NACCO Industries, Inc. Q4 FY2025 earnings call

• JC discussed a tragic safety incident in December 2025 at a Florida operation resulting in loss of two employees, and the company is reinforcing safety expectations.
• 2025 fourth quarter operating profit rose 95% y-o-y and almost 12% sequentially, with all three reportable segments showing improved y-o-y results, led by utility coal mining segment.
• Completed termination of pension plan, resulting in after-tax termination charge of $6 million.
• Utility coal mining segment reported gross profit this quarter after previous quarters of losses, with Mississippi Lignite Mining Company's team working to mine efficiently and control costs, but customer's power plant maintenance outage affected first quarter demand.
• Contract mining segment benefited from operational and strategic initiatives, secured multi-year dragline services contract for U.S. Army Corps of Engineers project and anticipates new limestone quarry in Arizona in 2026.
• Minerals and royalties segment grew y-o-y, with royalties from natural gas assets benefiting from higher prices and production, and Mitigation Resources expected to be profitable in second half of 2026.
• Anticipate significant capital investments in 2026, with majority related to business development opportunities, only investing if projects meet strict criteria.
• Reestablishment of National Coal Council in 2026, which advises on coal's strategic role in U.S. energy policy, reinforcing confidence in 2026 prospects.

Utility Coal Mining Segment

• Operating profit in 2025: $7.2 million, significantly higher than $2 million in 2024 Q4.
• Segment-adjusted EBITDA in 2025: $9.7 million, up from $4.2 million in prior year.
• In Q4, gross profit was achieved after previous quarters of losses, driven by more tons produced and sold, higher production efficiency, lower cost per ton sold, and production outpacing deliveries leading to capitalization of certain production costs into inventory. However, customer's power plant maintenance outage in mid-February affected first quarter demand, and any delay or further changes in demand, etc., could alter expectations. Expected year-over-year improvements in 2026 but partly offset by lower earnings at unconsolidated mining operations due to wind down of reclamation services at Sabine Mining Company.

Contract Mining Segment

• Revenues, net of reimbursed costs grew 9% year over year, primarily driven by higher part sales, partly offset by increased volumes of lower price times.
• Operating profit: $900,000 and segment adjusted EBITDA: $3.3 million were comparable to prior year. Improved margins at mining operations and increase in part sales offset by $1.1 million loss contingency related to safety incident and lower employee-related expenses. Expected significant year-over-year increase in results in 2026 due to higher customer demand, earnings contributions from new contracts, and continued momentum from 2025 activities. Secured multi-year dragline services contract for U.S. Army Corps of Engineers dam construction project in Palm Beach County, Florida, which is ramping up, and anticipate commencing operations in new limestone quarry in Arizona in 2026.

Minerals and Royalties Segment

• Delivered year-over-year growth in revenues, operating profit, and segment-adjusted EBITDA due to increased royalty revenues from legacy natural gas assets benefiting from higher prices and production, offsetting impact of lower oil prices and production. Lower employee-related expenses and higher earnings from equity investment also contributed. Newer investments expected to contribute favorably to 2026 results, but overall year-over-year decrease in operating profit and segment-adjusted EBITDA expected, particularly in second half of year, with forecast developed prior to recent Middle East developments which could change expectations. Royalties from natural gas assets benefited from higher prices and production, more than offsetting impact of lower oil prices and production. Mitigation Resources expected to generate profit in second half of 2026 and move toward more consistent results as business expands.

• Expect year-over-year improvements in consolidated operating profit, net income, and EBITDA in 2026.
• For utility coal mining segment, expecting year-over-year improvements in 2026 but noting any delay or further changes in demand, etc., could alter expectations.
• Contract mining segment expects significant year-over-year increase in results in 2026 due to higher customer demand, earnings contributions from new contracts, and continued momentum from 2025 activities.
• Minerals and royalties segment newer investments expected to contribute favorably to 2026 results, but overall year-over-year decrease in operating profit and segment-adjusted EBITDA expected, particularly in second half of year, with forecast developed prior to recent Middle East developments which could change expectations.
• Anticipate use of cash before financing greater in 2026 than in 2025 due to planned capital investments.

