Q4 2020 Peabody Energy Corp Earnings Call
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Good day, ladies and gentlemen, and thank you for standing by.
Welcome to the Peabody Energy fourth quarter 2020 earnings conference call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time. If you should require assistance during the call. Please press Star then zero. This conference is being recorded I'd now like to turn.
The conference over to your host Julie Yates. Please go ahead ma'am.
Good morning, and thanks for joining peabody's earnings call for the fourth quarter of 2020.
With me today are president and CEO, Glenn Kellow, and CFO Mark per rack.
Within the earnings release, you'll find our statement on forward looking information as.
As well as a reconciliation of non-GAAP measures.
We encourage you to consider the risk factors referenced there.
Along with our public filings with the SEC.
I'll now turn the call over to Glenn.
Thanks, Julie and good morning, everyone.
As you all know 2020 brought on many challenges here in the us and across the globe.
So the coal industry and Peabody in particular, it was no different.
As the Covid pandemic kind of in full force in early 2020.
Sorry to dwell on natural gas prices.
Low global energy prices.
And the disruption of certain markets throughout most of the year.
These unrelenting impacts contributed significant financial headwinds.
For the industry and for Peabody.
Operational results was severely impacted by June threats, both depressed.
This demand.
On pricing levels.
Surety markets requested significant additional collateral in the third quarter.
And we were at risk of breaching our key financial Covenant based on fourth quarter results.
Against this challenging backdrop.
We engaged in negotiations with our surety bond providers.
A group of 'twenty to 'twenty two noteholders.
And our revolving credit lenders.
As Mark will talk about in more detail here in a moment.
We were successful in reaching an agreement.
We closed on just last week.
We accomplished our key objectives of extending it substantial portion of our debt maturities.
Timing financial Covenant relief.
And securing a deal with the charities.
We will not just busy on the financing front either.
We had cited debt will be continued demand only when it was safe and economic to do so.
Over the course of 2020, we temporarily idled non individual mines.
Spanning from one week day multiple months.
We adjusted shift schedules.
The number of production units in operation and.
And further streamlined corporate and support functions.
These actions Unfortunately led us to reduce our global head count by approximately 2000 employees.
Okay.
Early on in 2020, when we announced our cost repositioning program.
We intentionally did non set a public target as we filled our results should speak for themselves.
In that regard I think they have.
Three out of four of our operating segments reduced cost per ton compared to the prior year. Despite a significant reduction in volumes.
We reduced total SG&A costs by $46 million.
That's not to say, we don't have more to do but it is a credit to the hard work of the Peabody team coming together in these unique and challenging circumstances to achieve those results.
Despite the challenges surrounding us.
The operations rightly keep safety at the forefront.
In the broader context that the U S coal industry had the safest year on record according to Amtrust.
We had a consecutive year with no fatal accidents at any of our operated mines.
For U S thermal mines had zero.
Reportable incidents.
Demonstrating truly zero harm.
And Australia had its lowest incidence rate since 2017.
In addition.
Our team has always taken great pride in our land restoration legacy and this year was no different.
Globally, we reclaimed.
One acre of land for every acre stood.
Over the past five years Peabody has restored more than $1 three acres of mind land for every Ikea disturbed.
Our progress is also evidenced in the us through the final phase III bond release of more than 20000 acres across 10 months thoughts in the United States.
As we embark on 2021.
We are seeing signs of improvement in seaborne thermal coal demand.
Global seaborne thermal supply has also had been significantly impacted largely due to severe weather in Indonesia, and COVID-19 related production disruptions in China and labor issues in Colombia.
Should demand continue to improve we are well positioned to capture value.
Over the past five years, our stable on thermal segment has delivered average cost per ton of $31 Nike net segment competitive.
Any pricing environment.
While seaborne met markets are also showing encouraging signs of improvement from low seen in 2020.
Trade flows remained disrupted.
Causing short term pricing volatility.
China's limits on Australian coal imports as well, so the scope and scale.
The steel market recovery in traditional markets continue to impact the seaborne met market.
Given this backdrop, we remain cautious as we consider bringing on any additional supply, including resuming production and are currently suspended.
Suspended mines.
U S thermal coal markets continue to be heavily influenced by natural gas prices.
Renewable generation and weather.
This is especially evident in what happened in 2020.
For most of the year prompt natural gas prices were below $2 50, and coal demand suffered.
Yeah.
In December from gas prices averaged $2 58.
And as a result, we estimate the coal demand rose to nearly a quarter of the generation mix.
Currently the 2021 forward strip gas price is above $2 50.
