Peabody Energy Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 2, 2024

There are 7 speakers on the call.

Operator

Good day, and welcome to the Peabody First Quarter 2024 Earnings Call. All participants will be in listen only mode. After today's remarks, Please note this event is being recorded. I would now like to turn the conference over to Carla Kimray. Please go ahead.

Speaker 1

Good morning, and thanks for joining Peabody Energy call for the Q1 of 2024. With me today are President and CEO, Jim Grech CFO, Mark Sperback and our Chief Marketing Officer, Malcolm Roberts. Within the earnings release, you will find our statement on forward looking information as well as the reconciliation of non GAAP financial measures. We encourage you to consider the risk factors referenced there along with our public filings with the SEC. Now I'll turn the call over to Jim.

Speaker 2

Thanks, Carla, and good morning, everyone. First quarter operational results were highlighted by a number of challenges and successes. There were unforeseen production challenges in Australia that are now behind us. While thermal coal shipments in the U. S.

Speaker 2

Were impacted by unseasonably warm winter weather and low natural gas prices. Within our seaborne met segment, Shoal Creek continued to exceed production expectations, although shipments have been hampered by the failure of the Demopolis lock. We continue to strategically invest in our portfolio through the development of Centurion and completed the acquisition of the adjacent Wardswell coal deposit, which extends the mine life to over 25 years. Before I expand on the markets, I want to thank our global employees for their continued focus and commitment to working safely and efficiently. Now turning to the global coal markets.

Speaker 2

Seaborne thermal coal markets traded within a tighter range for the Q1. The warmer winter and low natural gas prices have continued to weigh on demand for thermal coal, coupled with a steady supply from the East Coast of Australia, resulting in Newcastle coal trading within a range of $120 to $135 per ton. Asian thermal coal imports are expected to remain robust with China continuing to show increases in electricity demand with 1st quarter seaborne thermal coal imports estimated at a year over year increase of approximately 15%. Within the seaborne metallurgical coal market, coking coal prices declined during the quarter. Metallurgical coal demand was hampered by thin steel margins globally, except for India, where robust economic output supported steelmaking profitability.

Speaker 2

CTI prices also retreated during the quarter, however, not to the extent of higher quality coking coals. During April, we have seen improving steel margins and seasonal restocking providing pricing support to metallurgical coal markets. In the United States, electricity generation for the Q1 of 2024 proved to be particularly challenging with a warm winter and significantly lower gas prices resulting in coal share of electricity generation nationally declining to approximately 15% during the Q1. With that said, coal continues to be a critical component to the country's energy generation when looked at regionally in the U. S.

Speaker 2

As an example, coal power was relied upon and accounted for over 40% of generation in the MISO and SPP regions with various instances in January 2024, again proving the importance of coal for a reliable grid. Now moving on to our operating segments. The seaborne thermal segment shipped higher volumes than anticipated with additional Wolfen Yang volumes going to the domestic market as a carryover from the train derailment on the mainline in December. Average realized prices and cost per ton were lower than anticipated due to higher production at Rolpinyon where we opportunistically mine some high ash seams, which we do when the market supports it. The higher production of Wopanjan was offset by an extended longwall ramp up at Wambo.

Speaker 2

Looking forward, we expect a higher proportion of Newcastle spec coal due to increased production from the Wambo complex. The seaborne met segment shipments were in line with expectations. Volumes are lower than ratable for the year due to an anticipated longwall move at Metropolitan and mine sequencing at the CMJV. Segment cost per ton were at the high end of our range impacted by an unplanned Capo Bella dragline outage and the acceleration of planned coal prep plant repairs at the CMJV, partially offset by higher production at Shoal Creek. Our sales mix was impacted due to mining some lower quality coal at CMJV due to mine sequencing.

Speaker 2

As we look forward to the full year, our sales mix should improve with additional sales in Shoal Creek due to the anticipated opening of the Dimopoulos lock. In the PRB, shipments were lower than expected as a result of an unseasonably warm winter and prompt natural gas prices that averaged $2.10 Segment cost per ton came in higher than expected due to lower volumes, but were somewhat offset by rationalization of discretionary cost spend. Although PRB demand for the quarter was challenged, we are contracted to 85,000,000 tons for the year. Our full year guidance assumes a normal summer and fall with customers meeting their commitments. Our customers have different demands or needs.

