Q1 2020 Earnings Call
[music].
So if I were about to be gets.
Good day, everyone and welcome to the P. body energy first quarter 2020 earnings call. At this time all participants are in listen only mode. Following today's presentation instructions will be given for the question answer session.
Anyone needs assistance at anytime during the conference. Please press star followed by zero.
As a reminder, this conference is being recorded Wednesday April 29 2020.
I would now like to turn the call over to truly gates. Please go ahead.
Good morning, Thanks for joining Peabody earnings call for the first quarter 2020.
With us today, our president and CEO, Glenn Kelo as long as interim CFO Mark spoke back.
The earnings release, you'll find our statement on forward looking information as well as a reconciliation of non-GAAP measure.
We encourage you to considered a risk factors reference there along with our public filings with the FCC.
Given the unique circumstances of Cobra 19, we will begin today's remarks with a robust discussion of Peabody specific actions underway north boxes evolving situation I'll now turn the call over to going.
Thanks, Julie and good morning, everyone.
I'm pleased to know the Julie has recently taken over his head of Investor Relations in communications.
I'd like to start today by extending my sincerest gratitude to have local workforce of more than 6000 employees.
Secondly by serving on the launch to provide products to meet bottlenecks.
Thank you for you to each and every day.
It has been a challenging stock to 2020 and among the most complete squabbled backdrops remodeled and three decades in the global industry.
The context, and just the first quarter strives, what's still spikes in the impacts of the system a tragic bush pause.
Immediately followed by some of the heaviest rightful he southwell since then I'd say Nazis.
In the U.S., we saw natural gas prices hit 21, do you laws and now we and the rest of the world.
Managing through the devastating and conflicts of it I think pandemic.
Coal mining has been designated as an essential business by many governments to support Caulfield electric power generation and critical still Mike needs.
Even so.
Health and safety of employees and older communities remain at the forefront of all we do.
We will continue to acquire them on I really wanted to site and economic to do so.
Yeah following recommendations by the city C and he is trying to public health with rigorous protocols controls and prevention measures in place at all of allocations.
This includes temperature in health screens I.
I did not seem like.
Enhance cleaning and sterilization practices.
Expanded use of personal protective equipment.
Good night, where possible and social distancing procedures.
You also utilizing more flexible losses at many of our thoughts to reduce exposures.
And ladies positive quite global uncertainty.
We are enhancing our efforts to protect their business.
We believe it's not enough to simply live within that means you must take aggressive decisive action and credit around catalysts to change.
As such we like the suing structural improvements across the enterprise.
NHL project team has been informed.
I have a sought by a board of directors to manage a host of initiatives.
The project team is tough with expediting ITSI to help my bottom up analysis to identify structural improvements.
Finally gaps and ensure accountability for operational targets.
Almost would be included in the analysis.
With initial focus on the highest value opportunities.
Let me be clear Monza cannot demonstrated pop to cash generation at lower pricing levels will be suspended.
We proved that willingness to do so with the suspension or closure of several months in the Midwest in 21 I'd say.
In April we eliminated approximately 250 positions from solve out PRB and with investments to better scale stopping requirements to meet customer demand.
With those actions, we would expect the second quarter restructuring charge.
This follows the reduction of approximately 215 operational positions.
<unk> bonds in the first quarter this year to better align with industry conditions.
Last year, you'll recall, we identified $50 million in cost savings.
Benefited SG nine operating costs and is being implemented throughout the year.
As a result to further reductions in the first quarter. We are expecting additional 20 million of annualized cost savings about 10 million of which will be a direct benefit to SGN I.
Combined these actions have resulted in the reduction of our corporate and support head count.
The one third.
Last two quarters.
In addition, we've taken steps to mitigate our financial risk.
We previously suspend dividends and share repurchases.
During the first quarter, we paused voluntary debt reduction activities and have no current plans to repurchase senior secured notes or the timeline.
Then in April we borrowed $300 million under our revolving credit facility to enhance our financial flexibility.
We're also evaluating a portfolio to determine if we have the right makes of assets.
Or certain assets would be candidates for divestiture.
A recent example is the cell surplus undeveloped tenements in Australia during the first quarter.
We also continuing to pursue tiki key business initiatives.
The highly synergistic PRB, Colorado joint venture and the commercial process for the knocking at Walmart.
