NACCO (NC): First Earnings Report as a Standalone Company
Two days ago, NACCO (NC) released its first quarterly results as a standalone company. Yesterday morning, the company had its first earnings call as a standalone company. The stock dropped 10% following these events. I’m not going to write about NACCO each quarter. But, some people asked for my thoughts on the quarter and the stock drop. So, I’ll do it this once.
Overall, the earnings call and the stock drop reinforced my belief that it could take a year or more of NACCO trading “cleanly” as a separate company before it’s well understood by investors. More on that at the end of this post.
First, the earnings release. Here, everything was as expected.
You can – and should – read NACCO’s full earnings release here. These are the items I highlighted:
- “After the completion of the spin-off, NACCO ended the third quarter with consolidated cash on hand of $93.9 million, debt of $58.7 million and net cash of $35.2 million. The cash on hand included a $35 million dividend received from the housewares business prior to the completion of the spin-off.” So, the company now has $5.13 in net cash per share.
- “NACCO’s board of directors will evaluate and determine an ongoing dividend payout rate at its next regularly scheduled meeting in November. When doing so, the board will consider the financial conditions and prospects of NACCO and North American Coal following the spin-off of the housewares-related business.” We’ll see what they decide to start the dividend at. The “financial conditions” are strong. The “prospects” are bleak.
- Not a highlight, but a note: The after-tax numbers are meaningless here because of a very unusual tax timing situation. The company had a 44% tax rate on continuing operations. In the future, I expect the normal tax rate for NACCO as a standalone company will be 23%. So, ignore all after-tax numbers.
- Centennial is NACCO’s consolidated (so NACCO bears all the risk) failed mine: “Centennial will continue to evaluate strategies to optimize cash flow, including the continued assessment of a range of strategies for its remaining Alabama mineral reserves, including holding reserves with substantial unmined coal tons for sale or contract mining when conditions permit. Cash expenditures related to mine reclamation will continue until reclamation is complete, or ownership of, or responsibility for, the remaining mines is transferred.”
- NACCO confirmed that the customer will bear the risks related to the Kemper plant / Liberty mine failure and NACCO will be paid to do the mine closure work: “The terms of the contract specify that Mississippi Power is responsible for all mine closure costs, should that be required, with the Liberty Mine specified as the contractor to complete final mine closure. Should the decision to suspend operations of the gasifier and mine become permanent, it will unfavorably affect North American Coal’s long-term earnings under its contract with Mississippi Power.”
- “…capital expenditures are expected to be approximately $21 million in 2018.”
- “While the current regulatory environment for development of new coal projects has improved, continued low natural gas prices and growth in renewable energy sources, such as solar and wind, could unfavorably affect the amount of electricity generation attributable to coal-fired power plants over the longer term. North American Coal expects to continue efforts to develop opportunities for new or expanded coal mining projects, although future opportunities are likely to be very limited. In addition, North American Coal continues to pursue additional non-coal mining opportunities, principally related to its North American Mining business and elsewhere where it might provide other value-added services.”
Then there was the earnings call. You can listen to the earnings call here. There were only two questions. One was from an investor. Neither was informative.
The first question was about how low NACCO could get SG&A over time. I think there was some confusion here. The “NACCO and Other” part of the company includes ongoing losses related to “Bellaire”. This is the company’s legacy underground mining liabilities.
A brief aside. NACCO in the sense of “North American Coal Company” (this is now actually a subsidiary of NACCO and its debt is non-recourse to the parent) was founded in 1913 as a coal broker and evolved into a typical coal mining company. It did things like underground mining of metallurgical coal – so “black”, commodity coal you ship via rail to steel mills and stuff – and then only in the 1950s started making the first steps in transitioning to focus on providing coal to power plants under long-term supply contracts (“steam coal”). By the 1980s, this transition was complete. But the company never entered bankruptcy or anything. So, NACCO has a continuous 104-year corporate history in the coal business. There are legacy liabilities they simply can’t get rid of. For example, they had to put money in a trust to clean up water in Pennsylvania. The cash outflows related to these liabilities should be small but perpetual. So, there will always be losses at “NACCO and Other”.
Then, on top of this, you had some salaries before the spin-off – like for the Chairman / CEO – that will go away. They said that on the earnings call.
So, I think there’s confusion about 3 different issues here. One, you have to wait a full year after a spin-off before you have truly clean SG&A numbers. Two, NACCO includes legacy liabilities that will always be there. In my past write-ups on NACCO, I always accounted for this using the past 20 plus years of data on losses from that parent company. And then, beyond that, SG&A isn’t going to go down if it’s actually related to the coal business or the expense of being a public company. For example, in the earnings call they mentioned that there has to be corporate management of a public company and that can either happen in Cleveland or Dallas and it’s probably cheaper to keep it in Cleveland.
The second question was from an investor who said he made a lot of money on the stock. I think he meant he bought NACCO before the spin-off and has since sold about 95% of his position in NACCO and may or may not have kept his Hamilton Beach (HBB) shares. He asked a question management obviously can’t answer: why did the stock go from like $20 at the moment of the spin-off to as high as $44? And he said that $44 was something like double the price of peers.
Obviously, management didn’t answer that question.
The one interesting part is that the investor mentioned coal prices and peers. Now, you can use multiples of other coal miners to value NACCO on the belief that the durability of coal for generating electricity is limited and NACCO’s customers will eventually shut down the power plants that NACCO is selling to. That’s reasonable. But, NACCO does not benefit in any way from higher coal prices. And this investor mentioned that coal prices hadn’t gone up and yet the stock had gone up. Management said NACCO’s business model has nothing to do with coal prices.
This just reinforced for me that it may take a year or more of NACCO trading on its own for even the shareholders of the company to understand what it does and what drives its free cash flow.
The 10% drop in the stock also reinforced this belief that it’ll take a while for NC to be well understood. Reasonable people can argue over whether the stock is worth $20 or $40. But, there was no new information in that earnings release or the earnings call that could possibly change the value of the company by 10%. It was a very boring quarter.
Two final notes on NACCO. Someone asked me what would cause me to sell my NACCO shares. If the company bought another consolidated coal mine, I’d almost certainly sell my shares regardless of their price.
Two, there’s a book called “Getting the Coal Out: A Centennial History of the North American Coal Company and NACCO Industries, Inc.: 1913-2013”. You can apparently order it from the company’s website. I know you can buy it used at places like Amazon, because I own a copy.
If you’re interested in NACCO stock, invest in the book before you invest in the shares.