Speaker 2

We will work with them to be responsive while still retaining the full value of our contracts. In other U. S. Thermal, shipments were below expectations as we had a few customers reduce their shipments due to high inventories and low natural gas pricing. Segment margins were higher than anticipated due to favorable sales realization, which included some sales contract cancellation settlements.

Speaker 2

Even with the current market conditions, our exceptional sales team was able to book some new business. So our price volumes for the year did not change. Outside of our active operations, we continue to make progress at the Centurion mine, our key metallurgical coal growth project. We've had some delays in the delivery dates of some mining equipment from the manufacturer, but expect development coal to occur in the Q2. As previously announced, we closed an awards well transaction last month.

Speaker 2

We are currently developing an integrated mine plan and we'll discuss it more fully in the future. The recruitment of the initial Centurion mine development workforce is complete, even though labor remains tight in the mining industry in Australia. We continue to expect the 1st longwall coal in early 2026 and capital expenditures remain in line with previous guidance. We are pleased to announce that for the first time in nearly 12 years, we are mining at our Lee Ranch mine in New Mexico. In 2022, we secured a new long term contract, which extended the life of our New Mexico operation and supported the transition from El Segundo back to Lee Ranch.

Speaker 2

In summary, we have had some challenges this quarter. But as we look out to the full year, our operations and sales book have us well positioned. We completed 2 longwall moves in Australia, coal quality is improving and our production plans give us confidence in reaffirming our full year guidance. I'll now turn it over to Mark to cover the financial details. Thanks, Jim.

Speaker 2

In the Q1, we recorded net income attributable to common stockholders of $40,000,000 or $0.29 per diluted share and adjusted EBITDA of $161,000,000 Included in these results was an estimated $18,000,000 non cash remeasurement charge from the weaker Australian dollar. The company generated $120,000,000 of operating cash flow and had $61,000,000 of capital expenditures with more than half of that dedicated to Centurion. During the quarter, we continued to execute on our shareholder return program and repurchased 3,200,000 shares or 3% of shares outstanding. Under the existing $1,000,000,000 share repurchase program, we have $570,000,000 of remaining share repurchase authorization. The company ended the quarter with $856,000,000 of cash, fully funded reclamation accounts and a new 3 $20,000,000 revolving credit facility.

Speaker 2

Turning now to the Q1 segment results. Seaborne thermal recorded $94,000,000 of adjusted EBITDA. 1st quarter shipments were 100,000 tons more than anticipated as higher Wilpinion production offset lower production at Wambo. The lower cost Wilpinion production was offset by lower realized prices resulting in EBITDA margins of 33%, in line with the previous quarter. The Seaborn Metallurgical segment generated $48,000,000 of adjusted EBITDA.

Speaker 2

Average realized pricing was less than anticipated due to mining lower quality coal seams at the CMJV and PCI coal prices remain weak relative to premium hard coking coal. Costs of $139 per ton were at the higher end of guidance due to unplanned equipment and wash plant repair costs the CMJV. The U. S. Thermal mines produced $63,000,000 of adjusted EBITDA in the quarter and lower than expected shipments that Jim previously mentioned.

Speaker 2

The TRB mine shipped 18,700,000 tons and generated $16,000,000 of adjusted EBITDA. Cost came in at $12.74 per ton, higher than expected due to lower production volumes. The other segment generated adjusted EBITDA of $47,000,000 We shipped 3,200,000 tons, about 400,000 tons less than anticipated, but also benefited from contract cancellation settlements, which increased revenue and EBITDA margins above 4th quarter levels. Cost of $45.25 per ton were in line with guidance as lower maintenance and repair spend offset less volume. Looking ahead to the Q2, seaborne thermal volumes are expected to increase to 4,100,000 tons, including 2,700,000 export tons with higher volumes out of the Lambo complex.

Speaker 2

400,000 export tons are priced on average at $146 per ton with 1,300,000 tons of high ash product and 1,000,000 tons of Newcastle spec product unpriced. Costs are expected to remain consistent with the prior quarter at $45 to $50 per ton. Seaborne metallurgical volumes are expected to be 1,900,000 tons, 500,000 tons higher than the Q1 as the Metropolitan longwall move is now complete and mine sequencing improves at the CMJV. Volumes are expected to achieve 65% to 70% of the premium hard coking coal price based on the projected sales mix and current price relativities. With higher production, costs are anticipated to improve to $110 or $120 per ton, in line with full year guidance.

