NACCO Industries, Inc. (NC) Earnings Call Transcript & Summary

Thank you for standing by. My name is Tina and I will be your conference operator today. this time I would like to welcome everyone to the NACO industry second quarter 2026 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. ask a question, simply press star 1 on your telephone keypad. To withdraw your question, press star 1 again. It is now my pleasure to turn the call over to Christina Metzko, Investor Relations. Please go ahead.

Good morning, everyone, and thank you for joining us for our 2026 second quarter earnings call. I'm Christina Kometko, and I'm responsible for investor relations at NACO. Joining me today are JC Butler, NACO's president and CEO, and Elizabeth Loveman, our senior vice president and controller. Yesterday we released our second quarter results and filed our 10-Q with the SEC. Both documents are available on our website. During today's call, we will reference non-GAAP measures, which we believe provide additional insight into how we manage our business. Reconciliations to the most directly comparable GAAP measures are also available on our website. Before we begin, let me remind you that today's remarks include forward-looking statements. Actual results may differ materially from those indicated due to a variety of risks and uncertainties which are described in our earnings release, 10-Q, and other SEC files. We undertake no obligation to.

update these statements. Now I'll turn the call over to JC for his opening remarks. JC. Thanks, Kristi, and good morning, everyone. I want to start by saying that from an operating standpoint, the second quarter showed meaningful progress across NACO's businesses. Utility coal mining, contract mining, and minerals and royalties all contributed nicely to strong year over year improvement in gross profit and adjusted EBITDA. As we disclosed in our earnings release, the second quarter included impairment charges related to solar development projects that more than offset the strong operating performance of our established businesses and resulted in a consolidated operating and net loss. During the quarter, additional information and developments regarding two solar development projects within REGEN resources became available, which caused us to reassess the economics of these projects. This included updated information about increased costs and delays in connecting generation facilities to the grid. These new features are also available to the grid. Negative developments collectively reached a tipping point in the quarter. Two key factors are at play. Tax law changes tied to the One Big Beautiful Bill Act, which was signed into law just over a year ago, created tremendous timing and related procurement challenges for renewable development projects like ours, which were started long before the One Big Beautiful Bill came into play. Those factors, coupled with intent short-term demand for generating equipment, EPC services, and equipment required to connect projects to the grid, and price increases linked to this demand and tariffs, created a perfect storm. As part of our routine quarterly review, it became apparent that two impacted projects were veering off the path we anticipated, leading us to take the impairment. Our review of the situation resulted in impairment charges totaling $12 million in the quarter. We believe these impairments reflect a realistic view of the challenges in developing solar projects today, and we believe this was the right call for our business. We are not treating this as business as usual. We understand that the impairment raises questions about our capital allocation discipline. particularly in a business with risks that differ from our established mining and natural resources operations. We reassess these projects based on updated costs, timing, grid connection, regulatory and market information, and we are pursuing a range of alternatives to monetize these investments and reduce future exposure. These alternatives include potential asset sales, contract amendments, and other strategic actions. Depending on the outcome, there could be additional curtailment charges, but our focus is on preserving value where possible and limiting future capital requirements. As many of you know, we've always taken a long-term approach to building this company. We invest in business and opportunities where we believe our operating expertise, core skills, patience, and disciplined capital investments can create value over time. That approach has helped grow and diversify NACO over the years, in most instances with great success. However, an important part of that philosophy is continually evaluating investments as markets evolve. We assess opportunities against our financial objectives and expected returns, and we are willing to adjust our priorities when we see better paths to long-term value creation. Recent