proposed will be implemented and ultimately approved by the bankruptcy court.

Moving to our second business segment, soda ash. Net income decreased $5 million compared to the prior-year quarter, driven by lower international demand that resulted in lower international soda ash pricing and volume sold. Ciner Wyoming started to see the impact of COVID-19 on its operations toward the end of the first quarter in the form of slowing global demand and downward pricing pressure. And while we believe it did not have a material adverse effect on first quarter results, it will have a negative impact on subsequent quarters. The extent and duration to which COVID-19 will impact demand is highly uncertain and cannot be predicted with confidence at this time.

We received $7 million of cash distributions from Ciner Wyoming during the first quarter of 2020, compared to $10 million in the prior-year quarter. As discussed on our previous earnings calls, the managing partner, Ciner Wyoming, decided to reduce distributions during 2019 to fund a multi-year capacity expansion project. They continue to develop plans and execute the early phases for this project.

Prior to the COVID-19 pandemic, we expected to receive approximately $25 million to $28 million of annual cash distributions from Ciner Wyoming until the project is completed. However, we are unable at this time to predict the ultimate impact COVID-19 may have on Ciner Wyoming's business or the future distributions that we received from Ciner Wyoming.

Our corporate and financing segment costs declined $4 million in the first quarter of 2020 compared to the prior-year quarter, primarily due to lower interest expense, as a result of the $93 million of debt we've repaid over the last 12 months. Operating cash flow was $22 million higher compared to the prior-year quarter, primarily due to the timing of interest payments on our parent company bonds that we refinanced in the second quarter of 2019. Interest payments on our existing 9.125% bonds are due in Q2 and Q4, while they were due in Q1 and Q3 on our prior 10.5% bonds.

In February, we paid a quarterly $0.45 per unit distribution to our common unitholders and a quarterly cash distribution of $7.5 million to our preferred unitholders with respect to the fourth quarter of 2019. However, as Craig mentioned earlier, due to the unprecedented uncertainty that exists in the near- and immediate-term, we suspended our common unit distribution with respect to the first quarter 2020 and will pay in kind $3.75 million or one-half of the $7.5 million quarterly preferred unit distribution. This decision enables NRP to conserve almost $9.5 million of cash until we have more visibility into the financial impact caused by the COVID-19 pandemic. We remain focused on those things we can control in protecting our business with a clear priority on cash and liquidity in this uncertain industry and global environment.

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

Questions and Answers:


Thank you. [Operator Instructions] Your first question comes from the line of Mark Levin with Benchmark Company. Please go ahead.

Mark Levin -- Benchmark Company -- Analyst

Great. Thanks very much. Hope you guys are doing well and staying safe. Just a quick question, as it relates to your comment about the cash flow cushion turning negative. Does that impact or will that impact -- how you guys think about how much liquidity or cash you want to hold versus paying down debt. I mean how does the cash uses change in the environment in which we have, if at all?

Craig W. Nunez -- President and Chief Operating Officer

Mark, this is Craig. I'll take the first stab at that and let Chris add on if he wants. It doesn't change anything at all. The beauty of our liquidity position is that that cash flow cushion could go significantly negative and we have a very long runway that we could fund that negative cash flow cushion with the liquidity that we have. So it gives us a -- so it doesn't change our view. We're going to continue to pay down debt. And as I said in the prepared remarks, we would like to reinstate the common distribution in August. However, we just need to see how things play out over the next couple of months in the macro-environment before we do. Chris, do you have any comments on that?

Christopher J. Zolas -- Chief Financial Officer and Treasurer

I think -- no, I think, you hit all the key points there.

Mark Levin -- Benchmark Company -- Analyst

Great. And I guess we're sitting here almost midway through or we're kind of working our way through the -- through the second quarter, not looking for guidance, but just, I think, you had mentioned nine idlings, most of it -- on your properties, most of which or some of which had returned. To the extent, you do have visibility into 2Q since we are sitting here in the middle of it. I mean is there going to be a step-change or should we expect a step-change in what shows up this Coal Royalty production. I mean, obviously, we can see the prices on the met side or at least have a general idea directionally, but just kind of thinking about what you guys are seeing from a volume perspective, maybe you can answer that without being specific?