That said there is no question that U S. Thermal coal is a challenged market and one that is in secular decline.
However on standby our U S thermal assets, we have the lowest cost assets in the most competitive basin net demonstrated meaningful cost improvements year over year within our other U S thermal segment.
Against that backdrop.
I'll now going on when you're a bit more detail around what is happening at some of our operations and what we have accomplished over the past year.
As I mentioned previously last year, we undertook numerous initiatives to reduce cash spend as we idled mines adjusted shift schedules and reduced the number of production units in operation.
Across our U S thermal operations, we temporarily idled four months the less than a month at a time to better match, our production with customer demand.
We have the ability to and continue to ship contracts among minds, the best serves our customers needs and maximize value.
Within the stable on thermal segment, we temporarily suspended huambo underground in mid 2020, given tough market conditions.
The team has done a great job of improving on development rights.
And I'm pleased to note we will now be moving ahead with the mining the next panel and the current district in 2022.
We also on a roll for of our net <unk> at some point in 2020.
Shoal Creek in Metropolitan above still suspended and we are cautiously evaluating market conditions as well as continuing conversations with key stakeholders to debt.
Meet their needs and enable us months to resume production.
In 2021, we are planning on further advancing the <unk> project.
This is a relatively low capex project that will transition mobile to a greater mix of semi hard coking coal and extend the lots of them on.
We are also still progressing the north Daniela commercial process.
While it has taken a bit longer than we would like given COVID-19 related challenges and market conditions. We continue to believe <unk> is a valuable assets with world class infrastructure on high quality coking coal.
I'll now turn the call over to Mark to provide some additional color on the financing process on results.
Thanks, Glenn and good morning, everyone I'd like to start today with an overview of our recent financing activities.
Last week, we closed the previously announced exchange transaction.
Ed on the major highlights now.
Nearly 87% of the 2022 senior secured notes were tendered in the exchange offer.
Of note holders who participated in the exchange received a pro rata share of both the 10% senior notes secured by Wilson Young and the eight 5% senior secured notes issued by Peabody as well as additional cash consideration.
This resulted in the issuance of $194 million of New senior secured Wilson you on note and a $195 million of new senior secured Peabody notes, both due December 2024.
The $60 million of 2020 notes that did not participate in exchange are now unsecured and will continue to be paid a 6% coupon until March 2022.
$540 million revolving credit facility commitments. We're also exchanged for $206 million of senior term loans secured by Wilson young.
$324 million letter of credit facility and $10 million of cash consideration.
With the completion of the exchange transactions are global share. The agreement has also been locked in.
Per the terms of that agreement, we posted $75 million of additional collateral in December in the form of letters of credit and we posted an additional 25 million per annum through 2024 subject to an increase to the extent the company generates more than $100 million on free cash flow in any 12 month period, RIS asset sales greater than $10 million.
In term of surety providers dropped outstanding collateral requests and have further agreed not to request additional collateral on existing bonds or cancel any bonds throughout the duration on the agreement.
Taking a step back that leaves us with a $60 million maturity in March 2000, $20 million to $595 million on secured debt due December 2024, and 889 million on secured debt due March 2025.
Within the next two weeks, we will make an offer to repurchase $22 5 million in principal amount of the new Peabody notes at a price of 80% of par.
We also have the $324 million letter of credit facility and a $250 million accounts receivable securitization facility.
At December 31, we had $790 million of cash on cash equivalents.
This capital structure provides the foundation for future value creation, and the flexibility needed to continue to pursue operational improvements across the platforms, particularly within our net segment and capture the expected seaborne market improvements Glenn mentioned.
With that recap of our financing activities I'd now like to turn to the segment performance for the fourth quarter, beginning with seaborne thermal results.
Once again, our seaborne thermal segment delivered strong fourth quarter cost performance with cost per ton of $27, 12% lower than the prior year and total seaborne thermal segment totaled $5 2 million tons with $3 2 million tonnes exported.
While margins were impacted by weaker pricing the segment delivered 24% adjusted EBITDA margins are $45 million of adjusted EBITDA.
<unk> contributed sales of $3 6 million tons, and adjusted EBITDA of $21 million.
In addition, the mine achieved an all time low for Australian cost per unit of $4 40 for the full year further demonstrating the mines first decile cost performance among Australian thermal coal mines.
Seaborne met results were negatively impacted by weak pricing and demand idling Shoal Creek the planned longwall move at Metro and mine sequencing at the <unk>.
For the quarter net cost totaled $107 30 per ton on only one 4 million tons.
