Q2 2023 Peabody Energy Corporation Earnings Call
Welcome to the Peabody second quarter earnings call all.
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At this time I would now like to turn the conference over to Karla Kimrey, Vice President of Investor Relations. Please go ahead.
And thank you for joining peabody's earnings call for the second quarter of 2023 with me today are president and CEO Jim Grech.
CFO , Mark Sperbeck, and our Chief Marketing Officer, Malcolm Roberts within the earnings release, 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 Jim.
Thanks, Carla and good morning, everyone.
In the second quarter of 2023, our unique diversified portfolio allowed us to successfully execute against our plan, while operating in a volatile market environment.
In the quarter, we initiated our annual shareholder return program with.
With a fixed dividend and a meaningful share buyback plan, we returned $262 million to our shareholder return program in the last quarter.
Before I address the markets I want to thank our global employees for their continued focus on working safely and efficiently.
Now turning to the global coal markets.
Born thermal coal markets remain volatile with prices declining during the second quarter.
Comparatively high coal and natural gas inventories in the northern hemisphere.
Following an unseasonably warm winter have weighed on demand leading to a weaker pricing environment for high energy thermal coals.
Kind of year to date thermal coal imports point to significant increases in consumption of seaborne thermal coal.
With an annual thermal coal import run rate of approximately 400 million tons per year, representing approximately a 90% increase over 2022 levels.
India too is showing signs of improved economic activity during the first half of 2023 and with it increased power demand and elevated coal imports.
Overall demand for seaborne thermal coal is robust and supply remains constrained across major supply regions.
We anticipate that the onset of peak summer energy demand in the northern Hemisphere, followed by a restocking in preparation for winter will contribute to a normalization of inventory levels.
Abiding support to seaborne thermal coal markets.
Within the seaborne metallurgical market.
Overall crude steel output during the quarter was variable with interruptions that European blast furnaces.
Set by notable year on year crude steel production growth in both China and India.
Metallurgical coal supplies remain constrained primarily due to residual impacts of what weather events in Queensland during the first quarter of 2023.
The rate of exports from Queensland remains below historical rates and premium hard coking coal pricing remains elevated finishing the quarter at $233 a ton.
The outlook for the metallurgical coal market remains positive with subdued seaborne supply combined with anticipated increases in import demand for steel, making raw materials.
With improving crude steel production rates in Europe , North Asia and India.
In the United States overall electricity demand decreased nearly 4% year over year.
Negatively impacted by weather.
Through the six months ended June 30th 2023.
Christy generation from thermal coal has declined year over year due to low gas prices and nearly level renewable generation.
Coal inventories have increased approximately 50% during the six months ended June 30th 2023.
Natural gas prices have recovered modestly from the lows of earlier this year with U S natural gas prompt pricing of $2.65 per annum be to you.
D. I E is currently forecasting U S natural gas prices to average $2.80 per M. B to you in the second half of 2023.
Up from the $2 40 per M. B to you in the first half of the year.
Overall near term demand for U S. Thermal coal is anticipated to improve in the third quarter in comparison to the second quarter.
Now moving on to our operating segments.
As expected our seaborne thermal coal exports came in at $2 6 million tonnes.
Higher than the prior quarter as the Womble longwall move was completed and wet weather, which impacted the first quarter was abated.
Segment costs per ton were in line with the first quarter as higher production was offset by the timing of equipment repair and maintenance costs.
Our seaborne met coal shipments were stronger than expected at 2 million tonnes due to strong sales out of the C. M JV complex.
In the second quarter, we had good success with our operations at Shoal Creek as we recovered from the first quarter fire.
During the second quarter, we were able to seal off the two longwall panels in the J panel area of the mine.
We resumed with development coal production and the new L panel area, we anticipate better mining conditions.
A new longwall kit for the mine is expected to be delivered by the end of the year.
And the P. R b shipments were lower than anticipated shipping.
