Alpha Metallurgical Resources Inc (AMR) 2021 Q4 法說會逐字稿

Hello, and welcome to today's Alpha Metallurgical Resources Fourth Quarter 2021 Results Conference Call. My name is Elliot, and I will be coordinating your call today. (Operator Instructions)

I would now like to hand over to our host, Emily O'Quinn. Please go ahead when you're ready.

Thank you, Elliot, and good morning, everyone. Before we get started, let me remind you that during our prepared remarks, our comments regarding anticipated business and financial performance contain forward-looking statements and actual results may differ materially from those discussed. For more information regarding forward-looking statements and some of the factors that can affect them, please refer to the company's fourth quarter and full year 2021 earnings release and the associated SEC filing. Please also see those documents for information about our use of non-GAAP measures and their reconciliation to GAAP measures.

Participating on the call today are Alpha's Chair and Chief Executive Officer, David Stetson; President and Chief Financial Officer, Andy Eidson. Also participating on the call are Jason Whitehead, our Chief Operating Officer; and Dan Horn, our Chief Commercial Officer.

With that, I'll turn the call over to David.

Thanks, Emily. Good morning to everyone, and thank you for joining us this morning. Today, we are pleased to report a record quarterly performance for Alpha, with adjusted EBITDA of $316 million for the quarter. We benefited from continued strength in the coal markets with a forward strip for Australian prices predicting strength through the coming months and further into the future than many initially had projected. Of course, none of us can know what will happen in days and months ahead and there's a lot going on in the world right now resulting in significant levels of uncertainty and volatility. The war being waged by Russia to take over Ukraine is especially disheartening, and we are especially troubled for the millions of innocent people who are suffering in a danger because of this conflict. I'll let Dan discuss this in his remarks as well, but we will continue to monitor this conflict as it unfolds and evaluate any potential impacts to Alpha or the broader gold supply chain.

Just a quick analysis of where we started 2021 and how the year ended is evidence that a landscape can shift significantly in a short period of time. Pricing for our met coals increased 2, and in some cases almost threefold over the 2021 calendar year. The improved pricing for our products generated revenue levels that allowed us to embark on our aggressive debt reduction plan. Over the last couple of quarters, you've heard me discuss the importance of debt reduction to Alpha's longevity and our steadfast commitment to being a good steward of your capital. I am pleased to report that we are progressing exceptionally well on the goal of eliminating our long-term debt.

In the fourth quarter, we paid $50 million in prepayments. And since that time, we paid another $150 million on the term loan. All this outstanding work brings our current debt level to under $300 million. To put that in perspective, we started 2021 with a total debt level of over $580 million. And a little over a year, we reduced our debt, including legacy liabilities by more than $280 million. It's an outstanding accomplishment, and we remain committed to our goal of eliminating the term loan debt this year.

Given the continued strength of the current coal markets and faster-than-expected pace, which we've been able to dramatically reduce our debt and legacy liabilities, we are also pleased to announce a shareholder return program. Our Board of Directors has approved a $150 million share repurchase program that will allow us to buy back our stock in the open market, with purchases beginning as early as this week. We are grateful for the confidence our shareholders have placed in us, and we are pleased to be able to offer this program to continue enhancing shareholder value. We believe that both the share repurchase program and our continued debt reduction efforts are creating meaningful value for our shareholders and building a stronger company.

In this business, especially for any public company, there's a significant amount of scrutiny on the quarter and what's happening in the near term. While managing the near-term operations is a necessary and important part of an effective corporate plan, I find it just as important to understand where the company is going over a much longer time horizon. As you heard me say last quarter, this is a cyclical business that can experience dramatic highs and dramatic lows, but we are long-term thinkers here at Alpha. We have a dedicated 3,500 professionals who make up the Alpha team, and our operational portfolio is comprised of 8 preparation plants, 19 metallurgical coal mines and for a few more months at least, one remaining thermal operation that will mine out midyear. That kind of portfolio complexity allows us the flexibility and optionality to meet extremely specific customer request, but it also demands a high level strategic planning and operational execution. This is why we routinely gauge in long-term forecasting to be sure we are maximizing the assets in our portfolio and planning for investments that will optimize our coal rank and quality mix in the future.

The capex projects we shared with you last quarter are an excellent example of those kinds of actions that will position Alpha well for both the near and long term. Our teams are currently completing an in-depth analysis of Alpha's 15-year plan, and we look forward to publicly sharing some high-level takeaways from this work once it is finished. We are excited about what lies ahead for Alpha and the ability to continue investing in our future successes.

I'm now going to turn the call over to Jason for some details on our operational performance.

Thanks, David. Good morning, everyone. Before I talk about some of the details of the quarter, I'd like to start with a general statement about last year and what our operations teams were able to achieve. Alpha remains the largest and most diverse U.S. metallurgical producer, having shipped a total of 16.8 million tons in 2021, with 13.9 million tons of that being metallurgical coal. That doesn't happen, especially in the midst of a global pandemic, without our thousands of team members continuing to focus on safe production and taking ownership of the safety, environmental and productivity goals for their respective operation and work location. What the team was able to achieve is impressive, but we also like to specifically recognize operations that go above and beyond to exceed expectations.

