Ladies and gentlemen, thank you for standing by, and welcome to the NACCO Industries Third quarter Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I'd now like to turn the call over to Ms. Christina Kmetko. Please go ahead.

Thank you. Good morning, everyone, and welcome to our 2020 third quarter earnings call. I am Christina Kmetko, and I am responsible for Investor Relations at NACCO Industries. Thank you for joining us this morning. 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 third quarter 2020 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 For anyone who is not able to listen to today's entire call, an archived version of this webcast will be on our website later this afternoon and available for approximately 12 months. Our remarks that follow, including answers to your questions, contain 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. These risks include, among others, matters that we have described in our earnings release issued last night and in our 10-Q and other filings with the SEC. We disclaim any obligation to update these forward-looking statements, which may not be updated until our next quarterly earnings conference call, if at all. Now let me discuss our 2020 third quarter. I will cover our consolidated results first and then provide the highlights for each segment. On a consolidated basis, our third quarter consolidated operating profit improved 8.5% to $9.4 million, up from $8.7 million in 2019. This improvement was driven by a number of factors, the largest thing, a reduction in our unallocated employee-related costs. Higher earnings at…

[Operator Instructions] First question comes from Andrew Kuhn with Focused Compounding.

I want to start with the voluntary retirement program. I was wondering if you could talk a little bit about how long have you been considering a program like this? And were there any specific events that led to this decision? Or is this more of a response to the shift in public opinion towards coal? Is it changes in the economics of wind versus coal with future regulations you think or might be expecting? Maybe if you could talk a little bit about that, that would be great.

Sure. Thanks for calling in. Thanks for the question. I guess I would say that we are always paying a lot of attention to our overhead costs. Good rule to live by, whether it's a business or your personal life, anybody's personal life. So -- and something that we watch pretty carefully. We measure it. We look at it. We study it and think about it. And I would say that it certainly is partly related to challenges that we see in the coal segments. We, earlier in the year, lost Camino Real because of a termination event between our customer and their customer. And to a much lesser extent, Caddo has now gone into reclamation, but that's kind of immaterial. And we've got lower production levels at Sabine. I mean there's no question that there's -- there are challenges in the coal segment. But I'd also point out, there is -- I'm sure you've noticed the changing nature of our business, right? We've had a lot of growth over the last several years in our newer businesses. North American mining is growing very rapidly. We're seeing initial growth in our Minerals Management business. We certainly anticipate more of that, and we've started this new Minerals Management business called -- I'm sorry, Mitigation business called mitigation resources of North America. The growth in those businesses will change the needs that we have from an overhead G&A kind of standpoint. And so as we think about those dynamics, we also look at the investments that we've made over the last several years in new tools and seeing the better utilization that we get out of these new software platforms. And it's sort of -- it's providing us with an opportunity to see that we can operate from an overhead standpoint, more efficiently, lower cost. I always think that's a good thing to do. So I would say -- your question started with, we've been thinking about it for a long time. I'd say we're sort of always thinking about our overhead structure. And so this seemed like now was a confluence of factors that said now is probably a pretty good time to think about doing that.

Got it. Right. My next question would be you're planning to invest $25 million in mineral and royalty interest during 2020 and 2021. Are these most likely to be U.S. oil rights as opposed to anything foreign or anything that's mainly natural gas? And is your reason for making these kinds of investments purely about diversifying away from being just Utica natural gas? Or would you say the price decline in oil over the last year played a part in where you've chosen to focus your investments?

Yes. So it's -- I mean, it is -- this is one of our core growth platforms, our minerals management business. We, as you know, have a vast majority of our legacy investments are -- were made decades ago really in the Marcellus and Utica. It's largely natural gas. And I think as we've stated publicly, but I've certainly said, we're looking to diversify what we own in the mineral space. So that will -- we're heavily weighted towards natural gas now. So that means we will probably be investing in oil as opposed to natural gas. I will tell you that we're focused in the United States, not offshore at all. And we view this as a core part of diversification. I wouldn't -- I think one of the things you mentioned was diversification away from coal. I wouldn't say it's away from coal. I just look at our company and say, "Gosh, any business does better when it's got a diversified portfolio of customers and suppliers and business models and skill sets and sources of income. And so the activities that we've been pursuing pretty aggressively over the last several years, and we intend to continue to pursue reflect that desire to grow and diversify, create additional platforms that we think can be successful contributors to our business.

Got it. And then finally, I guess, maybe the question is, how do you want investors to think of NACCO? Are you a mining services company? Are you an energy stock? Are you a coal company? Basically, what industry would you tell an investor they are buying into when they purchase NACCO shares? Then I'll jump back in the queue.

