Q3 2020 Peabody Energy Corp Earnings Call
Ladies and gentlemen, currently on hold for the there's confidence caused this stuff you had something to do Oh deal sometime to be underway. Shortly thank you for your patience and please remain on the line.
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The the Peabody third quarter Twentytwenty earnings calls.
At this time, all participants I didn't listen only mode.
During todays presentation instructions will be given for the question and that's just a fun.
If anyone needs assistance at any time getting the confidence. Please press the star followed by the sea at home.
As a reminder, this conference is being recorded today the ninth of November 2020.
I'd now like to turn the conference over to Julie Yates, Vice President of Investor Relations.
And of course morning indication. Please go ahead.
Good morning, and thanks for joining two bodies earnings call for the third quarter was 2020 with.
With me today are president and CEO, Glenn Kilo as CFO Mark spoke about.
Within the earnings release, you'll find our statement on forward looking information as.
Well as a reconciliation of non-GAAP measures.
We encourage you to consider the risk factors reference there along with our public filings with the FCC.
I'll now turn the call over to Glen.
Thanks, Julie and good morning, everyone.
2020 has been a year unlike any other.
They bought it has certainly been active over the past several months, we sold to third quarter results, reflecting progress just what challenged demand fundamentals.
In addition to our ongoing portfolio enhancements.
We've been working on several specific financial objectives.
We still have a change in our recent sure do you bring it to the state.
No watch Ritchie.
James how long standing commitment to reclamation.
In fact Oh.
The last several years.
We've achieved final phase three bond release more than 20000 acres across 10 months Australia's largest starts I.
I guess recently.
Management practices related to the successful Weve education.
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So the excellence in money.
I should award or the Wyoming Department of environmental quality.
Mark will be covering more have financing activities, but now I'd like to touch on the market fundamentals.
Well people these ongoing protocols and approach to health and safety have allowed us to maintain a central operations.
Well the economy and.
Baucus continued to be impacted by the pandemic.
Well certainly we have seen early signs of recovery each I include.
Including improved industrial production.
We are cautiously.
Cautiously optimistic.
The improvements can be sustained given recent surgeons incurred but not seen cases worldwide.
Within the steel industry.
Great fundamentals are being led by China. It's.
Steel production up 6% year to date.
Even so Chinese imports of met coal has been muted given artificially put controls.
India met coal imports have also been challenged declining <unk> million times year over year through September.
Could you put the demand pressures.
Met coal demand revise boy pretty pandemic levels and continues to pressure seaborne prices.
We do believe that process will ultimately rise from current levels. However, the timing is I'm not.
Major factors, we are keeping an eye on include potential changes and younger Fisher legal controls in China as well the timing and tried to cover the recoveries in other major steel producing countries.
We can Matt has also been the story for India seaborne thermal imports shooter.
Jude or even three other hangs at high domestic production.
In contrast, I, usually am nations, demonstrating sizable year over year growth.
No 1 million songs through September.
Particularly within seaborne thermal we are seeing a meaningful supply response was like Indonesia is exports are down 35 million songs either died.
Columbia, U.S. thermal exports are down sizably as well with.
With the September Columbia, or export level locking in all time lows.
As we look ahead at Mako draw those easier is expected to represent the vast majority of seaborne met demand growth.
The next several years so.
Supply growth is expected to be led by Australia.
I haven't countries are also projected to be a notable contributor to increases in both seaborne met and thermal coal demand.
Even rapid industrialization and electrification.
In fact coal is still expected to see guidance in absolute demand for generation. Despite shots deterioration in terms of consumption in developed economies like the U.S. into Europe.
Within the U.S. coal generation is down 24% through September.
I was kind of it has accelerated what was previously projected to be multi year decline in coal demand.
I was hoping to get it is that we have seen an uptick in natural gas pricing.
We've also seen a decline in utility inventory levels, while still elevated.
Moving in a positive direction.
That's the industry.
Now, let's talk about our actions.
I want to just remind me what I previously seaborne met portfolio.
