NACCO Industries, Inc. (NC) Earnings

Management highlights

• JC mentioned strong start to 2026 with 43% year-over-year and 45% sequential increase in operating profit. Utility coal and contract mining segments drove growth. Adjusted EBITDA increased 28% year-over-year and 15% sequentially. • Utility coal mining segment: Mississippi Lignite Mining Company was a main driver of operating profit increase. Pivoted effectively during customer's power plant outage, redeployed crews to reclamation activities, reducing asset retirement obligation. Lower cost per ton minimized effect of reduced deliveries. • Contract mining segment: Commenced activities under multi-year dragline services contract in Florida for U.S. Army Corps of Engineers project. Excited about opportunity to expand in large-scale infrastructure projects with electric drive M-TEC draglines. Expect to commence operations in Arizona limestone quarry in second half of 2026. Changed depreciation method for drag lines and other large mining equipment to units of production. • Minerals and royalties segment: Higher earnings from IGAR equity investment offset lower natural gas revenues. • Mitigation resources: Acquired 958 acres in Tennessee, project expected to deliver mitigation credits in 2029. • Capital expenditures: $33 million in first quarter, anticipate additional investments in 2026 for business development.

Guidance

• Consolidated: Anticipate meaningful year-over-year improvements in operating profit, net income, and adjusted EBITDA in 2026, excluding $6 million after-tax pension settlement charge in 2025. Growth expected to moderate in second half of 2026. • Utility coal mining: Expect meaningful increase in operating profit in first half of 2026, partly offset by lower earnings at unconsolidated mining operations in second half. • Contract mining: Anticipate substantial year-over-year increase in operating profit and segment-adjusted EBITDA due to earnings contributions from new contracts and momentum from 2025 activities. • Minerals and royalties: Expect year-over-year decrease in operating profit and segment adjusted EBITDA in 2026 due to production declines in natural gas assets and changing mix of activity. • Mitigation resources: Expected to generate profit in second half of 2026 and move toward more consistent results as business expands.

Segment performance

Utility coal mining segment: Operating profit was $7.4 million in 2026, a substantial increase from $3.8 million in 2025 first quarter. Segment adjusted EBITDA increased to $9.7 million from $5.8 million in prior year. Efficiency actions and reclamation progress at Mississippi Lignite Mining Company drove improvement. Contract mining segment: Revenues, net of reimbursed costs, increased 32% due to commencement of Army Corps of Engineers Dragline Services Contract and increased customer requirements. Operating profit and segment-adjusted EBITDA saw substantial year-over-year increases. Minerals and royalties segment: Higher first quarter 2026 earnings from IGAR equity investment mostly offset lower natural gas revenues, resulting in comparable year-over-year operating profit. For full year 2026, expected year-over-year decrease in operating profit and segment adjusted EBITDA due to anticipated production declines in natural gas assets and changing mix of production and development activity. Mitigation resources: Expected increasing profitability over time from sale of mitigation credits and expansion of reclamation and restoration services. Mid-April 2026 acquisition of 958 acres in Wilson County, Tennessee, with credits anticipated in 2029.

Analyst Q&A

• Q: Hey, good morning. Good morning, Doug. So congrats on the good quarter. I guess starting with Mississippi lignite, it sounds like the plant maintenance has been completed and it's back to business as usual.

  A: Yeah, yeah, the outage that occurred, you know, the unplanned outage that occurred earlier in the year has been completed, and the plant is actually running pretty well, which, you know, helps us because the best situation for us is to, you know, be mining at a steady rate so we can, you know, operate most efficiently. So that's a nice positive.

• Q: Is that plant... Are you able to say whether that plant is now providing attractive returns to its owners given the evolution of electricity markets?

  A: You know, we don't have a lot of exposure to the electricity side of that equation. So it would be, I think it would be reckless for me to speculate on how exactly that's playing out right now. Generally, there's high demand for electrons that's supportive of prices, but you'd have to work through the mechanics of the PPA that they have, sorry, the power purchase agreement they have with TVA in order to really figure out how that works. I just am not privy to those details.