Shipments were impacted by low cost or low customer demand due to low natural gas pricing high coal inventory levels in the June tornado event in arm.
In addition to base and had an abnormal amount of rainfall, which caused a slowdown at some of our operations.
The second quarter is typically the wettest in the basin, which also impacts the transportation corridors.
In other U S thermal shipments were impacted by lower customer demand as a result of low natural gas prices and high utility inventories.
Looking solely at our sole position <unk>.
<unk> volume should increase in the second half.
But consumption of PRP call has been down given low natural gas prices and generally unfavorable weather conditions in the first half.
We are working with our customers to be responsive to their needs, while retaining the value in our contracts.
Our adjusted guidance reflects our current assessment of sales going forward taking into account the current U S market conditions.
In addition to our active operations. The company continues to advance redevelopment efforts at north can yellow.
With key project milestones and critical path items on tract.
Activities to date have included procuring equipment.
Refurbishment and replacement of surface infrastructure.
Zone a remediation.
Completion of drilling program for zone, B re ventilation and advancing work necessary to reenter zone B.
The next significant milestone re ventilation and reentry of zone B.
It's currently targeted for mid September subject to regulatory approval.
Since commencing redevelopment at North Daniela in late 2022, the company has invested $53 million of the initial approved redevelopment capital expenditures, which includes further ventilation equipment conveyors and infrastructure updates in anticipation of reaching development coal production.
Subject to regulatory approvals in the first quarter of 2024.
Before I turn it over to Mark I would like to address a tornado event that impacted my arm.
On June 23rd our North Antelope Rochelle mine in the CRB was struck by an E F. Two tornado.
Six people that have to temporarily go to the hospital, but Fortunately no one was critically injured.
While we are back to full shipments we did have considerable damage to the surface buildings.
We appreciate all our employees' efforts in returning to mine to full operations.
I'll now turn it over to Mark to cover the financial details.
Thanks, Jim in the second quarter, we recorded net income attributable to common stockholders of $179 million or $1 15 per diluted share and adjusted EBITDA of $358 million.
The second quarter results included a $34 million charge for the write off of certain underground development and equipment at Shoal Creek and property losses related to the tornado edmar.
The company's leading diversified portfolio of mines generated $353 million of cash flow from operations enhanced by 109 million working capital benefit, which will largely reverse next quarter.
With our balance sheet built to withstand the volatility and lower prices. We saw in the second quarter. We were pleased to return $262 million to shareholders, including a cash dividend of $11 million and share repurchases of $251 million.
This reduced our share count by eight 3% in just one quarter.
We currently have $749 million of remaining authorization under the $1 billion share repurchase program.
We remain committed to returning at least 65% of annual available free cash flow keeping returns right sized based on operating and financial performance.
After the recently declared second quarter cash dividend of seven and a half cents per share at least 142 million remains available for shareholder returns expected to be used for additional share repurchases.
Turning now to the second quarter segment results.
Seaborne thermal recorded $198 million of adjusted EBITDA, 20% higher than the prior quarter. Despite a significant decline in the average Newcastle benchmark price higher.
Higher production rates drove cost to the low end of our guidance range and higher export shipments resulted in an adjusted EBIT margin of approximately $50 per ton.
The seaborne metallurgical segment generated 103 million of adjusted EBITDA shipments of 2 million tons exceeded expectations and we are over 50% higher than the previous quarter due to higher sales from the C. M JV as they recovered from first quarter range.
Costs were $13 per ton lower primarily due to higher production and lower sales price sensitive costs.
The U S thermal mines produced $78 million of adjusted EBITDA impacted by fewer shipments due to low natural gas prices and higher utility customer inventories.
<unk> mines generated $26 million of adjusted EBITDA tons.
Tons sold were $3 1 million tons lower than the prior quarter, we lost approximately 1 million tons at the end of the quarter due to their tornado that struck the NR mine in volume on two requirements contracts were $1 2 million tons lower than expected.
