Q3 2019 Earnings Call
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Operator today.
At this time I would like to welcome everyone to the.
Third quarter T cells with my team financial results Conference call.
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<unk> Chief Financial Officer, Mr. show you may begin in your remarks.
Thanks, Operator, Hello, everyone and thanks for taking the time to join US today to discuss our third quarter 2019 result.
After my remarks, there will review our result in additional detail and then you'll have the opportunity to ask questions.
Were performed exceptionally well and exceeded our expectations in the third quarter, which led to near record quarterly comp sales volume.
The mines continue this pro forma achieving strong levels of production that drove the higher sales volumes, despite challenging market conditions impacting met coal prices.
We recorded $288 million in revenue was $83 million of adjusted EBITDA and free cash flow of $118 million.
Production volume in the third quarter was 2.2 million short tons compared to 1.8 million short tons produced in the same quarter of 2018 and increased 19%.
We successfully completed two longwall moves in the third quarter of this year, which is consistent with the amount of longwall move <unk> third quarter 2018.
These results demonstrate the significant efforts made by our employees and anticipating and planning or longwall moves practically driving production efficiencies and managing our equipment downtime.
In addition, the capital investments that we've made in our minds continue to be extremely beneficial as we strive to reach full capacity through improved production efficiencies and better equipment utilization with less downtime in the safe environment.
A good example, because you have to settle on Warfield stuff, we purchased for myself.
She will reduce the time required approval a wall and therefore mitigated the impact on production longwall moves.
It also provided additional flexibility and risk mitigation to minimize careers. The production downtime, if we encountered I expect a geological conditions.
The company spent $33 million on capital expenditures and mine development cost during the third quarter this year compared to $24 million during the same period last year.
This amount includes the longwall panel development costs for the ongoing extension of mine for the four toward the next area of the mine plan.
In addition, the fourth cash spending including construction of the server shaft invoice that can be seen on pages 11 to 12 of our investor presentation on our website.
Well the fourth expansion is completed it will feature news, they ought equipment and facilities, including a new portal bathhouse power substation and Bunkering system.
We expect to be longwall mining in that area sometime in the next five to six years and intend to spread the capital spending over that same time period.
We achieved the sales volume of 2.0 million short Cogs in the third quarter of 2019, which reflects a 19% increase compared to the same quarter of 2018.
Demand from our customers continued to be strong Gordon third quarter of this year, despite the challenging market conditions, which I will discuss in a few minutes.
Ourselves by geography in the third quarter of 2019, 55% into Europe , 25% into South America, and 20% into Asia.
By way of comparison, the geographical mix in last year's third quarter did not include any sales into Asia and sales were higher in both Europe and South America.
Inventories increased 118000 short tons from the second quarter, two to 602000 shortened primarily due to higher production volumes.
We continuously mandatory inventory level, the lowest possible mouth, while optimizing our supply chain and the flow of met coal deliveries to the poor.
Our actual level of inventory can be significantly impacted by several factors that are primarily timing related such or next like can schedule or learning delays caused by storms in the Gulf.
The plan pretty young local Australian index price close the third quarter $52 per metric ton lower or approximately 27% lower than where it started the quarter in July .
Our gross price realization for the third quarter was 102% to the <unk> Platts premium Lowball, Fob, Australia index price and was higher than the prior year period of 97%.
Remember the actual percentage is a blended rate of our low and mid vol met coal sales.
Let's now turn to market conditions in the third quarter.
We had anticipated the global production growth of pig iron eased somewhat in the third quarter.
<unk> very strong results achieved in the first half 2019.
Despite a slower growth rate in the third quarter global pig iron production over the first nine months of 2019 was still up by 3.4%.
The global Pig Iron production volume, we fell for the same period of 2018.
However, excluding Chinese production global pig iron production volume across many countries contracted by 1.4%.
Lower production rates were felt in almost all producing countries and the Atlantic basin as well its other prominent producing countries like Japan.
The third quarter is normally a seasonally slower period, but it is widely believed that the lower activity reflects the response of steel producer to softer demand a compressed margins.
We believe these factors among others contributed to the depth and met coal prices during the third quarter.
On average the major pricing indices corrected more than 30% from their July 1st level, establishing their low points toward the end of the third quarter.
