Q2 2019 Earnings Call
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Okay for the arch coal earnings call.
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Hey, Michael.
Last day Mckellar Thats its belts am I see H.A. E. L E T I see age.
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In the one nine to seven eight to nine five.
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It's a I.E.R.A.
Era.
Q I'm joining you into your conference now and you'll be in a listen only mode.
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You're welcome.
The event is now being recorded we focused on getting the longwall in operation as quickly as possible and we'll be looking for every opportunity to accelerate the development work still further.
In support of the accelerated timeline, we now anticipate spending approximately $100 million of development capital at Leer, South in 2019 versus the $90 million that was initially indicated.
While we are compressing the capital spending into fewer quarters than originally stated.
We remain comfortable maintaining our original estimate of $360 million to $390 million to complete the project.
Moreover, we still anticipate producing approximately 1.3 million tons of coal with continuous miners during the development process.
These development tons, which have the same quality as our premium high vol. A layer product will be sold at market based prices.
Consequently, we'd expect those tons of generate roughly $100 million of EBITDA given the current market conditions.
And equates to more than 25% of the anticipated capital needed to develop the mine.
In short, we expect very rapid payback at Leer, south across a wide range of market scenarios.
It's also important to recall that the state of West Virginia recently passed legislation with the aim of Incenting new investment in the states coal mining sector.
The legislation should enable us to recover up to 35% of our total investment in Lear, South in the form of lower severance tax payments over the course of the next 10 years.
I'm also pleased to report with the strong execution during the first half and the positive operational outlook for the remainder of the year. It gives us sufficient comfort to raise our coking coal guidance. Despite the somewhat softer market environment, we've seen in the past few weeks.
With this we now expect to ship 6.7 7.1 million tons of coking coal in 2019, which represents an increase of 100000 tons at the midpoint.
Additionally, we've tightened our cost guidance for the segment to a range of $61 to $65 per ton an improvement of 50 cents at the midpoint.
While these are modest tweaks that are reflective of our commitment to continuous incremental improvement in every aspect of our business.
As for the third quarter of 2019, we now expect the financial contribution from metallurgical segment to be relatively comparable to what we achieved in the second quarter as increased shipping volumes are projected to be counterbalanced by lower index based pricing.
On the thermal side, we continue to take what the market is offering while being disciplined in terms of capital spending and managing our costs.
That strategy allowed us again to generate meaningful levels of free cash from our thermal assets in the quarter. Just ended despite the impact of flooding that significantly curtailed rail service during the period.
Looking ahead, we expect a greater contribution of free cash from both the powder River basin and other thermal segments in the second half of the year due principally to improved logistics and even lower capital spending.
Thus, we are maintaining our prior volume and cash cost guidance for both segments.
Moving to the recently announced joint venture with Peabody involving our western thermal assets. The Hart Scott Rodino filing has been made and the transaction is currently under review by the Federal Trade Commission.
We believe this business combination creates unique synergies that will lower costs and strengthen our competitiveness with both natural gas and renewables benefiting our customers and their consumers.
As you can appreciate though.
Given the nature of the review, we will not be able to answer questions and provide additional information related to this process on today's call.
Before closing I want to congratulate the arch team for another exceptional performance in safety and environmental stewardship.
Generally speaking we gauge our performance against charges pass to excellence, which is a high bar even against those metrics. It was a strong performance on both fronts.
As just one example, the Leer mine recently surpassed 1 million employee hours without a reportable injury.
In addition, it's also rewarding to be recognized by outside entities and we collected several noteworthy honors during the quarter. Among those accolades Black Thunder was honored with the top 2018, Wyoming Department of environmental quality Reclamation Award.
In addition, our west Elk mine received recognition from Rocky Mountain coal mining Institute as the safest underground mine in Colorado in 2018.
These are significant and commendable achievements.
In summary, we continue to hit our marks and every critical.
In every critical area of performance last quarter, and we intend and expect to maintain that strong momentum during the second half of the year.
With that I'll turn the call over to John Drexler, Our CFO John .
Thanks, Paul and good morning, everyone as John and Paul have indicated we continue to execute on our plan of generating significant cash flows from our low cost operations investing in and accelerating the startup of the high return layer South project.
And returning substantial amounts of capital to you our shareholders.
First a brief update on our cash flows capital allocation and liquidity position.
We continue to generate significant cash flows during the quarter with operating cash flows of approximately $141 million.
