Good morning. My name is Denise. And I'll be your conference operator, today. At this time I would like to welcome everyone to the NACCO Industries Q1 2019 Earnings Conference call [Operator instructions]. I'd like to turn the call over to Christina Kmetko. Please go ahead.

Thank you. Good morning, everyone. And welcome to our 2019 first quarter earnings call. I am Christina Kmetko, and I'm responsible for Investor Relations at NACCO Industry. I will be providing a brief overview of our quarterly results and business outlook. And then I will open up the call for your questions. Joining me today are J. C. Butler, President and Chief Executive Officer of both, NACCO and North American Coal and Elizabeth Loveman, NACCO's Vice President and Controller. Yesterday, we published our first quarter 2019 results and filed our 10-Q. Copies of our earnings release and 10-Q are available on our website. For anyone who is not able to listen to today's entire call, an archived version of this webcast will be on our website later this afternoon and available for approximately 12 months. As we begin, I would like to remind participants that this conference call may contain certain forward-looking statements. These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements made here today, in either our prepared remarks or during the following question-and-answer session. We disclaim any obligation to update these forward-looking statements, which may not be updated until our next quarterly conference call, if at all. Additional information regarding these risks and uncertainties was set forth in our earnings release and in our 10-Q. Before we talk about the quarter, let me give you an overview of the change in our segment reporting. We are now reporting three segments. Coal Mining, North American Mining and Minerals Management. Previously, we've reported North American Coal and NACCO and other. The Coal Mining segment operates surface coal mines pursuant to a service-state business model under long-term contracts. This segment includes our legacy surface…

Your first question comes from Mitchell Lolley with Nixon Capital.

So the extra segment disclosure is quite interesting, and it makes me think of several questions to ask. And first, maybe starting off with the bigger picture, it sounds like there has not been a meaningful change to the 2019 outlook that you laid out on the fourth quarter call. I guess a major stand out is the massive jumping royalty income, but other than that, it sounds like the coal business and the North American Mining operations are performing about in line with your expectations earlier this year, is that fair?

That's fair.

So now addressing the royalty income component, I mean you generated $11.7 million of royalty operating profit in the first quarter, which is actually more than what you've historically generated in a typical year. So just a couple questions on that. First, was there anything unusual that drove the huge spike in royalty income this quarter, like possibly the receipt of up front lease bonus payments or was a lot of the royalty income actually just tied to increased production activity in the quarter?

This was entirely production activity.

And can I add one thing? For upfront lease bonus payments, we recognized that over the primary lease terms, so you wouldn't see a spike in earnings as a result of that. It was recognized over five years, so you would never see a spike because of lease bonus payments.

And J.C., based on what you wrote in your annual shareholder letter, is it accurate to assume that you guys are actively pursuing more growth opportunities in the royalty business?

We are. I mean one of the reasons we have this segment is because we have these reserves that we've owned for a very long time. And because of technological developments with hydraulic fracturing and infrastructure that's come into Southwestern Ohio in particular -- the Southeastern Ohio, it's really turned into a very substantial income stream. The development of that is really up to the companies that developed and produced from those wells. It's not something that we do directly, that we benefit from the royalties that come out of that. We've recently hired an experienced petroleum engineer that's got expertise in this area to help us optimize, maximize our income stream that comes out of these reserves, but also look at ways that we might strategically expand that in the future.

And then just to make sure I'm understanding the earnings release correctly, you're saying that royalty income for the remaining three quarters of 2019 should also increase year-over-year?

Yes, should increase year-over-year. Exactly how much, as we've said in the earnings release and in the risk factors as well, so much of this is up to what the third-party producers do. If natural gas prices drop, they can decide to shut off the wells. Every well has its own unique decline curve. I mean there's lots of other things that can happen. They also could develop additional wells that could increase it but we're not really in control of any of that. But we do expect increased income year-over-year.

Mitch, just to clarify though, the one thing we did say, we don't expect it to be at the rate that it was in the first quarter.

No, I understand that. If we can move to the limestone business. It's pretty interesting to see what the new segment disclosure that North American Mining actually generates a material amount of profit for the overall company, and I was wondering if you could maybe start by talking about some of the business development initiatives that you're pursuing in 2019 for North American Mining.

Well, I mean I can speak generally about that. I'm not going to provide any specifics. North American Mining is a segment. Probably the best way to describe that is it's the home for business development that's not coal. Any coal business development of course would be in that segment. So business development for North American Mining, of course, will be expanding its existing core business, which is really maintaining an operating draglines for lime rock producers, largely in Florida. And we've been successful the last couple of years growing that business pretty substantially in Florida. We've recently added a contract outside of Florida. We picked up equipment beyond draglines. And we've added very small operation at mines, sand, so it's beyond limestone. We're going to continue to look for ways to expand that business, as I say beyond draglines, beyond Florida, beyond lime rock. In the perfect world, we would also be able to expand the scope of what we do for a quarry operator or a mineral producer, so that we ran really our integrated solutions business model like we do at the coal company or at the coal business, where we really run the entire mining operation and then hand off the coal to a customer who, in a mine-mouth relationship, then produces electricity, or in a couple instances, produces activated carbon. In a perfect world, we'd operate for a lime rock quarry or a mineral producer, where we would run the entire mining operation and then hand off the product to them for transformation into whatever product it is that they sell. So we've got a lot of efforts focused on this. We've added people to North American Mining, specifically, dedicated to business development. We also are tapping into resources that we have at the North American Coal and NACCO Industries' parent to help with that. And we, from time to time, borrow people from our mining operations to come help on special projects. So that's all contributed to, I think the business development success that we have seen, and hopefully we will continue to see.