Despite being largely as expected the correctly, it looks significantly quicker and steeper than predicted surprising most market participants.
We believe there were three principal drivers behind the correction in pricing.
First the implementation of Chinese import restrictions on imported coal second the slower demand for met coals outside of China and third.
Global seaborne supply chain that operated with minimal disruption as in past quarters.
What are your strong performance continues to demonstrate the unique value of our highly focused business strategy as a premium pure play met coal producer.
Our goal is to operate profitably and maximize cash flow generation in any pricing environment not just in the favorable conditions with experience in the past.
We've invested in the business where appropriate to support this strategy.
We've also continued to reward our stockholders as conditions warrant.
Our operational successes are accretive to the hard work and dedication of our employees and I. Thank them for all they've been doing to help us performance strong ways, we did in the third quarter.
Our top priority remains working safely as that is the first and most important step to working efficiently and ultimately achieving success in the marketplace.
For your safety incident rates or some of the lowest in the country, but we strive for T. Rowe injury.
In addition to discussing our strong performance in the third quarter. I also wanted to give you an update on a bluecore growth plot project.
You can refer to slides 13 through 16 of our quarterly investor presentation on our website.
As previously stated Blue Creek is one of the few remaining untapped reserves premium highball, a met coal in the United States.
We're excited by the promising results from our early work and bleed Bluecore has the potential to deliver significant value to our stockholders.
Our initial work has focused on the feasibility of a single normal operation with annual production of approximately 3 million short time, what the potential mine life, a 40 to 60 years.
Well, we continue to be fun project parameters in 2019, our initial studies have demonstrated robust returns across the range of met coal prices.
This initial studies, that's going to capital expenditures of approximately $550 million to $600 million over five years.
Where are your continues to pursue several activities to maintain project momentum and optimize blue creeks project parameters.
These activities include additional core hole drilling together geological and marketing data.
Valuating strategic rail and barge transportation partnerships.
And obtaining permits for Slurries storage, a course Refu series.
We're currently working with several vendors to finalize construction plans to ensure that the development plans are solid.
We're also considering allowing for the full potential of too long wall, which would mean annual production of up to approximately 6 million shortened if desired.
Additionally, we plan to continue to explore potential off take arrangement as well as project financing alternatives.
We expect Blue Creek will be fully permitted and shovel ready by early 2020 at which point warrior wouldn't be in a position to make a decision on future development.
We're extremely excited by the potential we see a blue Creek and bleed the project become the cornerstone of our future portfolio.
We look forward to providing updates to our stockholders over the next few months.
I'll now ask Dale to address our third quarter results in greater detail.
Thanks, Paul.
For the third quarter of 2019.
Net income on a GAAP basis was $45 million or 87 cents per diluted share compared to net income of $53 million or one dollar per diluted share in the third quarter of 2018.
Excluding the nonrecurring other income non-GAAP adjusted net income for the third quarter of 2019 was $41 million were 79 cents per diluted share compared to one dollar and six cents per diluted share that third quarter of 2018.
Adjusted EBITDA was $83 million in the third quarter as compared to adjusted EBITDA of $94 million in the same period of 2018.
The quarterly decrease was primarily driven by an 11% decrease in average net selling prices.
And slightly higher power and maintenance costs and higher stock compensation expenses over the same period last year.
Actually offset by a 19% increase in sales volumes.
The company's adjusted EBITDA margin was 29% in the third quarter compared to 34% in the third quarter of 2018.
Total revenues were $288 million in the third quarter of 2019 compared to $273 million in the same period last year.
This increase was primarily due to the 19% increase in sales volumes.
The average net selling price per short ton decreased approximately 11% not third quarter compared to the same period in 2018.
Index prices dropped significantly during the third quarter.
Our gross price realization was 102% in the third quarter of this year.
Merge and other charges reduced our gross price realization to an average net selling price of $141 per short ton and a third quarter of 2019.
Parents are $159 in the same period last year.
Finding cash cost of sales Fob poor was $189 million were 67% of mining revenues and that there.
Compared to $166 million were 63% mining revenues in the third quarter of 2018.
Cash cost of sales for short time I'd be poor that's approximately $95 in the third quarter compared to $100 and the same period of 2018.
The decrease is primarily due to the 19% higher production volumes, reflecting the benefits of our capital investments.