That includes the refund of $35 million of alternative minimum tax credits.
Capital spending for the quarter was $48.7 million.
This total includes $18.9 million of development capital for Lear, South with the remainder maintenance capital.
Due to the timing of equipment rebuilds, the second quarters maintenance capital is expected to be the highest of the year.
As it relates to Lear, South total capital invested in the project stands at $36.3 million and we now expect to spend $100 million over the full year.
As John and Paul have discussed we have made substantial progress to date, achieving significant milestones in the process of development, allowing us to accelerate the startup of the long haul.
Consistent with the last several quarters cash flow in excess of our capital needs was devoted to our capital return program.
For the second quarter, we bought back 697000 shares or approximately 3% of our initial shares outstanding for $63 million.
We achieved this buyback level during the second quarter. Despite the fact, we were out of the market for a period of time during the quarter in light of the pending announcement of our joint venture with Peabody.
To date, we have spent a total of $726 million buying back 8.8 million shares are over 35% of our initial shares outstanding in just nine quarters.
Also during the quarter, we paid our normal recurring dividends of $7.4 million, bringing our total dividends paid since we initiated the quarterly dividend program in the first quarter of 2000 $17 million to $71 million.
The Board also approved the next quarterly cash dividend payment of 45 cents per common share, which is scheduled to be paid on September 13 to stockholders of record at the close of business on August Thirtyth.
We believe the dual focus of returning capital to our shareholders via recurring dividends and share repurchases, while simultaneously funding to build out of our high return Lear South project represents an excellent allocation of our capital.
Looking ahead, we will continue to evaluate which uses of cash provides the best risk adjusted return over the longer term.
But having said that we continue to view our stock as an excellent value.
Given our current capital resources and the expectation of strong free cash flows for the remainder of the year. We expect to continue to return cash to shareholders, while simultaneously funding the buildout of our earlier south operation.
Regarding our liquidity, we ended the quarter with $395 million in cash and when combined with the borrowing capacity of our credit facilities, we had $508 million of liquidity.
As we have stated we like to maintain our liquidity in the range of $400 million to $500 million with a substantial component of that being cash and we are very comfortably positioned just above the high end of that range.
Our strong balance sheet combined with our low cost operations provides us protection through the full market cycle, while allowing us to generate substantial value when coal markets are healthy.
In summary, we are pleased with our performance in the first half of 2019.
Our low cost operations continue to generate substantial cash that we are using to enhance the value of arch by investing in our high return later, south complex and by driving forward rapidly and aggressively on our capital return program.
We expect to continue down that same path for the remainder of 2019.
With that we are ready to take questions.
Operator, I will turn the call back over to you.
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We'll take our first question from Mark Levin of Seaport Global.
Thanks, just a second if editorializing great execution I can't I was thinking about it earlier I can't remember a time, where.
The execution has been this solid interest and disconcerting for so long. So my my hat is off to the entire.
The entire company.
And related to that yes, my pleasure great great job related to that point, maybe you could talk a little bit about.
Something that we don't talk a lot about on calls which are tons per man hour, which seemed to improve.
Significantly from from Q1 to Q2 and your met operations and I think there was reference to again the reference to entering into figure seems and maybe what you expect that to do.
To your overall cost.
When you're thinking about 2020.
Yes, Mark this is Paul I'll take off on that.
If you look at Q2 versus Q1.
We'll start with what was kind of the same you know we just bolt had are both beckley in Sentinel had what I'd call just a good solid quarter.
Quarter over quarter they were strong.
Probably the one asked trick by the quarter as Mt. Laurel continued to struggle and I think every day on the decision we made to pull longwall, it's only been reinforced.
But what offset that clearly was an outstanding performance by the team at Leer.
The mine went through a longwall move they got it done ahead of schedule and the productivity coming out of the move was outstanding. So I think you're starting to see that reflected in the productivity in the ton per man hour numbers.
And when you think about just now maybe more financially when you think about Q3 versus Q2 EBITDA.
I think in the press release, you referenced the met coal contribution being somewhat similar in Q3.
Q2, with more volume offsetting weaker pricing and.
Better outlook, maybe for PRB and also other thermal in the second half.
Maybe how to think about what the earnings will look like or what EBITDA might look like in Q3 versus versus versus Q2, given given those factors.
Yes, obviously mark we.