And this year I was wondering to what extent are you taking advantage of this really high royalty-income stream, and maybe using that to fuel some of the incremental business development activity at North American Mining. I mean is that how you think about it at all?

I mean, sure. We've got a very conservative balance sheet, which allows us to really focus on doing the right things for the business over the long term, including business development. North American Mining has been a real focus of ours in growth for the last really, three years. It's when we decided to put a lot of effort into this so sure, using some of the resources that we have available in the company to support growth when it makes a lot of sense.

And I also noticed, I guess this was last quarter, and you mentioned it that you recently won your first sand mining contract with King William in Virginia. And that's also the first contract North American Mining has won outside of Florida. So could you talk about some of the value NACCO's mining services add to quarry owners? And why some of these big companies like Martin Marietta or CEMEX decide to hire North American Mining as a service partner?

I mean, sure. This is what we do. We're experts at mining, whether it's aggregates or coal or other minerals. We understand how to optimize the equipment. We understand how to staff it. We understand the whole dynamic inside mining. Our North American Mining business, of course, grew out of the expertise that we developed in coal mining. We run the company as a single company, so all these skills transfer between businesses. And this was maybe an annual report letter, we feel that we can bring our expertise to the mining operation at a quarry, for instance, and allow the customer -- if we focus on the mining, the customer can focus on what it really does best, what their core skills, which are crushing and processing the act that lime rock and instance of a lime rock quarry and then marketing and selling it. Those aren't skills that we have, but when you think about it, it's the same thing as a coal mine with a mine-mouth power plant. It's really a single thing that has to operate in perfect coordination to be successful. We go to a quarry and do the same thing. We can really be the experts at mining and allow them to be the experts at crushing and sizing their product and selling it.

And once you win a contract with, let's say, Martin Marietta or larger players, does that set you up, I mean does it get your foot in the door for later wins at some of their other quarries or…

Well, I mean I will tell you that our future success is dependent upon our past and current success. We are pretty open about the fact we view ourselves as a service business. And the quality of the work that we do depends on our ability to have additional opportunities in the future. I've got a lot of confidence in the work that we do and the quality that we bring to mining, the discipline that we bring to that. So sure. We're, of course, hopeful that the work that we do with any of these customers can lead to more opportunities.

Now switching topics just a little bit. I noticed you bought back more stock in the first quarter than you have in quite some time. Could you talk about what drove that decision?

We've had stock repurchase programs in place for a long time. I think some companies have a stock repurchase strategy if they just constantly are buying stock because it makes Wall Street happy that they're always buying stock. We believe that it makes sense to buy stock in a company when there's a good ROI. So we're spending shareholder money, and so we buy stock when we think it makes sense to buy stock. I will tell you we do it largely through 10B5 programs with broker dealers. So it's not like we're, on a daily basis, playing with any of this. We set a program in place and then let it execute.

And then lastly. So you're expecting to generate significantly more than $36 million of cash flow before financing this year, and that's net of all expenses and capital expenditures, so it's a lot of cash that you'll be able to allocate, however you see fit, plus you have $79 million or a little more than that, $79.1 million of cash sitting on the balance sheet. So under what circumstances would you return some of that cash to shareholders in the form of a special dividend? I mean the current payout is something like $5 million a year, so it's not like you have issues covering that.

If you look at the history of NACCO Industries and its many forms, even back when we had Hyster-Yale and Hamilton Beach as part of our company, we've always had a pretty disciplined approach of returning capital to shareholders through a reasonable dividend program and periodic share repurchase programs. We have, only once that I can remember and I've been here 24 years, only once can I remember paying out a special dividend. We're pretty clear in our annual report letter that we run the company with an eye towards taxable shareholders with a long term perspective. I don't know that paying a special dividend is necessarily in the best interest of taxable shareholders.

[Operator Instructions] And there are no further questions queued up at this time, I'll turn the call back over to management.

Thank you very much. If you do have any follow-up questions, my phone number is in the earnings release. Please feel free to reach out, and I will follow up with you then. Thank you, have a great day.

Thank you for participating in today's NACCO Industries Q1 2018 Earnings Conference Call. This call will be available for a replay beginning at 12 p.m. Eastern Standard Time, today, through 11:59 Eastern Standard Time on May 9, 2019. The conference number for the replay is 237-8565. The number to dial for the replay is 1800-859-2056. This concludes today's conference call. You may now disconnect.