Peabody Energy Corp

NYSE:BTU

Earnings Call Transcript 2021-Q1

[Operator]

Good day, ladies and gentlemen and welcome to the Peabody Energy Q1 2021 Earnings Conference. At this time, all participants are in a listen-only mode. Following today's presentation, instructions will be given for the question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded today.

I would now like to turn the conference over to Ms. Alice Tharenos. Please go ahead, ma'am.

[Alice Tharenos, Head of IR and Communications]

Good morning and thanks for joining Peabody's earnings call for the first quarter of 2021. With me today are President and CEO, Glenn Kellow; and CFO, Mark Spurbeck.

Within the earnings release, you will find our statement on forward-looking information as well as a reconciliation of non-GAAP 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 Glenn.

[Glenn Kellow, President and CEO]

Thanks Alice and good morning everyone. Before we get started this morning, I'd like to take a moment and welcome Alice to her new role as Head of IR and Communications for Peabody. Alice has over 20 years of financial and commercial experience with our company in the U.S. and overseas.

Turning now to the quarter, we continue to see operational and productivity improvements take hold across the company. We're off to a good start on safety, particularly in the United States with injury rates for the quarter was

[Technical Difficulty]

[Operator]

Hello, this is the operator. It does seem as though the speaker's line has been muted and is no longer broadcasting audio to the conference. Please standby just for a few moments while we attempt to fix this issue. Thank you.

Again, apologies for the inconvenience, but we are trying to reconnect the speakers. Call should be back to normal within a few moments. Again, thank you for your patience.

Again we are still trying to reconnect our speakers today. So, please, if you could continue to standby while we do try and reconnect them. Thank you again for your patience. Again I would like to thank everyone for your continued patience. As I do believe the speakers are on their way back and the issue should be resolved shortly. Thank you.

Perfect, it does look like we do have our speakers joining us back here today. So, I would now like to turn the call back over to Alice Tharenos to continue her remarks and again, apologies to everyone for the delay there.

[Glenn Kellow, President and CEO]

Thank you. And yes, apologies. Somehow we were we were disconnected, but we could slink [ph] hello again and look, I'm just going to resume the comments.

We were talking about the fact that our safety performance had improved probably 50% over the last year. We have lower cost per ton in three of our four operating segments compared to the prior year and further reduced SG&A spending.

While seaborne thermal volumes and costs were temporarily impacted by flooding, and a ship letter outage, we anticipate performance progressively improving throughout the year.

US thermal mines also performed well, lowering cost per ton 9% from the prior year, an outstanding performance given volumes were down 13%.

Seaborne met cost per ton improve modestly over the prior year even as volumes were muted by idle mines and the ongoing pandemic. Productivity improvements at Coppabella and Moorvale contributed to the complex of becoming an $0.11 unfavorable increase in foreign currency rates. We continue to take action to improve our met coal operating performance. And while we recognize there certainly is more work to do, we are taking our foot off the pedal.

At Shoal Creek, while the mine remains idle, we are continuing activities to increase productivity, lower costs, and improve yields in the future, resuming production and shipments are contingent upon completion of these initiatives, as well as stable customer demand.

On these fronts, our labor contract expired April 1st and we've been in active negotiations with the union. We have made the decision also to upgrade the PRB plant to capture a yield improvement and we continue discussions with customers about our mine restart.

As a reminder, that mine has historically had large and long-term customer relationships with the majority of volume as pricing off the hard coking coal market. We'd anticipate the PRB planned project to be completed in mid-quarter three.

At Metropolitan, while discussions are ongoing with customers and the workforce, the full [Indiscernible] will return to the mine in early May. Development work has been partly ongoing through the idle period and normal production is anticipated to begin in the second quarter with the ramping up to full production plans in the third quarter of this year.

You will recall that we've been continuing commercial process for North Goonyella. We've been impacted by a variety of factors. And while the process is ongoing, at this stage, it has not presented us with an any attractive executable options.

We continue to be active across a range of fronts, regulatory, mine planning, and commercial and believe North Goonyella is a valuable asset with world-class infrastructure.

You might also have seen that we recently entered into an agreement to sell our closed Millennium Line and assign a portion of the related asset retirement obligations to owners of a neighboring deposit. While this is still subject to closing conditions, it is an example of that continual evaluation of options.

