Q2 2021 Peabody Energy Corp Earnings Call
Earnings Conference call.
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Following today's presentation instructions will be given for the question and answer session.
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As a reminder, this conference is being recorded today August today July 20.
9.2021 I would now like to turn the conference over to Alister Arena. Please go ahead.
Thank you good morning, and thanks for joining Peabody's earnings and the second quarter of 2021 with me today are president and CEO, Jim Grech and CFO Marc Urbach.
Within the earnings release.
And you'll find our statement on forward looking information as well as a reconciliation of non-GAAP financial 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 Jeff.
Thanks, Alan and good morning, everyone.
Peabody had an encouraging quarter as our assets are continuing to deliver solid operational performance and we're seeing robust global coal market demand with strong economic indicators as economies continue to recover from the pandemic.
We are progressing and actions to expand our margins and reduce our debt levels and are well positioned.
Benefit from market recovery.
Higher volumes because the second half of 2021 are projected at the time of robust markets.
But before I cover the highlights for the quarter I'd like to begin by thanking our global workforce for their continued focus on working safely and efficiently.
I have been impressed by the dedication and efforts.
<unk> to beam and.
Confident we will continue to build on improvements we have achieved to date.
As planned and every segment our assets are expected to deliver increased production and the second half of the year as we benefit from our efforts at a time of elevated demand.
Within our seaborne and thermal platform we expect.
Higher volumes from the advancement of development at the <unk>, JV and the Wolf and John extension projects.
Within our U S thermal platform, we expect <unk> demand to continue at the strong pace, we have seen and the second quarter and we are positioned to deliver all customer volumes.
And in the Illinois Basin, we are expecting.
<unk> and productivity improvements from our Indiana open cut mines due to new pit development and equipment enhancement projects.
And finally, and our met mines, we expect higher volumes from the CMV and from the Metropolitan Longwall, reaching planned production.
Now turning to the quarter.
Second quarter results show EBITDA improvements and every operating segment as compared to prior year as our assets are responding favorably to increased market demand with lower costs as a result of improvement efforts across the company.
Our seaborne thermal segment benefited from increased prices compared.
Prior year, resulting in margins of 37%.
I am happy to say is the <unk> JV development, and the Wolf and John and extension projects with over $50 million of capital invested year to date are both on target to deliver higher volumes and the second half as compared to the first half of 2021.
Our U S thermal mines delivered another solid quarter generating EBITDA of nearly $90 million. The operations continued to deliver low cost while benefiting from market recovery with more than a 20% year over year increase and volumes.
And the quarter, we recognized improvements and our seaborne met segment cost with a 14% decrease.
Versus the prior year led by productivity improvements at the <unk>.
And metropolitan Longwall production restarted.
We are confident a long term agreement with our domestic customer.
<unk> will be completed within Q3.
And at Shoal Creek, we are on target to complete the plant upgrade project and mid Q3.
And we continued productive discussions with unions regarding expired labor agreement and we continue to review options with customers as we see that there is a robust demand.
<unk> Shoal Creek product and the near term market.
We also took steps and the quarter to reduce our debt levels and raised cash through the issuance of common shares.
And Mark will have more detail on this and his comments.
We remain committed to enhancing our platform to be resilient and all market cycles.
So thinking within our optimal cost structures with a focus on cost improvements and a disciplined approach to volumes.
Our intent is to opportunistically reduce our debt levels and bolster our liquidity as we have demonstrated with our year to date progress.
Looking forward we.
We continue to evaluate.
Alternatives to strengthen our portfolio to achieve our strategic objectives of re weighting investments towards seaborne markets.
<unk> U S thermal asset cash generation and maintaining financial strength.
We are exploring opportunities to invest and the growth of our seaborne platform.
By operating and the second half, we expect to begin development of more of El Sol.
And which will transition to mind from a greater mix of PCI production to semi hard coking coal and extend the life of the mine.
Based on current economics, we are also progressing plans to develop longwall 'twenty 3 panel to extend the life.
Huambo underground and 'twenty into 2023.
Also subsequent to the quarter, we closed transactions to sell our closed millennium and Wilkie Creek mines.