Speaker 2

TRV shipments are expected to be 15,500,000 tons lower than ratable as we enter the traditional Q2 shoulder season. Costs will be temporarily elevated at $12.75 to $13.75 per ton due to lower shipments and resulting higher strip ratio. Other U. S. Thermal coal shipments of 3,800,000 tons expected to be higher than the prior quarter as we recently signed new contracts for 1,800,000 tons to be delivered this year.

Speaker 2

We expect costs of $44 to $48 per ton in the quarter. Additionally, in the second quarter, we have the $134,000,000 cash purchase of Ward's well and are expecting tax payments of nearly $120,000,000 in Australia covering the remaining 2023 liability in the first half of twenty twenty four estimated payments. With an implied stronger second quarter, we are reaffirming full year guidance. We expect to generate significant cash flow in the second half of the year and remain committed to returning capital to shareholders. Strategically, we continue to take steps to deliver long term value.

Speaker 2

We closed the Wards Well acquisition in April and continued development at Centurion. We expect 1st continuous miner development coal this quarter and are on track to commence longwall operations in the Q1 of 2026 on time and on budget. Operator, I'd now like to turn the call over for questions.

Operator

Thank you. We will now begin the question and answer session. Our first question comes from Lucas Pipes from B. Riley Securities. Please go ahead.

Speaker 3

Thank you very much, operator. Good morning, everyone.

Speaker 2

Good morning,

Speaker 3

Steve. Mark, I want to start with a few questions on the finance side. You noted the U. S. Reclamation bond release of $105,000,000 and I wondered if you could maybe walk us through the cash flow implications of that release, if any.

Speaker 3

And then more broadly, there has been some lumpiness around cash flows in Q1. I'd anticipate something similar in Q2 with the Wartswell acquisition closing. Could you speak to any other kind of cash flow impact in Q2, be it working capital or otherwise? And then just with that lumpiness, how do you think about staying in the market from a buyback perspective? Do you have the flexibility be opportunistic?

Speaker 3

Or do you kind of pause it here and then resume it in the second half as when you noted cash flow would be stronger again? Thank you very much.

Speaker 2

Yes. Lucas, thank you for those questions. I'll try to hit on all of them. A really good result with some bond reductions in the Q1. Credit to our team here for, 1, getting the the reclamation work done, but 2, also following up and getting those bonds released.

Speaker 2

On average, those bonds are probably collateralized at about 55 percent. So there was some cash returned. We also moved around some other bonds in Australia. So there was a cash inflow. So you see a reduction in that restricted cash and cash collateral on the balance sheet.

Speaker 2

Offsetting that from a cash flow perspective though was some use of working capital. So net net that $120,000,000 of operating cash flow is how you should look at that.

Speaker 1

You mentioned

Speaker 2

a little lumpy here with Q1 with the performance we turned in as expected. Q2 will be similar. We have the $134,000,000 cash purchase awards well. And I noted in the remarks tax payments in Australia of about $120,000,000 That makes up both the remaining liability from 2023 as well as first half of twenty twenty four estimated payments. So a couple of significant cash usages here in the second quarter.

Speaker 2

But again, going out, look at the second half, well positioned based on guidance in the forward price strip, you can see some pretty significant cash flow depending on your price deck, but $300,000,000 to $400,000,000 is an opportunity we have out in front of us from a cash flow perspective. Maybe lastly, just touching on the program, I'll note a couple of things. One, everything we do, including our shorter term program, is designed for long term value and durability. Since we restarted the program, we've announced a return of just under $500,000,000 $50,000,000 in dividends and about $430,000,000 in share buybacks. Through the repurchase program, we have essentially created 15% growth in earnings and free cash flow on a per share basis with that share reduction.

Speaker 2

We have completed the balance sheet initiatives we set out 2 or 3 years ago to do, which included one very important step that no one else has done and that is pre funding 100% of our global reclamation liability. This puts us in a leading position in the industry going forward, taking that big liability off the table and eliminating a big liquidity and capital risk going forward. So we believe that puts us in a great position to continue developing our premium hard coking coal project in Centurion. And with our quarterly fixed cash dividend, the program's durability remains through periods of lower cash flow, but also very flexible to increase in periods of above average free cash flow on direction of our Board. So lastly, I'd note, I think you asked, are we going to be opportunistic or flexible?

