First Horizon Q2 2024 Earnings Call Transcript

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Provided by Quartr
August 1, 2024

There are 7 speakers on the call.

Operator

Good day, and welcome to the Peabody Second Quarter 2024 Earnings Call. All participants will be in listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Carla Kimrey, VP, Investor Relations. Please go ahead.

Speaker 1

Good morning, and thank you for joining Peabody's call for the Q2 of 2024. With me today are President and CEO, Jim Grech CFO, Mark Sperbeck and our Chief Marketing Officer, Malcolm Roberts. Within the earnings release, you will 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. Now, I'll turn the call over to Jim.

Speaker 1

Thanks, Carla, and good morning, everyone.

Speaker 2

Thank you for taking the time to join us today and for your interest in Peabody. I am pleased to report the 2nd quarter results came in as forecasted, and we have a confident outlook for the second half of twenty twenty four. More importantly, to date, Peabody is having a remarkable year with safety, our number one value as 5 of our mines have had 0 reportable injuries. Peabody is committed to increasing shareholder value through a balanced approach of maximizing shareholder returns and investing in organic metallurgical coal growth at Centurion. Our resilient balance sheet allows us to be flexible and dynamic in the prevailing market conditions.

Speaker 2

As a result, and in accordance with our shareholder return policy and favorable outlook for the remainder of the year, we have committed an additional $100,000,000 for opportunistic share repurchases. Centurion, a world class hard coking coal growth project is going very well. The initial underground development rates are exceeding expectations. We were able to mine our first development coal in June and in July we commissioned our 2nd continuous miner. We are on budget and expect to ship coal from this mine to customers in the Q4 and are on target for longwall coal in the Q1 of 2026.

Speaker 2

With the recent acquisition of the Wards Well deposit, we have extended the mine life to over 25 years with an average annual production of approximately 4,700,000 tons. This quality of coal is an established cornerstone of coking coal blends, highlighting the potential for sustainable financial returns and is a unique opportunity to reweight Peabody's earnings to Seaborne Med. Now moving on to our operating segments. Overall, 2nd quarter operational results came in as forecasted and our mines performed safely. The seaborne thermal segment performed to expectations.

Speaker 2

Our Opendron mine continued to operate well with improved equipment availability and truck utilization. As Malcolm will address, the agent thermal market continues to see demand growth for our Wilpin John product. And as such, we have increased volume expectations for the remainder of 2024. The seaborne met segment also came in as forecasted. Our volumes, costs and realized prices were as expected.

Speaker 2

Australia did experience some significant rain in the last week of the quarter and some shipments out of the CMJV were delayed. Additionally, CMJV will be mining through challenging geotechnical conditions, which is reflected in our reduced full year guidance. The Dimopoulos lock in Alabama was opened ahead of schedule in mid May. While we were pleased with the U. S.

Speaker 2

Army Corps of Engineers bringing the Dimopoulos lock online earlier than expected, unfortunately another lock, the Holt lock, was determined to be unstable on June 22. The core is planning to install a bunk head as a temporary fix by the end of September to early October, which could open the lock intermittently to allow traffic to pass until a permanent fix is achieved. As we did while the Dimapos block was down, we will continue to utilize alternative rail transportation at Shoal Creek at slightly reduced volumes reflected in the full year guidance. I want to thank our rail and other logistics providers for their continued partnership and support. In the PRB, shipments were slightly higher than expectations as we came out of the shoulder season.

Speaker 2

The segment had strong cash performance with a continued emphasis on operational efficiency resulting in improved margins. While we expect a stronger second half of the year, we felt it was prudent to reduce full year guidance as customer inventories remain high along with depressed natural gas prices. Other U. S. Thermal costs and revenues were in line with expectations.

Speaker 2

Shipments were slightly less than expected and up 16% as we began delivering against new contracts originated during the Q1. In total, for the U. S. Thermal markets, we saw nominations and volumes increase as the quarter moved on. We continue to see this in July also.