• Safety incident at Florida operation in December 2025 resulting in loss of two employees, which led to a $1.1 million loss contingency in the contract mining segment.
• Uncertainty in demand due to customer's power plant maintenance outage in mid-February affecting first quarter demand for utility coal mining segment, and any delay or further changes in demand, dispatch, or reduced power plant mechanical availability could alter expectations for utility coal mining segment in 2026.
• Commodity price forecasts as well as development and production assumptions in minerals and royalties segment could change due to recent Middle East developments, which could impact 2026 results.

Q: Hey, good morning. Good morning. I guess starting with the coal division, Can you quantify how much the step-down in Sabine work is?

A: We have not quantified that number. Doug, what I would say, Doug, I think what I'd say is, you know, when the mine and the plant were operating and were delivering coal, that was the highest level of income that we received from Sabine. As we step down into reclamation, that, you know, appropriately because, you know, we're scaling down the amount of work, that fee was reduced. As we exit that, you know, that situation, that's when it goes away. So it's not, I just want you to know that it's not going from like full bore production level, which we had, you know, a couple of years ago to zero. It's stepping down from a lower level.

Q: And at the same time, you get your price index goes up this year, right?

A: Yeah. You're speaking at Red Hills at Mississippi Lignite Mining Company that, yes, we believe it's based on what happens to indices month to month, but we believe that we're going to see an increase in price during the course of the year.

Q: And does that flow in, you know, is that weighted towards, is there a seasonal element to that when that really starts to benefit you?

A: It's a formula that compares current prices for relevant indices to prior indices. So, you know, it's tracking movements over a one and five year period. And so, you know, just as we look at what was happening In the prior periods and what our expectations are in the future periods, we're able to, you know, develop a forecast. There's not really a seasonal component to price. However, you know, there is generally a seasonal component to deliveries. In, you know, particularly in the south, power plants operate at their heaviest level in the winter when it's cold and the summer when it's hot. And the shoulder seasons typically don't operate at the same high level.

Q: I mean, could that create kind of a windfall situation given the spike in oil prices?

A: I think we could play out lots of scenarios. I think you could say spikes in, you know, various things are going to drive the price up. But, you know, we can also see things happen in the market that cause some of those indices to drop as well. So I think it's really hard to forecast. I mean, every day you pick up the Wall Street Journal and you can read, even in just one newspaper, various things. views of how this might play out with respect to controlling prices and inflation and interest rates and all the other stuff.

Q: Well, and I had understood from your previous comments that it wasn't actually the wholesale petroleum price. It was more of the diesel price at the pump. Is that true or did I misunderstand there?

A: So the price is based on published indices. So it's not like... It's not like we drive by the local gas station and see what diesel is selling for. It's the nationally, you know, federally published indices.

Q: I guess moving on to contract mining, how large is the – I know you probably don't want to quantify it, but just relative to a typical contract, is the Army Corp of Engineers contract?

A: It's a significant contract. We're very excited about the opportunity. As we mentioned, it's an opportunity for us to apply our skills in a new market instead of mining aggregates that are going to be used either in a cement plant or you know, sold as crushed aggregates or sand or gravel. You know, this is an opportunity to go use our skills for infrastructure projects. So it's a pretty sizable project for us, and we're excited about the new opportunity and the partnership.

Q: And what's the timing of that in terms of when that starts and when it gets up to full production?

A: We are already ramping up production. I don't actually know when it gets to full production. Liz, do you know that? I think it's going to depend a little bit on the timing of getting the additional drag line. But it will ramp up throughout this year.

Q: Do you think there's an opportunity to add more business like that?

A: Well, we don't know, but I think we hope so.

Q: How about Phoenix? How substantial is that new business?

A: It's a sizable drag line that we've moved out there. As you know, Phoenix is just exploding with growth. So it seems like, you know, lots of potential there.

Q: You gave your capital... um targets your capital expense targets um i guess two questions on that um well i guess i'll start just i'll break them up on the first one um is it reasonable to think that that capital will be allocated in a manner similar to um 2025 in terms of the divisional breakout you mean like the pie chart of capex?

