Q2 2020 Peabody Energy Corp Earnings Call
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First reference there along with our public filings with the FCC.
I'd like now I'll turn the call over to Glenn.
Thanks Julie.
Good morning, everyone.
First and foremost I'd like to thank our employees for their continued dedication to providing essential products.
The Sun many in these uncertain times.
As always the health and safety about employees is paramount to everything we do.
We continue to walk right now the robust protocols and procedures inline with the C.D.C. and other health Department guidelines.
Mr Guy against kind of it.
Obviously coated I've had a significant impact across the global economy.
Specific to coal supply and demand.
Impacts actually to understanding the backdrop in which we are currently operating.
So today I'd like to stop is another you current market conditions, and then moving to actions we've taken to reposition our cost structure.
I will then provide an update on key initiatives.
Before handing the call I've dimmock to cover the financials.
[music] global economy continues to navigate through the pandemic the timing scope and scale of the recovery remains uncertain.
I will still capacity across Europe, and Asia Pacific.
Has greatly impacted metallurgical coal domain.
You did they through June global steel production was down 6%.
Excluding China.
It will still production was down 14%.
As a result.
Demand for major Nicole importing countries, excluding China.
As being down either died.
Well, we have seen sensipar responses.
The uncertainty has resulted in continued pressure on seaborne metallurgical process.
Hi, wanting had on certain this market is China was a net importer of steel for the first time in 11 years in June.
That was even with a record daily crude steel production during the month.
On the thermal side, we overall electricity generation and competition by natural gas and LNG has resulted in a challenging fundamentals as well.
Furthermore, slower economic activity continues to widen large importing nations.
Particular Indian thermal coal imports a down 20 million tons from the prior year through June.
Well Chinese thermal coal imports refer earlier this year.
Uncertainty around the position of import restrictions.
Has begun to impact demand.
Mike Mcauley fourth.
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Even though we think some supply responses seaborne thermal coal prices remained depressed.
He did these reports about 17 million tons through June and U.S. exports down 7 million tons Goodbye.
In addition, we'd expect further supply caps as most major seed one supplies have revised guidance level.
In the U.S.
Other disruptions have been coupled with extremely weak natural gas prices and growth in renewable generation.
The crushing called the man and potentially start writing the secular demand decline already underway.
Through June total life was down 4%.
Generation fell 31% to just 17% of the generation mix.
Natural gasoline.
Sure well I'd be to 39% and not the sense of the generation makes respectively.
Preliminary data for the July indicates improved coal generation I.
Just recently, we've seen an uptick in natural gas prices.
But if that holds should provide a more fiber back up a call and should the railroads be able to flex up to the increase demand.
Notwithstanding this the overall weak demand coupled with depressed pricing has required us to continue to aggressively pursued cost repositioning program.
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Good I, we've made significant progress and we have needed to.
Still more needs to be done.
Temporarily idled production at someone.
Adjusted shift schedules scaled back our workforce.
And reduced the number of units in operation.
A blended into a bit of the details.
Hello workforce perspective, we've eliminated an additional 450 positions in cycle.
In total since the beginning of the you Weve scalp I kind of level workforce by 50% as we continued with that dynamic conditions.
I would the pot 18 months, a global headcount has declined by 24%.
Due to a combination of accidents tighten as well as natural attrition.
Where possible we feel that work is allowing him to retain benefits, while we adjust along with the man protocols.
Most notably in mid June we still worried about 280 employees and contractors and I won by underground mine.
We have restructured the couple of Bella and more while months to up right as a single bonding complex.
Pottery production units, which includes trucks right as studies in supporting equipment.
And as a result, we've also scale back a workforce about 15% from a complex.
We'd expect the structural changes to resolve and increased efficiencies moving forward.
You pop treated these benefits.
Out of 17 colleagues I ended up right at mines have demonstrated cost per ton improvements when comparing second quarter actual results.
To the financial Eutwenty, not saying performance.
And that's even with substantially lower volumes.
These improvements are most notable.
Process surface operations. The quickly responded to and I became rapidly declining demand.
Cost per ton asset has operations it grew 6% compared to the prior year.
Even as volumes dropped nearly 30%.
I wanted to grab room and pillar operations have also responded well to challenging conditions.