developments with our solar projects have reinforced the need to apply heightened scrutiny to investments outside our established operating platforms. With that, let's turn to our core businesses. At Utility Coal Mining, Mississippi Lignite Mining Company was a main driver of the operating profit increase in Utility Coal Mining, as our team effectively responded to changing conditions. Operational issues at the customer's power plant affected production requirements, and our team shifted resources to planned reclamation activities. This reduced our asset retirement obligation rather than having those costs be recognized as an expense that would have impacted second quarter earnings. This nimble response allowed them to continue working while also advancing work that supports the long-term life cycle of the mine and is consistent with how our coal mining teams operate. We have long-standing customer relationships built around reliability, safety, environmental responsibility, and the ability to adapt to situations required. Separately, we are actively engaged with the customer regarding the delayed payments disclosed in our 10-Q. We are focused on collecting amounts owed, preserving our contractual rights, and evaluating all options available under the contract. While we will not discuss specific legal strategies on this call, we understand the importance of enforcing the economic protections in the contract if payment delays continue. Contract mining continues to be our primary growth platform for mining, with strong second quarter results reflecting the successful execution of this growth. The new dragline services work in Palm Beach County, Florida, is ramping up. Our limestone mining operations continue to serve growing needs. customer requirements, and we are preparing to begin operations at a new limestone quarry in Arizona later this year. This business builds on our existing expertise through great geographic and mineral expansion and a growing portfolio of long-term contracts with strong customers. We're improving profitability, enhancing earnings visibility, and creating long-term value. That kind of growth fits NACO well. In minerals and royalties, we continue to successfully manage a diversified portfolio of oil and gas mineral and royalty interests and related investments. This business aligns well with our core growth strategy by levering our core skills and assets to generate meaningful ongoing cash flows across the broad range of natural resource businesses. BEAM continues to take a disciplined, data-driven approach to evaluating the portfolio and future opportunities. While second quarter results for minerals and royalties were strong, results in this segment can be affected by commodity prices, production timing, and the pace of domestic development activity. We manage the portfolio with a long-term view and continue to build on the quality of the assets we own. We expect profits in this segment to moderate near-term due to normal production declines on existing wells and a continuation of the current pace of domestic development activity, particularly in natural gas. Mitigation Resources continues to build its platform in natural resource restoration and reclamation services. We are pleased to see that Mitigation Resources is building a strong and sustainable business by leveraging our environmental and land management skills and experience. performance is currently variable as this business grows, mitigation resources is on a very nice trajectory towards profitability that we believe will provide consistent results as the business expands. Stepping back, the first half of the year reinforced what we believe makes us unique. We have core legacy businesses that generate strong earnings and cash flow today, growth platforms that are expanding, and a disciplined investment process that requires us to continually evaluate where capital can create the most value. you. Sometimes that means investing for growth. Sometimes it means adjusting courses, facts, and circumstances change. Both are part of responsible long-term investment discipline. As part of our disciplined investment approach, we remain focused on strengthening our balance sheet. We are prioritizing the use of free cash flow to enhance liquidity and reduce debt while continuing to fund disciplined high return investment opportunities. We anticipate investing up to $35 million in the remainder of the year, primarily for business development opportunities, but only if investment opportunities meet our capital investment criteria. Recent developments have reinforced our focus on investing where there are clear value creation pathways. We believe this approach presistence us to execute our growth strategies while strengthening our balance sheet and creating long-term value for our shareholders. With that, I'll turn the call over to Liz to walk through the financial results and outlook.

