First Horizon Q2 2023 Earnings Call Transcript

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July 27, 2023

There are 6 speakers on the call.

Operator

After today's presentation, there will be an opportunity to ask questions. Please also note that this event is being recorded. And at this time, I would now like to turn the conference over to Karla Kimrey, Vice President of Investor Relations. Please go ahead.

Speaker 1

Good morning, and thank you for joining Peabody's earnings call for the Q2 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.

Speaker 2

Thanks, Carla, and good morning, everyone. In the Q2 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 a fixed dividend and a meaningful share buyback plan. We returned $262,000,000 through 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.

Speaker 2

Now turning to the global coal markets. Seaborne thermal coal markets remain volatile with prices declining during the Q2. Comparatively high coal and natural gas inventories in the Northern Hemisphere following an unseasonably warm winter have weighed on demand leading to Weaker pricing environment for high energy thermal coals. China's 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 400,000,000 tons per year, representing approximately a 90 increase over 2022 levels.

Speaker 2

India too has shown signs of improved economic activity during the first half of twenty twenty three 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 restocking and preparation for winter will contribute to a normalization of inventory levels, Providing support to seaborne thermal coal markets. Within the seaborne metallurgical market, Global crude steel output during the quarter was variable with interruptions at European blast furnaces, offset by notable year on year crude steel production of wet weather events in Queensland during the Q1 of 2023. The rate of exports from Queensland remains below historical rates And premium hard coking coal pricing remains elevated finishing the quarter at $2.33 a ton.

Speaker 2

The outlook for the metallurgical coal market remains positive with subdued seaborne supply combined with anticipated increases in import demand for steelmaking raw materials, along with improving crude steel production rates in Europe, North Asia and India. The United States, overall electricity demand decreased nearly 4% year over year, negatively impacted by weather. Through the 6 months ended June 30, 2023, electricity 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 6 months ended June 30, 2023. Natural gas prices have recovered modestly from the lows of earlier this year with U.

Speaker 2

S. Natural gas prompt pricing at $2.65 for MMBtu. DIA is currently forecasting U. S. Natural gas prices to average $2.80 per MMBtu in in the second half of twenty twenty three, up from the $2.40 per MMBtu in the first half of the year.

Speaker 2

Overall, near term demand for U. S. Thermal coal is anticipated to improve in the Q3 in comparison to the Q2. Now moving on to our operating segments. As expected, our seaborne thermal coal exports came in at 2,600,000 tons.

Speaker 2

Higher than the prior quarter as the Wambo longwall move was completed and wet weather, which impacted the Q1 was abated. Segment cost per ton were in line with the Q1 as higher production was offset by the timing of equipment repair and maintenance costs. Our seaborne met coal shipments were stronger than expected at 2,000,000 tons due to strong sales out of the CMJV complex. In the Q2, we had good success with our operations at Shoal Creek as we recovered from the 1st quarter fire. During the Q2, we are able to seal off the 2 longwall panels in the J panel area of the mine.

Speaker 2

We resumed with development coal production in the new El 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. In the PRB, shipments were lower than anticipated. Shipments were impacted by low customer demand due to low natural gas pricing, high coal inventory levels and the June tornado event at Naarm.

Speaker 2

In addition, the basin had an abnormal amount of rainfall, which caused a slowdown at some of our operations. The 2nd 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.

Speaker 2

Looking solely at our sold position, PRB volume should increase in the second half. The consumption of PRB coal 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.

Speaker 2

Market conditions. In addition to our active operations, the company continues to advance redevelopment efforts at North Goonyella with key project milestones and critical path items on track. Activities to date have included procuring equipment, Refurbishment and replacement of surface infrastructure, Zone A remediation, completion of drilling program for Zone B work necessary to reenter Zone B. The next significant milestone, re ventilation and reentry of Zone B, The company has invested $53,000,000 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 Q1 of 2024. Before I turn it over to Mark, I would like to address the tornado event that impacted Naarm.