Hello operations will that have not being able to respond as quickly to lower demand.
As you could imagine slowing down production on a long haul operation is a bit more difficult given complexities with fixed costs and often the geotechnical desire to advance the wall.
Well, we've made significant progress we know we cannot stop here, we will continue to pursue aggressive actions, particularly at a level operations to improve that cost performance across the entire platform.
We also continue to advance several commercial processes, including the pending payout the Colorado joint venture with such an option for an open yet.
What is the arguments in the joint venture to hearing will be held next week.
Well, we've always believed in the benefits the joint venture will bring to multiple stakeholders. The case is only growing stronger in 2020.
Challenging demand conditions and underscores the need for this transaction to remain competitive with other fuel sources.
We look forward to the judge's ruling by the end of the third quarter.
We also recently concluded the first round of the milk and yellow commercial process.
In which we continue to have interest for multiple counterparties.
Second round is underway and we look forward to providing an update at the appropriate time.
We will continue to widen these options again strategic development alternatives.
Market conditions and the status of the commercial prices I continually monitor to determine the timing of any incremental spend related to ventilation reentry to debate.
With that I'll now turn things of the map and he's first official cool as Chief financial officer to cover the quarterly results.
Thanks, Glenn Good morning, everyone I'll start today by walking through a few any notable items in the financials.
Second quarter revenues declined 45% prior year to 627 million.
Significantly lower volumes and depressed pricing.
Oh, seaborne demand and pricing were impacted by the ongoing Colgate thanking pandemic.
Yes demo volumes and prices were negatively impacted by continued weakness in natural gas prices. In addition, the closure of coming into in 2018 contributed to lower year over year revenues and volumes.
Second quarter results include a 1.4 billion dollar impairment charge at our North Antelope Rochelle nine despite being a fabulous asset lower long term natural gas prices changes and timing of coal plant retirements and continued growth in renewable generation, let us to change our long term life of mine assumptions, resulting in the impairment charge.
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While we still believe coal at essential to reliable energy grid and that our PRB assets are best positioned to serve that demand as witnessed by our 19% Q2 margins and the PRB. We do expect called long term share of the U.S. generation mix to remain below prior year levels.
Competition from other fuel sources, particularly natural gas and win remains fierce underscoring the case for the PRB coal it at a joint venture with such.
Well take litigation continued during the quarter, we incurred $13 million and transaction costs for they propose joint venture.
As I mentioned, we've taken a number of actions across the business to improve our cost structure is helping in restructuring charges of 16.5 million in the quarter.
Some of the benefits from those actions are seen in the reduction in SGN, a 35% from the prior year year to date SJ expand the 50 million reflects the lowest level for a comparable period since 2003.
Turning now to segment results, let's begin with seaborne thermal.
We sold 4.6 million tons with two and a half million tons export year to date export sales totaled just over 5 million times and the average price of $56 per short ton.
Actually inline with the average Newcastle benchmark price over the same period.
The seaborne thermal segment responded well to an extremely weak pricing environment.
Delivering cost per ton of sub $30, leading to 17% adjusted EBITDA margins.
Next from our seaborne metallurgical operations, where nearly half than in prior year levels as Colin disrupted global demand and we continue to be challenged by production constraints.
Lower volumes, particularly at show Creek cap Abella end Marvell continues to significantly higher cost per ton of $121 for this segment. In addition on payroll accounting impacts related to net realizable value adjustments increased met costs.
Albeit slower than anticipated we are continuing to progress the mainline conveyor system upgrade. It show Creek is also experienced lower yields at the mine further impacting coil availability.
During the quarter capable experienced a planned dragline outage on time and budget, which also impacted costs.
Cost of morale improves significantly in gene following elevated overburden ratios earlier in the year given more vales geology, there are times in which we will be primarily removing overburden as we work for parts of the first half from 2012.
We expect to remain I'd call for the remainder of the year.
Are you have several assets responded extremely well directly declining demand reporting average adjusted EBITDA margins of 20%.
And the PRB coal shipments declined 28% compared to prior year, primarily due to continued low natural gas prices impacting demand.
Regardless cost improved 5% to $9.26 per ton.
Compared to the first quarter cost per ton came down a dollar in two sets we realize that benefit upset room regained in the first quarter and continue to reduce repair and maintenance expense increased productivity optimize blending of MK inventory and began to realize benefits of head count reductions taken earlier in the quarter.