The other U S thermal mines delivered 52 million of adjusted EBITDA tons sold decreased by approximately 700000 tons compared to the prior quarter, but a laser like focus on operations drove cost down to less than $40 per tonne, maintaining adjusted EBIT margins of 26%.
With the first half complete we've updated our outlook for the remainder of the year seaborne thermal volume has increased 500000 tons to 15 to 16 million tons due to higher expected production at Wilton Young.
Seaborne metallurgical volume is expected to be 500000 tons lower at six five to seven and a half million tons due to less than previously anticipated production at the C M JV and Shoal Creek.
PRP shipments have been revised downward to 80 to 85 million tonnes, reflecting the impacts of low natural gas prices utility inventories and mild weather to date and major coal generation regions.
For similar reasons other U S thermal volumes had been reduced to 16 five to $17 5 million tonnes.
We should note that committed sales volumes exceed our thermal guidance given the continued low natural gas price and rail limitations, we expect customers in limited situations to request deferral of volume into next year, we will only entertain such requests if we preserve the full economic value of existing <unk>.
<unk>.
Specifically for the third quarter seaborne thermal export volumes are expected to increase to $2 7 million tonnes.
Approximately 300000 tons are priced on average at $181 per ton and one 4 million tons of high ash product and 1 million tons of Newcastle product our unpriced.
Costs are expected to be lower quarter over quarter at 45 to $15 $50 per ton.
Seaborne metallurgical volumes are projected to be lower than the second quarter at one and a half million tons due to a longwall move at metropolitan.
200000 tons are priced at 216, and the remaining unpriced volumes are expected to achieve 70% to 80% of the premium hard coking coal price index.
Lower premium hard coking coal prices and a widening gap to PCI coals are anticipated to result in more favorable price sensitive costs lowering expected costs to a 115 to $125 per ton.
And the <unk>, we are anticipating shipments to increase to 21 million tons at an average price of 13 80 per ton and cost of approximately $11 75 per ton.
Other U S. Thermal shipments are expected to increase from the second quarter to approximately $4 2 million tons at an average price of $50.50 per ton and cost of approximately $41 per ton.
In summary, we have a unique diversified portfolio of assets and the necessary financial flexibility to succeed in all markets.
We will maintain a rigorous disciplined to capital allocation and expect to return at least 65% of annual available free cash flow to shareholders.
Operator, I'd now like to turn the call over for questions.
Thank you.
Again to ask a question you May Press Star then one on your Touchtone phone.
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At this time, we will take our first question from Lucas pipes with B Riley. Please go ahead.
Thank you very much operator, good morning, everyone and great to see those capital allocation to shareholders during the quarter.
Alright, Thanks Lucas.
And I wanted to.
Start my first question on that point of shareholder returns you you noted 142 million.
That remain available should we kind of think of as dose being used for for buybacks over the next three months. So so kind of you you deploy a 142 million to buybacks.
Between now and the time you report Q3 results and then essentially our Q3 results get announced you re up it with whatever that free cash 65% of the free cash flow doing available free cash flow.
From Q3 results that kind of the cadence now going forward.
Yeah, Good morning, Lucas and thanks for hanging in there and I know it is a very very busy earnings call day. So I appreciate I appreciate the questions.
With regard to the shareholder return program you are correct. We remain committed to returning at least 65% of available free cash flow on an annual basis and you'll see the calculation in the earnings release that that sums up to that.
Certainly last quarter, we did a we did above the 65%.
Got it got it okay, but it's not like it.
It's not like you it would be more than 142 million over the next three months in terms of buybacks. You would you would kind of reconvene in three months' look at Q3 results and and and and that would determine the forward pace.
Again, we're going to we're going to return at least 65% and we don't we don't share any specific details. It's fair to think of it that way Lucas, but I'll refer you to last quarter, where we did do a bit more than the 65% in the last quarter, but we will true it up each quarter and so 65 person.