From a broader market perspective, seaborne thermal coal conditions remain favorable, while China's import restrictions are a significant disruptive factor to seaborne metallurgical coal prices, and continue to weigh on Australian hard coking coal, while lowball PCI has narrowed to near parity.

Tight supply and low inventory levels of kept new counts of thermal pricing at improved levels year-to-date. China's domestic thermal supply remains hampered by heightened safety inspections.

India's plants stocks have been falling gradually since mid-December, as government-owned plants reduce intake and there has been a delay in typical restocking ahead of the monsoon season in June. As at the end of March, India's planned inventory levels [Indiscernible] at approximately 15 days versus some 28 days a year ago.

Our low costs thermal coal platform is well-positioned seaborne to take advantage of these higher near-term prices. Within the seaborne met coal market, the imbalance between Australian export and Chinese delivered prices remains wide.

The delivered price into China is currently trading at roughly double those seen FOB Australia as the unofficial ban on Australian coals remains in place. In addition increased COVID concerns with the crisis in India are further weighing on Australian hard coking coal pricing.

These factors continue to pressure the stable and met market, despite global steel production increasing 5% year-over-year.

In contrast, the spread between Australian hard coking coal pricing and lowball PCI pricing has recently narrowed to near parity. Lowball PCI supply coupled with China paying a premium for Russian coals have contributed to rising lowball PCI prices.

Here in the U.S., overall electricity demand increased 2% over last year, positively impacted by cold weather. Higher natural gas prices resulted in us thermal coal share of electricity generation increasing by 37% to 24%, while natural gas declines of 34%.

As a result, coal inventories have fallen by 20 million tons since December. During the quarter, utility consumption of PRB coal rose approximately 35% compared to the prior year.

I'll now turn things over to Mark to cover the financials.

[Mark Spurbeck, CFO]

Thanks Glenn and good morning everyone. First quarter results demonstrated our continued focus on cost management and performance improvement, as cash flows from operations increased to $71 million compared to a net use in the prior year. This result was achieved despite lower volumes and average realized pricing.

Compared to last year's first quarter, total volumes declined 15% with net shipments down 50% primarily due to the Shoal Creek and Metropolitan mines remaining suspended during the quarter. Lower pricing also weighed on results as average realized prices declined over $8 per ton for seaborne met products and $0.35 per ton for PRB thermal coals.

Cost savings initiatives continued to garner results at the corporate office as well, with SG&A down 13% year-over-year, allowing us to revise our full year estimated SG&A costs down another $5 million. At this run rate, Peabody's annual SG&A expense would be at its lowest level since 1999.

Interest expense of $52 million includes $11 million of one-time fees that were expensed upon completion of the refinancing transactions early in the quarter. Higher borrowing costs and amortization of related debt issuance costs also contributed to an increase in interest expense year-over-year.

Loss from continuing operations net of income taxes totaled $78 million. Adjusted EBITDA of $61 million was 66% or $24 million higher than the first quarter of last year.

Turning now to segment results. As expected, seaborne thermal costs and volumes were unfavorably impacted by the transition to the United Wambo joint venture. In addition, the stronger Australian dollar, historic flooding in New South Wales, and related impacts on the logistics chain and an unexpected ship loader outage at the Newcastle NCIG port raised cost in the quarter.

While we were fortunate not to suspend any of these operations, first quarter shipments were about 400 tons lower than expected due to the logistics challenges. Continued strong performance at Wilpinjong partly offset these higher costs.

During the quarter, Wilpinjong young sold 2.9 million tons, including 1.1 million export tons at an average cost of $23. Wilpinjong recorded $25 million of adjusted EBITDA and had $104 million of cash at March 31st.

First quarter met volumes were impacted by Shoal Creek and Metropolitan remaining idled. However, we are seeing strong demand return for PCI products. We continue to take action to lower costs to a more competitive level and indeed, variable costs came down year-over-year.

Cost per ton were in line with the prior year, despite shipments being down 1 million tons. Excluding idled mine costs, met costs were $84 per ton, about $3.5 lower than our average realized price for the quarter.

Productivity improvements at Coppabella and Moorvale contributed to the cost declining $13 per ton, even with the unfavorable exchange rate impact. In the U.S., PRB cost decreased 7% year-over-year due to ongoing cost reduction initiatives and favorable pit sequencing.