These cost improvements contributed to the PRB segment, earning 19% adjusted EBITDA margins in the quarter.
To put the PRB volume decline in perspective year to date, we've shipped at an annual pace of 83 million tons compared to 2018 sales of 108 million times, yet we quickly scaled down operations to meet lower customer demand, all while delivering lower cost per ton.
The other U.S. demo segment also responded well to challenging industry conditions, leaving the company and adjusted EBITDA margins at 22%. Despite volume declines cost part-time remained in line with the prior year as a team further streamlined operations by reducing spending and material services repairs and labor among other items.
Let's turn now to the balance sheet and cash flow, we ended the quarter with $849 million of cash and $926 million of liquidity, which marks a 262 million dollar reduction from March 31st.
During the quarter $48 million of cash was used for operating activities, including about $25 million of net interest payments and $15 million an hour of cash spent.
An additional $79 million was used for investing activities, including $55 million for capital expenditures.
In addition to cash usage for operational needs availability under the accounts receivable securitization facilities decline and we posted additional collateral for certain long term obligations.
To enhance our financial flexibility, we are undertaking a process to evaluate various strategic financing alternatives, including a debt for debt exchange among other options.
In line with this new designated I will pay online and related legal entities unrestricted subsidiaries in accordance with a negotiated terms of our senior notes and credit agreements.
Year to date working on has accounted for 74% of total seaborne thermal segment adjusted EBITDA.
Given this process is ongoing we will withhold further comments and refrain from answering questions on this topic today.
Yes, Ben continued uncertainty in global markets, we are continuing to suspension of full year 2020 guidance consistent with last quarter. There are a few known factors I'd like to discuss.
Cash preservation remains key and it's something we are focused on across the business.
We further reduced full year 2020, s. Uni by 10 million to an estimated 110 million.
It's also cut capital expenditures by another 35 million to 200 million and deferred $10 million of Aero cash spend the future periods based on operational sequencing.
Everybody has an outstanding reclamation track record and remains committed to restoring the land and timely manner and in full compliance with the regulatory requirements.
Shifting to contracted sales.
Well sales volumes will ultimately be dependent upon general economic conditions, whether natural gas prices and other factors as we sit here today, we expect PRB volumes in the second half of the year to increase relative to the first half of the year. We have 46 million tons committed for second half delivery versus first half shipments of 41 million tons.
Yes.
Are there any less formal shipments are expected to largely be inline with the first half of the year.
We also have 2.1 million tons of export seaborne thermal sales already price for the remainder of the year.
As a reminder, we also sell export volumes on a spot basis.
Moving forward, we believe it's necessary to take further actions to strengthen our cash flows across the business. We're focused on driving improvements to counter the impacts of lower demand and pricing and better position the company for the future.
I'd now like to turn the call over for questions operator.
Thank you Sir.
Ladies and gentlemen at this time, we'll now begin to question.
A question please.
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Two questions will be answered.
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Mr. listen from benchmark company. Please.
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Okay. Thanks very much.
A couple of quick questions.
Turning to stay away from from guidance because I know you guys are suspended yet, but maybe some thoughts on how to think about met coal volumes and cost.
After the year to the extent.
You are able to comment.
Yes, Mark Thank you Julie So obviously you're right we've we've.
The Sunday guidance, there largely going to be a factor.
Demand is right and what we've seen here here recently has been met coal demand.
Yeah.
Quite a bit more.
Production year to date, three Dan was down 14% excluding China.
Pretty drastic new we're continuing to work with our customers and will continue to work rebounded to meet their demand, but it's really good.
Pretty pretty big unknown at this point.
Remarks, I'd mention the focus on the longwall operations.
So about three longwalls.
Then assets.
And I believe we've been particularly focused on the fixed costs associated with those.
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We want to target that little bit that would assume that we'd be operating yet.
The capacity or normal rights and those as Julie said, that's going to be dependent upon.
On talking to our customers working with our optimism about the direct situation is in the second half of the so we're not really I would predict that at this point.
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I think question you're asking.
Are you hearing other parts potentially book talking about customers building up a little bit optimistic about the second the second half is that the sort of general dental nature of the.