Speaker 2

Malcolm Roberts, our Chief Marketing Officer will be delivering our outlook on

Speaker 3

the markets today. Malcolm? Thanks, Jim. Seaborne thermal coal continued to range trade for the quarter. In Australia, the Newcastle high energy thermal market is best described as balanced.

Speaker 3

The United States imposed further economic sanctions on Russia, resulting in some bias reducing Russian coal purchases. Improved Newcastle demand was met with higher rates of production and the Newcastle high energy thermal coal spot price averaged $136 per metric ton during the Q2. Asian thermal coal imports have grown this year with China continuing to show increases in electricity demand supporting seaborne thermal coal imports coupled with strong demand growth in Vietnam. Both China and Vietnam have recorded strong year to date increases in imports of approximately 15% 37%, respectively. Within the seaborne metallurgical coal market, premium hard coking coal processed during the quarter averaged $2.42 per metric ton.

Speaker 3

Parts of the global steel market reported tempered demand and thin profit margins during the quarter, subduing demand growth for metallurgical coal. In India, steel production was disrupted due to election activities and the onset of monsoon season. While China Steel production was mixed with the historically weak market dragging on demand, also offset by economic stimulus targeting the real estate sector. The coking coal prices found periodic support during the quarter because of supply side disruptions, including rail and port maintenance containing exports in Queensland, restricted USA exports from Baltimore and historically low production in China. The June incident at a major hard coking coal mine in Queensland is expected to constrain premium hard coking coal supply in future quarters.

Speaker 3

Despite these supply side constraints, coking coal supply proved sufficient to meet demand during the Q2. In the PCI segment, prices improved during the quarter supported by constrained supply and some buyers switching to Australian supply in place of Russian. The spot price of PCI increased 23% during the quarter to finish the quarter at $182 per metric ton, a 78% relativity to premium hard coking coal. Overall, the metallurgical coal market remains finally balanced, exposed to volatility influenced by the rate of exports from Australia and economic performance in China, India and elsewhere. In the United States, during the 6 months ended June 30, electricity generation from thermal coal has increased slightly year over year driven by an overall increase in electricity demand.

Speaker 3

This is despite low natural gas prices and stronger renewable generation. The EIA in its July update to the short term energy outlook forecasted increase in the use of coal to generate electricity this year, leading to a 12% reduction in inventories by year end. I'll now turn over to Mark to cover the financial details. Thanks,

Speaker 2

Malcolm, and good morning, everyone. In the Q2, we recorded net income attributable to common stockholders of $199,400,000 or $1.42 per diluted share and adjusted EBITDA of $309,700,000 During the quarter, we reached an insurance settlement for $109,500,000 We included $80,800,000 of the settlement in adjusted EBITDA, while the remaining $28,700,000 was recorded as the recovery of property and underground development that was previously written off. This settlement covers all property and business interruption losses suffered at Shoal Creek last year. We received a 5 $600,000 advance payment in the 2nd quarter and we'll receive the remaining $103,900,000 this quarter. At June 30, we had $622,000,000 of cash after acquiring Wardswell and making $113,000,000 of income tax payments, which were both noted on our last call.

Speaker 2

During the quarter, we paid a $0.075 per share cash dividend and for the Q1 since restarting the shareholder return program, we didn't repurchase shares. However, with the strong operational recovery in the second quarter and a favorable free cash flow forecast in the second half of the year, today we announced an additional $100,000,000 available for share buybacks. And for the 6th quarter in a row, declared a 7.5% dollars per share dividend. Turning now to 2nd quarter segment results. Seaborne thermal recorded $104,000,000 in adjusted EBITDA, dollars 10,000,000 better than the prior quarter, a much improved production from the Wambo complex resulting in additional Newcastle quality export tons.

Speaker 2

The segment's adjusted EBITDA margin of 34% was better than the previous quarter as higher realized prices more than offset the increase in costs from a higher mix of Wambo production. The seaborne met segment generated $144,000,000 of adjusted EBITDA, including the insurance settlement or $63,000,000 related to 2nd quarter production, a 30% increase compared to 1st quarter's $48,000,000 result in an apples to apples comparison. Each mine in the segment increased shipments quarter over quarter. And as noted earlier, we expect to collect over $100,000,000 of at Shoal Creek in the Q3. The U.