Gave pretty good indication on the Mat segment.
As you look at the PRB and as you know PRB third quarter is usually the strongest quarter.
And I think there is every indication that.
We're not quite back to what I'd call normal, but we are operating fairly well out there. So there is nothing that I see in the PRB that would offset kind of that normal Q3.
Strong shipping schedule on the other thermal I think we're also expecting a pretty good pickup so in all things being equal I think you could take our typical Q3 say from last year adjusted for prices and.
Give our indication on met and you'd have a pretty good indication where we're at.
Okay and then my last question is a market question. So over the last couple of months I know met prices. If we can do.
A fair amount.
What are you guys seeing in the market I mean, obviously us exports are still down 810% I think they recovered a little bit in the second quarter from the first quarter Australia.
Australian exports Havent picked up a whole heck of a lot. This year and I know we are all aware of what's going on kind of in the steel market, but just kind of from your vantage point and what you're hearing from your customers in Europe and domestically about what's going on in the met market do you guys expect prices to stabilize around here or what what are you guys seeing or thinking.
Yes, Mark I think what you know as we enter the third quarter and I think we're comfortably at about 98% committed on the coking coal side based on the midpoint of our guidance and we're really not seeing what I would call any pushback.
We've had a lot of conversations with our new European customers.
There's a lot of concern on the economy. There is lot of discussion on you know what the global economic situation is tariffs.
I think people are being cautious but right now.
I Havent had a lot of concern relative to the customers not bake in coal.
Mark This is John let me jump in I guess as we look at the Globe. We continue to think Theres been pretty significant underinvestment. The last several years, we think the markets are overall pretty well balanced.
Yes, we've seen some weakness over the last couple of weeks, but.
I guess longer term, we still pretty confident about where we see prices going with depletion rates at 2% and those are arches numbers pretty conservative demand growth. We thank you still need 70 75 million tons over the next five to six years just to meet that new demand. So.
We're not looking at a short term we continue to look long term, we feel very confident with our cost structure, our quality and our balance sheet vinyl to manage through these dips and really capitalize when they move up.
That's great. Thanks again, congratulations on a very good quarter.
Thank you Mark.
Thank you we'll take our next question from Lucas pipes of B. Riley FBR.
Hey, good morning, everyone and I would like to Echo Marcs comments fantastic execution that said really great to see.
Thanks, Lucas Thank you Lucas.
I wanted to hone in on one of Mark's questions on on the met coal side.
Very strong productivity and then at a higher seem heights at your I think later this year. Starting later this year and I wondered if you could maybe quantify for us what that impact could be on at both production and cost basis and half of that Havent see my follow up questions. Thank you.
Yeah. Lucas obviously this has been baked into our numbers that we have echoed this is coming for quite a while.
And.
Obviously the impact is positive.
A 20% increase in seem HIF is effectively what were expecting.
As you go to that it should have a corresponding impact on costs, but at the same time as I've said, we've got Mt. Laurel that's been out there a little bit offsetting this but.
Overall, I couldn't be happier with where Alere has gone and Doug.
Expecting the same great things that allow yourself.
I mean look as if you think about second quarter I mean, Paul has been a little modest I mean, we had a longwall move at Leer. We continue to fight this thing at Mount Laurel, We had cost US 62 seven so.
Going forward you got to feel good about our cost structure.
Particularly with Lears performance.
And then I assume in 2020, we would have a full year impact of those.
Higher seed Thats correct.
That is correct.
So and.
I guess that have to be a little bit patient in terms of how 2020, but look like in terms of production costs, but.
Looks looks very promising so.
Another question on the on the met coal side.
In the release, you mentioned about 1.3 million tons of development Tom.
As you.
Advance in leaders, South where would we see those those tons precisely with this be captured under sent to know how would this be in your normal production guidance.
Or could production be already low be a little bit higher as you as you develop this new mine I would I would appreciate some additional context around placing those tons in our model. Thank you.
Yeah. Lucas this is John Drexler, the 1.3 million tons, we've talked about the development tons and how they will generate EBITDA as we move forward.
As far as how they are being reported right now with the very modest development. That's occurring they are included in sentinels tons, but it's very small as you can imagine as we're just.
Initially into the lower cut Danny seem there.
And so that will grow as as we move forward, but remember we're transitioning some C M units at Sentinel into the lower containing scene. So we'll.