On a year to date annual basis got it no that's that.
That's clear that's clear thank you for that and then.
Turning to two two of operation so good to see the increase in the thermal.
Guidance for the year I'm wondering if you could maybe elaborate a little bit on the key drivers for that and then on onshore Creek should we think of that minus one longwall mine going forward. Thanks. Thanks for your color on that.
Yes.
I'll talk about Shoal Creek, our first in Hi, Lucas Jim Grech here good to hear your voice again.
Same here thank you.
Yeah. So.
We have the new longwall coming in through a delivery has already started so we're expecting to get that delivered here by the end of this year and have an operating or very early.
Early into 2024.
The intention prior to the mine fire was to have the two long walls operating at the mine and we saw the second law of them all there it's behind the sealed area.
And you know we have to wait until we have permission to enter back into that area Lucas to to see the status of the of the equipment in.
What we can do with it you know can we start operating again in that panel do we have to extract the longwall.
So I would say the the timing and the certainty of the second one is is in question. The first one the new longwall certainly is on track.
<unk> to be installed so.
I would say by the end of this year, we're certainly have one longwall mine.
Next year, we're for sure one long haul mine with the potential for two but we really don't know until we get back behind no seals, which is at best a couple months away.
And maybe I'll follow up on the seaborne thermal.
A couple of things for the additional tons.
No more higher ash tons out of Wilton young and the Huambo open cut joint venture doing extremely well. So our volumes are up there are you all.
Also note pretty good reduction in cost for the next quarter.
Again, I think it's one will open cut the production going up in cost doing better as.
As well as some additional wilbon young tons, there and also some lower sales price sensitive costs.
And Lucas.
Another point I wanted to make on Shoal Creek.
Was.
Even though we're looking at the one longwall, it's an el panels, where we have started our development coal.
The mining and the coal seams look very good.
Very good conditions for us right there so.
We have given.
All right we've talked about the the output of the mind before and I'm confident with the one longwall mine in the mining conditions. We're in you know theres going to be no drop off from our expectations from the production levels.
That we've had in the past, where we're going to be again, the El panel has some very very good mining conditions from what we're seeing so far.
Very helpful color on both fronts. Thank you for that and then a quick follow up on the on the on the JV and <unk>.
I looked at the cash flow statement for the quarter and COO.
Contributions to JV were roughly equal to distributions.
From the J D.
Is that only middle amount or does that also include huambo and if it is middle Mt.
We expect maybe additional cash.
Cash to come in from that side.
Would appreciate your perspective and clarification on that point.
Yeah Lucas it is only middle amount there so not a lot of cash flow from middle Mount currently.
I'd expect the results to be kind of similar in the second half of the year as well certainly not what we saw last year.
Alright, well I have more questions, but ill jump back in the queue. Thank you very much.
Thank you.
And again, if you have a question you May press Star then one to join the queue.
Our next question here will come from Nathan Martin with the Benchmark Company. Please go ahead.
Hey, good morning, everyone. Thanks for taking my questions.
Morning, Nate.
Maybe I'll just start on north can yellow I appreciate the update there in the release can we maybe get a refresher on the expected spending and timing of that spending on the project as you guys move towards anticipated longwall production in 2026, and then you know what and when are some of the regulatory hurdles you.
Correct.
Yeah.
The the first we've got it in two tranches of spending or as we've discussed in the past. The first one is a $140 million, which we're spending this year a lot of that this year and into early next year.
And the.
And what we're saying is the major regulatory hurdle that we have to.
To overcome or I shouldn't say overcome to get to get approval of the permission to reenter the zone B area, which is the field area and Thats a combination of the gassy net area and the ventilation of that area.
And we expect to be able to reenter zone B and sometime in September that is the major regulatory hurdle that we have to get through.
So after we can reenter zone, B and we get a good assessment of the situation there.