Speaker 2

Yes, I think our program is bent to be flexible. And as we look out in the full year, we see some strong cash flows going forward and we have the flexibility in our program to look on things on an annual basis and get back in the market on an opportunistic basis when our Board deems it appropriate. So a lot of flexibility, a lot of opportunity in front of us going forward and we remain committed to returning additional capital to shareholders.

Speaker 3

Mark, really appreciate that. I think you hit on all the points there. So thank you for that. Jimmy, I want to get your perspective on a couple regulatory things. First, EPA last week unveiled a new power plan rule.

Speaker 3

Could you maybe comment on what you think the impact is to your domestic business and how you think from a strategic perspective you could you can mitigate any impact? And then over in Australia, there's I think a new labor rule coming that in regards to contractor pay. If you could maybe comment on that and what the impact might be in Australia, would appreciate your thoughts on those 2 developments. Thank you.

Speaker 2

Okay. Yes, Lucas. So on the first one with the EPA and the new suite of rules and the clean power plan rules. I do have some comments on that, but I do want to start out and just recognize the fact that approximately 3 quarters of the EBITDA generated from our company comes from our seaborne thermal and met segments. So that doesn't mean we're not concerned about these regulations.

Speaker 2

Again, majority of the EBITDA comes from our seaborne platform. And one of the things you said, what's it going to mean for our domestic business? Well, a lot of these things going into effect, if they do go into effect in the later years. So I don't see any near term impacts. And the question is still out, is there any longer term impacts?

Speaker 2

So we've stated many times that as a company, we believe in a diverse energy mix and that includes coal and renewables to have grid reliability and energy security and affordability. With the suite of regulations, we do believe though that the EPA has overstepped its authority granted to it by Congress and it's threatening grid reliability at a time of increased energy demand. So what's different I think this time around from when this has happened in past years, is several things, Lucas, that have to be taken into account when you're trying to assess what potential impact that we're going to see from these regulations. One is what's going on now, which is it hasn't been happened for many, many years is surging power demand forecast for the next 5 years. And we've had relatively flat load growth for quite a period in our country.

Speaker 2

And now with the manufacturing centers, electric vehicle, data centers, AI centers and so on, there's tremendous, tremendous load growth projected. So again, you get what's the impact on the U. S. Coal markets. Well, as a result of that load growth projected load growth in past quarters over 20 power plants have announced delays and retirement dates.

Speaker 2

So actually you look at that in the U. S. Thermal market from that perspective is actually growing. The second thing that's out there that I think is very, very different from when the UK has done this in the past with these proposed regulation is the national reply of a concern of grid reliability and not having enough existing even existing baseload generation to support this load growth. So what does that mean is there is a groundswell of opposition or stated concern with these proposed EPA regulations.

Speaker 2

You've got FERC, NERC, PJM, MISO, electric utilities, which we haven't heard from in the past. Politicians from both sides of the aisle are talking about their concerns with these proposed regulations. You've got the middle leading national newspapers, The Wall Street Journal, Washington Post, New York Times overnight. There's a very good article in Fox News, an opinion piece stating their concerns over this grid reliability. So it's very, very different in the past, this groundswell of opposition and concern over these regulations.

Speaker 2

And what I think is going to happen is you're going to see a very swift and significant pushback in the U. S. Court system Over 20 state attorney generals have already announced their intentions to fight the proposed regulations. We're working with the National Mining Association and America's Power to mount U. S.

Speaker 2

Mining industry support legal challenges, and we expect to see court stays on this at sometime this year. So the crux of your question is what do we think is going to happen? Nothing in the near term and I think there's enough opposition in the long term to really put in doubt the impact that these will have on the U. S. Generation mix, particularly given the fact that power plant lines are being extended because of the load growth.

Speaker 2

The second question you had was about the new labor rules and Australia contractors same job, same pay. We've included all of that in our guidance already. That really isn't effective until November 1. And any impact we see is going to be in there. And we don't have as many contractors on our payroll as other mining companies in Australia.