Yes. Thank you for the question. I will tell you that it's a question that we are spending some time on right now, thinking about how to do a better job of describing who and what we are. I mean, historically, we've said NACCO industries -- we all know historically, NACCO Industries was the parent company for North American Coal and Hyster-Yale and Hamilton Beach, Hyster-Yale and Hamilton Beach are now separate companies. So today, NACCO Industries is the parent -- public parent of North American Coal and North American Coal has a group of growing businesses inside it, including its legacy coal operations. Those businesses that we're growing are becoming more like siblings than children, if you think of typical org chart kind of structure, and we're thinking about what all that means with respect to how to think about NACCO. The way I think -- mean, short of an eloquent way to describe it. That will -- hopefully, we'll be able to produce here in the next several months. The way I describe it is we're a very strong legacy coal business. We're really in the mining services business because the nature of our management fee contracts were -- which are all but one of our coal mining contracts really are structured in a way where we're providing mining services. We only have one mine where we're actually in the business of selling coal and making our profits off the margin. The Limerock business started as a very small business, helping people with their maintenance and operation of draglines, it's now turned into a very sizable business. We're now the largest operator of draglines for any purpose in the United States. And it's turned into a kind of a really nice growth platform where we're providing mining services, not only in aggregates, but we're doing some sand work. And as you know, we're going to be developing a lithium mine with a management-fee approach. So again, in mining services. And then we have our other two businesses that are the Minerals Management space, which is really a royalty business. Invest in minerals, collect royalties. It's very low overhead investment kind of business, and we've got our mitigation business that grew out of our strength in our reclamation work and environmental work at our coal mining operations, but we've turned that into a business. So I'd say in some ways, we're headed back towards having a portfolio of businesses and the natural resources and mining services industries. But how exactly to describe that in a succinct, eloquent way, I mean, that's something we're trying to figure out. And Andrew, that's going to include rethinking everything from how we think about marketing materials, we're going to talk about potential new partners to how our websites are designed. But it's a very topical question that you've identified. And hopefully, I've helped describe at least what our thinking is at the moment.

[Operator Instructions] And we have a question from Trey Henninger with DIY Investing.

I wanted to -- my first question about North American Mining. Now that the North American Mining division has positive operating earnings. Do you expect to see operating leverage from the future revenue growth opportunities that you're pursuing or do you expect earnings to grow linearly with future revenue growth?

Well, of course, the answer is always, it depends on the mix of new business that we bring in. And the profit growth profile of any new project. But I would say, in general, we believe that we have made the investments that we need to make in the administrative platform, kind of the backbone of the North American Mining business. I think the largest of those investments have probably already been made, and we have the infrastructure that we need to continue to drive that business forward. So I would expect that we're going to see in general, probably pretty good operating leverage as we continue to grow that business. We think we can add quite a bit without meaningful additional overhead cost. And I will say we've got a headquarters in the Miami area. We have a secondary warehouse and service center in Central Florida. I mean if we find that we are establishing another pocket of business somewhere in the United States, we may end up putting another satellite facility to serve a number of customers. But that really would be -- that would probably come after we were establishing a toehold in another part of the U.S. It wouldn't be an investment that we'd make ahead of time. So I think, yes, I think there's pretty -- I think there are good opportunities for the operating leverage that you mentioned in that business. Albeit, there may be some stair steps along the way.

Understood. My next question is about the minerals mining or Minerals Management investments that you're talking about making. So you mentioned making somewhere in the range of $25 million in investments over the next year. Can you speak at all to the types of return on investment that you're seeking from those sorts of investments, either in terms of ROI or payback period?

I mean -- we have not disclosed our specific targets. And each -- as we look at each type of mineral that we might acquire, and that's with regards to whether it's gas or oil, which basin is it in. But I would also, what stage of development. We may invest in some undeveloped mineral reserves that we think have reasonable likelihood of future development. We may invest in some recently drilled wells that are yet to be completed. We may invest in some that are -- were drilled and completed several years ago, and they're lower and they're further out in their decline curve. So each of those is going to have its own return profile. But I would say that the business model that we are trying to build, and we think that we're going to be successful in building is one that's going to deliver returns on capital that will be certainly in the teens. And that's -- but that's going to take some time to build. We have our legacy operations, we have very, very little invested in them because the investments were made a long time ago. We've recently added -- we now have 3 people in this business that are really driving us forward. And we've made some investments in some technology and software tools to help them. And it's really now building out the platform that eventually will get us to a business where we've got, we think, very nice returns.

So are those direct investments in minerals or is it more similar to the $2 million investment where you've purchased public securities?

Yes. The $2 million purchase of public securities, was a unique point in time when certainly public company stocks in the royalty space have been beaten up, so we feel that we were able to get a jump-start in our diversification efforts by making that investment. But that is not our primary interest. Our intent is to buy mineral interest or royalty interest, which is really very similar to a mineral interest. It's just one step removed. We intend to do that directly as opposed to doing that through investments in public companies that are doing exactly the same thing that we're thinking about doing. That first investment was really an opportunistic jump-start as we saw it.

Okay. And so just to be clear, the Minerals Management segment, if you were to invest in, say, oil reserves, you don't have any plans to develop those reserves yourself, but simply to earn the royalties on them when partnering with another developer?

You're correct.

Becoming an oil or is it just the reserves?

I'm sorry, can you just say that last part again?

So the question is more structured, like are you becoming like an oil E&P company? Or are you just holding the reserves to seek the royalties basically?

We are owning the reserves to seek the royalties. In some instances, those will already be leased, in some instances, they will already be leased and developed, in some instances, they might not be leased yet.

[Operator Instructions] And we do not have any telephone questions at this time. I will turn the call over to the presenters.

Thank you very much for joining us. J.C., did you have any follow-up concluding remarks you wanted to make?

No, Christy, I just want to thank the callers for their questions.

Great. Thank you again for joining us today. We do appreciate your interest. And if you have any follow-up questions, my information is available on our earnings release, please feel free to give me a call. Thanks so much, and have a great day.

Thank you for participating in today's conference call. This call will be available for replay beginning at 11:30 a.m. Eastern Time today, November 3, through 11:59 Eastern Time, November 10, 2020. The conference ID for the replay is 1574089. Once again, the conference ID for the replay is 1574089. And the number to dial for the replay is (800) 585-8367. Once again, the number is (800) 585-8367. This concludes today's conference call. You may now disconnect.