• Q: On the contract on the North American mining, so you've had a contract to start this quarter, and then you have a couple more starting through the year. You know, last year, I guess there was a big drop-off in the second half, and I think that was partly weather-related. Would you anticipate a more steady sort of cadence through this year and even growth through the year?

  A: Yeah, I mean, you know, it's always subject to, you know, what could happen in the interim that would cause something to go, you know, directions we don't anticipate. But as we added, you know, we're ramping up production at the new project in Palm Beach County, the U.S. Army Corps of Engineers project. We've got one drag line operating. Another one is just on the – it's either just been commissioned or will be shortly. Third drag line is going to be in there later in the year. So we're going to see increasing levels of production there in support of that project, which is great. Then in the second half of the year, we're going to start, you know, operating the drag line in Arizona. which is great. Those are the main two new contracts that we're layering on to our existing contracts this year.

• Q: And then... You had a large... Oh, sorry, one other question on North American mining. In terms of how you account for capital expenditure on that S or on that division, what is the sort of decision point on whether something gets expensed in the quarter as opposed to allocated to capital?

  A: Liz, that's a you question. Liz: Yeah. I mean, you know, normal repairs and maintenance are expensed if it's something that you know, is going to benefit us over the long term, like, you know, a drag line, you know, a rebuild on a drag line tub, those kinds of things that are, you know, expected to generate, you know, we're going to be able to use those over a longer period, and they meet our capitalization criteria, we would capitalize those. So just general repairs and maintenance as expense, other things are capitalized. It's kind of a major component, I guess, is the way you can think of it. For a large drag line, the tub is the base that the drag line sits on. You know, these things, the big ones walk, which is, you know, fascinating technology, but it sits and rotates on a tub. Others, you know, are on very large tracks, kind of like you'd see on a truck. you know, mobile crane or a bulldozer kind of thing. It operates on track. So large components get capitalized. Everything else gets expensed. If it's going to extend the useful life, it gets capitalized. I guess that's another way to say it. Like if you, you know, take a boom down and do a complete boom rebuild, that probably gets capitalized.

• Q: Then you had a large. Just on that point.

  A: Yeah. You know, we talk about the fact that we pursue contracts that may, not all contracts have capital up front, but we do contracts that have initial capital up front when we may put a drag line in place or in mitigation resources, we're buying mineral interests or, sorry, in minerals and royalties, we're buying mineral interests, mitigation resources, we might buy land. But generally, the maintenance CapEx that we have in our projects going forward is a low number as a percentage of the original. So, you know, I don't want you to think that any of these things that Liz was describing, you know, tub repairs, boom rebuilds, I mean, they come up every so often, but they're a small portion of the, you know, depreciation expense that we incur over the life of a contractor.

• Q: Let's see. Oh, and in terms of Thacker Pass, I believe that's supposed to ramp next year. I think lithium prices have come up quite a bit. Anything you're seeing there that's worth updating on?

  A: I'm actually headed out there next week. you know the plant is progressing very nicely uh we're doing initial work on mine development uh we've got our you know our our office trailers established where the mine site will be which is directly adjacent to the processing plant uh that i mean that project's moving along nicely i look forward to being out there next week to see it you're right later this year early next year is when we anticipate It's really late next year. I'm off a year. It's late 2027 is when we anticipate, you know, making lithium deliveries to them, which they'll then be processing. But everything seems to be on target. And they do a very nice job of updating their website with what's going on. So if you wanted to look there, they update that. They do a great job giving the project updates. And I think they just filed their annual report today. So probably good information out there.

• Q: You had a large expenditure this quarter for mitigation resources. I think that's independent of your comments on buying land in Tennessee. What was the $32 million? What did that relate to?

  A: So our total CapEx for the quarter was $33 million, right, Liz? Liz: Yes. Christy, you're nodding. That was made up of the purchase of land in Tennessee and expenditures on the drag lines for the project in Florida that we just discussed, the Farming Corps of Engineers project. That's really what makes up that $33 million. Got it. And consulting. So there's other things. There's other things in there, too. That's not 100% of it, but it's certainly a majority of those expenditures are related to the land purchase for mitigation resources and the drag lines for contract mining.