Which will result in reduced administrative oversight and a reduction of our coal mine liabilities and as a.
In Q3, we will recognize somewhere between 40% to $50 million net gain and receive a small cash consideration.
From a broader market perspective, the near term outlook for all of our segments is favorable with strong market indicators and increased global demand.
The seaborne.
Thermal and metallurgical coal markets are expected to remain tight and the near to medium term as supply response to elevated demand remains muted.
Newcastle thermal coal pricing is at levels not seen and over 10 years.
And the U S.
Thermal coal market indicators are favorable with increased electricity.
Our results and and high natural gas prices.
Overall electricity demand increased 4% over last year.
Positively impacted by weather and weak prior year comparative due to COVID-19.
Coal share of electricity generation increased to approximately 22% for the first half of 2021.
The demand and as a result coal inventories have fallen by approximately 17 million tonnes.
During the first 6 months of this year utility consumption of <unk> rose approximately 35%.
Paired to the prior year.
And.
These global market conditions are showing the strength of our.
And we've diversified asset base.
Which makes us distinctly unique from any other U S coal company.
Our Q2 results are a great example of the value we can generate from our asset mix and then use those funds to reduce our debt levels, while investing in assets and strengthen our production positions and the markets, where we get the.
Best value for our product.
I'll now turn things over to Mark to cover the financials.
Thanks, Jim and good morning, everyone.
Second quarter results continued to demonstrate our focus on cost management and performance improvement 3 out of 4 operating segments reported lower costs compared to the prior.
Prior year, and maybe more importantly, 3 out of 4 operating segments reported lower cost compared to the first quarter, most notably our seaborne thermal operations reduce cost per ton by 19% quarter over quarter.
Second quarter revenue increased 15% from the prior year to 723 million.
And on higher volumes, and our U S thermal and seaborne met operations.
And higher average realized pricing for our seaborne thermal export products.
Loss from continuing operations net of income taxes totaled $23 million, including 25 million and unrealized losses on economic hedges.
We reported adjusted EBITDA of $122 million, and nearly 100 million improvement compared to prior year second quarter results of $23 million and doubled the $61 million reported and the first quarter of this year, demonstrating the strength of our diversified assets.
And importantly.
Further action to enhance our financial strength.
Following the completion of the financing activities and the first quarter at June 30, we had raised net cash proceeds of 65 million by issuing $8.1 million shares of common stock under the previously announced at the market equity program.
Subsequent to June 30.
And we raised an additional $21.5 million and issued $2.7 million shares.
We put much of that money to immediate work and retired nearly $84 million of additional debt as of June 30, We completed open market repurchases of $53 million of senior secured debt and completed multiple bilateral debt.
For equity exchanges retiring $30.9 million of the 2022 senior secured notes in exchange for $4.5 million shares of common stock.
These transactions resulted in a net gain from early debt extinguishment of $11.8 million and the second quarter.
We reached further agreements to retire.
And all $50 million of debt that will settle after June 30, which is expected to result, and a net gain of approximately $15 million and the third quarter.
For the year, including amounts that will settle after June 30, we will have reduced debt by a combined $176 million.
And a different now to the segment results. The seaborne thermal segment benefited from a $12 increase and average realized price per ton compared to the prior year and held costs nearly flat, despite lower volume unfavorable exchange rates and higher fuel and royalty costs.
Seaborne thermal volumes were 500000 tons.
And the prior year due to the transition to the United <unk> Open cut joint venture and timing of shipments from we opened young.
Welcome Young shipped 3.3 million tons, and the quarter, including $1.2 million export tons at average cost of $22 per ton.
We opened Jan realized.
Realized average revenue of $38 per ton, resulting in an EBITDA margin of approximately 41%.
We opened young recorded $52 million of adjusted EBITDA and had $102 million of cash at June 30.
Operating cash flow of $11 million for the second quarter. It will open young was impacted.
Lower increase in accounts receivable and higher inventory levels.
Second quarter met shipments were approximately 300000 tons higher than last year due to higher demand for our PCI products from the copper Bella and more Vale mines.