A question.
So.
Yes.
I think I think for us.
Clearly.
China importing steel is probably a is probably as a general positive, but we do have walked down securing and idled capacity occurring across much of Val.
Good customer.
Markets.
We are starting to have the same sorts of couple of questions you you'll.
You will appeal hearing, but I think it's too early to just sort of Colette I think it's still a lot of uncertainty in the market and clearly tough conditions. It.
We'll see more metallurgical coal and that probably is reflected in why it's it's between right right now I also probably indicate that.
A lot of unknowns around China, and the import restrictions on Nicole will calls going into chartered as well.
And how quickly those guys targets are going to be Hildan diaby relaxed in some way in the second half of this year. So still a lot of uncertainty is a bit you were trying to fight.
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Yes, okay. Thanks for the question, we had we had net realizable value adjustment.
Pretty much across our net portfolio a round numbers, it's probably about 20 million or $20 per tonne impact.
No no with that being said.
The non cash noncash adjustment I did point out and then when that coal is essentially so it would be.
What about that essentially so it's just an accounting, but it did have a five point that I've talked before I started out about it certainly underscoring white hot hot market conditions were any.
Given its base.
Hi thing assets as we ended the quarter.
Mr. Matthew fields from Bank of America. Please go ahead with your question.
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And just wondering.
On the be designation.
Venture.
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You did 150 per year of RPD.
What about you were able to lead.
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Hi, This is mark I heard most of your question, we're having some told the line, but what I would say.
That.
Effectively.
I've made will be online is an unrestricted subsidiary in accordance with the negotiated terms at the senior notes indenture and credit agreement.
We don't we don't discuss than disclose individual basket, but I will reiterate that everything you've done is consistent with a negotiated terms of the documents.
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So we had we had about $80 million by our collateral that was posted during the second quarter.
We're just selling additional to that.
Well.
Please.
Mr. Jones. Please go ahead.
Okay. Yeah. Okay. Thank you and then do you anticipate having post anymore collateral going forward.
Throughout the year.
We were very clearly routinely have negotiations and discussions with our surety providers early in the third quarter. There was about $50 million that we have had posted here in July.
Don't we don't anticipate significant more at present time. However, we we have those negotiations in the surety have the right I contractual right to our request additional collateral of 2% to 100%, though the I'm sure you've on about.
And now I think you're aware, but those are generally in the form of letters of credit not cash collateral posting.
Mr. David.
Capital markets. Please go ahead with your question.
Hi, I Hope you can you can hear me I just have a question regarding that changes to the designation of the subsidiaries at Wilton John.
I mean potentially divesting that asset is also under consideration.
No I I'll say that the designation unrestricted unrestricted subsidiary has that has no implications or whether or not that asset would be for sale.
We have no no current plans today do you have to have that asset for sale.
Okay. Thanks, and then and then in terms of the.
I apologize.
Sure here, but.
Coal cash cost in the second quarter.
Just mentioned that there was a 20 dollar negative headwind.
The second quarter and does that go away all else equal cashcall should be down $20 a time in the third quarter net.
The question what was the impact of the net realizable value adjustments the inventory that we recorded during the second quarter.
That impact is approximately $20 million per tonne right.
Hi, first time after the twice now I'm $20 per ton in the second quarter non cash charge effectively the inventory and we haven't of what's is valued at at that realizable price less any cost too I get it to market.
And.
Just a little bit back for color. There that is based on that has sold right which were down substantially incident, we only sold about a million Bucks for 10 million tonne Alan getting anything any time during the quarter over 15 million times in the prior quarters. So 20 20 million dollar impact roughly but on a part time basis without.
Five given the weak demand that we thought in the quarter.
Thank you and going forward just to reiterate.
It's going to be a functioning.
Demand will styles that we take into second second half of the of the year and also in particular take going back to well one will operations their ability to continue to respond to the changes in demand profile.
Mr., Matt Vittorioso from Jefferies. Please go ahead with your question.
Yeah. Thanks.
Hello.
Hello.
With your credit facility in poorly.
Oh gosh, using the credit facility to close collateral.
So.
Other maintenance covenants or or any other covenant issues that are coming down the pipe on that.
Matt Yes, one I'll just reiterate departure from you know we are in compliance with all the covenants in our debt documents.