People do you not chicken testing the FTC negative split decision regarding the formation of the joint venture in court.
Starting in late June.
Dependent of course, any scheduling changes by the court.
A ruling as expected shortly thereafter.
The north can you tell a commercial process is also underway.
As you would expect we're closely monitoring the market situation as we proceed with this process as well as an incremental spending related to the reentry and development of Mod.
We have also been focused on reducing holding costs at north in yellow.
Most recently, we successfully entered into commercial agreements through just rile uncalled commitments beginning mid year 2020.
While these reductions import and Ralph commitments spanned a multi period.
We maintain sufficient rollup coal capacity when them on a regimes operation.
Quarterly holding costs and they are projected to be about $5 million starting in the third quarter 2020.
This marks that approximately 85% reduction in costs over the past several quarters.
Overall, it's a taught a significant change for the global economy, our business and our employees globally.
This team continues to step up to each and every challenge, while keeping safety and health top of mind.
Turning to industry dynamics now.
The impact of Cabot, not saying have been widespread.
With International Monetary fund projecting the global economy to contract more than it has lots of century.
National shutdowns are continuing resulting in supply and demand disruptions across the call industry.
So I'd like to focus on several key regions starting with China.
Well restrictions in China have now being lifted the catch we reported a nearly 7% contraction first quarter GDP has reinforced large scale shutdowns in quarantines to contain the outbreak.
Despite these conditions, China increased total coal imports by 28%.
Rebounding from the drop off lighting 20, not saying when import restrictions reinforced.
A strong import levels combined with lower domestic process as ultimately resulted in other supply thermal coal in the country.
Pressuring process.
Overall, Chinese domestic coal process Happing week.
With the arbitrage in favor of imported calls, particularly on the mid sought.
We're closely monitoring calls for government intervention in the fall what production cuts and potential import restrictions.
Steel operations in India have been impacted by multi week shutdown of the country.
Triggering a number of ports to close for sure on save on cargos.
In addition, Japan recently announced a state of emergency emitted shop, sparking type is 19 cases.
As a result to the country's largest produces accounting for about three fourths of Japanese steel output have made you kept production by 25% due to a significant decline in demand.
In addition to demand impacts supplier is continue emerge as a number of global and domestic producers have gets out of suspended production.
Turning to the U.S.
The impacts from the pandemic applies increased pressure on total load and in turn call demand.
In early April electricity demand decline was not seen since 2003.
As major industrial activity has been shut it contributing to depress path process.
During the first quarter average Henry hub natural gas prices reached their lowest levels since 99 not.
Good day, three much cultural generation is down 31% with coal production declining 17%.
Hi, Paul has been another challenging months reflected limited industrial activity in what is traditionally a shoulder season.
Overall, it's a taught a significant change for the global economy.
And that business.
With that I'll now ask Mark to cover first quarter highlights and a 2020 Apple.
Thanks, Glenn I guess is difficult backdrop, I now like to touch on a few of the key financial results in the first quarter.
Revenue totaled 846 million compared to 1.25 billion in the prior year, largely due to the impact of reduced volumes and lower pricing.
As a reminder, our pantomime ceased production in the third quarter of 2019.
DNA in the first quarter totaled 106 million, representing a 39% decline from the prior year DDNA reflects the closure of cantor as well as lower contract amortization expense and volumes.
First quarter SG any improved 32% versus the first quarter of 2019 down to 25 million.
This reflects the benefit of actions taken to date as well as lower share based incentive compensation.
Earnings from equity affiliates reflect a loss of approximately 9 million related to the independently operated middle amount joint venture due to the impacts from heavy rainfall in January and February.
The joint venture recently agreed to have one a peabody's general managers run the day to day operations at the mine.
As expected first quarter adjusted EBITDA of 37 million was impacted by lower realized pricing and higher seaborne metallurgical costs.
We continue to see strength from our seaborne thermal segment adjusted EBITDA margins of 27% were driven by 32 dollar cost per tonne, even as drilling and blasting and woken young were impacted by weather.
As expected results from our seaborne met segment reflected the impacts of an extended longwall move at Metropolitan pit sequencing at more hill and the start of the mainline conveyor system upgrade at Shoals Creek.
We also completed highwall mining millennium mine in the first quarter.