Speaker 2

So there is some impact. It's not significant and it's already in our forecast going forward after November 1.

Speaker 3

Jim, thank you very much for that detailed answer on the EPA side, very, very helpful. On the second part, roughly what percentage of your Australian workforce is consists of contractors or labor costs. I guess it'd be a few ways to slice it, but I guess if it starts November, then we have 2 out of 12 months impact. So just trying to get a sense for what it could mean for next year on a full year basis.

Speaker 2

Yes, Lucas, I don't have that right in front of me, but we'll get it right back. We'll get we'll follow-up with you on that one to get you the correct number on that.

Speaker 3

Sounds good. I really appreciate the color. I'll turn it over for now. And in the meantime, best of luck.

Speaker 2

Thank you, Lucas.

Operator

The next question comes from Nathan Martin from Benchmark Company. Please go ahead.

Speaker 4

Thanks, operator. Good morning, everyone.

Speaker 2

Good morning, Nathan.

Speaker 4

Let's start off with Centurion. You guys still targeting development coal there sometime here in the Q2, it looks like. What's your plan and timing, I guess, as far as selling or marking those tons is concerned?

Speaker 2

Well, I'll let Malcolm Roberts comment on that, Malcolm.

Speaker 5

Yes. Good morning, Nathan. Look, we've already started including contracts for the development coal coming out of Centurion. So during the quarter, a blue chip North Asian customer has agreed a 2 year contract and we look forward to making our 1st shipment later this year.

Speaker 4

Malcolm, are there any limitations there from a transportation standpoint at this point?

Speaker 5

Absolutely no transport issues. We fully set up within the Goonyella system with contracts and the like to be able to ship that product.

Speaker 4

Okay. Perfect. Great. Appreciate that. And then maybe stick with transportation for a second.

Speaker 4

I think, Jim, you made some comments about the Demopolis lock outage. Just to be clear, what kind of impact are you still seeing there Shoal Creek? Clearly, your 2nd quarter met sales guidance is up quarter over quarter, but just a little more color there would be great.

Speaker 2

Yes. I'll comment on the lock and then I'll turn it over to Malcolm to talk about the sales. And the lock we've been saying, we expect it to be back, Nathan, in service by the end of May. And the Corps of Engineers came out this morning and actually said, I think it's going to be May 22, It will be back in service, so more than a week earlier than planned. So that's some good news that we have for us.

Speaker 2

Now in regards to your question about the impact on sales, I'll let Malcolm comment on that.

Speaker 5

Yes, sure. Thanks, Jim. Look, we've been railing some product to the port at McDuffie. However, what this really means is that for

Speaker 2

the second half the year, we're going

Speaker 5

to be weighted probably twothree of our annual volume from Shoal Creek to the second half of the year and onethree for the first half as a result.

Speaker 2

But we really do look forward

Speaker 5

to that lot coming back and we're advised today 22 May.

Speaker 4

Okay. Guys, appreciate that info as well. And maybe shifting over, and I know I asked about this last quarter, and I think, Jim, you clearly made some comments in your prepared remarks too. But the PRV shipments below your Q1 target, 2nd quarter guidance down 3,000,000 tons plus or minus. Again, we know seasonally that's typical during the shoulder season.

Speaker 4

But would be great kind of get your thoughts on what gives you confidence to maintain your full year guidance range at this point. I mean, it looks to me like you will need to increase second half shipments by at least 12,000,000 tons just to kind of hit the low end of that range. So it would be great to just get a little bit more thought around that piece. Thank you.

Speaker 2

Nathan, first off, the tonnage levels that we're looking at for the second and then particularly the 3rd Q4 are well within tonnage ranges that we've shipped in the past. So as far as the quantity of coal and our ability to produce it and I do believe the railroads are going to be able to move it as well, which is a key item in the 3rd and fourth quarter. So logistically, operationally, we feel very good about that. Our sales book is strong and the indications we have from our customers is that we right now we are expecting to have some normal pull in that 3rd Q4 on those tons. We've already seen an uptick in some nominations from May.

Speaker 2

It was a little stronger than we thought it was going to be. And we are getting some early indications we could see that again in June. So it looks like there is recovery starting to occur in the PRB and the indications we're getting from our customers at this time operationally, logistically. We feel again, we feel that that's why we're reaffirming that guidance for the full year.