Cost per ton reductions were achieved even with shipments down 12%, of which an estimated 1 million tons was timing related from disruptions due to severe weather in February. Cost per ton also declined in the other U.S. thermal segment as we continue to benefit from ongoing cost management initiatives and productivity improvements.

From a balance sheet perspective, we used some cash and completed the refinancing transactions, repaid approximately $54 million of debt, made scheduled interest payments, and reinvested in our asset portfolio with capital and net contributions to joint ventures.

In addition, lower receivables, largely related to timing of seaborne shipments, resulted in outstanding letters of credit temporarily exceeding the balance of eligible receivables under our accounts receivable securitization facility. This required us to post $44 million of cash collateral recorded as restricted cash to back these LCs. As eligible receivables increase, this cash collateral would be returned to us. At March 31st, we had nearly $624 million of cash, cash equivalents, and restricted cash.

Looking ahead to the remainder of the year, we are planning for PRB volumes in line with 2020. Currently, we have about 95% of those volumes priced. Other U.S. thermal shipments are expected to total 16 million tons. Cost for both segments are expected to be largely in line with the prior year.

Seaborne thermal volumes and costs are expected to progressively improve from first quarter levels. We expect this segment to ship 17 million tons, including nine to 10 million tons of export coal. Compared to 2020, seaborne thermal costs are expected to increase given the lower volumes, higher expected royalties, and current unfavorable exchange rates.

Seaborne met volumes are contingent upon the ongoing improvement programs and activities at Shoal Creek as well as customer demand.

Metropolitan is expected to ramp up to a normal run rate in the third quarter. At Coppabella and Moorvale, volumes are expected to increase due to stronger customer demand and productivity improvements.

As mentioned earlier, we are targeting lower SG&A than previously thought and maintaining our prior capital expenditure guidance of $225 million, which includes $135 million for significant reinvestment in Australian-based seaborne platforms. Looking ahead to next year, we are targeting lower capital expenditures due to a substantial reduction in major project spending.

I'd now like to turn the call over for questions. Operator?

[Operator]

Thank you. [Operator Instructions]

Okay. So, we will now take our first question from David at BMO Capital Markets. Please go ahead.

[David Gagliano, BMO Capital Markets]

All right. Thank you and thanks for taking my questions. I just have -- I have a -- I have a couple of short-term-ish and then one strategic question. On the short-term-ish type of questions. First of all, the second quarter outlook for flat or similar results.

I was wondering wanting to get in talk through the puts and takes there. It looks like obviously, seaborne thermal prices are higher, there's some cost issues in the first quarter that seemed like they were one-time-ish in the seaborne thermal business. So, I would have expected a bit of a sequential improvement in the second quarter. So, I'm curious if you just talk through what the offsets are? That's my first question.

And then, just real quickly, if you could just touch on what the volume expectations are from the Metropolitan mine, once it's restarted in the third quarter? And then my last -- sorry I'm going on -- but my last strategic question is if you could just give us an update on the CEO search. Thank you.

[Mark Spurbeck, CFO]

Hi David, it's Mark. On seaborne thermal, you're right, we're seeing improved pricing in the thermal markets, Newcastle thermal. We are continuing to transition to the Wambo Open Cut joint venture. So, volumes are improving, but still lower than run rates, not expecting significant though overall improvement in the next quarter.

[Glenn Kellow, President and CEO]

Maybe I'll take the next one, incentive Metropolitan, we've been continuing some development during this idle period. We're bringing back the workforce next week -- the remainder of the workforce next week. We'd expect to ramp up through the through the rest of the second quarter into the third quarter. That mine by reference produced about 1.3 million tons last year. And it is going to vary depending on longwall outages and longwall more move timings as well those ongoing cost demand.

Your third question on the CEO search, the Board have indicated that -- the Company has indicated that it's undertaking both an external search and an internal search. And that process is still ongoing.

[David Gagliano, BMO Capital Markets]

Okay, just real quick -- thank you for that by the way. And just a real quick follow-up on the -- back to the first question. I understand the commentary on the thermal, but just overall that the commentary was basically a kind of a similar, I believe, second quarter result versus the first quarter.