Total cost for the seaborne met segment improved by over $16 per ton.
And compared to prior year, primarily due to a more than 20% improvement at the <unk> due to fleet optimization efforts and mine sequencing and.
Despite metropolitan and ramp up costs from the restart of the longwall late in the quarter.
And the U S. Our minds responded well to improving demand conditions.
And by and <unk> mines shipped 22, and 5 million tons and the quarter, a 26% increase from 2020 levels and also a significant increase from just $20.7 million tons and the first quarter.
Additionally, we further lowered cost compared to the prior year and prior quarter periods to just over $9 per ton.
And despite higher fuel costs.
The other U S thermal mines also reduce cost by 5% compared to prior year and generated 27% EBIT margins.
At June 30, we had $562 million of cash cash equivalents and restricted cash.
In the quarter cash flow.
From our operating activities was negatively impacted by an increase of approximately $125 million and working capital primarily from higher accounts receivable and timing of payments.
Looking ahead to the remainder of the year, we will continue to be disciplined taking advantage of increased demand.
And controlling costs and taking a measured approach to the balance sheet.
And the second half, we anticipate higher seaborne thermal volumes and expect to ship 9 to 10 million tons.
Between 5 and 6 million export tons of which 3 to 4 million tonnes or unpriced.
Costs are expected.
Expected to nudge higher with a greater mix of Lambeau underground tons and higher expected royalties.
<unk> volumes are expected to increase to over 7 million tonnes with $3.7 million export tons and finished the year strong.
Seaborne met volumes remain contingent upon a restart at Shoal Creek.
Yeah.
Metropolitans expected to ship up to 800000 tons and the second half and <unk> volumes are expected to remain strong.
Approximately 2 million tons.
We anticipate lower second half costs due to higher metropolitan longwall production and anticipate maintain.
Year to date cost improvements at the <unk>.
We are planning for <unk> volumes to be higher and the second half and essentially have all planned tons priced.
Other U S thermal shipments are expected to increase compared to the first half maintaining 16 to 17 million tons for the full year.
Cost per.
<unk> shipments are expected to be slightly higher and the second half due to mix.
We are now targeting SG&A of $80 million per the year and additional $5 million decrease as we continue to realize savings from lower overheads were also reducing our capital expenditure guidance to 200 million for the year, including.
For both the major projects of 100 million for significant reinvestment and our Australian based seaborne platforms.
And lastly, we now expect interest expense for the year to be $190 million, a $10 million reduction from prior guidance as a result of the early debt retirements I spoke of earlier.
<unk> I'd like to turn the call over for questions operator.
Thank you ladies and gentlemen at this time, we will now begin the question and answer session and.
And you have a question. Please press the star followed by the number 1 on your push button and phone if.
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I'll go first and Lucas pipes with B Riley Securities.
Thank you very much and good luck.
Morning, everyone, Jim Great Great too.
I'd now your voice and.
And congratulations on a strong quarter.
Thank you good to hear your voice as well.
And maybe.
To start with a higher level question.
No.
Yes.
Your background.
On the commercial side and this is a.
And really really strong market globally, but also at.
And it appears there is a research and <unk> and domestic demand can you can you touch on where you see the opportunities.
From a pricing perspective, as you look across your portfolio.
Folio.
Well, Lucas, whether it's domestically or internationally.
Global coal demand.
And the increase now some markets like the U S. Over the long term are going to have a secular decline.
But in total globally, we see coal demand increasing.
And I'll talk about the.
Supply side response to that but my view is that's going to lead to increased price volatility to the upside and.
And the reason I'm, saying that is the supplier response to these increased demands is just not there like it has been historically.
And lack of capital available to the space the trouble of permitting the difficulty in getting workers.
The last.
<unk>.
<unk>.
The supply demand is just not what it used to be and so domestically. We are seeing that right now internationally, we're seeing that right now and I think the volatility to the upside.
Just going to increase as we go forward because overall IC demand globally, increasing with supply not keeping pace with it.
Very very helpful and.
A quick follow up question on <unk>.
On that.
When you think about.
And you look across the space and number of your peers to your point or are considering reducing.