A: I think we've been really clear about how we think about deploying capital, and if we don't meet our investment criteria, then we just don't invest. You can find the breakout in the 10-K in our MD&A, where we have a discussion of 5 actual and 2026 planned CapEx.

Q: In terms of the Army Corps of Engineer work and the Phoenix work, I mean, that capital has already been spent, right?

A: There is some additional capital for the Army Corps of Engineers project. That's going to end up being a three drag line project. And so we're still, you know, getting the, you know, the final drag lines commissioned in order to construct it and commissioned in order to do that project.

Q: Would you be able to say about how much is left on that project?

A: We haven't disclosed that. I mean, it's included what we spend in 2026 is included in the 36 million we have for the contract mining segment.

Q: In terms of allocating to the minerals segment, does Iger give you a good – Do you have an opportunity to continue to invest capital in that operation? Is that an attractive use of your capital as they expand?

A: We think it's a very attractive use of our capital. It's why we invested an additional amount in their operations. I think, and we're very enthusiastic about the investments that we've made with them. I think it's a great piece of our minerals and royalties platform. You know, the work that they're doing, I think, is for the most part funded. So, one, I don't know that there would be additional opportunities to invest. But I also think, you know, we want to pay attention to diversifying our investments. You know, the whole premise of catapult is our mineral segment is we started with a highly concentrated investment in Appalachian natural gas assets. And the goal here is diversify into other basins and other minerals. Iger is a piece of that. Taking more Iger, I think, you know, is more concentration as opposed to more diversification, which is our primary goal. Now, I'm not going to rule out that we'd ever invest more in Iger, but I'd say generally we're more in line. We're more... more likely to end up, you know, investing in mineral and royalty interests like we have in the past.

Q: If you hit that capital target, my guess is you're going to be somewhat cash negative for the year. Do you have a leverage level where you feel, you know, where you get uncomfortable or where you're willing to go up to?

A: I don't ever want to get to a level where我 start to feel uncomfortable. You know, we talk often about our desire to have a conservative financial structure. As we've discussed, you know, we've been through a period of investing in all these businesses, and we believe that we're entering a period of significant harvest in an investment harvest business model. Um, so, you know, one, we don't know whether we're going to spend the entire $89 million and two, um, excuse me. And, you know, two, we're going to watch our level of harvest that's going on during the year. And we will certainly manage, uh, in an appropriate way so that we don't ever get to a point where我们're having a call and I'm like, I'm a little uncomfortable with where we are in our leverage. I don't want to get there.

Q: I guess last question from you is just on mitigation resources. So is most of the revenue in the unallocated line, is that mostly mitigation resources?

A: Yes.

Q: How are you feeling about that business in terms of growth? I saw that you said it would be profitable at the end of the year. Is that something you expect to continue to go forward into next year?

A: Yes, we expect it to reach profitability and grow from there. The mitigation banks, there's two parts to that business. One is the mitigation banking business, speaking of invest and then harvest. You know, we identify properties in high growth areas. In some instances, we'll acquire property with opportunity to improve the streams and or wetlands on that property. And, you know, you get permits approved with the Army Corps of Engineers. And then there's basically a 10-year process where we do work that would involve improving the streams and or wetlands and then monitoring and you receive credits. We know upfront how many credits we're going to get and the mitigation banks that we've already got in place have a very large value of credits that are going to be released from them over time. So we've got a pretty good horizon on the, on the, We call it credit inventory that we will be able to sell in the future from just our existing credits. Now, you know, that's all subject to timing because obviously你've got to get through the Army Corps of Engineers upfront permitting process. Then you've got milestones that we need to hit with the work that we're doing. We're confident that we can be successful with that. But then you've also got, you know, what are customer projects? What's their timing look like? When do they get their Army Corps permits and how does their development proceed? So we think all of this is moving in a positive direction and will continue to do so in the future. And all of that gets mixed in with shorter term reclamation and restoration projects, you know, that we're finding really nice success in that part of the business. So你 blend those two together, and we think this business is on a really nice trajectory that will really start taking hold later this year.