So, where are the offsets to the positives that we're seeing in thermal -- seaborne thermal and the cost situation probably in seaborne thermal on a quarter-over-quarter basis?

[Mark Spurbeck, CFO]

David, let me reiterate. I think Wilpinjong continues to perform according to the guidance that's out there and fairly consistent. I think, the Wambo Open Cut joint venture we have that impact. The underground as possibly had some inventory reductions in the quarter. We won't probably see that in the second quarter. Does that answer your question?

[David Gagliano, BMO Capital Markets]

So, let me just ask it more directly. Are unit costs going up, flat, or down in seaborne thermal quarter-over-quarter in the second quarter? And similar question for the Met business as well?

[Mark Spurbeck, CFO]

Thermal volumes coming down.

[David Gagliano, BMO Capital Markets]

Okay.

[Mark Spurbeck, CFO]

The unit cost improving sequentially over the first quarter.

[David Gagliano, BMO Capital Markets]

And then on the met side?

[Mark Spurbeck, CFO]

And on the met cost -- yes, again, the met volumes are really going to be contingent upon the ramp up of Metropolitan. The CM JV is having lower production in the second quarter.

[David Gagliano, BMO Capital Markets]

Okay. Thank you.

[Operator]

Thank you. We will now take our next question from Lucas at B. Riley Securities. Please go ahead.

[Lucas Pipes, B. Riley FBR]

Hey, good morning everyone. Question on Shoal Creek, you mentioned in the release a couple of activities to improve productivity there and I wanted to -- could you elaborate at what specifically would be happening underground or maybe at the surface even? Would appreciate that. And then also in terms of the negotiations on the labor side, anything you could share there? Would appreciate that. Thank you.

[Glenn Kellow, President and CEO]

Thanks Lucas. And the thing I called out in terms of activity we made the decision to make some enhancements to the prep plant to upgrade yields. And that outage will take us through into the third quarter -- now in the middle of the of the third quarter.

With respect to the labor discussion -- negotiations, as you would expect, are probably limited given their active discussions underway, limited on what I can say other than we are in discussions around ways in which we as a company believe that we can improve our competitiveness and productivity through that process.

[Lucas Pipes, B. Riley FBR]

I appreciate that and then follow-up on the prep plant modification. So, is it fair to conclude that Shoal Creek wouldn't be restarted before all those upgrades are completed?

[Glenn Kellow, President and CEO]

Certainly that would be the limiting factor on shipments. With -- that would be true, it could be possible to run underground production before that time.

[Lucas Pipes, B. Riley FBR]

That's helpful. Thank you. And then bigger picture question. Over the years, there have been discussions around the logic behind a potential separation of seaboard and more domestic U.S. assets. Is that something that is potentially contemplated that could make sense? Or what do you see kind of Peabody evolving over the foreseeable future? Would appreciate any thoughts you can share? Thank you.

[Glenn Kellow, President and CEO]

Lucas, as was indicated, there is a transition of the CEO underway. And that's probably best for the incoming CEO in terms of being able to respond to. Clearly the company, when you look across the portfolio, has an extremely strong U.S. thermal business. We have what we regard as the lowest cost and best position assets and the best basin in the PRB. Our Midwest business did exceptionally well in the quarter had very strong returns. And similarly, our seaborne thermal business is a strong business that's produced attractive margins.

We've got more work to do on our met -- on the met front, you've seen the steps we've taken to improve that activity. And -- but there is more work to do at the same time, we believe in the long-term outlook for metallurgical coal.

[Lucas Pipes, B. Riley FBR]

I appreciate that. Thank you and best of luck.

[Glenn Kellow, President and CEO]

Thanks Lucas.

[Operator]

Thank you. So, that is all the questions we have in the queue at this time. So, I would like to turn the conference back over to Glenn Kellow.

[Glenn Kellow, President and CEO]

Thank you, operator and look, apologies again for the technical disruptions that was at the start of the call. Thank you for joining us today. I'd especially like to thank our employees for continuing to keep safety at the forefront of all we do and continuing to execute on our various cost improvement initiatives. I'd also like to thank our customers, investors, and insurance providers for your continued support. Operator, that concludes our call today.

[Operator]

Thank you. So, this does conclude today's call and you may now disconnect.

[Alice Tharenos, Head of IR and Communications]

Good bye.