Q2 2019 Earnings Call

Good afternoon.

And welcome to the Hallador Energys second quarter 2019 earnings Conference call.

All participants will be in listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero.

After todays presentation, there will be an opportunity to ask questions.

To ask a question you May Press Star then one on your Touchtone phone.

To withdraw your question. Please press Star then too.

Please note. This event is being recorded I would now like to turn the conference over to Ms., Becky Palumbo director of Investor Relations. Please go ahead ma'am.

Thank you Nancy.

We want to thank all of you for your interest in Hallador today and for taking the time to join US on today's call to discuss our second quarter 2019 result.

As a reminder, this event is being webcast live and youll be able to access the replay of this call on our website.

We filed our second quarter Form 10-Q yesterday afternoon, and it is now posted on our website.

Participating on today's call are Brent Bilsland, our president and CEO and Larry Martin Our CFO , Larry will begin today with a brief financial overview of the quarter, followed by Brent with comments on operations.

After Brent completes his remarks, we will open the lineup for humanity.

Our remarks today will include forward looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially.

For example, our estimates of mining costs future coal sales and regulations recruiting to the clean Air Act and other environmental initiatives, we do not undertake to update our forward looking statements whether as a result of new information future events or otherwise, except as may be required by law and with that I turn the call over to Larry.

Thank you Becky good afternoon, everyone.

Today, we'll be reviewing our quarter and year to date results.

Start to start out I want to get rid of or go through a couple definition.

We define free cash flow as net income plus deferred income taxes, plus BDNA plus a our ROE accretion.

And stock compensation less maintenance capex and the effects of our equity method investments, we define adjusted EBITDA as EBITDA plus stock compensation and they are all accretion left the effects of our equity method investments and our glass sands.

For the quarter, we had a net loss of 3.3 million or 11 cents a share.

And year to date, we've made 3.7 million of net income or 12 cents a share our free cash flow for the quarter was 5.9 million 20.6 million for the six months ended June .

Our adjusted EBITDA for the quarter was 16.4 million or 41.7 million for the six months.

We borrowed 4.7 million in the quarter and we have paid a total of 15.4 million.

For the six months ended June Thirtyth.

We paid dividends of $1.2 million or four cents a share for the quarter.

2.5 million eight cents a share for the six months.

Our bank debt at 630, 19 was 173.1 million, our net debt taking out our cash in.

But they have to sell securities was 164.4 million.

Well our debt target for the end of the year is a 155 million to 160 million and our leverage ratio at June Thirtyth was 2.2 times debt to EBITDA.

I will now turn the call over to our CEO , Brent Bilsland for comments on the quarter.

Good afternoon, everyone.

As Larry previously highlighted hallador experienced a $3.3 million loss in the second quarter.

The majority of the losses due to a 1.8 million non cash adjustment.

In the fair market value of our interest rate swaps.

Each quarter, we marked them.

We mark the value of our swaps to market and in the second quarter.

The adjustment was larger than normal due to the changing from a position.

Of raising interest rates to one of lowering interest rate.

However, hautelook, which is the whole its interest rate swaps long term the gating much of the effects of quarterly non cash fluctuations evaluation.

Additionally, the seasonal nature of our contracts led to the second quarter of 2019 shipments.

The 15% less volume.

The first quarter of the year.

This reduced shipment pace was expected.

And shipments for the year on schedule as first half shipments were 49% of our 8 million tonne annualized target.

During the quarter, we chose to produce more coal than we shipped building coal inventory in anticipation of larger shipments in Q3.

That's our coal inventory grew to $29.3 million in the quarter.

And we borrow unfold 4.7 billion to meet our increased working capital needs.

Oh liquidity still stands at a healthy 73 billion.

Yeah.

I think the circumstances to track for the quarter that generated 16.4 million and adjusted EBITDA.

In the first half of 2019 that generated 41.7 billion and adjusted EBITDA.

If we were to report earnings only once a year these quarterly fluctuations fluctuations would go unnoticed, but.

Since we report quarterly we must trust that the Hallador shareholder can see as we do that however remains on pace to have a great year.

When we review the quarter, we are most thrilled with our continued success locking in sales for the quarter of 20 calendar year.

In past calls we have tried to highlight our growth in customers in sales as we have made a structural shift to become an 8 million tons of your company.

The 2019, we are 100% sold at 8 million ton target pace.

And for 2020, we are now.

88% contracted at our $8 billion target pace.

When you look at the remainder of.

2019 to 2020.

Two or the next three and a half years.

We have 21.7 billion tons sold.