• Q: And when you make a large land purchase like that, what's the payoff in terms of time? When do you start to see cash realizations from that?

  A: Oh, I mean, you know, the nature of our projects typically, there's always exceptions, but typically we expect to get assets deployed pretty quickly and start generating cash returns. You know, if you look at, I'll give you one example in our minerals business. We, for the most part, look at projects that have payback, complete payback within five years. And then, you know, these assets delivered for decades after that. So, you know, we always look at, as we're measuring, you know, NPV and IRR on these projects, you know, the speed with which you get your capital back is a big factor in all of this. And, of course, you know, as we discuss internally all the time, the faster we can get our capital back, means we have capital that we can then redeploy into other assets, other contracts, other opportunities that build on this long-term business model that we've described in our investor deck. Right. And if you were asked about the Tennessee land, we had issued a press release when we acquired the land, and we noted that credits we anticipate will be available in 2029. There's a permitting that has to happen before the credits are available.

• Q: When you buy an asset, does that improve the utilization of your heavy equipment that you're using to improve that land?

  A: Yeah, so within the mitigation resources business, you know, when we started, we were just really doing the credits and contracting the dirt work. Very quickly, we realized that we should be doing our own dirt work because we can better control our costs and our schedule. And honestly, we're pretty good at what we do. So we established a business inside mitigation resources that we call NIPRA Services. that does dirt work not only for mitigation resources' own projects, but from time to time we go identify, that team identifies other restoration and reclamation projects that can be done for third parties. So we're able to utilize the equipment. And this is smaller equipment. This is not like stuff that we would operate at a big coal mine. This is smaller kind of things that you can haul under the road. So we do not only our own dirt work, we do real work for third parties as well, which has turned out to be a really interesting business with a huge addressable market and I think a lot of opportunity.

• Q: I guess last question on the minerals business. So given the increase in oil prices and appreciating that there's a lot of volatility in those prices. Are you getting any indications on whether that's going to lead to more wells over the rest of the year in terms of your partners or, you know?

  A: Yeah, you know, I mean, they, like everybody else, are watching what's going on with caution. You know, several years ago, we went through the period where all the producers, not all, many of the producers were, it's almost like, you know, an internet business where it was all about the clicks. It was about how many rigs did they have going and how many wells they were drilling and not what was going on with their cash flows. And they all, a bunch of them got burned by that. So, you know, amongst the more sophisticated producers, which are primarily the folks that we work with, They're being cautious not to get out over their skis by taking on too much debt or bringing in private equity money that they need in order to fund a huge drilling program. Now, I think that it's sustained. I mean, I read the same stuff you probably read in the Wall Street Journal and other places. But, you know, as if we have continued higher oil prices, They don't necessarily have to be at the level they are. Would that probably lead to future increases in development? It probably would. But I think they're all waiting to see how this plays out and what really happens to oil prices over the long term. My own view is if all of a sudden somebody waved a magic wand to the Middle East and everything was settled, which I don't think is going to happen, oil prices are going to drop because The immediate stress will come out of the system. Oil will begin flowing through the strait more regularly. But I think there's going to be a risk premium added to global oil prices for quite a while. And, you know, that's going to affect how people think about drilling in the Permian and other oil-producing regions of the United States. Purely my opinion based on what我've been reading, but it feels like how it plays out. Mm-hmm. Ultimately, that should be good for the oil reserves that we own. I think ultimately that spills over into natural gas to some extent, although we really haven't seen much movement in natural gas prices thus far, even though what's going on in the Middle East has disrupted LNG shipment. My own opinion is Over time, this is a positive for U.S. LNG exports, and we're less heavily than we used to be, but we're still significantly weighted towards natural gas. So ultimately, that should play into a really nice long-term benefit for our natural gas asset. Yeah, right.