As a result, the segment reported $34 million of negative adjusted EBITDA.
Our U S thermal mines performed incredibly well, despite tough demand conditions and COVID-19 related challenges.
<unk> segment shipped 22 million tons at an average adjusted EBIT margin of 20%.
The <unk> reported adjusted EBITDA contributions of $52 million on strong productivity and disciplined cost control.
In fact, non <unk>, both achieved record annual unit costs in 2020.
The other U S thermal mines generated $45 million of adjusted EBITDA compared to the prior year cost per ton were 25% lower largely due to the <unk> settlement, resulting in elevated costs in the prior year.
Even without the client us settlement impact costs, we're still over $2 per ton lower year over year on.
In large part due to ongoing cost management efforts.
<unk> and <unk> also achieved record annual cost per unit in 2020.
A quick note on us thermal mine productivity as measured in units per employees shift 2020 was 5% higher than 2019, despite 14% lower total units.
During the fourth quarter, we recorded a noncash impairment charge of $69 million.
Related to unassigned coal reserves in the Midwest that were not in our mine plans.
Loss from equity affiliates totaled $34 million, including a $33 million reserve on tax assets at middle amount, which has been excluded from adjusted EBITDA.
Now, let's turn to our 2021 outlook.
Starting with the U S thermal assets.
We are planning for PRT volume speedy largely in line with 2020 shipments of 87 million tons about 80% of those volume they're priced at an average of $10 82 per ton.
Other U S thermal shipments our plants declined from 2020 levels in part due to plant retirements.
Currently we have 16 million tons priced at an average realized price of $37 50 per ton.
U S thermal shipments will ultimately be dependent on general economic conditions natural gas prices weather and other factors.
Although recent conditions are favorable we had a relatively warm start to winter and utilities had accessed adequate coal stockpiles, both of which are expected to impact first quarter 2021 shipments.
From a cost perspective, we expect both <unk> and other U S thermal costs to be largely in line with 2020 levels.
Seaborne thermal volumes are expected to decline given wireless transition to the United <unk> joint venture.
We anticipate our share of the call can be about 2 million tons. This year.
However, underground volumes are anticipated to increase modestly partially offsetting the transition to the surface joint venture.
<unk> young volumes are expected to remain in line with 2020.
We anticipate a slight increase in seaborne thermal costs, given lower volumes and higher royalties associated with an expected improvement in pricing.
Fight this modest increase our seaborne thermal segment is expected to deliver strong adjusted EBITDA margins in 2021.
As mentioned earlier, both Shoal Creek and Metro are idled we.
We are cautiously evaluating market conditions, and we will be deliberate in determining future production claimed at those mines.
Prior net volume projections assumed shoal Creek resumed production in early 2021, and net net trappers operational for the full year.
In 2020, those nine ship, a total of $2 3 million tonnes.
On the other hand, we are planning for slightly higher <unk> shipments in 2021 and could move more if conditions are favorable given inventory levels.
On a corporate perspective, we anticipate further reductions in SG&A with annual spend targeted at $90 million full year capital expenditures are anticipated to be approximately $225 million, including about $135 million related to mine extension projects.
With the new capital structure cash interest expense is anticipated to be about $150 million.
Taking a quick book and just the first quarter of 2021 results are expected to be down from the fourth quarter, given lower volumes across each of the segments.
Our U S thermal customers generally take higher volumes in the fourth quarter to meet their full year commitments together with the slower start to winter, we expect first quarter shipments to decline modestly.
Seaborne thermal shipments will be impacted by lower volumes from the United <unk> JV.
Net shipments are expected to be lower due to the suspension of production at Shoal Creek and metric, which combined shipped about 600000 tons in the fourth quarter.
Indeed, 2020 has been extremely challenging year.
These challenges were met with decisive action and while we still have our fair share of headwinds we remain laser focused on further reducing cost and improving cash flow to best position. The company for success in all market cycles.
I would now like to turn the call over for questions on.
Operator.
Thank you.
Ladies and gentlemen, if you wish to ask a question. Please press star one on your telephone you may remove yourself from the queue at any time by pressing the star key follow up on the digital.
You are using a speakerphone, please pick up the handset before pressing the corresponding digit digits. Please limit yourself to one follow up in order to allow everyone the opportunity to.
Ask a question once again press star one to ask a question.
And we'll go first to David Gagliano with BMO capital markets.
Alright, great. Thanks for taking my questions hopefully I can get us a few in because it's kind of a series of questions and I need to get cut off on the middle of that.
If possible I know, there's a limitation, but I'll try and keep it relatively tight but I think I reported keeping together so.