Thus, we have 77% of our contract of our sales contracted over the next three and a half years and an 8 million ton annualized pace.

The reason for our continued sales success throughout.

2008 team in 2009 in first quarter of 19.

Our subsidiary or Sunrise coal subsidiary grew from nine customers in three states to 17 customers in eight states over that time period.

These new customers give us more opportunities to continue growing sales.

Now, we feel that being 77% hedged for the next three and a half you give our investors a parallel free cash flow visibility.

We'll see if you assume that 80% of EBITDA roughly in Sealy, roughly 60% of EBITDA equates to free cash flow.

Then how it or has that enterprise value to free cash flow yield in the mid teens, while the S&P is yielding in the low single digits.

That's we believe how little represents a tremendous value.

To date, only 5% of our current customer demand has announced a retirement date within the next decade.

Now we realized there is potential for more retirement announcements for customers.

Well, we are also confident in our ability to continue to grow our customer base.

As we have most recently deployed.

Additionally, we believe that exports will continue to take an increasing larger share of Illinois basin production.

To Echo comments from recent coal company earnings.

Another of other of our competitors we too.

I believe the downturn of the export market is cyclical in nature and not structural.

There are still more megawatts of coal fired power plants being constructed in the world that are closing.

So in conclusion, we strongly believe that Howard or has a great free cash flow yield.

With superior contract visibility a growing customer base.

And plenty of excellent opportunities to redeploy capital.

So with that I will open the call up to questions.

Thank you we will now begin the question and answer session.

To ask a question you May Press Star then one on your Touchtone phone.

If you are using a speakerphone please pick up your handset before pressing the keys.

To withdraw your question. Please press Star then team at this time, a little pause momentarily to assemble our roster.

And our first question comes from Lucas pipes.

Who has just withdrawn his question.

So there are no other participants in the queue.

And he just came back excuse me.

Our first question comes from Lucas pipes from B. Riley FBR. Please go ahead.

Sorry.

Sorry about that that said that was an exercise and how to operate at Dow set. So I. Appreciate you taking my question.

Hi, and good afternoon, everyone.

First question.

Look at the market appears to be softer right now what can you tell us about.

The current market environment in terms of contracting activity are there you know a lot of offshore if it's out there or or or utilities kind of taking a wait and see approach in Canada. What are you seeing out there in the market and then how much term can you get on on any additional contracts that would very much appreciate your perspective.

Thank you.

[noise].

Well currently we're not really in a traditional RFP period.

We the traditional.

RFP season is really more of this fall September .

Timeframe.

That's why we were very pleased that we were able to.

Contract.

About 10% of our next year's business during that during the second quarter, which.

I thought was potentially a little unusual.

But I think it comes back to.

You know we're doing we've grown so with so many new customers that were doing smaller pieces of business and.

And really you know the pricing has held in there thus far.

You know the export market definitely has deteriorated significantly from a year ago timeframe.

But it to some degree I question, how much of the of the drop is actual physical trades and more.

You know how much of that is just traders trying to get out of positions.

So we think that.

That that exports will come back stronger, but but it needs a little time to unwind itself.

And again longer term, we continue to look at the growth in India.

And you know eastern Europe , and those markets and it just looks like to us that.

More Illinois basin over time, you're going to be flowing into those markets. So.

We are in.

Probably as good a shape as we've ever been going into a year.

At 88% hedged.

You know sitting here in early August I mean, I, just I'm not sure I know of another time, we've accomplished that especially at our.

Our higher sales volumes so.

Really in good shape, and we think we've got a lot of time you know.

To to hit our target.

Of 8 billion tons next year so.

We're not feeling a lot of pressure. We certainly it's just you know are looking forward to the RFP season. This fall.

And hope hope to continue contracting business.

Right.

I think that's all I've got to say on that.

That's that's very helpful. Thank you Frank for your perspective May show up, but that's not a follow up on that topic.

At two to switch to switch topics.

Earlier this earning season one of your peers in the Illinois Basin mentioned and I'm paraphrasing, but was along the lines of business. The most dynamic.

Time that I've seen from a strategic point of view in my career again, I'm paraphrasing, but it was.

Oh in regard to Oh, My basin and.

And I was curious.

How are you looking at the strategic landscape in terms of consolidation.

In the industry today I would appreciate your thoughts thank you.

Well I think they announced or proposed joint venture between Peabody NRG in the powder has a lot of people talking.

You know that's not really a structure that we've seen in a while.

And so it's a little bit unique, but it seems to make a a lot of sense and.

Well I think everyone's kind of watching that that transaction to see.

What comes of it.