in more detail. Liz? Thank you, JC. Building on JC's operational comments, I'll provide an overview of our financial results. The key takeaway is that our operating businesses delivered strong quarterly year-over-year operating I'm sorry, strong quarterly year-over-year profit improvements while reported gap results reflected the solar-related impairment charges JC discussed. Consolidated revenues were $72.3 million, up 6% from $68.2 million in the prior year quarter. Gross profit was 15.2%. up 123% from $6.8 million last year, reflecting strong performance across each reportable segment. The consolidated operating loss was $2.3 million, compared with an operating loss of less than $100,000 in the prior year quarter. The net loss was $1 million, or 13 cents per quarter. share compared with net income of $3.3 million or 44 cents per diluted share in the 2025 second quarter. Consolidated adjusted EBITDA was up 72% to $15.9 million from $9.3 million last year. This measure excludes the solar related charges and highlights the importance improvement in the underlying operating businesses. At the segment level, utility coal mining results were affected by operational issues at Mississippi Lignite Mining Company's customers power plant. While revenues decreased due to lower customer requirements, operating profit increased to $6.3 million from $1.2 million in the prior year quarter. and segment-adjusted EBITDA increased to $8.7 million from $3.4 million. These improvements primarily reflect better Mississippi lignite mining company results as resources were shifted to planned reclamation activities, as increased earnings from unconsolidated operations and lower operating expenses. Looking forward, we expect full-year utility coal mining operating profit to increase year-over-year due to the strong first half performance. In the second half of 2026, we expect results at Mississippi Lignite Mining Company to decline from the first half due to lower custom demand, higher diesel fuel costs, and an anticipated inventory impairment charge. We are also monitoring the customer's payment status closely, and our outlook reflects the need for continued caution around customer demand, collection timing, and inventory valuation. Earnings of the unconsolidated mining operations are also expected to decrease due to completion of Reclamation Services at the Sabine Mining Company on September 30, 2026. Segment profitability is expected to improve in 2027, driven by increases in both the consolidated and unconsolidated mining operations. In the contract mining segment, current quarter results benefited from the commencement and wrap up of the Palm Beach County Drag Line Services Contract. This contract combined with increased customer requirements and deliveries at the limestone mining operations led to a 34% increase in revenues net of reimburse costs and substantial year over year increases in both operating profit and segment-adjusted EBITDA. Operating and profit increased to $3.8 million from $1 million, and segment-adjusted EBITDA increased to $6.3 million from $3.9 million. For both the second half and full year of 2026, we expect substantial year-over-year growth in contract mining, operating profit, and segment-adjusted EBITDA. Second half results are expected to moderate from the strong first half due to lower anticipated customer demand. In 2027, a full year of earnings contributions from Palm Beach Dragline Services contract together with potential new deals in the pipeline, are expected to lead to significant operating profit improvement. In the minerals and royalties segment, operating profit increased to $6.7 million from $5.2 million, and segment-adjusted EBITDA increased to $7.7 million from $6.1 million. The improvements were primarily due to a 46% increase in royalty revenues driven by higher oil prices and a favorable adjustment to prior performance. period pricing estimates, partly offset by lower second quarter earnings from our IGR investment. For the remainder of 2026, we expect increased income from our IGRE investment and higher oil prices to be more than offset by anticipated production declines and a changing mix of production and development activity. As a result, operating profit and segment-adjusted EBITDA are projected to decline compared with the first half of 2026. as well as the second half and full year 2025. In 2027, we expect the minerals and royalty segment to continue generating meaningful earnings and cash flow, although operating profit is expected to moderate, primarily due to normal production declines and a continuation of the current moderate pace of domestic development activity. At the consolidated level, we expect a strong performance generated by reportable segments during the first half of 2026 to drive year-over-year improvements in full-year 2026 consolidated adjusted EBITDA, which excludes the solar impairment charges and a $7.8 million pretax pension settlement charge recorded in 2025. Given the effect of changes and potential curtailment and impairment charges in the second half of 2026. We anticipate second half and full year operating profit and net income will be lower than in 2025. Consolidated adjusted EBITDA in the second half of 2026 is expected to remain strong, although the pace of growth is expected to moderate relative to both the first half of 2026 and prior year periods. From a liquidity standpoint, at June 30, 2026, we had outstanding debt of $120.1 million, Total liquidity was $114.6 million, consisting of $45.5 million of cash and $69.1 million of availability under a revolving credit facility. While we anticipate a moderate year-over-year increase in cash generated from operations, cash flow before financing is projected to remain a use of cash in 2040. reflecting our planned investment activity. We expect cash flow before financing for 2026 to improve modestly over 2025, and we expect that improvement to continue into 2027. With that, I'll turn the call back to JC for closing remarks. Thanks, Liz. To wrap up, the second quarter demonstrated the strength.