Along those lines I wanted to talk a little about.
Re pricing leverage which.
Maybe perhaps being overlooked a little bit.
And I was wondering if you can help me quantify some of us.
For example, the seaborne thermal business, we're coming up with an estimate for 2021 volumes, let's call it about 17 million tonnes.
Can you just remind us again, how much of that is.
Available to re price in the seaborne export market.
And also if prices in that market stay where they are to day.
What would the $47 number that was reported in the fourth quarter will look like on a forward looking basis.
Dave I'll see.
Start.
On that 17 million seaborne thermal tons.
Obviously looping on has that domestic contract and there's about seven to 8 million tons that are delivered domestically the remainder of that 17 million tons would be available for export.
And then I would just add on there Dave.
We've got a very small volume of that of that price, which is our typical practice there and then we've got.
I would say just over about 1 billion tonnes that would typically be committed to that Japanese fiscal year price. So the rest would be subject to.
Spot or some sort of index pricing throughout the year.
Okay, so that so.
So is it reasonable.
Based on what you just said that $47 number that was reported.
If we look at it versus the $80 now is there any like what sort of a reasonable discount on average to assume vs.
The $80 per hour number that's also out there now.
Total largely be a function of net freight and of course that 47 includes the domestic volume.
Wow.
So if we think about from what we have for for 2021 based on the window opened and an underground obviously at least signal with the Rainbow open cut being down compared to the prior year that Nic.
Higher higher new capital shipments will be a bit lower as opposed to what it would have been in 2020, obviously, given we haven't given guidance specific guidance, it's a little hard to get into.
Two specifics on mix, but apples to apples, we will have more of a lower quality product simply because of that one low product coming out by 2 million tonnes.
So thats part of their trading activity.
<unk> to look at what's going on in those various markets and try to adjust the mix weighted relevant in order to capture the best the best margin and make customer requirements. So so.
The team will be looking to have some flexibility.
Pending what was going on in the different quality markets within that mix.
Okay.
Okay and then.
Sorry, just one last clarification question on that one you said the $47 included the domestic lines I thought there were two numbers reported in the press release.
And I thought the $47 was actually just the export number I'm just trying to.
Clarify that number.
Oh, sorry, I may have I may have misspoke.
You are right. The 4700 84 hour shifts the export price for the quarter.
Okay. Thanks, and then just if you could also on the met side.
Two questions related.
Idled mine costs.
On a quarterly basis for example at Shoal Creek, what are those on a millions of dollars basis and then also.
If you could also give us a sense.
<unk> setup for met that I, just mentioned for thermal.
On our numbers, we've got about let's say $5 5 million tons for 2021.
How much of that I'm, assuming all of it but is there any of that volume that's not open for repricing.
And can you give us a sense as to what youre seeing in.
And the net seaborne met market for for that product right now in terms of price if we're seeing a lot of different prices.
That's a day mark.
On the on the idle mine cost Shoal Creek in particular.
Proximately $4 million, a month $12 million per quarter.
And then just on.
On your second point that was on pricing first of all Creek is that right.
No actually Mike My second part was really.
Asking.
If we are if we assume five 5 million tonnes of volume in 2021.
For seaborne net in total how much of that is priced if any at this point.
And what are kind of current market prices for kind of the blends that you have out there for that five 5 million tonnes.
So in general on this would apply for 2021 as well we don't price in advance of a whole lot from our map platform now we will have volume committed but they won't be lapping the pricing until further on in the quarter and so as we look at that we looked at what what is operational certainly for the full year would be.
<unk> Allen Morgan Hill, obviously copper balance that kind of premium PCI product for more available would be at a bit of a discount to that.
Think about realizations that will ultimately depend on what those volume and the timing.
Any per.
<unk> plans at Shoal Creek in Metro.
Okay, alright, thanks ill get back in queue. Thanks.
Next we'll go to Nick <unk> with Stifel.
Hi, good morning.
I was hoping.
Talk a little bit on short Creek in Metropolitan trying to get a better sense for.
What are you looking for a restart time is it a function of price as a function of getting the volume contracted.
And could you remind us on the volume cost with two in on what your realizations are relative to the index.
Yes.
Mid markets in particular, as we've indicated there's a lot of complexity that secure and within those markets as we look to.
Clearly China has been extremely strong in terms of the recovery.
But unfortunately in terms of what's occurring.
Australian imports into China.
<unk>.
We've had a COVID-19.
Disruption in those markets, that's creating an imbalance so I guess in.
In.
In global flows.