Speaker 2

On June 23, our North Antelope Rochelle Mine in The PRB was struck by an ES2 tornado. 6 people did 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 the mine to full operations. I'll now turn it over to Mark to cover the financial details.

Speaker 2

Thanks, Jim.

Speaker 3

In the second quarter, we recorded net Attributable to common stockholders of $179,000,000 or $1.15 per diluted share and adjusted EBITDA of $358,000,000 The 2nd quarter results included a $34,000,000 charge for the write off of certain underground development and equipment at Shoal Creek And property losses related to the tornado at NARM. The company's leading diversified portfolio of mines generated $353,000,000 of cash flow from operations, enhanced by $109,000,000 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 Q2, we were pleased to return $262,000,000 to shareholders, including a cash dividend of $11,000,000 and share repurchases of $251,000,000 This reduced our share count We remain committed to returning at least 65% of annual available free cash flow, keeping returns right is based on operating and financial performance. After the recently declared 2nd quarter cash dividend of $0.075 per share. At least $142,000,000 remains available for shareholder returns, expected to be used for additional share repurchases.

Speaker 3

Turning now to the 2nd quarter segment results. Seaborne Thermal recorded $198,000,000 of adjusted EBITDA, 20% higher than the prior quarter despite a significant decline in the average Newcastle benchmark price. Higher production rates drove cost to the low end guidance range and higher export shipments resulted in adjusted EBITDA margin of approximately $50 per ton. The Seaborne Metallurgical segment generated $103,000,000 of adjusted EBITDA. Shipments of 2,000,000 tons exceeded expectations And we're over 50% higher than the previous quarter due to higher sales from the CMJV as they recovered from 1st quarter rains.

Speaker 3

Costs were $13 per ton lower primarily due to higher production and lower sales price sensitive costs. The U. S. Thermal mines produced $78,000,000 of adjusted EBITDA, impacted by fewer shipments due to low natural gas prices and higher utility customer inventories. The PRB mines generated $26,000,000 of adjusted EBITDA.

Speaker 3

Tons sold were 3,100,000 tons lower than the prior quarter. We lost approximately 1,000,000 tons at the end of the quarter due to their tornado that struck the NARM mine and volume on 2 requirements contracts were 1,200,000 tons lower than expected. The other U. S. Thermal mines delivered $52,000,000 of adjusted EBITDA.

Speaker 3

Tons sold decreased by approximately 700,000 tons compared to the prior quarter, But a laser like focus on operations drove costs down to less than $40 per ton, maintaining adjusted EBITDA margins of 26%. With the first half complete, we've updated our outlook for the remainder of the year. Seaborne thermal volume has increased 500,000 tons to 15,000,000 to 16,000,000 tons due to higher expected production at Wilpin Young. Seaborne metallurgical volume is expected to be 500,000 tons lower at 6,500,000 to 7,500,000 tons due to less than previously anticipated production at the CMJV and Shoal Creek. PRB shipments have been revised downward to 80,000,000 to 85,000,000 tons, reflecting the impacts of low natural gas prices, utility inventories And mild weather to date in major cold generation regions.

Speaker 3

For similar reasons, other U. S. Thermal volumes have been reduced 16,500,000 to 17,500,000 tons. 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 commitments.

Speaker 3

Specifically for the Q3, seaborne thermal export volumes are expected to increase to 2,700,000 tons. Approximately 300,000 tons are priced on average at $181 per ton and 1,400,000 tons of high ash product And a 1,000,000 tons of Newcastle product are unpriced. Costs are expected to be lower quarter over quarter at $45 to $50 per ton. Seaborne metallurgical volumes are projected to be lower than the 2nd quarter at 1,500,000 tons due to a longwall move at Metropolitan. 200,000 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.

Speaker 3

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 cost to $115 to $125 per ton. In the PRB, we are anticipating shipments to increase to 21,000,000 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 Q2 to approximately 4,200,000 tons at an average price of $50.50 per ton and cost of approximately $41 per ton.