All in all Thats incorporated in all of our met coal guidance as we move forward.
Okay got it perfect. Thank you and then one last one for me.
If your phone ringing in regards to the PRB.
Yes, I would think that if you take 10% out of supply.
It shake things up even though even in the.
What is otherwise a pretty lackluster demand environment would appreciate your thoughts.
Yes, I'd tell you Lucas its hard to talk about the the PRB without at least technology.
There's a pretty tough story out there with.
A large number of people lost their jobs.
The impact what I'd say the county, the vendors the states you know the cities, it's a tough story.
What I find fascinating about this thing having said all that is we pulled out 35 or 40 million tons out of the market.
And that was a combination of central App High Vol High Vol B PCIA.
PRB and the market reaction was effectively zero.
We've had a few calls.
But.
To be honest there is just not been a lot of concern over the issue at least from the customer's perspective that we've heard from.
Well no I wish I share your thoughts on the PRB into reaching them.
Thank you for that additional color I'll turn it over and continued best of luck.
Thank you.
Thank you we'll take our next question from Michael Dudas.
Vertical research.
Morning, gentlemen.
Morning, Michael Good morning, Michael.
First question I guess.
On the lines of the great performance at Leer and productivity enhancement, you're having how do you feel about current LIBOR, where you are relative to your needs.
And since Theres been some more trouble on more concern in the coal fields.
Is that going to be helpful to to help you get better quality, especially as you're ramping up and trying to plan for.
Lee or south as you target 2021 and are some of these activities from some of your competitors going to.
Maybe start to impact some issues and from vendors and some other.
Negative issues as we move into 2020.
Hi, Michael.
Also I'll start by talking about the PRB on the labor front and moved to the east but.
Relative to people.
We were in pretty good shape, obviously theres been a lot of good people put on the market.
I think youve read some headlines or some of the other competitors picking up people and honestly we've picked up some people.
And.
Frankly, I've been willing to pick up some skilled people that we didnt necessarily even though it's just a good opportunity to higher what are some very good.
Operating electricians and those type of people.
In the east, it's it's always a little more interesting on the labor side.
Clearly, we have to bring on and I'll forget the exact number but somewhere between a 150 and 200 people at Leer South.
And we've been doing it pretty methodically and had relatively good luck doing it.
I think the one advantage we have is that we've we've anticipated. This issue. We started a training program at Leer about three years ago, or we're starting to train new miners.
That process is paying off and we're starting to build a pipeline of our of employees that were not so dependent on.
Trying to go out and steel people from each other.
And.
Probably the one thing I'm, probably most proud of in that processes, we have a very good stick rate with those people.
And.
I think taking young people that are interested in the industry and training them. The way. We want is really been the way to go and this poaching people from each other just doesn't seem to ever work out.
Michael just to jump onto that I think our employees certainly we have a low turnover rate when you look at Leer, south and the growth in the future of the company I think people feel good about where we are today and where we're going and therefore, we're just not seeing a lot of turnover people and as Paul said.
We're not having a whole lot of trouble, bringing people on earlier south so from a labor standpoint, I think we're probably his position as well as we could be.
I appreciate those comments is very helpful and I just wanted to follow up would be as.
Gauging the export market, especially globally on thermal how that's.
Been pretty well over the last several months.
However.
Just from your angle.
Looking at the overall net side as the quality of the coal that you in the U.S. providers into the marketplace are going to offset maybe either economic slowdown on the met side and and guess what you do have little bit exports on on West Africa.
Are we getting close to bottoming in the anticipate seeing some of the issues that come out of the marketplace to open up the market. Thanks guys.
Yes.
I'm not sure I caught the entire question, but I'll, just try and hit the high points and maybe John can jump in but.
You know we export.
Principally.
Roughly about 750000 or a million tons out of the east from our Colomac operation off Ipi too.
Current marks.
Those those values won't are that those tons will not go into the European market.
We've done a fairly good job, though displacing some of that export with some domestic sales that we jumped on earlier in the year. So generally feel good about that position.
In the west.
West Elk has always been a strong participant Newcastle.
We were aggressive in taking out hedges, which you obviously have paid off last couple of quarters.
So we're in relatively good standing as far as Westell going into 2020, and I think the way West Oaks always going to run it.
As we watch the Newcastle market will will enter in and come out of it and just you know, we're not going to try and judge the market of the top we're just going to layer it in and be careful how we do it.