<unk> expenses were about $9 million or approximately 3% of total revenues in the third quarter compared to approximately $7 million in the prior year period.
Expenses were higher primarily due to higher stock compensation expenses record this year over last year.
Depreciation depletion expenses for the third quarter, 2019, or $26 million or 9% of total revenues and were flat compared to the same period of 2018.
Net interest expense was about $7 million in the third quarter and include interest on our outstanding debt.
Lets amortization by debt issuance cost associated with our credit facilities.
Partially offset by interest income.
This amount was lower by $3 million compared to the same period last year.
Due to the early retirement of a portion of our debt in the first quarter of 2019.
Other income of approximately $5 million record in the third quarter of 2019 due to unexpected proceeds received from a settlement with one of our predecessors, Walter Energy, Canada, and its affiliates and their bankruptcy proceedings were outstanding point.
The company record noncash income tax expense of $8 million during the third quarter of 2019 zero expense in the same period last year.
This result, primarily reflects the utilization of our net operating losses Oriental well with a corresponding decrease in deferred income taxes reflected on our balance sheet.
As you May recall, we released a valuation allowance on deferred income taxes associated with the company's dental wells in the fourth quarter 2018.
We paid no cash taxes in the third quarters of 2019, and 2018 and continue to expect that the utilization of our in a wells will reduce our federal and state income tax liability to zero until the end wells are fully utilized or expire.
We expect this will continue to drive significant free cash flow conversion over the next several years.
Turning to cash flow.
During the third quarter, the company generated $118 million to free cash flow, which was the result of cash flows provided by operating activities of $150 million.
Cash used for capital expenditures and mine development cost a $33 million.
This compared to $78 million free cash flow in the third quarter of 2018.
Just trying to resolve was primarily due to the near record.
Hi, quarterly sales volumes offset by low lower average net selling prices and a decrease in working capital $67 million in the third quarter. This year.
The decrease in working capital was primarily due to $52 million lower accounts receivable.
Cash used in investing activities for capital expenditures in mind development called the $33 million in the third quarter 2019, compared to $24 million in the same period last year.
This years third quarter results included $6 million in mind for development cost.
Relate to a continuous miner unit and support calls they were incurred and developing new longwall panel and the for north area.
Cash was used in financing activities were $19 million in the third quarter 2019.
Primarily consisted of repurchases at the company stock of $11 million.
<unk> payment of a quarterly dividend of $3 million plus repayments of capital lease obligations a $5 million.
The company's balance sheet remains strong with a leverage ratio was <unk> 0.26 times adjusted EBITDA.
In addition, we have ample liquidity with total available liquidity as of the ended the third quarter $335 million, consisting of cash and cash equivalents in short term investments of $219 million and $116 million available under our ABL facility.
This is not about staying letters of credit of approximately $9 million.
We believe our strong balance sheet and significant free cash flow generation will provide us with flexibility if we decide to pursue it blew Creek development project next year.
In summary, the third quarter reflected strong operational performance that drove a 19% increase in quarterly sales and production volumes.
Free cash flow generation and overall strong financial performance.
Strong performance was offset by lower market pricing.
Now turning to our outlook and guidance for the remainder of 2019.
We expect to complete one warm longwall move the fourth quarter for a total of five longwall moves in 2019 compared to a total of three moves we had in 2018.
We are reaffirming our guidance for the full year 2019, as previously issued during our second quarter call.
I set out in our press release, our full year 2019 guidance is as follows.
Wholesales of 7.5 to 7.9 million short time.
Oh production, a 7.5 to 7.9 billion short tons.
Cash cost of sales Fob port of 89 to $95 per short ton.
Capital expenditures of 100 $120 million.
Mine development cost of $18 million to $22 million.
<unk> expenses at $32 million to $36 million.
Interest expense net $30 million to $32 million.
Noncash deferred income tax expense of 20% to 23%.
On a cash tax rate of zero per se.
I'll now turn it back to walk for his final comment.
Thanks, Bill before we move on to queuing today I'd like to make a few more comments about the company and its outlook for the fourth quarter.
We're very pleased with a company strong operational and financial performance in the third quarter of 2019.
And we appreciate the support and engagement, we have received from our stockholders and of course our employees.
Based on regular feedback from our customers, we expect for contracted sales volumes to remain fairly consistent fourth quarter.