Speaker 3

In summary, we have a unique diversified portfolio of assets and the necessary financial flexibility to succeed in all markets. We will maintain rigorous discipline 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.

Speaker 4

Thank you.

Operator

From Lucas Pipes with B. Riley. Please go ahead.

Speaker 4

Thank you very much, operator. Good morning, everyone, and great to see those And I wanted to start my first question on that point of shareholder returns. You noted the $142,000,000 that remain available. Should we kind of think of as those being used for buybacks over the next 3 months? So So kind of you deploy $142,000,000 to buybacks between now and the time you report Q3 results and then essentially When those Q3 results get announced, you re up it with whatever the free cash, 65% of the free cash flow during available free cash flow from Q3 results.

Speaker 4

Is that kind of the cadence now going forward?

Speaker 3

Yes. Good morning, Lucas, and thanks for hanging in us. And I know it is a very, very busy earnings call day, so 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.

Speaker 3

And you'll see the calculation in the earnings release that sums up to that. Certainly, last quarter, we did above the 65%.

Speaker 4

Got it. Got it. Okay. That's but it's not like it'd be more than $142,000,000 over the next 3 months in terms of buybacks. You would kind of reconvene in 3 months, look at Q3 results and that would determine at the forward

Speaker 3

pace. Again, we're going to return at least 65%. And 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 Then the 65% in the last quarter. But we will true it up each quarter and show 65% on a year to date annual basis.

Speaker 4

Got it. No, that's clear. That's clear. Thank you for that. And then turning to operations, good to see the increase in the thermal guidance for the year.

Speaker 4

I wondered if you could maybe elaborate a little bit on the key drivers for that. And then on Shoal Creek, should we think of That mine is a one longwall mine going forward. Thanks for your color on that.

Speaker 2

Yes. I'll talk about Shoal Creek first. And hi, Lucas, Jim Grech here. Good to hear your voice again.

Speaker 4

Same here. Thank you, Jim.

Speaker 2

Yes. So We have the new longwall coming and its delivery has already started. So we're expecting to get that delivered here by the end of this year and have it operating Very early into 2024. The intention prior to the Mine Fire was to have the 2 longwalls Operating at the mine. And we still have the 2nd longwall there.

Speaker 2

It's behind the sealed area. And we have to wait until we have permission to Enter back into that area, Lucas, to see the status of the equipment and What we can do with it, can we start operating again in that panel? Do we have to extract the longwall? So I would say the timing and the certainty of the second one I would say by the end of this year, we're certainly a 1 longwall mine. Next year, we're for sure a 1 longwall mine with the potential for 2, but we We really don't know until we get back behind those seals, which is at best a couple of months away.

Speaker 3

And maybe I'll follow Up on the seaborne thermal, a couple of things for the additional tons. More higher ash tons out of Wilpiniong And the Wambo Open Cut joint venture doing extremely well. So volumes are up there. You also note a pretty good reduction in costs for the next quarter. And again, I think it's Wambo open cut, the production going up and cost doing better, as well as some additional Wilpin Young tons there, and also with some lower sales price sensitive costs.

Speaker 2

And Lucas, another point I wanted to make on Shoal Creek was Even though we're looking at the one longwall, it's in the L panels where we have started our development coal mining and the coal seems look very good, Very good conditions for us right there. So, we've given we've talked about the output of the mine before And I'm confident with the 1 longwall mine and the mining conditions we're in, there's going to be no drop off from our expectations from the production levels that we've had in the past. We're going to be again, the L panel has some very, very good mining conditions from what we're seeing so far.

Speaker 4

Very helpful color on both fronts. Thank you for that. And then a quick follow-up on the JV. And I looked at the cash flow statement for the quarter and contributions to JV were roughly equal to distributions From the JV, is that only Middlemount or does that also include Wambo? And if it is Middlemount, We expect maybe additional cash to come in from that side.

Speaker 4

We would appreciate your back if any clarification on that point.

Speaker 3

Yes, Lucas, it is only Middlemount there. So not a lot of cash flow from Middlemount 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.