Mike on that on the coking coal side, we do feel good about what we're seeing on the quality front and if you look at where high volume is trading today. It's just a couple of dollars below Australian hard coking coal and that's just the advantage of Australia being right. There at the doorstep of of the Asian market.
But we do feel good about that we certainly continue to believe that that are high volume product is going to be really instrumental as additional lower quality time have to make their way into the market any thoughts on headcount et cetera. The high vol. As a really significant advantage from a lending perspective and allows the coker east and bring in those lower quality product. It does feel like the market deal is sort of getting a little steadier here. We've obviously had a deaf over the last month and a half or so but we are starting to see what we think might be a little bit more stability, we'll see how that plays out.
The last couple of days and team have looked better and as indicated we are hearing good interest continue to be sort of encouraged by the town. Despite those macro concerns that John and Paul referenced so we do feel feel decent about sort of the export market. It's just we have the sort of same uncertainty that sort of global economic level that everybody else does.
They got appreciate those thoughts I think the only thing that a better second quarter than article where the samples.
Thanks, guys.
Hi, Thanks, Mike.
Yes.
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We'll take our next question from John Bridges of JP Morgan.
Good morning, everybody and I'd like to Echo marketing Louis's comments on your on your results well done.
Maybe I'd also like to take another shot at the seam thickness question.
You are going into the heart of the Siem and 2020, how long will the engineers that you stay there before you come out of it and then.
Leo South presumably that's not in the Bolzoni as well so what do you expect the same thing is to be at least south and 2021.
Hey, John This is Paul first of all thank you for the comments.
You know John this is kind of the heart of the reserve we're going to be in this same thickness for.
Quite a few years out.
It was simply the way we had to develop the mine that we had to go basically to the southeast corner and come back out but as a.
As we head north and we head west the coal seems relatively fit.
And.
It's a pretty good story.
It's a little unusual that you don't start off in your best coal, but thats the way the mine was it had to be developed.
And certainly a south is in the six foot cold as well.
Yes, clearly are south as we've talked in the past as you know a couple of advantages actually overlay or its a little bit thicker coal and probably more importantly, it's got longer longwall panels. So we're expecting productivity very similar to layer. So John what we said about that is the Lear southwest alike. A lot like Lear has been over its first five years plus of operation actually as Paul said, a little bit thicker longer longwall panels. All good. It's just that Lear now take this sort of a step change in to even thicker coal still so we would expect Lear south to look a lot like what we've seen out of linear with the additional benefit that we've we've learned a lot over the last five plus years of operating there and the local scanning and longwall mining and we have really refine those processes, so feel really positively.
Okay, Great and you call me talking a lot about.
The shortfalls on supply affecting.
Perfect in met coal and helping keep the price up one of the things that sort of intriguing to me is that certain in theory, given the pressure on.
On thermal coal from SG invest as et cetera, et cetera that.
That effect should be having a bigger impact on supply of thermal coal but of course, we have this big disconnect between met coal in thermal coal prices at the moment.
I just wondered if you had any thoughts as to.
What was.
Depressing.
The seaborne thermal coal prices and when that might abate.
Well, let me jump in and Paul can add on I think certainly on the thermal we're starting to see a lot of pressure given where a pie too is.
I think the.
The reason you haven't seen a more significant drop off as people hedge their sale for 2019 as those hedges come off in later in the year going to 2020, I think there will be a lot of pressure and quite frankly, John I don't know that there's any place for that call to go domestically. So I think you'll see a lot of pressure as we move into 2020, Paul you got anything no. The only comment I'd make John as its the usual commentary you here on Europe and that is LNG prices were relatively low it displaced a lot of coal coal inventories built up and apiay to crashed.
Okay. Okay. Yes, I was I was hoping you have some new revelation, it's more or less in line with.
Now a few here and I'd like.
Yes, yes, we'd love to hear John anything else that.
Okay from looking at it thanks, again and congratulations on the results.
Thank you John .
Thank you we have no further questions at this time I'll turn it back to John eaves for closing remarks.
I want to thank you for joining the call. This morning, the management team will be focused on executing on the four drivers in the back half of 2019, our capital return program development earlier, South the transition in the heart of the reserve at Leer and the completion of the JV with Peabody Energy, we look forward to updating you in October thank you.
Thank you ladies and gentlemen. This concludes today's conference you may now disconnect.