Lastly, U.S. thermal.
Demand has been challenging as indicated by first quarter volumes in the PRB tighten rose, 4% due to pit sequencing and an increase in the federal excise tax.
Our costs were partially offset by lower diesel costs and favorable mix.
Beginning this year, our former Midwest in Western segments were consolidated into other U.S. thermal for purposes of segment reporting.
During several mine closures in 2019.
Segment delivered 20% adjusted EBITDA margins in the first quarter, driven by lower repairs and maintenance costs and favorable diesel pricing.
Focusing now on our balance sheet, we have total liquidity of nearly 1.2 billion and carried net debt of 624 million at quarter end.
As Glenn mentioned, we elected to about $300 million under our revolving credit facility after quarter end in light of the global uncertainty related to the covert 19 pandemic.
The step is just one of many actions, we're taking to mitigate financial risk and ensure we have adequate financial flexibility.
Well, we are suspending full year guidance, given uncertainties respect to covert 19 I'd like to review what we do know today currently second quarter headline spot pricing for seaborne products significantly below first quarter averages and me substantially impact the company second quarter results.
Within our seaborne metallurgical segment, we're continuing with the upgrade of the mainline conveyor system at Shoal Creek in the second quarter and Metropolitan we have resumed mining in the new panel. Following a Q1 longwall move a cup abella, we're mining seaway relatively lower ratio, okay, which is projected to mitigate the cost impacts of a major dragline Reid.
Air in the second quarter.
Within seaborne thermal we have just over 3 million tons of export thermal coal price for the remainder of the year at an average price of $64 per short ton.
In the PRB, we have 88 million times priced at an average price of $11.46 per time for delivery. In 2020. We also have 19 million tons of other U.S. thermal business priced at an average of $36 per tonne, our U.S. sales agreements, including blend of fixed volume commitments as well as required.
Amounts and options contracts that do allow for some volume flexibility.
Given rapidly changing market conditions, we've had several customers notify us of changes in nominations. We've also had customers book new business.
Ultimately deliveries will be dependent on whether natural gas prices and other factors.
We're closely monitoring these volumes given ongoing industry weakness and are aggressively protecting our contractual rights current conditions underscore our strategy to have a strong book of business to start the year.
As you think about other business drivers, we expect to realize lower diesel prices and Australian dollar exchange rates this year.
We also expect to accelerate the collection of our remaining $24 million of AMC credits and defer approximately $18 million a FICA tax payments into 2020 and 2021 under the cares Act.
These timing benefits come in addition to the $24 million an empty credits already collected in March.
2020, SDMA has been lowered to about 120 million.
Reduce capital expenditures of approximately 235 million are dedicated to sustaining and compliance activities joint venture commitments and midstream projects with rapid cash paybacks. In addition, we've scaled back aeros cash spend to approximately $60 million.
I'd now like to turn the call for questions.
Operator.
Thank you if you would like to ask a question simply press the star key followed by the digit one on your telephone keypad.
So if you're using a speakerphone. Please make sure your mute function is turned off tulare signal for HR equipment.
Once again star one at this time, we'll pause for a moment.
And we'll first hear from Lucas pipes.
<unk>.
Hey, good morning, everyone I hope, you, all doing well and staying safe.
Good morning, Thank you Sam you.
Thank you. Thank you.
I first wanted to.
Asking about medical business and in the release, you mentioned, how you're going to speed reviewing.
Oh the operations for profitability.
Q1, obviously costs were.
Unusually high and I assume you don't really see the benefit yet.
Oil and exchange rate changes.
Now kind of second quarter.
Prices have come down.
More and and how should we think about that business.
And how.
Hi, I'm sure you maybe adjusted this current market environment.
And your thoughts and color on yes. Thanks.
Thanks Lucas.
As we indicated.
Previous quarter and colon and also in this release we were expecting.
Some activities that would give elevated.
Costs in that in that first quarter.
One was the extended outage at our Metropolitan mine.
The second was.
Pit sequencing and called activities that a couple of bell or mobile mine and we've also commenced the upgrade project at a chunk Craig So we were expecting.
Hi costs and that.
Continuing to set us up.
In terms of operational capability.
At a light a point.
And that business. Unfortunately did did Mike a loss in the quarter.
As you've indicated process.
I've moved further which would continue to impact that that business in the into the second quarter.