Which includes resetting cost structures.
Choke rich metropolitan.
Let's start with show courage.
It's hard to say, we've had a tough year here Mike.
Market conditions has.
And continue to severely impact customer demand.
With demand as well as lower productivity rights the pool, a geological conditions, especially out of the closet a batch panel.
Also resulted in cost being elevated this year.
In addition, Cabot rights in the third quarter, the hard show Craig.
Got any of them on the upper right.
Corresponding with increasing rights, rather bad surrounding community.
Given the combined impact of these challenges.
Elected to temporarily auto show create beginning in early October.
Pulls provides the opportunity to better position the operation.
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A metropolitan.
We have focused on improving development rights those gallons production during periods of weak market conditions.
Currently we are in discussions with that customer and workforce to Richard brings to best serve the needs of all stakeholders.
Oh, just this month, we battled an additional excavator fleet at mobile given current inventory levels, coupled with weak demand.
Earlier this year, a middle man and you operating management team took over the day to day activities.
Beginning to see the benefits of that change as well as cost improvement initiatives.
Place Tonight that fourth quarter volumes, the middle man.
Fully committed as demand for that baseball PCR product has been robots.
Moving to our seaborne thermal business, we continue to post impressive cost performance.
Led by woman, John Yeah, one by surface mining.
Joint production of the United won the joint venture.
He is on schedule to begin this quarter.
Well the transition was already well on its own production anybody who will benefit from lower strip ratios and access to otherwise stratified resorts that will enable the continued production about high quality seaborne thermal products.
We continue to match production with demand across the operations.
And as a result, we scaled back production at relatively high cost one of the underground in the third quarter.
The Mont is focused on enhancing its competitive position. So Nigel continued monitoring the current history always 2021.
In the U.S., we recently terminated our joint venture agreement with much following the court's decision to support yet he sees EPS to block the transaction.
We are of course deeply disappointed.
With that decision and it seems back on our portfolio objectives.
That said, our PRB operations have done a remarkable job in responding to this challenging market.
And we continue to believe we have the best Liberal sort of assets as demonstrated in the third quarter.
We plan on continuing to adjust to changing demand profiles and it has to have a big bets against natural gas by serving as the low cost PRB virtusa.
With that I'll turn it over to Mark.
Thanks, Glenn and good morning, everyone.
I'd like to start with our recent success on the security front. We have reached what we believe is the first of its kind agreement for substantially all of our surety providers to resolve outstanding collateral requests and limit future collateral requirements I.
I would personally like to thank all of our surety providers for their collaboration and that supports that further enables our long standing commitment to land reclamation.
Based on the terms of the agreement, we will post $75 million of additional collateral and provide second liens and $200 million of mining equipment.
And annual basis thereafter, we will provide an additional $25 million of collateral through 2025 for the benefit of the series. The collateral will further increase to the extent the company generates more than a $100 million of free cash flow in any 12 month period, whereas asset sales greater than 10 million.
In exchange for this the surety providers agreed to a collateral staff so not to demand additional collateral through December 2025, or the maturity date of the credit agreement whichever comes sooner if.
They've also agreed not to draw on the letters of credit or cancel any existing surety bonds. During this time period.
The collateral stands still is contingent upon us reaching an agreement with our revolving credit lenders in an AD hoc group of the 2022 note holders.
Based on our fourth quarter outlook, it's probable our results will not be sufficient to meet the net leverage ratio requirement under the revolving credit agreement given this any additional collateral request prior to the shirt you resolution U.S. GAAP required that would that be reported as current on our balance sheet at September 30.
While we have not yet reached an agreement with the creditor group. Our primary objectives are to obtain covenant relief extend the maturity profile and maintain sufficient operating liquidity.
The company's longer term goal remains to reduce debt and deleverage the business.
Let's now walk through a few notable items in the financials.
Third quarter revenues declined 39% from the prior year to 607 1 million on lower volumes changes in mix and weaker seaborne pricing.