The covenant that it's probably probably what you're referring to is the.
The net leverage ratio of two times.
And as we progressed through the back half of the year here that firstly net leverage ratio will start to get tight we're going to do whatever it takes to maintain compliance and access to the revolving credit facility.
Okay, and then I.
I guess I'll just make more of the statement the question.
Yeah, you guys.
Buying back equity while back in but no one knew what conditions were going to look like Tony Tony but [noise].
Something like that but your lenders are getting on this call.
Questions about how you're maneuvering assets and what you're going to do with your cash, yes, I think I'm a little bit more transparent.
Just given that.
We didn't need to be in the second spot.
Maybe just consider that.
Thanks, Matt I'll, just as I mentioned before we want discuss any specific plans today, but as I mentioned in my remarks adept for debt exchange is one and then it's one of the many a financing options that we are considering.
And I think.
It's important also to recognize that the market landscape has changed considerably and graphically with end just thoracic six month of the year.
I mean, even if we just look at that price is a Q2 versus 19 purpose Q2 of 20 I mean, we're talking about 200 over 200 dollar for time versus 118, and so it can you do you think about the gap backdrop of when we were making those decisions versus where we sit here today things are drastically changed and nobody can pick up now now and then cobalt has.
Obviously, you know added to that uncertainty as well so we're taking multiple that across all areas of the business I'm going to talk quite a bit today.
Not been off Reconditioning program.
We've taken drastic actions on that front as well I mean over the past 18 month, we've eliminated 20 corporate kind of our headcount. So we're taking actions throughout the business in tackling it from every way that we can no doubt about it kapfer preservation remains key here, but we believe work we're doing what we need to do.
Mr. Scott shift from Clarkson. Please go ahead with your question.
Hi, Good morning, everyone. If I could also follow up on couple of questions about not coal costs similar reasons decided for belviq costs on a quarter or other than the Lord point.
Our system upgrade a sequence on them on the contract mobs are all side.
Situation.
Form or will some of these persisted into the third quarter.
Yes, so the drag on outage cover Bell was scheduled outage was done on time on budget.
At mobile because the pit sequencing, we expect to be on call in the second the second half of the year. So I guess entering the year, we knew the first.
A couple of quarters, we're going to just to add does.
Factors.
Good combined <unk> Friday's typing a little bit longer at a show pretty good and then then we will give each but we would expect to conclude that into the second half of you I think ultimately talks are going to be more back through the overall volume.
That's moved in our ability to respond, particularly with fixed costs. We've taken we've taken steps across really being thought platform.
But if I if I can go outside.
Metropolitan.
One of the underground months global operations, we have looked as to the display that advance applied got fixed costs were up on used schedules and reduce contractors and workforce.
Okay. That's helpful.
And then stay on costs, probably going to occur one one of the PRB.
Costs were pretty impressive this quarter, but I think part of that was due to less maintenance expense do kind of students cost levels repeatable through the remainder of the year or should we expect to move higher.
Borders.
Well I'm not sure we singled out mines, its maintenance expense, so little bit but.
The middle of the team has done a fabulous draw the cross sell and saw you is still platform and being able to respond to significant as low volumes.
We might we started to let me so lot of natural gas prices.
And the impact on on demand that was occurring in that first quarter I think we've taken.
Steps to respond.
It's also part of Val.
Selling.
Cost improvement program Thats really across across the entire business, but I think clearly the you with Phil thermal activity.
As really has really stepped up I know I would say that that what we are looking at is sustainable cost improved but now.
It's fair to say that we've got some particular that surface operations, we've got some tailwinds with respect to lower diesel process.
But we are looking notwithstanding that we are looking at ways in which we can capture sustainable costs I am not only for the for the next six months, but but over the last month.
Okay.
Yeah, no further questions at this time.
Well. Thank you and thank you also participating in todays cool I'd like to especially thank you all employees for their continued dedication to reducing your quality products and for the heightened commitment to health and safety.
Even with multiple changes to the business you've also on the ability to quickly get that I'm grateful for the unwavering focus as we adapt to a new global landscape.
So please stay safe and well and operator that concludes today's call.
This concludes the Peabody Energy Q2, 2020 Annie's calls thank you.
Thank you.
Oh.
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