Craig W. Nunez -- President and Chief Operating Officer

Sure, Mark. I'll take a swing at that and try to help you with it and then I'll let Kevin comment as well if he has further comments. Keep in mind that we receive payments at the end of the month for the production that occurred the previous month. So we really don't have visibility, for example, into March until the end of April and we don't have visibility into April until the end of May in our coal business.

So other than what we can glean from talking with our operators. But it is fair to say that in April, as we were collecting for March, we did see a decline. And I would say it's a noticeable decline in production that occurred -- that was starting to occur, that we expect to continue. I don't know what's happening. I don't know how that's going to react with the resumption of operations in a number of our properties. But we are starting to see a decline that it's certainly nothing that's on the magnitude that at this point gives us concern regarding our ability to continue operating business as usual, given the free cash flow generation that we have and also the -- if that doesn't prove to be enough, we also have significant cash reserves and liquidity. So, Kevin, do you have any other comments?

Kevin J. Craig -- Executive Vice President, Coal

No, Craig, I think, that's a good summary of what we're seeing so far here into the Q2.

Tiffany Sammis -- Investor Relations

Got it. And back to your distribution comment about August, I mean, are there certain things that you're looking for or certain metrics or what exactly would give you the confidence to resume? What are you specifically looking to see, Chris?

Christopher J. Zolas -- Chief Financial Officer and Treasurer

We want to see what happens with our trend in cash flows. And that's trending cash flows, both from the coal side and the soda ash side as well. We're just in the -- we're somewhat in the early innings of seeing the impact on the business -- both of those businesses from -- with respect to COVID-19. And what we don't know is if things are going to somewhat stabilize and begin to come back up again. We don't know exactly how deep the trough is going to be or how long the duration is going to be. And we're hoping that in the next couple of months, we'll have more visibility into that. We watch the medical numbers, but we're certainly not experts at the medical side. So it's -- I can't say that we have any firm targets on number of new infections or that type of thing because that's just not inside our wheelhouse.

But we are interested to see what happens to global soda ash demand and pricing. We are interested to see what happens to volumes and pricing on the met and thermal side as we get into later this month and end of June and July to see if the reopening of the American -- the US economy. We've seen that China is ahead of us and see how that reopening continues to play out. Great Britain is announcing plans to reopen. Germany is doing the same thing. Various parts of Europe are doing the same thing.

We want to see how this plays out, and of course, if we get a month down the road and suddenly cases are spiking again and those economies are closing back up that will not be a good result. If on the other hand, everything continues to proceed in a relatively positive fashion, hopefully, soda ash and coal demand and pricing will respond accordingly and we will feel more optimistic about what we can do with the distribution.

Tiffany Sammis -- Investor Relations

Thanks. That makes perfect sense. Great. I appreciate for your time this morning.

Craig W. Nunez -- President and Chief Operating Officer

Thanks for your questions, Mark.


And there are no further question at this time, I will turn the call back over to the presenters for closing remarks.

Craig W. Nunez -- President and Chief Operating Officer

Thank you, operator, and thank you, everyone, for participating in our call and thank you for your support of NRP. This is a very unique and somewhat interesting time and it's a tragic time and we will continue to work and be safe and attempt to deliver value to -- value for all of our stakeholders. So, with that, thank you for participating. Stay safe and healthy. Have a good day.


[Operator Closing Remarks]

Duration: 20 minutes

Call participants:

Tiffany Sammis -- Investor Relations

Craig W. Nunez -- President and Chief Operating Officer

Christopher J. Zolas -- Chief Financial Officer and Treasurer

Kevin J. Craig -- Executive Vice President, Coal

Mark Levin -- Benchmark Company -- Analyst

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Motley Fool Transcribers has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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