U.S. demo revenues fell 215 million, including an 83 million dollar impact from the prior year closure of kinda.
As Glenn mentioned, we started to see the benefit of our cost savings initiatives across the platform.
These actions as well as lower volumes resulted in a 39% reduction in operating costs and expenses.
During the quarter, we amended our not represented retiree medical coverage to better align with industry benchmarks and current business conditions. As a result, we adjusted the liability to fair value utilizing lower discount rates and the prior year.
The result was a $13 million mark to market loss in the quarter and 175 million reduction in the liability.
During the quarter, our thermal segments demonstrate exceptional cost performance amid difficult industry conditions further highlighting the strength of our surface mining capabilities.
Seaborne thermal cost per ton totaled $27.59, representing a 22% improvement versus the prior year as we benefited from lower ratios and improve geology at the wombles surface mine and will pay off.
Of the 4.6 million tons of seaborne thermal coal shifts during the quarter 2.7 million tons were exported at an average realized price of about $46 per short time.
C. One metallurgical coal shipments totaled 1.1 million tons compared to 1.8 million tons in the prior year.
Lower pricing and a higher mix of PCIA impacted our realizations during the quarter.
Well, it's still too high the initial steps we've taken to improve costs within our seaborne met segment are beginning to take hold despite.
Despite lower volumes seaborne met cost per ton improved 15% compared to the third quarter of 2018.
Finally, our U.S. thermal mines have been very successful in reducing cost to mitigate the impacts of lower demand.
I'd be posted 30% margins in the third quarter and record low cost just under $8 per ton.
Well costs reflect our optimization of can vision based monitoring to reduce maintenance spend as well as lower fuel and sales related costs. We also recognized a one time benefit of 35 cents per ton in the PRB, but.
But just to be clear PRB cost performance would have been a record even without this one time benefit.
The strong cost performance led to our PRB mines generating $78 million of adjusted EBITDA in the quarter or the U.S. their mines to generate an additional 52 million.
From a cash flow perspective, we generated $21 million of operating cash flow and ended the quarter with $815 million of cash.
Looking ahead to the fourth quarter, we expect a modest improvement in seaborne shipments and a slight decline in U.S. thermal guidance compared to the third quarter fourth.
Fourth quarter seaborne met costs are anticipated to rise due to a planned longwall move at metropolitan and changes in product mix seaborne thermal coal should be largely in line with the third quarter.
We have 23 million tons of PRB sales and 5 million tons of other U.S. Their most just committed for delivery in the fourth quarter. We also have about 2 million tons of exports seaborne thermal sales price for the remainder of the year. In addition to 700000 tons of seaborne met sales.
2020 full year capital expenditures in ESS, you may have both been reduced to approximately 185 million and 105 million respectively.
Looking ahead to 2021 market indicators suggest improvement and seaborne coal demand and further economic recovery at the same time U.S. thermal demand should also benefit from the economic recovery and higher forward natural gas prices offsetting the impact of additional plant retirements.
Sales volumes will ultimately depend on market conditions. Other company specific factors include the anticipated resumption of production that Shoal Creek as well as lower production from United won both joint venture due to the initial transition phase.
Across the entire organization adaptability remains Paramount, we are adjusting to changing demand resetting our cost structure and ensuring financial flexibility.
We've made solid progress we're committed to doing more.
I'd now like to turn the call over for questions Anita.
Thank you, Sir ladies and gentlemen, find we will now begin.
Okay.
Yes.
If you have a question. Please press the star followed by the <unk>.
<unk>.
Your questions will be answered.
Yeah.
It's about using speaker.
The headset before discussing the numbers.
Your question.
Yes.
Thanks, Steve.
One moment please for the first question.
Well take our first question from David Gagliano from BMO capital markets.
Please go ahead with your question.
Okay. Thanks for taking my questions first I I actually had a question regarding.
I guess, a separate 8-K that was halted the declines in the journal, there's quite a bit of projections and that collection.
Like some 21 through 24.