We expect that any spot opportunities in the market will be mainly concentrated in Asia.
We believe global steel producers will continue to be pressured, but then margins due to low steel prices and high high iron ore input prices. Despite the recent correction in met coal prices.
For these reasons, we remain cautious on the fourth quarter market conditions, and anticipate that pricing volatility will continue to impact the markets until the current Chinese import restrictions ease and trading activity resumed for 2020 deliveries.
However, after considering the expected market conditions for the remainder of the year low with her strong performance year to date, we are reaffirming our 2019 guidance target.
More specifically based on these input we expect our fourth quarter sales and production volumes to be the lowest of the year.
But still at the high end of our guidance targets, if everything goes well.
Let me give me a bit more color on the expectation for sales and production volumes in the fourth quarter. We purposely ran the operations, especially hard in the first nine months of this year to capture the maximum profitability and free cash flow during peak periods of met coal pricing.
As a result as a fourth quarter normally contains more days off for holiday period, we expect to take advantage of the market conditions to allocate additional days to perform in routine downtime maintenance on key equipment. That's what we're completing one more 10 day longwall move.
During these production outages, we expect current inventory levels to decrease.
Finally, I hope you'll agree there our performance this year reflects our often repeated mantra we run the business is it the next pricing downturn geologic issue, we're just around the corner.
So I would have targets and flexible operation that allows to adjust to the market environment as it changes throughout the year.
With that we'd like to open the call for questions operator.
In Q1, all begins a question and answer session.
You asked a question you remember a star then one on your Touchtone phone.
The speakerphone, please pick up your handset pressing the keys.
So what's your question. Please press Star then too.
Today's first question comes from David Gagliano I'd be ammo capital. Please go ahead.
Alright, Thanks for taking my questions I think well you might you just said one of them at the end there but.
So in terms of the quarter over quarter decline.
It's a pretty steep for the fourth quarter in terms of production and shipments you know it sounds like its seasonal plus market conditions.
You looked at 2020.
Any any reason.
Do you expect volumes not to be back and so that at 2 million ton per quarter. So in that we've seen lately.
Well, we're still building our budget for next year, so it'd be premature for me to to announce what our production targets are for next year, what we think we'll do quarter on quarter.
We're still putting that together so I really don't want to I don't want to comment on that right now David I'm sorry.
Okay understood anything in terms of extraordinary downtime or conditions at the mine a other than I.
I guess, what you called his normal routine maintenance, but again it does seem like a pretty significant.
Obviously, it is a very significant quarter over quarter drops. So I'm, just wondering to get a little more color on.
Sure.
What are the things I'm, sorry, one of the things up happening as we do have the longwall move at mine for this year, we Didnt know weve. It if we would be able to get the additional set of shields and we budgeted for this year at the beginning for mine seven we just didn't we know if we'd get delivering time. When we did we were able to reduce those longwall moves that mine seven down too.
Very short moves basically one or two day longwall moves just walking from one face to the other so you know cutting out for longwall moves several hundred thousand tons of additional production for the year.
The the mind for move it does not have that same opportunity. So that will be a full blown moving it'll cost us a well over 100000 CONMED.
We intend to do some work on from the infrastructure like on our skipped that will require us to run at a much lower rate for a period of time associates things like that and again, what we've done as we would push these mines pretty hard all year, there's really nothing wrong. It's your some work, we really want to get done to set ourselves.
For success going forward.
Okay. That's helpful. Thanks.
Sure.
I don't know Swanson today comes from Daniel Scott Clarksons. Please go ahead.
Hi, Thanks, very much I may follow up on David's question on a very solid quarter.
Did 2.2 million tons with two longwall moves in the quarter.
With I imagine summer vacations, and whatnot and does that signal a.
You know kind of a new run rates potential for mines foreign seven or is there something that we should think about that that would prevent that.
Well I again.
We really didn't have to longwall moves full blown longwall moves because at the S. A set of shield and that will not continue a indefinitely into the future because what we have the we have three different starts to shields from mine seven one is for relatively low same one is for relatively high same on one side can operate in either.
And it all depends on where we're moving the law was too.
On their following panel, whether or not we'll be able to do zero day longwall moves. So you can't just assume that everything a mindset will be zero day moves going forward.
And again I think what we did was it goes pretty hard all year long now we've got some holidays coming up and we know that we've got some things we'd like to get done.