Speaker 2

S. Thermal mines produced $53,000,000 of adjusted EBITDA. The PRB shipped 15,800,000 tons below 1st quarter's volume as expected due to the traditional 2nd quarter shoulder season. The segment reported $17,800,000 of adjusted EBITDA as the mines did an outstanding job managing costs, which despite significantly lower tons kept average unit costs flat and increased margin approximately 30% from Q1 levels to $1.13 per ton. The other U.

Speaker 2

S. Thermal segment generated $35,000,000 in adjusted EBITDA. Shipments increased 450,000 tons from the Q1 and we are expecting even stronger shipments in both the 3rd and 4th quarters. Our U. S.

Speaker 2

Thermal platform continues to demonstrate strong positive margins and free cash flows. On a combined basis, the U. S. Thermal operation shipped 19,500,000 tons and realized an adjusted EBITDA margin of $2.73 per ton in the second quarter. After shipping 21,900,000 tons an adjusted EBITDA margin of $2.88 per ton in the first quarter.

Speaker 2

For the first half of the year, our U. S. Thermal mines have produced $116,000,000 of adjusted EBITDA while requiring only $17,700,000 of capital.

Speaker 4

With the first half

Speaker 2

in the books, we expect robust free cash flow in the second half despite a couple of challenges. As Jim noted, we've adjusted full year guidance for 3 items. Seaborne thermal volume increased 500,000 tons as Wilpinion continues to outperform expectations, particularly with the strong demand and price support for higher ash products. Seaborne met volume was reduced to 600,000 tons due to the challenging geological conditions at the CMJV and the impact successive block outages on the Black Warrior River at Shoal Creek. The combined volume impacts are expected to increase segment costs for the full year by $8 per ton.

Speaker 2

We lowered PRD volumes by 5,000,000 tons as customer inventories remained high and natural gas prices remained stubbornly low. We have not negotiated deferrals on any of the 85,000,000 price tons. And as we have done previously, we will manage customer volumes while maintaining Peabody's value in all contracts. Taking a look at the 3rd quarter, we expect another seaborne thermal quarter very consistent with the first two. Shipments are expected to be 4,000,000 tons, including 2,500,000 export tons.

Speaker 2

600,000 tons are priced on average at $120.45 while 1,000,000 tons of Newcastle product and 900,000 tons of high ash product are unpriced. Costs are anticipated to remain stable at $48 to $53 per ton. Seaborne met shipments are expected to be 1,700,000 tons at the midpoint of the 1st and second quarters. Lower tonnage from Q2 is due to a planned long, long move at Shoal Creek and we should also see production and shipment levels rebalance at Metropolitan after shipments ran ahead of production by 200,000 tons in the second quarter. After the recent recovery in PCI prices, we expect to realize better prices relative to the benchmark and achieve 70% to 80% of the premium hard coking coal price.

Speaker 2

Costs are expected to be slightly better than the midpoint between the 1st and second quarters and land between $120 $130 per ton. Following the traditional shoulder season and building on the momentum we experienced in the latter part of the second quarter, we expect PRP volume to increase nearly 6 1,000,000 tons to $21,500,000 in the Q3. With higher shipments, we also expect to benefit from lower fixed cost per unit and are forecasting costs at $11.50 to $12.50 per ton, increasing margin quarter over quarter again to $1.75 per ton in the 3rd quarter. Other U. S.

Speaker 2

Thermal shipments are also anticipated to be ahead of prior quarter at 4,000,000 tons and costs are expected to remain flat at $44 to $48 per ton. In summary, we hit all operating targets in the 2nd quarter, reached a key milestone by achieving 1st development coal at Centurion and negotiated a favorable settlement for last year's loss at Shoal Creek. The Q3 outlook is equally good and today we announced another $100,000,000 available for share buybacks. Operator, I'd now like to turn the call over for questions.