<unk> their thermal coal footprint and the seaborne markets as well.
And what role could Peabody play and in that.
Is M&A fees.
<unk> here and how would you think about financing opportunities.
Any thoughts you can appreciate any thoughts you could share would really.
And we appreciate that thank you very much.
Lucas if theres ongoing M&A activities, we don't comment on them, but I would say that we are showing our commitment to the seaborne thermal markets with the investments we're making at <unk>.
Mambo.
Underground with extending another panel.
<unk> to 'twenty 3 panel that will open Yonge extension that we have going on there right. Now. So these are assets that we have and hand and.
<unk>.
We are putting capital into them for their expansion and their continued life because we see the seaborne and thermal markets is a good market to be and.
Yeah.
Thank you really appreciate that and then last 1 for now.
To switch topics went up when I look at your guidance for 2021.
Roughly.
<unk> 3 different buckets $95 million and legacy liability costs.
Ken.
Can you share and perspective on.
Net.
What the tailored to those liabilities are some of them more 1 off or on.
How should we model them going forward. Thank you very much.
Lucas it's mark.
A couple of things that you're referring to in the release and in our guidance.
Eagle <unk>.
$60 million for final reclamation, I think that $50 million to $60 million is a pretty good run rate for the foreseeable future here. The next few years as.
As we continue to do the right thing and reclaim lands.
And there is also $30 million of our retiree health care.
And that is.
And that's a probably a pretty good run rate as well for that for the next few years.
Related to retiree healthcare and it will reduce over time, but free.
For the foreseeable future I would use that number and then the last thing on that list, there's $15 million for the settlement of a multiemployer pension plan.
And that has actually had been a series of payments there.
And that $15 million. This year. It was the last payment that we have to make for that settlement, we actually completed that in July.
Very helpful really appreciate all the color best of luck and ill turn it over thank you.
Thank you.
And we will take our next question from Nathan Martin with the benchmark company.
Great. Thanks, and good morning, everyone and welcome Jim and congrats on the quarter.
Thank you Nathan.
And I appreciate all the guidance you guys provided and earning release earnings released.
Moving to start with some question.
I guess on the seaborne met side.
Could you give us some idea and with the quality split look.
Like for this year between the hard coking coal and PCI products within your seaborne met volume guidance, and then and maybe what kind of discounts. If any are you guys seeing relative to the indices.
Yes Nathan.
Questions.
I'll take a stab at this.
Again.
Looking at 2.
And 2 million tons for the <unk> and the second half and about 800000 tons from Medtronic and CMV generally produces a benchmark PCI product.
And Thats near a 145.
$5 a ton today.
Medtronic and produces really a blend a soft hard coat semi soft coking coal and PCI blend.
And probably realize about 80% of our premium hard coking coal benchmark from a pricing perspective on that.
With a little over 2.
And it's 1 tons on price for the remainder of the year.
There's certainly some upside here and in the portfolio and prices given the current conditions.
There is a bit that is price, there's probably about 400000 tonnes at the CMV.
Currently priced at about $100 per ton.
$2 million.
Thank you that will conclude our question and answer session.
That will conclude our question and answer session. At this time I would like to turn and operator I think.
Operator, I think there was a follow on from Nathan if we can give him a second.
And just a moment Nathan if you would signal again.
Please press star 1 on your telephone keypad.
Mr. Martin Your line is open.
And I apologize for that guys I was I was on mute Mark I appreciate that color.
And so I just look at the cost.
Cost as well and seaborne met side of the business.
And I see a full year guidance now at $93, Excluding Shoal Creek.
Maybe you can you guys give us an idea of the ongoing costs.
For Shoal Creek, or maybe even north Korean yellow, because obviously the reported cost and the first half or over $100 a ton.
Still a good way to think about it and our report.
Courted basis or should that come down and just any thoughts there.
A couple of thoughts 1 so.
So.
North Daniela is completely out of the holding costs there.
And then held stable here for the last 6 months to a year.
<unk> Creek is out holding cost.
And are about $10 million a quarter so far obviously.
And we're reinvesting in that asset looking to move forward.