I think.
And this is a general.
Across all of our portfolio. Our first priority is obviously, the health and safety about workforce on the communities in which we operate.
And then we're thinking about the challenge really a two wins firstly, a staying very close to our customers understanding our markets understanding our customers understanding the requirements and then from our business in the in the through that lens of safe operations.
I will to adjust our operations production plans.
To me to meet those customer needs.
You source.
Take action progressively in the first quarter then again.
Through through the month of April.
As we continue to adjust them on plans to make those might those customer requirements.
On top of that we do have.
A number of activities underway, which you would expect in order to a privately respond.
And position.
Our business.
We would expect mines, if they become pressured at low cross environments. So beato identify a path to cash generation otherwise we've had a track record of acting.
Suspend or if it's ideal mine mine production.
The particular focus of activities Lucas if you alluded to would be a met platform for some of the reasons of instead.
That's that's very helpful. I appreciate.
All the color.
Switching switching topics.
<unk>.
You've taken some measures to further further bolster that.
When I looked at some of the working capital changes.
I had the benefit on the on the inventory side on the table side that also.
Hi, good changed.
Quite substantially.
What we're supposed to the big drivers behind that and if you could maybe wrapped up into.
Broader discussion of how you think about liquidity in this market environment, what's adequate et cetera.
Very helpful. Thank you.
Yeah, Good morning Lucas.
A couple of things on the working capital that payable side, a couple of the biggest movers visit was timing related to.
National restarts royalty payments compensation, as well accruals or payroll.
So normal working capital items, nothing nothing out of the ordinary from from that perspective.
As you mentioned.
Given the uncertainty around the covert 19 pandemic, we certainly are protecting the companys liquidity and cash position after quarter end as Glenn mentioned, we we drew down $300 million on the revolver to bolster the company's cash position certainly.
Without knowing the depth and severity of the pandemic.
The company has taken a very cautious approach today.
Got it.
Really appreciate the color.
So in this challenging environment.
Thank you.
Thank you thank you too.
Matt Vittorioso of Jefferies.
[music].
Yes. Good morning, Thanks for taking my question I guess I've two questions first just on the.
Potential monetization that when yellow.
To help us think about.
The magnitude or the size of proceeds you might.
The able to get or what's the valuation there I know there are other minor.
And Thats probably have their eye on.
The though that.
You can tell us around.
As far as the size or.
What's the proceeds might be from central monetization there.
Well, yes. Good morning. Thank you for the question given that we have a commercial process underway you you'd naturally expect us not to comment.
On on views around that having said that.
A significant reserve position high quality coking coal routinely.
With would be able to sit.
Oh, historically has been participating setting the the benchmark.
For for that particular product.
It infrastructure.
Good good good location.
So we like the asset.
There is a commercial process underway as you would.
You wouldn't expect me to to comment.
But with respect to North Daniela you also taught a source type significant steps as we indicated over the last couple of quarters that focus was on reducing the holding costs.
We've been successful and being able to do that particularly now not only in the activities are carrying on the ground, but the tyco Pike commitments.
We expect to be mitigated from from the third quarter.
Okay, Great and then my second question I guess just be on capital allocation Youre pretty clear that you had suspended debt reduction activity.
And are not looking to.
Repurchase any of your secured notes in the open market I guess I find that a little disappointing from that perspective.
You've got billions to of liquidity.
Got a 2022 maturity that's trading at a pretty deep discount.
You guys were out buying equity.
You know the equity implied a four or $5 billion valuation.
Bonds that implies company the enterprise is worth less than 500 million.
And you've got liquidity it feels like this is a real opportunity to create equity.
And.
Then you're basically saying you're not going to do anything I was just hoping comment on that.
Yes, sure happy to add a little more color there as we noted last quarter.
We intend to reduce debt over time.
The pacing in quantum of debt reduction however is dependent on both industry and company specific factors.
The overall uncertainty related to covert 19 resulted in us and spending guidance.
And certainly muddy the water from a liquidity perspective, I'd, rather you saw us draw on the revolver to protect the company's cash position and financial Flexibilities in these uncertain times.
We also have no further clarity with regard to the PRB joint venture with arch or or North Daniela since the last time, we spoke.
So.
Question, we've taken a cautious approach, we think thats prudent given the industry conditions and the overall uncertainty in the market today.