Operator

Certainly. We will now begin the question and answer session. The first question comes from Lucas Pipes with B. Riley. Please go ahead.

Speaker 4

Thank you very much, operator. Good morning, everyone. Jim, Mark, my first question is on the capital allocation side. You have a formula for capital returns, I think it's 65% of available free cash flow. And so, two questions on the back of this.

Speaker 4

1, how should we think about the additional allocation of $100,000,000 to buybacks? Is that you saying, look, with this price environment, we really just want to commit. So maybe if cash flow is a little lower, you have the available cash to return it. So you want to make that statement. I'm just trying to understand because presumably with the formula, that additional, allocation would technically not be necessary.

Speaker 4

So I'd appreciate the context. And then bigger picture with capital allocation, there are some met coal assets for sale in Australia. I've heard of some opportunities in the U. S. Market too.

Speaker 4

Do you think about M and A more broadly or are you really just focused on your organic growth opportunities and returning capital to shareholders? Thank you very much for all your color. Jim, did I do you hear me?

Speaker 2

Hi, Lucas. Good morning. Good morning. Lucas, I'd like to comment some on your first question and turn it over to Mark and then we'll come to your second question. On the first question, I'd like to just note that we say on our 65%, we say at least 65%.

Speaker 2

And we certainly have the optionality to go above that when we have the cash and we feel comfortable to do so. And so what we're doing here is a prime example of that and our commitment to be focused on increasing the shareholder value with the share buyback. So but I think you have some more detail on that about the rest of the year. So Mark, I'll let you comment on that. Yes.

Speaker 2

Good morning, Lucas. Listen, with the continued development, it's ensuring I think $81,000,000 year to date on net capital, probably $200,000,000 since starting in the cash purchase awards well here in the second quarter. We always knew we wouldn't generate a lot of free cash flow in the first half of the year. But as Jim mentioned, our resilient balance sheet allows us to be opportunistic when market presents opportunities.

Speaker 5

I

Speaker 2

think our stock recently crossed the 50 day moving average and the 100 day moving average as coal equities are generally traded off with coal prices. So we see this as a really attractive point in time and an opportunity to further reduce our share count as we steadily march closer to Centurion coming online. As we noted even in our last call, our program is designed to be flexible and give us an opportunity to be opportunistic with the resilient balance sheet. As far as the remainder of the year, we do see good free cash flows in the second half. And depending on where prices shake out, we should continue to generate free cash flow in the second half and into next year.

Speaker 2

But to be clear, no change to the program. Lucas, in response to your second I'm sorry, go ahead Lucas, any questions on your first follow-up on

Speaker 4

your first follow-up? No, no. Yes, that's yes, exactly. I think you know where I wanted to follow-up on the M and A side.

Speaker 2

Yes. So Lucas, I just want to stress that as a company, our focus is on creating shareholder value and the focus is on that right now. And with that, there's 3 or 4 areas that are at the forefront for that. One is maintaining our balance sheet strength and financial stability, which has taken us a long time to get to and we're going to continue doing that. We're very focused on the share buybacks and maintaining our dividend.

Speaker 2

As Mark said, we've done the dividend 7 quarters in a row and we've just put another $100,000,000 into the share buybacks. We're also very focused on our organic growth with the investment that we have in the Centurion mine and also just continuing investment in our operations keeping reliable and safe and predictable. That is the overwhelming focus. Assets come and go on the market and everything that's out there like with every coal company comes across our desk. But our focus is on maximizing shareholder value and that's where the number one focus is and that's where we're at.

Speaker 2

Assets come by, certainly every company takes a look at them. But right now, I think I've set up on the points that we're very much focused on.

Speaker 4

Very helpful. I appreciate that. I want to turn from my second question to kind of the operational outlook on the met coal side. And first, the anticipated geological issues at CMJV, when did you first become aware of those issues? What exactly is the issue?