of our core operating businesses. Our teams are executing well. Contract mining continues to demonstrate the value of the long-term growth platform we're building. And our other businesses continue to expand capabilities that can contribute over time. At the same time, we're focused on directing capital only towards the opportunities we believe offer the strongest risk adjusted returns. We remain focused on execution, liquidity, disciplined capital investments and long-term cash flow generation. Reisman, investments mature, and new contracts contribute more fully. We expect our businesses to support improving results and stronger cash flows over time.

We'll now turn the call over to any questions you may have. As a reminder, to ask a question, simply press star 1 on your telephone keypad. Again, that is star 1 to ask a question. And our first question comes from Douglas Weiss with DSW Investments. Please go ahead.

Hey, good morning. Good morning. So congrats on another good result. I guess starting with MLMC, It seems like there are a few things going on at once there and I was hoping to just get a little more clarity on each. I guess you alluded in the queue to reduce demand for MLM's use generation. My sense, I would have thought that demand pretty steady given the growing need for electricity. Could you just comment on that?.

Yes, sure. It's a good question. So there's three things that we're One is we deliver the fuel, the power plant generates electrons, and TVA takes the electrons to put onto the grid. You know, we stand ready to deliver the fuel when it's needed, as we're contractually obligated to do. The power plants... operates when it is able to operate. Although, as you know, because you've followed the company for a long time, the power plant goes through both planned outages when it's sort of periods of routine maintenance. Those are typically done during the spring and the fall when the weather is pretty moderate and, you know, there's... not the same level of demand on the grid in general, because of less air conditioning needs and things like that in the south. So you got the planned outages, but then you also have the unplanned outages. And as you know, over the last several years, the plant has had a number of periods of unplanned outages. During the second quarter, there was a pretty significant unplanned outage at the plant. We knew it was going to be down for a while while they were repairing it. So we diverted our work to reclamation activities that go through, you know, those costs get charged the balance sheet as opposed to the income statement because we've got a reclamation liability. Okay. So you've got the plant that has planned and unplanned outages, but then the other piece of this is when the plant is up and available, is TVA taking the electrons or not? It's called dispatch. There are times when generally, yes, from a macro standpoint, increasing demand for data and other things, certainly is increasing demand. There are periods of time when, you know, TVA finds itself with excess electrons and it will choose which assets it's going to dispatch. tax law convoluted. I think distorting tax law sometimes causes renewables to be dispatched ahead of base load generation. because of the tax credits. And then there are just other times when the weather turns out to be really mild or other things happen and TVA just doesn't need the electrons. So as we sit on the backside of this, we're subject to power plant, being up and running and TVA needing the electrons. Our, you know, our history is our history. The forecast is based on what are we hearing from our customer and TVA. But, you know, the indications that we get are general and not specific. know day by day or week by week and so it can change from that our current expectation um is what it is, and we're just going to have to see how that plays out with the power plants and TVA with respect to electrons.

Is that exploiting? Yes. Yes, no, that's helpful. And as far as the receivable, you know, it doesn't sound like from a practical standpoint there's much... in the near term to be done on that except, you know, wait for the plant to become pretty.

more fully utilized you know I can tell you it's we're paying a lot of attention to it we're keenly focused on it and we're as we have we will continue to you enforce and pursue the clear rights to remedy that we've got in our contract. Mm-hmm. Okay. Contract. Which? Contract was in 1995. It runs until 2032. It's been the same contract throughout, so we're pretty familiar with the terms.

Right, right. Okay. Let's see. You know, I had a kind of bigger picture or I a longer term question on power production in North Dakota. I was reading about proposals to extend a pipeline from the Bakken across North Dakota. I'm just curious how likely you think those projects are to go forward or that project is to go forward. And... If that would have, you know, potentially introduce new gas fired competition into the region over the next I guess, over the next decade? Well, so the pipeline.

I mean, there's multiple pipeline projects being discussed up there. in North Dakota. We're not a party to that, so it's hard for me to really comment on the likelihood or any of that. I can tell you that it's an incredibly energy rich state with tremendous coal and oil reserves and then the associated natural gas that comes with the oil. The state is an energy exporter. And, you know, I think there's lots of opportunities for the the North Dakota generation industry to support more generation. You know, there's a lot of data, there's a lot of other demand in the upper Midwest that can be served. And, you know, I don't know, I don't think that we really view many of those projects as real competition for us. Mm-hmm. Okay. At the same time, there's also a lot of transmission being developed. just as there's various stages of pipelines being built. There's a lot of transmission work underway in the upper Midwest, North Dakota and beyond. which, you know, you can, I think of transmission like a highway system. If you didn't keep expanding your highway system, you'd end up with congestion. But if you keep expanding your highway system, which in this case is transmission, you don't really have the congestion problems and the electrons can get to the markets they need.