So we intend to to get those done and more run the mines as hard as we think is practical in the fourth quarter.
All right very helpful.
Market weakness is that you know set you up for it to help you out in fourth quarter sales force production or where do you see yourselves by end of year.
Well I think if I said three is probably three to four is probably a more realistic expectation and I think we do have the we have the inventory going into the fourth quarter that allows us to do a little bit of work at the coal mines and still have the coal sale.
We did have strong sales in the theme in the third quarter I don't think we anticipated the up a quite the production performance that we did achieve so we're very pleased with both Bonnie gives us the opportunity to to do a little more work into fourth quarter and sell down the inventory it wasn't about a market weakness or.
Customers took their coal.
We actually you know where our customers performed very well for us.
Okay, Great and then just real quick follow up here when I think about a your comments on it you know the Blue Creek and you know one longwall could be a second longwall can you kind of can compare that to what the reserve life is you know not just for you actually see filings with the in the reality for mines foreign seven and kind of how that could layer what's your production.
Look could be in a high commodity environment over the next 510 years.
Oh, well mine lives for a firm on four as well over 20 years 25 years mine seven but brought that down a little bit the closer to 20, maybe a little less than that somewhere in there.
One long wall, that's probably a 40 to 60 year reserve it bluecore.
Two longwalls would basically by the time you put one in one cut in half, but it would probably drop at the 30 years or so and.
Again, if you if you look at Assembly, we look at capacity of all three operations running together with a single longwall I'd say you need to say you're in the 10 plus range.
Two long wall you'd expect to be in the I don't know 12, 13 range something like that.
Great very helpful. Thanks, guys.
Sure.
I don't know somebody that's it.
Our next question comes from Chris Turnure Deutsche Bank. Please go ahead.
[noise], Oh, hi, guys a couple of questions from major just following on on Blue Craig maybe as a starting point.
It's a decision on how you look at that project early next year on the size of it just completely determined on the sort of a bottom up approach on how you see the economics or is it somewhat market driven as well thanks.
Well I think it bodes well I think we started bottoms up well, but yeah. We look at it from the long what are we deal with the long term pricing for high volume coal because that's the other type of color will be produced there.
So we're doing a a bottoms up but naturally we're keeping them consideration what ive all a what what we believe will be the high volume market Rolling forward for the next 10 20 years.
Okay. Thanks, a lot and then just in terms of the shelf registration that came through is that just routine practice of renewing that I wondered if you could just give some comments. Thanks.
[noise] Yeah, no that was just routine maintenance our housekeeping really.
The S. Three than we had out there before only allowed us to do the.
Yeah, the block trades, where we had the private equity investors before so this is really just housekeeping had given us a broad universal shelf out there. So that you know from wind to access the capital market sometime in the future. Yeah. It just gives US you know quicker time to market and little bit lower costs, and plus we're already and we see Bob.
Sure. So that you know that goes effective immediately and wouldn't delay because of some FTC review in the future. So just really housekeeping.
Okay. Thank you and that the last one from me just in terms of the overall market I. Appreciate you don't so that much into Asia, but just looking at the import restrictions in China is a key clearing event for the overall market.
Any view on when we markets some more resolution on that as it is it next year early next year or do you think that could happen by the end of the year, just just any comments on the market. Thanks.
Well I think it'll be a you know our expectation is there will be early next year in the first quarter next year, we'll have more clarity I think from now till the end the year no one's a prod be surprising or just stayed as tight if not tighter.
Okay. Thank you that's it for me.
Thank you.
And ladies and gentlemen, excuse me as a reminder, as you would like to ask your question. Please press star one of them one at this time.
Next question comes from Lucas pipes B. Riley FBR. Please go ahead.
Good afternoon everybody.
And well just just a quick follow up on Q4.
I heard you say that you wouldn't be towards the higher end of guidance that central both production and sales.
Oh, Yeah, I would expect that and you know frankly, if prices were still $200 proton we'd be running these mines as hard as it could as we did the first nine months of the year. It's yes, what we see as a law and the.
All met coal pricing gives us the opportunity to also take advantage of that and in my perspective get our minds ready for for next year and be ready to continue to run them has the opportunity presents itself and a strong market presents itself.