Speaker 4

And then how long do you think those could last? Could this bleed into 2025? And then on the hold block, if you could maybe elaborate on the mitigation efforts, the anticipated impact to 2024 volumes and any costs that might be associated with your mitigation efforts? And then from a numbers accounting perspective, if there are additional costs, would that be reflected in your met coal cost guidance or would it actually come out of your realizations that you guide to? So just a clarification on that would appreciate it.

Speaker 4

Thank you very much.

Speaker 2

Yes, Lucas. So first off on the lock outage, as we said, we were expecting that bulkhead to be installed here towards the end of September. So stability is there on the lock, then the lock would then be expected as well to be opened back up for shipments, maybe not as efficiently as they would without the issue, but for those shipments to resume. We don't think the overall expense that we'll see is material between now and the end of the year. On the high side, maybe an incremental $8,000,000 to $10,000,000 of expense if this goes through the end of the year and we keep shipments going.

Speaker 2

But that would be the extent of it. And again, we're looking at alternate and that's the cost of alternate

Speaker 6

a

Speaker 2

As far as Capobello, the faulting is standard that occurs in the coal seams there. We have it all the time. And what happened is we've had more faulting than we anticipated. It's not uncommon to occur. We work through it and we're working through the section right now that again had more than we anticipated and we expect to get through that here through the end of the year.

Speaker 2

So again, there's nothing out of the ordinary with what's going on at Coppabella. There's always faulting. We've had a little bit more than anticipated and we're just working through that right now.

Speaker 4

That's helpful. On the $8,000,000 to $10,000,000 of potential costs with the hold lock, would that go through met coal unit costs or would it kind of come out of the realizations?

Speaker 2

Yes, Nucus market, that's all included in our segment costs. Perfect.

Speaker 4

And

Speaker 2

it's included in our guidance, 3%.

Speaker 4

Excellent. I really appreciate all the color and to the entire team continued best of luck. Thank you.

Speaker 1

Thank you, Lucas. We can take the next question.

Operator

The next question comes from Katya Yancek with BMO Capital Markets. Please go ahead.

Speaker 6

Hi. Thank you for taking my questions. Maybe staying for a bit on the Met segment. Can you provide a little more color on the 600 1,000 tons decline? How much of that or reduction, how much of that is hold lock?

Speaker 2

The majority of that is going to be with the CMJV. I think maybe about 100,000 tons of that maybe with the approximate catch about 100,000 tons is the whole lock and the other 500 or so is with the Centimeters JV.

Speaker 6

And then maybe, I think last quarter, the indication was that 2 thirds of Shoal Creek will ship in the second half because of the Demopolis lock closure. So is there a difference between these two locks, how much of impact they can have?

Speaker 2

We have the impacts of both of them, but again, in the overall impact because we've been looking at alternate after we do the alternate logistics to the tonnages for Shoal Creek for the year.

Speaker 6

Okay. And then on the Centurion, can you remind us how much you expect to ship the development tons in 4Q? And how we should think about shipments going into next year?

Speaker 3

Yes. Look, Malcolm here, last time, I think we said around 100,000. Right now, we'd be saying probably 60,000 to 70,000 by the end of the year.

Speaker 6

And for next year?

Speaker 3

I'd call it around 200,000 tons.

Speaker 6

Perfect. Thank you so much.

Operator

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

Speaker 5

Thanks, operator. Good morning, everyone. Congrats on the second quarter results, guys. Maybe just sticking with Centurion for second, can you just remind us, are there any permit or regulatory hurdles remaining before you get to the anticipated longwall startup in the Q1 of 20

Speaker 2

No, Nate. We have all the permits and regulatory regulation hurdles passed. So what we're doing right now is, we were focused on the development. And in the month of June, as we said in the comments, development went better than expected. In the month of June, we actually developed about 3 times the amount of footage that we had anticipated, getting the plan up and running right now and degassing the longwall section ahead of mining.

Speaker 2

Those are if you're looking at a thing that we're focused on that we need to stay focused on to get us to mining, those are really the issues ahead of us, not really permitting a regulatory.