Lot of good information I think I'm, just wondering are you going to talk through any of those projections.
On this call are on subsequent calls.
Yes, I think so thanks for the question the 8-K or does or doesn't include projections for out for the Wilton young asset through 2024, yeah, they're out there I'm happy to answer questions. The the remainder of the business as projects.
Through a 321 and 2022.
Okay. Let me ask this question on the on the Remainco projections for 21 22.
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Not I just want to make sure that we didn't expect was not to be.
Effectively guidance for the next two years forward remain calm and then if we just add one thing John you got together for total company as example, <unk>.
They've done their projections rise, there's always kind of mid year 2020. We are we are undergoing a obviously our annual budget process now, we typically will come out with a with formal guidance or at the next next call.
Okay and then just one other question on other filings. The 10-Q that came out this morning. It looked like it showed a cash balance went down.
Our total liquidity I think went down <unk> million or 440 million or so from September October what was originally a $40 million.
Right.
I think I think post quarter. Some of that is just regular working capital movement or potential changes in the availability under the company's accounts receivable securitization facility as well.
Okay. That's it for me thanks.
Thank you.
Thank you.
Yeah.
You can't lose yourself back into queue for a follow up question.
Sorry.
Next question Mr., Mark Levin from the benchmark company.
Please go ahead.
Great. Thanks, and congratulations on your Oh I'm sure.
Couple of questions.
Well I think you referenced that the commercial process is still ongoing.
Any thoughts on probabilities.
Two decision.
This quarter.
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Look like a sale does it look like.
Sort of the range of possibilities and how would you probability weight them occurring.
Yes.
He believes Vic Mako wouldn't wouldn't want to probably why the process is these are ongoing as we as we continue that I think we talked about.
Previously you were looking at a range of options backlogs South central joint venture development ongoing.
Ongoing development options.
The process has probably got maybe going a little bit slower than what we would have anticipated and pod around diligence challenges associated with kind of it but also the overall market conditions not going to put upon a time on it but the excited the process is still ongoing.
Got it.
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Optimizing the portfolio, but are there any asset.
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Or something that could happen over the next three to six months that would.
She really change your.
Your cash position.
Probably got to give the same answer to what we give it in the box they look.
We're right where agnostic.
As to how value is created we continue to look across our portfolio, but I wouldn't want to speculate on on individual autos.
Okay and then my final question is just for 2021 on the PRB.
Reported reporting.
I guess in the 11 sort of get low elevens, that's kind of the way.
Just think about where the market is or where you guys would be contracting.
For 2021, and then you know if you can provide any thoughts on what's your book looks like your 2021.
Yeah, we've given some some view around through the additional materials around Oh.
Our projections into 2021 week to being around 90 million tons, but we wouldnt typically give guidance until the first quarter of next.
Next year.
However, would probably contracting and so with respect to the PRB and obviously the same has done an amazing job and continue to do an amazing job highlighted this this quarter.
Closing the gap for US is had moved up that should be encouraging.
But probably the level of contracting.
Activity that we say would be below what we typically associate with this level of Oh.
Oh, Oh, Oh, Oh improved market.
Fundamentals that means.
The we've seen a draw on stockpiles and we probably anticipate having further stop all yours like next year I'm not going to call right comment on car contracting conditions, but the fundamentals would support improved conditions in the 2021.
Got it my last question is around the.
Official import ban.
Yeah.
Guys don't sell but so much coal into China, but I'm just curious.
You know how you guys have been impacted by it and what you're seeing and maybe what your expectations are around around what's going on there how that's impacting the seaborne market.
Yeah, just any comments.
Well, we have sold thus far up just under about 2 million tons into China. This this year about 1.4 million tons of thermal about half and half a million tons of metallurgical coal modestly.
Uh huh.
Hi.
First of all is not it is is the site signs as everyone else but.
No clearly is gone to say some of us in.
In terms of what they need back to dawn on markets and probably is depressing seaborne.
Markets more than what otherwise would be the case, particularly new types of metallurgical coal, which when you look at the fundamentals of probably a supporting a high across.