That's that's very helpful. So I think on the sell side that high end would be about 1.6 million times that on the productions at 1.2 million tons out. So those are kind of.
Edging up on dialysis maybe good.
Good place to be in the model.
Yes, I would assume so.
That's very helpful. Thank you. Thank you for that.
Okay, and then kind of bigger strategy question as relates to Blue Creek.
Oh do you think about kind of build versus buy.
Valuations in the sector are pretty continued to be pretty I'm demanding and that's maybe euphemism.
How do you think about allocating capital towards an inherently more risky and development process than buying back your stock or buying buying another mine that's already out there producing how do you. How do you think about this and in this context. Thank you.
Well I think we just look at it overall I mean, if you look at the returns you know and look at our stock price and you just look across the sector right. We've tended to focus more on special dividends, even though we're doing a little bit of both.
Special as well as buybacks others have focused on strictly on buybacks.
Well the buybacks haven't really worked I think you would look at some of those other coal companies and say well I prices down 40, 60% so the buyback really working.
So we don't seem the sector doesn't seem to be getting rewarded for some other things we're doing and.
Can't focus on you know what others are doing but yeah, we're performing.
And we continue to perform.
Yes, you know we trade at such a low valuation. So I think we continually look at that capital allocation and well, yes. There is risk and you know starting in developing project. It takes five years to construction spend $600 million.
That's a huge growth opportunity in the returns a pretty pretty pretty large there you know we provide that information on the NPV, that's almost $850 million on that project.
And at 24% IR art and that's another $150 price environment, basically where we are today.
So yeah I mean, we're just kind of looking at all those and we kind of try to balance all those different options.
Hmm, but as we've said in the four it before you know the acquisition opportunities are probably less for us.
Just because of the high quality coal that we have there's not a lot opportunities to go out there and get that type.
Add on you have to compare that to Blue Creek, because the return profiles is so high there.
That's very very helpful color I appreciate that and I'll sneak one last one in kind of going back to the broader market I.
I think three months ago. He said you wouldn't be selling any spot shipments to Europe in the second half a year and.
I'm wondering what are you seeing into different regions is Europe , Brazil, still pretty weak as Asia, holding up well ex China. What what are you kind of what you feel in terms of demand from from and customers by region would be very much appreciate thank you.
I think as I said in my comments, we saw weakness everywhere, a really except China.
Any spot sales that we did have them even normally have we saw those tons move into Asia, India third quarter and expect the same to continue into the fourth quarter. What we see in Europe is some just general weakness, we see some signs of things changing a little bit maybe strengthening here and there.
I think the automotive sector may be picking back up a bit.
But I I think our expectation is for next year, then we'll continue to see.
Performance about where we did this year for for most regions.
That's very helpful. Appreciate it and best of luck.
Thank you.
Oh, that's worsens remains a federal that's something else Gotta Clarksons. Please go ahead.
Yeah. Thanks, a real quick just a nail you down from what you said a couple of minutes ago, there on capital returns.
Guys and clearly gone the special dividend route at your stock has outperformed your peers and when we think about moving forward with Blue Creek, whether it's 600 million or whether it's a lower number.
And can you speak to you know understanding that the board as final say, but that you would continue that a debt capital return program during the construction of Blue Creek.
Well at this point nothing has changed in our and our policy as we've been working that policy in the past and you know if we were to make that decision to move forward, We'll do Creek.
Right now we don't expect that policy to change now if it does we would announced that at that time, but you know.
Clearly, we understand a lot of our investors.
For the cash special dividends, and then use a group people.
Our investors also that like the buybacks and then there's a group that kind of looks likes the growth.
Opportunity. So you know we don't use all the tools and our tool belt.
To satisfy our our stockholders so no we're not going to turn off the capital returns.
But I don't have a set percentage to give you or anything like that other inside you know, we're sticking to our current capital allocation policy and to the extent, there's excess cash we will be returning that to shareholders in various forms.
Great Dale Thanks, very much the color.
Thanks, Dan.
And ladies and gentlemen. This includes the question answer session I might just turn the conference back over to the management team for his final remarks.
That concludes our call. This afternoon. Thank you again for joining US today. We appreciate your interest in more your medical.
Thank you Sir todays conference has now concluded and we thank you asked for attending today's presentation. You may now disconnect. Your lines, However, wonderful day.