And for US we're looking highly on the more traditional markets in terms of Japan.
Korea.
India in terms of in terms of recovery.
And also some <unk>.
Impact on what's occurring with respect to.
Europe.
That disruption that we're seeing across traditional flows.
We believe has led to the volatility that we're seeing in market and something we remain.
Very cautious about in terms of.
Analyzing ultimate movements.
Specifically with respect to Shoal Creek and Metro in addition to the market analysis with clearly engaging with our customers.
On other stock stakeholders.
To determine the best.
With respect to production.
So.
In terms of the cost structure is there something that.
Are you able to occur between.
2020 to reset at lower for 'twenty one.
Yes.
I think we'd probably spoken about some of the steps that we had been <unk>.
Across our activities and operations in general.
Specifically on the on the met activities on those those two months in particular, those all have looked on around improvement and development rights that was taking place.
As reported in the team.
We've been delivering on that.
And continuing to improve.
Net cost position and the productivity across across development in Shoal Creek 2020 was a challenging year with the disruption in markets and really as you've seen we've had outstanding sales performance, particularly profit protest surface mines.
<unk> <unk> here in the us where we've had most challenges and adjustments to.
To market disruption has been with respect to that longwall operations at Shoal Creek in addition to that.
Disruption to our customer base.
We had some geological challenges as you might as you may recall and that did impact upon the overall cost position in 2020.
We did indicate that we're working on an improvement plan with respect to show growth that was.
<unk> through 2020, and we'd expect to continue to do those things into 2021.
So what's the.
On a year on the cost per tonne can we see in terms of a year over year improvement.
Yes, we haven't provided any guidance on that front I think certainly.
For the full year, our net segment in total at cost of about $109 per ton, you've heard us say before debt and as Glenn just mentioned on net.
Certainly focused on on.
Improving cost throughout the business, we've done a great job on the U S thermal segmenting, our seaborne thermal segment, so more work to do on the mat side.
But as far as specific mine cost us not something that we typically disclose.
Does that 109 include the $12 million of idle costs.
Hey, Doug first of all credit debt rate when it does not included.
And yellow, Idaho cost us that mine.
Consider the spending so it's down within its Philippine EBITDA does not within the segment result.
Alright, Thats all I have thank you.
Thank you.
Okay.
Okay.
We will go to Matthew fields with Bank of America.
Yes, hi.
I'm, sorry, I, just wanted to beat a dead horse, but the net market.
You talked about the dynamic where China has been very strong, but the Australian imports were disrupted so we've seen a very large disparity.
And the net price from Australia, and then what China buying from other countries. So.
It would seem from the outside looking in to this would be an opportune time to have a net minus non in China. So just kind of help us understand what.
Keeping you from bringing Shoal Creek back online.
Yeah, Matt certainly it seems very logical question.
But as we look at those high volume prices.
Any really non Australian coal going into China, They certainly are higher.
As we look at our Salt Creek customer base. Those are we have contractual commitments with our traditional customers in Japan, and Europe that we referred to satisfy so even if shoal Creek, we're operating right now it sounds as though we can ship into those.
On a spot basis in China. So what we're really focused on is continuing those discussions with key stakeholders at Shoal Creek.
Positioning the mine.
As best as we can for the future. We obviously I'll go back to what Glenn had side from a loss on outperformance responding to weak demand conditions.
Certainly encouraged by positive signs in that market, but we're going to be cautious as we evaluate future production volume.
Okay, and then one more for me.
What's going on with the North Daniela commercial process I know you started out about a year ago.
Any update in terms of potential bidders.
Order of magnitude of proceeds do you expect kind of any updates you can give us.
Well I'm not I'm not sure exactly the debt was a year ago.
Youll look at the type might be maybe different to us but we.
We certainly are continuing that process.
Being impacted as you expect on only bond markets physical restrictions with respect to the protocols.
With COVID-19 that exist, but I think the country and within the within the state around diligence activities.
But we continue the.
Debt, that's commercial debt commercial process and we continue to believe in the book.
The quality of that debt on coking coal on the world class infrastructure that we that we have great day.
Brought to call. It has it has been delayed.
But similar to I guess other.
Transaction processes.
The industry in 2020.
Yeah.
Okay.
Well look thank you all for joining us.
I'd like to especially thank Alan employees for the hard work and dedication you show.
Each and every day.
Wouldn't be way with Yahoo that without us and to all of US investors. We appreciate your ongoing support and engagement.
That concludes the call.
Great. Thank you and this concludes the Peabody fourth quarter 2020 earnings presentation. Thank you for participating.