As far as other basins go.

You know just really seems to be a time period of the haves and the have nots.

You've got.

Companies, such as ourselves that have good liquidity and avail paying down debt.

We think by the end of this year, we go under two times debt to EBITDA.

And so just not up more leverage our EBITDA is growing.

So.

You know and we're a low cost producer.

There's other producers out there certainly.

Our quite as well heads and you're being you're going to see the contracts flow to the low cost producers and you're going to see production be curtailed at the higher cost producers.

You know that always takes a little bit of time because.

It takes time for contracts to work off and like US were three and a half.

And a half years, we've got 77% of our of our.

Target.

Contracted so you know, but we work to get in that position.

And we think we've got some ideas out there to be able to pick up market share.

Because of the strength of our low cost operations because of the flexibility.

Of our transport options that we can give customers and you know the health the health of our balance sheet to you know the people realize that.

How are those going to be here for a long time to come so.

So you know that on the other side of the equate. The ledger you are seeing quite a few bankruptcies with various players and then some.

Some cases, you know they've struggled to raise debt financing that struggled to find buyers for some of those assets and.

Yeah, that's that's because you're seeing a handful of assets out there that can generate positive cash flow you know with zero debt. So.

So as the market.

Gives us these challenges you look for the stronger producers to pick up market share and the weaker producers to lose market share.

Got it okay.

That's that's very helpful. I appreciate that perspective and then.

Maybe to hone in on on one of the points you raised regarding taking market share.

It's that kind of a two year plan three year plan and.

When you think about some of the structural headwinds that are a pretty.

You know.

Oh pretty widespread in the industry kind of how how does that all fit together and and.

What where do you see kind of volumes longer term. Thank you very much for your perspective.

So as far as picking up market share.

You know, it's something we work on every single day now that being said.

You know there are times of the year that the buying window is open.

And there are times of the year that the buying window is closed and.

So that's why I always find the questions around pricing.

You know the people see and say well, what what's the spot price of gold today and.

You know when the markets when the windows close it really doesn't matter what the prices it only matters when the window is open.

And so you know.

In traditionally people are gonna buy you know to an 80, 90% hedge rate in the fall fall months Theyre going to then get into the.

The spring and you know and see what the what did winter break where their inventory levels and maybe it'll make some summer spot price purchases.

Which as you know somewhat we experienced this year.

So as far as opportunities to pick up market share you kind of have to get yourself in position with something.

Unique for the customer.

And then wait for the window open and so that's.

That's what we're constantly doing is trying to get into that position and we see definite opportunities out there. We just have to wait patiently for the window to open.

And Brent when you think about where you can pick up market share has on a regional basis, but that the Indiana would that be maybe.

In the South east or maybe other states in the in the Midwest would appreciate your thoughts on on where you see the biggest opportunities. Thank you.

Well, we can't we can't share all all of our cards [laughter].

Okay.

[laughter].

Well, you know where 70% of our volumes stay in the state of Indiana, 30% goes elsewhere.

Most of our new clients in the last.

You know 12 months have come from.

Outside of India, you know part of that you know from a from a structural point of view you saw the AD last year, our Princeton loop that gave us.

You know new capabilities <unk> ability to access some of the N.S. marcon ability to give traditional CSX customers.

More flexibility.

On where they take their product from.

So you know.

And then with just the blast that you know, Indiana by enlarge has not has not seen.

The largest number of retirements so.

You know those assets a there was quite a bit of an environmental controls put on the coal plants in Indiana and so.

You know I think the utilities look at that and say well gosh.

You know if we set set these assets down we still have to pay for all these investments that we made.

You know a handful of years ago. So.

Oh, that's that's why I think you're seeing those assets stay online much longer.

Then what you are seeing say assets in the powder River basin that that Didnt.

Put on.

Environmental controls to me, you know sulfur emissions and things like that so.

Oh, that's that's why I really think our customer base has a longer.

Staying period and why some of the structural headwinds art art is.

Our blowing its hard against us.

Okay. Okay, Brent really appreciate your color and continued best of luck. Thank you.

Thank you lose.

Again.

You have a question. Please press Star then one.

There are no other questions in the in the queue. This concludes our question and answer session I would like to turn the conference back over to Mr., Brent Bilsland, President and CEO .

Well I just want to thank everybody for taking the time to dial in today and listen to the call.

And appreciate Lucas for his question and.

We look forward to talking to you next quarter, we think we've got a.

The year set up to be a good second half of the year for Hallador and hopefully we plan on delivering on that so thank you all for your time and this ends the call. Thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect have a good day.

Thank you.