Okay alright. Thanks.
Mark Levin with the benchmark company.
Okay.
Okay.
Hearing no response will take a question from you feel from Bank of America.
Hey, everyone can you hear me.
Yes ma'am.
Yeah. Thanks, I just like the echo.
Comments and just trying to.
You know note that it reminds me a lot of in 2015 2016, when analysts bags cloud peak energy to repurchase their bonds at a discount and they chose not to but.
I guess, that's a story for another day.
So.
I guess you know in that light you know what.
The difference from your point of view between available revolver and having a cash on the balance sheet unless you think that the banks that lending you are.
On to become insolvent.
What's the difference between 630 million of cash and 930 million of cash when you're not burning up margin you have full.
Full access your lower.
Yes, Matt.
It's Mark I, just again I think there's two things there's the available liquidity on the revolver, we decided to draw down after quarter end is really to have that cash on the balance sheet given the uncertainty in the unknown depth.
And severity of the crisis as ever as it rolled out here.
Felt when additional cash on the balance sheet that was a better positioned to be in I think you saw many companies, including ourselves in the industry as well as a broader industry do the exact same thing.
Okay.
Happy Thanks, very much I, just I just would sort of go the other.
Questions about buying back bonds at a steep discount that could create equity value and.
Give you further runway and sort of two all sorts of good things for the company but.
Thanks, very much and good luck.
Thank you Matt appreciate this us.
David Gagliano be ammo capital markets.
Hi, Thanks for taking my questions I I just wanted to.
Just drill down a little bit on come near term operating metrics I know, obviously guidance has suspended I think.
Matt obviously, the met business pretty general operating loss in the in the first quarter on 2 million times, I think were 2 million tons of shipments.
Can you at least give us a sense as to what you're thinking in terms of the volumes for remainder of the here.
On that side.
And or related sort of within that question can you give us a census.
Obviously with the weakness in pricing now how much of the.
The previous started was 8.3 million for the year you did too so, let's say and 6 million left to go.
How much of that is actually EBITDA positive and the current environment.
Well I want to take the first the first one dicey.
Yes, I think we.
We said we suspended gods.
But also in Q1.
The effect is around.
Positioning the business.
The planned as part of the the mine change or in the case of show Craig. So some flag work will doing on on on.
On a on upgrades.
The.
The the pot answer is around the market and as I said that this would need to address this problem, but a challenge at both in the first is for the vet market in particular.
The extensive which nations will beyond.
Enhanced restrictions and how quickly they will recover and two important markets I think from a metallurgical coal perspective will be.
India, which extended its its second.
Three week shutdown, but is a large importer of medical.
And Japan, and Japan is important I guess from two perspectives, not only met coal and I talked about the declining steel mining.
The that sort of taken place there.
With the current conditions, but also its major consumer of high quality thermal calls an important market from from both perspectives.
John or of course is just because of its size and scale and importance on the seaborne market.
We will be another factor and we've seen encouraging signs in China, but the question reminds half how quickly will let that recovery take place and then what if any additional restrictions import requirements will work hard work across that so those things real.
Legally to uncertainty and thing.
Since your frustration, but thats, what led to the so the to the the removal of guidance just just a nicer if the trying to cool things when we just diagnostic having said that.
We actively work with their customers trying to understand those markets trying to understand those requirements, but there's a lot I've not at this point in time as well.
Hi, Yes, maybe I'd just add from you.
Yes from an EBITDA perspective, I think the last the second part of the question how much that was EBITDA positive given the given the fact that we pulled guidance, we wouldn't be able to speak to that either certainly.
We expected improvement in costs.
In the second half of the year, but with without knowing where prices are going to be as I mentioned in my Mark remarks earlier prices have been volatile and there certainly lower than that first quarter net will have a negative impact on Q2, and the rest of the year if prices stay where they're at.
Okay, and that's really the nature of the question I appreciate that it's challenging.
Really challenging.
Environment, but at the same time obviously.
You know in this environment burning cash is not it's not about an option for an extended descended period. So I guess the question really I'm getting at is.
Why not shut down more capacity now.
Given the environment is are the cost savings expected to offset where we are in pricing at this point.
Right.
I indicated that we were looking mine by mine, obviously, a particular focus on to admit emit business.