And when when the opportunity presents.
And the current quarter I would say that we had some cost metrics.
Ramping up there's probably other $4 million cost on a ramp.
Cost there is also a full month of holding costs. There. So there's probably $7 million to $8 million of cost set at metro up that were included in the quarter that wouldn't be there on a go forward basis.
Got it Mark Thank you for that.
And then I guess, just sticking with Shoal Creek for a second.
<unk>.
And I still expect the prep plant to be finished sometime here and for Q.
Labor negotiations ongoing I guess, if we assume a contract. It's worked out are there any limitations to ramping and the mine back up immediately whether geology or customer related I think as Jim pointed out and so.
And as prepayment.
Prepared remarks fixed.
Well Nathan with the mine, having sat for a while if theres going to be a gradual ramp up back to full production and so on day, 1 that would not come back at full production and we put money into the prep plant and.
Other parts of the facility so.
And some commissioning period.
Starting to mine.
Before we could hit full production at some point.
A few months after startup.
Can you remind us what full production might look like at this point 2 million per billion, calling something around there.
It can produce about 2.2 and 5 million tons a year.
And that would bring.
And is that getting like a high vol, a or more of a low volume product.
That's more of a high volume product.
Perfect.
And then just 1 final question from you guys.
We're thinking about Capex.
And nice to see you lowered the guidance.
They're about $25 million to $200 million. This year, which does include the $100 million. So this also thermal projects and assuming if we look ahead and what.
Point is the major project spending and wrap up.
Jim You mentioned a couple of other projects.
And can you guys think you can move down to more maintenance like levels of spending and.
And that what might that look like from an absolute dollar basis. Thanks.
Yes, Nathan a couple of things.
Lowered that guidance $25 million and 200. This year there is some additional further all project capital.
Of $25 million and that really resulted in that number and we said it before I'd.
And what day of $100 million on a sustaining basis is the right number.
Look at that 25 million reduction does that fall into 'twenty 2 most likely so maybe we got about $25 million, but the Wilson Yonge extension project and the and the Huambo open cut joint venture those projects are substantially complete this year.
So we should be at.
Still is much closer to a sustaining $100 million next year with maybe that 25 million reduction falling and 22 from this year.
And then any early thoughts Marc on both projects that Jim mentioned that more and more Vale, South longwall, 'twenty free panel and lumber.
Yes.
Both.
Both are great projects for the company and then more of a south we will well beyond that and the second half of this year.
And it looks it looks obviously quite promising and then at.
At today's prices and current economics, the Lama Longwall panel 22, we announced that we had done that earlier this.
Year looking at 'twenty, 3 now certainly looks to be quite attractive and very similar to 'twenty 2.
Great I appreciate the time and all the information guys and best of luck and second half.
Thank you thanks Nathan.
Thank you we'll take our next question from Matthew fields with.
And with Bank of America.
Hey, everyone.
And welcome Jim.
Thank you Matt My first question. My first question is on the Australian thermal side.
Obviously with the new castle price and strong it is as youre seeing more of a lag.
Due to the domestic.
Contract.
And what can you do about that kind of domestic tonnage and maybe.
Is there a price escalator and there is there a way to kind of shift more into the export market. While prices are so strong what can you just kind of help realizations on the thermal side and Australia.
Yes, Matt.
Domestic.
Domestic tonnage.
And it will open young there is really based on customer needs and really gets the first call from the mine and I'll say.
That's pretty ratable over the year, but we are expecting volumes to increase and the second half. So while we only export and $2.3 million tonnes and the first half we're looking at exporting about $3.7 million tons.
And a half.
$2.5 million of those tons are on price.
And with the remainder are priced at about $63 a tonne. So certainly looking at some higher prices and the second half and higher volumes on the export side in particular.
Okay, Thanks, and as a reminder.
And the second half.
No no. Please please finish.
I was just going to say and as a reminder.
And our.
Sales at a discount and a high ash product at a discount to the API 5 index, which is currently above $90.
But don't confuse that with the new castle benchmark product.
Sure. Thank you.
And then on the on the balance sheet.