Speaker 4

Great. Thanks, Jim. And then maybe just one more, Mark, to you. I don't want to leave you out. I know Lucas touched on this earlier, some of the moving pieces on the cash side here in the second quarter that are expected.

Speaker 4

Your available free cash flow, I think, was actually negative at the end of the quarter. I mean, how could this impact your ability to repurchase shares again here in the second quarter?

Speaker 2

Yes. No, you're right. The table shows the minus 4 there off of Q1 and with the cash purchase awards well and the cash tax payments, not expecting a robust number for Q2. But again, our program is designed to be flexible. It is on an annual basis.

Speaker 2

We're very happy with our liquidity position and we see some strong cash flows coming forward here in the second half of the year.

Speaker 4

All right, Steve. Very helpful. Appreciate the time and best of luck.

Speaker 2

Thanks, Nate.

Operator

The next question comes from Katja Janssuk from BMO Capital Markets. Please go ahead.

Speaker 6

Hi. Thank you for taking my questions. Maybe just staying a bit on the share buybacks. Is there any possibility that you could use some of the cash on the balance sheet since it's so strong for buybacks?

Speaker 2

Yes, Katya. It's Mark. As I mentioned, the program is based on annual look and we have flexibility. As I mentioned with Nate, we feel comfortable with our liquidity and strong cash flows coming in the second half of the year. So we are designed to be flexible and we haven't announced anything, but we have that built in to do what we deem appropriate and to be opportunistic as the market presents.

Speaker 6

Okay. And maybe then on the Centurion, I think for this year for second half, you expect to ship 150,000 tons or that was prior expectation. Is that still does that still hold? And then maybe looking to next year, what could potential contribution from Centurion be?

Speaker 2

Got you. Yes. So this year, we look to ship about 100,000 tons for the current year. I think production next year on a development basis is probably in the 400,000 ton range. And as Malcolm mentioned, we already have blue chip Asian customers kind of knocking down our doors trying to contract some of that goal.

Speaker 2

So really set up strong.

Operator

Our next question is a follow-up from Lucas Pipes from B. Riley Securities. Please go ahead.

Speaker 3

Thank you very much for taking my follow-up question. I'll start with a quick one. The high ash product, could you remind us what pricing has been quarter to date for that API 5? And then where does Wilpin Young typically price as a percentage against that index? Thank you.

Speaker 5

Yes, sure. It's Malcolm here. Look, we got to a 5% to 20% discount against the API 5 index, which is the China index, which is a 5,500 CACAL, 22 percent ash product. We supply our highest product slightly higher than that. So that represents a discount that we're going to.

Speaker 3

All right. That's helpful. And I'm sure, Creek, in Q1, the MSHA data was very helpful, was very, very strong. And so I wondered if you could maybe comment on kind of the operational outlook from here. I'd assume there's maybe a little bit of a normalization, but would be helpful to hear how you think about operations at Chill Creek for the remainder of the year?

Speaker 3

Thank you.

Speaker 2

Lucas, I think the answer date ahead about 600,000 tons in Q1, which again is a very, very strong quarter for the mine. Very happy with what PEMA has done down there and shows that new fit for purpose longwall that we had down there is really making a difference. But we do have longwall moves later in the year. We have minor's vacation and so on for to contend with later. And we didn't have all of those things occurring in the Q1.

Speaker 2

So to keep that pace up would be very challenging later in the year with all of the things that we have. I just don't see it staying at that pace in the following quarter with the longwall moves and the Myers vacation that we have ahead of us.

Speaker 3

I appreciate the color. Thank you very much. And again, luck.

Speaker 2

Thank you. Thank you, Lucas.

Operator

There are no more questions in the queue. This concludes our question and answer session. I would like to turn the conference back over to Jim Grech for any closing remarks.

Speaker 2

Well, thank you all for joining us today. I'd especially like to thank our employees for remaining on safety and for continuing to execute on our various initiatives. I'd also like to thank our investors, customers and vendors for your continued support. Operator, that concludes our call. Thank you.

Operator

Conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Remove Ads
Powered by Quartr
Earnings Conference Call
Peabody Energy Q1 2024
00:00 / 00:00
Remove Ads