Speaker 4

All right. Well, I have more questions, but I'll jump back in the queue. Thank you very much. Thank

Operator

Our next question here will come from Nathan Martin with The Benchmark Company. Please go ahead.

Speaker 5

Hey, good morning, everyone. Thanks for taking my questions.

Speaker 2

Good morning, Nate. Maybe I'll

Speaker 5

just start on North Goonyella. I appreciate the update there in the release. Could we maybe get a refresher on The expected spending and timing of that spending on the project as you guys move towards anticipated long haul production in 2026? And What and when are some of the regulatory hurdles you expect?

Speaker 2

Yes, Nate, the first we've got it in 2 To the spending as we've discussed in the past, the first one is $140,000,000 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 overcome or I shouldn't say overcome, To get approval of is the permission to reenter the Zone B area, which is the sealed area. And that's combination of degassing that area and the ventilation of that area and we expect to be able to reenter Zone B 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.

Speaker 2

It's approximately $230,000,000 to 2 $40,000,000 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

Speaker 5

And then maybe just shifting gears over to the domestic thermal side of the house. You did update your guidance there. You talked a little bit about some of the conversations you're having with your utility customers. Do you guys believe at least at this point That guidance fully incorporates potential domestic thermal deferrals or do you still having ongoing conversations and negotiations?

Speaker 2

Nick, we believe that fully encompasses all of the potential deferrals in the guidance that we've shown there.

Speaker 5

Okay. Got it, Jim. And then actually, I'll have you as well. In the past, you've been helpful kind of giving us an idea Where you guys are committed for 2024 in PRD and other thermal, any updates you can give us there, maybe what percentage of Funds are committed there and off of what base would be great as well.

Speaker 3

Yes, it's about 70% committed At midpoint of guidance, I'd 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. So we'll look to see more coming through here in the next quarter as the market picks up. So again, 70% on the Illinois Basin and probably about 85% in the PRB for next year.

Speaker 5

Perfect. Appreciate that update there, Mark. And then maybe just one kind of bigger picture question for you, Jim, to wrap up. There's some M and A opportunities out there, a few met coal assets in Australia up for sale. I know you likely can't make specific comments regarding Peabody and M and A.

Speaker 5

But could you kind of remind us how you guys think about and rank potential This is maybe seaborne met assets or thermal assets and how you kind of compare those to maybe the progress you're making on reopening North Goonyella? Thanks.

Speaker 2

And Nate, 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. Those always have the best returns for our shareholders and those always are our number one emphasis, our number one priority and that's what's exhibited by North Goonyella. Then secondly, if we do get into M and A, I'm not saying we are, we aren't. We've stated many times and it hasn't changed that our focus is on the seaborne markets. We see the seaborne markets as a growth markets In demand in both metallurgical and thermal, we have much more of a focus on the metallurgical seaborne markets, but we certainly would look at both markets For potential growth in the future.

Speaker 5

Great, very helpful. I appreciate the time guys. Best of luck in the second half.

Speaker 4

Thanks so much. Thank you, Nate.

Speaker 1

Next question?

Operator

Our next question will come from Lucas Pipes with B. Riley. Please go ahead with your follow-up.

Speaker 4

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 wondered if you could remind us what's outstanding there. And I know there was a cash collateral requirement in the past As those hedges roll off, could there be cash coming back here in the Q3 from that side?

Speaker 4

Would appreciate just 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 as that program concludes. Thank you.

Speaker 3

Yes, Lucas, the program has fully been unwound at June 30. So all the initial margin has returned. I think it was about $11,000,000 in the 2nd quarter and all the variation margin was returned by higher realized prices and baked into our EBITDA results. So program is Fully unwound and we're no longer got hedges for coal sales.

Speaker 4

That's very good to hear. That's it from now. I appreciate

Operator

And with that, there are no further questions. So So I'd like to turn the conference back over to Mr. Jim Grech for any additional closing remarks.

Speaker 2

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 Narmer.

Speaker 2

Operator, that concludes our call.

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