Then we have to go back to with our board and get the approval to spend the remaining it's approximately $230 million to $240 million.
And then that would get us into full longwall production there.
Early in 2026, so again I'd just like to reiterate the major regulatory hurdle.
That we have to get through is the permission to reenter zone B and we're looking for that to come sometime in September of this year.
Great Jim appreciate that refresher there.
And then maybe just shifting gears over to the domestic thermal side of the house did obviously update your guidance. There you talk a little bit about some of the conversations you're having with your utility customers.
You guys believe at least at this point, but that guidance fully incorporates potential domestic thermal deferrals or are you still having ongoing conversations and negotiations.
Nick Nate we believe that fully encompasses all of the potential deferrals.
And the guidance that we've shown there.
Okay got it Jim and then actually what have you as well in the past you've been helpful kind of given us an idea of where.
Where you guys are a committed.
For 2024, and PR being other thermal any any update you can give us there maybe what percentage of tons are committed there off of what base would be great as well.
Yes, it's about about 70% committed.
At midpoint of guidance.
Say there hasn't been.
A specific change over the quarter that was specifically done on purpose given the fact that it's been a pretty slow market declining price market.
Well look to see more coming through here in the in the next quarter as the market picks up so again, 70% on the Illinois basin, and probably about 85% in the <unk> for next year.
Perfect appreciate that update there Mark and then maybe just one kind of bigger question bigger picture question for you just to wrap up.
There's some M&A opportunities out there few met coal assets in Australia up for sale I know you'd like we can't make specific comments regarding Peabody in M&A, but could you kind of remind us how you guys think about and rank them and your potential purchases of maybe seaborne met assets, our thermal assets and how would you kind of compare those two maybe.
The progress you're making on reopening north candella. Thanks.
What I would say is in orders of prioritization.
Organic growth investing in our own assets extending leases investing in equipment to bring down costs increase efficiencies.
It was always have the best returns for our shareholders and those always our number one emphasis our number one priority.
Yes.
Exhibited by North can yellow.
Then secondly, if we do get into M&A not saying we are we are we've stated many times.
And it Hasnt changed that our focus is on the seaborne markets, we see the seaborne markets as a growth market and demand in both metallurgical and thermal.
We have more much more of a focus on the metallurgical seaborne markets, but we certainly would look at both markets.
For potential growth in the future.
Yeah.
Great very helpful. I appreciate the time guys best of luck in the second half. Thanks.
Thanks, so much thank you Nate.
Next question.
Our next question will come from Lucas pipes with B Riley. Please go ahead with your follow up.
Thank you very much for taking my follow up question, It's a quick one.
In terms of hedges on the thermal coal side.
I may have missed it but I didn't see a disclosure in the press release. This morning, and so I Wonder if you could remind us what's outstanding there and I know that was cash collateral requirement in the past.
Those.
The hedges roll off.
There'll be cash coming back here in the third quarter from from that side, but would appreciate your staff.
Discussion and I think we're close to the end so it would be good to just make sure I have everything in my model is that program.
Thank you yeah.
Yeah Lucas the program has fully been unwound at June 30, So all the initial margin return I think it was about $11 million in the second quarter.
The variation margin was returned by a higher realized prices.
Baked into our EBIT result, so programs fully fully unwound and we're no longer got hedges for coal sales.
That's very good to hear that that's it from now I appreciate the color and best of luck to you and the team.
Thanks Lucas.
And with that there are no further questions. So I'd like to turn the conference back over to Mr. Jim Grech for any additional closing remarks.
Thanks, 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 initiatives.
I'd also like to thank our customers investors insurance providers and vendors for their continued support.
And finally I'd like to thank everyone in the Gillette community, who responded during the tornado at an arm.
Operator that concludes our call.
The conference has now concluded. Thank you very much for attending today's presentation. You may now disconnect your lines and have a wonderful day.