And your release said that you had another $50 million of debt retirements to be settled after the.
The quarter and can you just give us some detail on what tranches that $50 million and sales.
Yes, most of that most of that 50 million and the term loan. It's just it's just a delayed settlement those we've reached agreements to repurchase those at a substantial discount as you saw from the expected gain and the quarter and I was just a matter of timing getting those settled.
And again and.
Yeah.
Go ahead.
Yes, most of that was the term loan as I mentioned Theres, a theres about 5 million of additional 2022 notes that we've done a debt for equity exchange as far as well some other ones that we closed and in the quarter.
Okay. Thank you.
And then.
You know you are poised to generate a decent amount of cash flow and in the back half here.
And your capital structure do you intend to kind of target that.
And that cash generation.
Is it in Australia as it is at and the Btu corporate notes or the terminal and can you just give us an idea of what your priorities are.
Yeah, Matt as you said before priority number 1 is to.
Is to maintain.
Operating liquidity and that Hasnt changed certainly and the current price environment much higher cash flow generation opportunity. If these prices prevail I'll remind everyone. The Wilson you on free cash flow.
And just got done talking about the volumes and the pricing there.
There is and excess cash flow sweep that's embedded with those nodes so anything generated and we opened.
100% of and excess cash flow will be swept to reduce the debt there and we'll put you on both the notes and the term loan at <unk> young.
And then we will continue to.
Opportunistically look at opportunities to find ways to continue to deleverage and reduce debt.
If if remaining cash flow is provide that opportunity.
Alright, great. Thanks, very much and good luck and the back half.
Thanks, Matt Thanks, Matt.
We'll go next to Lucas pipes with B.
B Riley Securities.
Thank you very much for taking my follow up question.
And I'm wondering I wanted to return to the market.
For just a moment here.
Jim when we when we talked about the market earlier you.
And you mentioned the strength and.
And your positive outlook and I think what's so remarkable here is that this strength is occurring despite the.
The Chinese ban of Australian coal and <unk>.
Unique position with your Australian portfolio to maybe comment on what is driving the strength.
Right and if youre not.
<unk> directly to China from Australia, and what is.
And what is what is.
What is driving prices higher and Europe, and you would really appreciate your thoughts on that and then anything as it relates to CFR prices in China, and how you might be able to take advantage of that and the future.
And what would also appreciate your.
And as off from that thank you very much.
Well look and first.
Historically, <unk> and 2020 for example, only about 2% of our coal is sold into.
And to China.
No.
We didn't have to rebalance our portfolio very much.
With the advent of the Australian <unk>.
Going into China and the market.
And in general or and total LOE has rebalanced.
And there's so much demand out there that they call the Australian and call. It isn't going to China is finding its way to other markets and then <unk>.
<unk> and coal as an example is finding its way to China. So I think.
The strong demand that's out there and certainly having an impact.
And the.
With the Chinese ban on Australia, and colon and now Youre starting to see the.
Atlantic prices metallurgical prices rising as well so.
The market has found a way to balance itself, but again for us we historically have not been.
So.
A seller of a lot of our coal into China.
And if you look to restart Shoal Creek.
How accessible with the Chinese market be for that product.
Well.
Historically has had customers that are not and the market in China, but.
When we restart that mine and that would certainly some of the customer increased inquiries. We are getting for coal are from that market. So and we have commitments to our existing customers and we have a loyalty to our existing customers well and we will make sure that we're meeting their needs and theyre not in the China market, but we'll also if we have the opportunity.
<unk> certainly play some coal and that market.
Got it okay.
And that's very helpful really appreciate all the extra color and.
Again best of luck.
Thank you Lucas.
Thanks Lucas.
That will conclude our question and answer session today at this time I would like to.
Call back over to Jim Grech for any additional or closing remarks.
Thank you all for joining us today, I'd, especially like to thank our employees for remaining focused on safety.
And for continuing to execute on our various productivity and cost improvement initiatives and all.
And so like to thank our customers investors insurance providers and our vendor.
Turn the call for your continued support.
Operator that concludes our call.
Thank you that will conclude today's call. We appreciate your participation.
[music].