Look for opportunities and activities if mine Scott.
Demonstrate a path to cash generation, we would make those decisions.
No when when do you expect those decisions to be an ounce within the next three months.
We're on the Larry Saul.
It will provide updates as a as a as a as appropriate.
You can you could consider it's an ongoing process we took actions.
But I have a 500 I think 570 positions that we.
We took across.
The first four months of 2020.
And we'll continue to take actions we took actions to.
Changes in.
And in demand do you would expect us to continue to take those actions going forward.
Okay. Appreciate I realize it's an extraordinarily difficult time and.
And these are not easy decisions to make I just.
I appreciate the update thanks very much.
Okay. Thank you.
Next we'll hear from Mark Levin, the benchmark company.
It's very much sorry.
Before I apologize if I missed it answered this question, but realize you guys aren't aren't getting.
Just going forward. So I don't want to go directly to that maybe more anecdotally what you're observing.
As it relates to Australian thermal or through the seaborne thermal segment.
Global LNG prices around two bucks or so are you guys see.
Any customer push back on fall Yong from maybe some of your key importing countries in southeast Asia ex ex China somebody other countries, just kind of curious whats the demand environment looks like right now.
For seaborne thermal.
Well I.
Indicated this important markets for the first placebo and an important customers obviously.
Career, as and Taiwan, So continue to move through reasonably well versus versus other environments, I mentioned, China seeking to to recover.
The extensive which yeah coal stocks are hot.
They're in the extent to which they work their way through the real K is going to be their impact on import restrictions if any how quickly we say, we see that thing applaud.
I mentioned, Japan.
And the at the activities, there and India.
Really being a key acai key market, particularly on.
On metallurgical coal, having its second of its a of extension. So there'll there'll key key markets people do you want to on a C ball perspective in key markets. So I guess for the for the global seaborne.
Industry in general.
Are you are you getting pushed back I guess, maybe as it relates to the seaborne seaborne thermal side are you having customers.
Thanks, you looking to.
Deferred deliveries delay deliveries buyouts, whatever the case, maybe what's sort of been the you know the discussions with customers.
So discussions with customers to try to understand their requirements and there's a great deal of uncertainty around them working with customers.
Yes, if that's appropriate but also defending our contractual rights as well.
Yeah that makes sense and last question for me.
I think 2020, you guys lowered capex for 235 million I think you're you got to finish up spending on Wilton, John and and Wambold.
Sounds to me like maybe show Creek. So it sounds like we'll be drilling and show Creek will be done this year a lot of lumber will be done next year. So when you think about 2021 Capex is it it sounds like it would be maintenance plus whatever is left it won but how much would you have left at a is that correct and b how much.
I have to spend would you had at Longbow.
2021.
Yes, Mark.
2.11st I'd make a you're right. We initially of is guiding toward a 250 million for the year. You remember that was a significant reduction from probably the building blocks that we put out earlier about 400 million. So took a significant reduction in capex heading into the year did find $15 million of opportunities reduce that again here.
For this announcement going forward.
You are right outside of sustaining Capex, a the two large projects a this year as the weibo.
Open to joint venture with Glencore as well the Wolfcamp extension project well beyond that what started last year significantly finishing up this year with maybe just a little bit of spend next year and then the joint venture.
There is going to be some significant spend next year for the joint ventures that continues to ramp up.
So that would be the biggest thing outside of routine sustaining capex.
Okay got it great. Thanks, very much appreciate it.
And that will.
Todays <unk> session.
This time I would like to turn the call back over to Glenn for any additional.
Thank God.
Thank you operator, and thank you tool on todays today's call. These are certainly unusual and difficult dies and Peabody like the rest of the world is navigating uncharted waters of the pandemic.
I continue to be impressed however by our team's ability to react quickly to the evolving situation and a new way of doing business as we work to provide an essential service that is vital to so many thank you. So all employees feel tremendous efforts.
I'd also like to thank how investors for your ongoing support as we tackle need Sam headwinds and advance robust aggressive actions.
Got it towards the must structural improvements with every positive need to him action. We believe we a best positioning Peabody longer term success, we look forward to keeping you apprised over that progress, so hopefully stay safe and well and operator that concludes today's cool.
Thank you once again that does conclude today's conference.
Now disconnect.
[music].