Speaker 5

Okay. Got it. Thanks, Jim. And then just related to the spend, I think you guys mentioned in the release, you spent about $200,000,000 thus far of the expected 489,000,000 dollars Mark, I think I caught you saying you spent about $81,000,000 year to date first. Is that correct?

Speaker 5

Secondly, how much would that leave for the second half? And then how much of the remaining that $489,000,000 would be spent in $25,000,000 $26,000,000 at this point?

Speaker 2

Yes, that's right, Nate. We got about $81,000,000 through June 30, there's probably about $75,000,000 more for the second half of the year. That would bring us up to about $275,000,000 from the start of the project. We probably have about $165,000,000 in 2025, and the remainder $30,000,000 $40,000,000 would be in 2026. Still on budget for the 489

Speaker 5

Okay, perfect. Thanks, Mark. And then maybe over to CMJZ, I know Lucas asked a little bit about this, but I guess maybe my question is and I'll tie it into this other piece too. I know you guys mentioned, I think it was you Mark as well that you now expect to achieve roughly 70% to 80% of the FOB Aussie benchmark met price versus 65% to 70% previously. I think I heard part of that was the increase in PCI prices, likely driven by some of the Russian PCI coal coming out of the market.

Speaker 5

But is there anything else that's driving that increase there? I was curious to see MJV, what kind of coal qualities are you mining right now that are going to be reduced? Is that helping your mix overall? Just it would be great to get any thoughts there.

Speaker 3

Look, Malcolm, yes, I'll say that our mix is pretty constant and our full year guidance has about 55% PCI sales

Speaker 2

incorporated within it. Yes. So most of that increase is the PCI price recovery relative to the benchmark. I think there is a slight increase in the mix, Ottawisen Semi Hard coming out of Moorevale, that improved the mix as well.

Speaker 5

Okay, great. I appreciate the time guys. Best of luck in the second half.

Speaker 2

Thanks, Nate. Thanks, Nate.

Operator

The next question comes from Lucas Pipes with B. Riley. Please go ahead.

Speaker 4

Thank you very much, operator. Thank you very much for taking my follow-up question. In the release this morning, you described Centurion as a 25 year opportunity at 4,700,000 tons. And I remember February 26 presentation where you kind of break out Centurion volumes by year 2026, 3.7, 3 point 5, the year after 4.5, 4.4, 3.4, so obviously below the 4,700,000 you cited this morning. Is the $4,700,000 is that reflecting warts well?

Speaker 4

And if I remember right, you were planning to update the market maybe on a more comprehensive mine plan update. So just wondering if that process has been completed, and if we should expect anything else. Thank you

Speaker 2

very much for your color. Lucas, a couple of things. 1, you're right, the presentation only showed the GM South or the North Carolina proper area that we originally acquired. Those guidance, those tons, 3,700,000 to 4,000,000 tons for the 1st 4 years has not changed. The 4,700,000,000 over the 25 year life takes into account the awards well, areas well.

Speaker 2

Longer panels, more tons between longwall moves, we're going to get more production on an annual basis. But nothing's changed in those 1st few years. It just again demonstrates the value that Wards Well brings to this project. As far as an overall update, we are still doing that study, again, maximizing those volumes, figuring out costs and integrating that plan together. We do plan to come to the market here in the second half of the year and give a full update and maybe a presentation on the project on a standalone basis.

Speaker 4

Really appreciate the clarification. Look forward to that. And again, best of luck.

Speaker 2

Thanks, Lucas.

Operator

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

I'd like to thank everyone for joining our call today, and I'd especially like to thank our employees for their outstanding focus on safety in the first half of twenty twenty four. Also, in the unit, our Kayenta Mine and our North Antelope Rochelle Mine, they were both recognized for their outstanding reclamation efforts. And I really want to thank our employees for the work they've done on the reclamation at those mines to achieve those awards. I'd also like to thank our investors, customers and vendors for their continued support. Operator, that concludes our call.

Operator

This concludes the conference call. Thank you for attending today's presentation. You may now disconnect.

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