Yeah at the moment.
Hi, coking coal.
Arbitrage against the into China would otherwise represent about $50, a a metric a metric Tom if it wasn't for those import input import.
Import restrictions that are citing bought us well have anymore no problem that in terms of.
Of what's likely to happen going forward, but the fundamentals will support would support.
Caused more fire will save on conditions.
Okay, great. Thanks, very much appreciate it.
Thank you.
He said that any additional questions. Please press the star followed by the <unk> at this time.
He said using speaker equipment, you'll need to lift the handset before making your stocks.
And the next question from Lucas Hi.
Hi from B. Riley.
Please go ahead.
Hey, good morning, everyone.
Mark.
Good.
Good job on the surety agreement and Cat you mentioned Mark some contingent fees in the prepared remarks could you walk us through those that one more time, that's just want to make sure I catch all of them and then secondly would there be any ongoing maintenance covenant relief.
To add to that to that data surety agreed. Thank you very much.
Yes look its thanks, thanks for the comments and questions first on the on the surety agreement. The the collateral stands bill is contingent upon reaching an agreement with the <unk>.
Our CF lenders enter 2022 note holders.
That needs to be completed by December 31st or extended the company's option to increase participation.
By the end of January.
I wouldn't speculate Oh, and then there's no there's no maintenance covenants. If you will on the on the surety agreement or the collateral standstill and.
Certainly wouldn't wouldn't.
Wouldn't speculate on any terms that we would negotiate with the unsecured creditors and ongoing transaction.
Got it got it but as it relates to that surety if.
I tend to take on that and the agreement goes into effect.
Effectively you would have no.
No no no additional demand in 2025.
That's right the collateral the collateral would be the the in addition to the upfront collateral opposed today it will be $25 million per year, and then again, if we if we generate.
More than $100 million of free cash on a 12 month period, there's a mechanism in there too to provide additional collateral along with that with asset sales greater than 10 million.
Oh.
Very helpful. Thank you and good good job on that and then a.
Second a.
You happy.
Takeout on Salt Creek and.
Providing some additional color today, but.
But can you can you elaborate on hot elevated cost structure that was mentioned.
Hi must be idling announceable really appreciated a better sense kind of how this mine has operated what challenges we have encountered and how you anticipate you get dressed that's helpful. Thank you.
Yeah. Thanks, Thanks, Lucas I think.
As we said last quarter, probably one of the biggest challenges that we've had in in adjusting to sit and give you. Some market disruption. This thing with a long haul operations and being able to we think it that much more success on the surface a little over that pillar operations to be able to so to address those back on the levels. It's been.
I mean, it's been more challenging and show courage. It's been one of those is one of those areas. It also time in a year that we took to had talked about doing upgrades improvements around.
They'll work Viasystems those sorts of things on top of that we did in Canada.
Geological challenges at the close out of our age panel.
I would also think at the time in the third quarter that bond was was was also being impacted by.
The community the transmissions are recurring in the in the broader community around around Hollywood all of those factors looking at the well look like would have led to the to the elevated cost position.
And I think what we're focused on now.
It's a it's really looking to try to reach that reset the cost base going forward and at the same time, yes.
Yes, it's a sort of to move with demand continues.
Continues to just just to strengthen so.
It's the same EPS, but taking a busy on our on a range of activities.
And targeting.
Yep and improved cost position moving forward.
Thank you I appreciate that I'll turn it over and best of luck.
Thank you.
Thank you. It appears that are no further questions at this time I'd like to turn the call back to your host for any additional.
No. Thank you Ofer I didn't look thanks, everyone for the questions and for participating in todays call.
To our employees you continue to impress amid these most difficult and dynamic industry conditions.
Rifle for your ongoing commitment to health and safety and the spirit of continuous improvement and so a lot of investors. We appreciate your ongoing support and engagement as we transition into your head operator that concludes our call. Thank you.
This concludes today's call. Thank you for your participation you may now disconnect.