Our best-in-class awards programs allows Alpha to compete against one another for top owners within their operational category. Winners are chosen based on a strict set of criteria that includes performance against safety, environmental stewardship and productivity goals for the year. In 2021, Road Fork #52 earned the trophy for the deep mine category and 88 surface came out on top of the surface mine category that included high wall miners. Marfork processing impact slowed out; one, in the processing and load-out categories respectively, while our Mammoth belt system claimed top bragging rights for the belt transfer system category. We congratulate every employee who contributed to the success of these winning operations, and we look forward to another year of robust competition in each category. Speaking of awards, the Virginia region received 2 awards from the Metallurgical Coal Producers Association. Deep Mine 44 won the 2021 Best Active Deep Mine owner and Deep Mine 25, one of the best completed deep mine. Congratulations to the Virginia team on this well-deserved recognition.

I'll now share a couple of operational and cost updates before handing the call over to Andy. During the fourth quarter, Alpha closed on 2 separate transactions to divest noncore properties, which included the Delbarton Preparation Plant, Kielty Mine and Edwight Mine, all of which were idled. Together, these divestitures resulted in a combined decrease of $18 million and Alpha's asset (inaudible). We remain committed to further streamlining and optimizing our portfolio as we look ahead.

Additionally, you may recall from our 2022 capex projects list that we announced before section will be added to our Lynn Branch Mine. I'm pleased to report the development progress on the additional section has advanced as planned, and the fourth section of Lynn Branch began production in February. While none of the other 2022 capex projects have been completed as of now, significant progress is being made and we remain on track with our expectations for each of these developments.

Turning now to our cost. As you can see from our release this morning, we continue to face elevated cost of coal sale levels in the fourth quarter. This is a result of several factors outside of our control. Higher royalties and taxes due to higher sales price make up a significant part of the equation, while inflationary pressure and increased labor costs are also weighing into the overall figure. My focus and what I expect our operations teams to continue managing each day is on controlling the elements that are within our direct influence.

During our budgeting process toward the end of last year we established our 2022 guidance based on a number of internal estimates as well as the current forward pricing estimates. At that time, met coal was predicted to enjoy strong pricing at the start of the year and begin to decline in the second half. Knowing the impact that higher pricing has on cost of coal sales, we established guidance based on the best available estimates of coal pricing at that time, anticipating that earlier costs may be higher than those later in the year. However, if coal markets end up carrying more pricing strength through 2022 than was previously predicted, we will likely adjust our estimates accordingly.

I will now turn the call over to Andy for some additional details on our financials for the quarter.

Thanks, Jason. Good morning, everyone. Alpha had a very strong end to the year with fourth quarter adjusted EBITDA of $316 million, more than double our third quarter adjusted EBITDA of $148 million. For the fourth quarter, Alpha sold a total of 4 million tons with 3.8 million tons of that coming from our Met segment. This overall volume is lower than the previous quarter in part due to the holiday season and some transportation delays we encountered during the period.

As expected, our realizations on the export business continued to improve quarter-over-quarter, with tons linked to Australian indices, realizing just over $239 for the quarter. Tonnage sold based on the Atlantic indices and other pricing mechanisms, realized just over $251 per ton in the quarter. Looking at the Met segment as a whole, we realized roughly $181 per ton, an increase of approximately 60% over the prior quarter's $114 per ton.

As Jason commented earlier, the current pricing environment includes a number of factors outside of our control, but do ultimately yield a higher cost of coal sales, and he mentioned the labor cost, inflation, higher royalties and taxes. So as those rolled in for fourth quarter, we saw Met segment cost of coal sales increasing to $92.62 per ton, and our all other category cost of coal sales rose to $60.77 in the fourth -- driven by those factors. SG&A, excluding noncash stock comp and nonrecurring items increased from $14.1 million to $18.1 million in the fourth quarter, largely due to higher incentive bonus accruals and outside fees. Our capex for the quarter was $22.9 million, roughly flat against the prior quarter of $22.3 million.

Looking at the balance sheet and cash flows, Alpha closed the year with approximately $81 million in unrestricted cash and about $34 million in availability on our ABL, for total liquidity of $115 million. These levels are net of our $50 million payment of term loan principal during the quarter. Cash provided by operating activities for the quarter was $104 million. At the end of the quarter, the ABL had $121 million of letters of credit outstanding and no borrowings. As you recall from our prior disclosures, we refiled the ABL in December of last year, primarily to cover our letters of credit and that refi admitted and extended the ABL through 2024.

Looking at our committed and priced business for 2022, the metallurgical tonnage in our Met segment is 39% committed and priced at the midpoint of guidance at an average price of $24.75. An additional 39% of our met tonnage at the midpoint is committed but not priced. The thermal byproduct portion of the Met segment is fully committed and priced at an average price of $52.46, and we're around 82% committed and priced for '22 in our all other category at an average price of $57.24.

As David mentioned at the top of the call, we continue to make significant headway on our debt reduction efforts. In the fourth quarter, we made a prepayment of $50 million in principal on the term loan. Subsequent to the quarter close, we made an additional $150 million in prepayments, bringing down our current debt level to just under $300 million, $299 to be exact. We're very proud of these accomplishments. More importantly, we strongly believe they position the company very well for the future. As David announced, we're also implementing a $150 million share repurchase program, that is effective immediately and will allow us to begin buying back our stock on the open market as early as this week.

The visibility we currently have on our near-term cash flows allows us to tackle 2 important goals at once. First, continuing to advance our aggressive debt reduction goals and while also offering a robust capital return program that enhances value for our shareholders. And naturally, we'll look forward to updating you on the progress on the repurchase program on our next quarterly earnings call.

As a final note, given our strong fourth quarter performance, we've adjusted our maximum 22 NOL deduction utilization from $392 million to $285 million, as shown in our updated investor presentation, which is now posted on our website. We expect these NOLs to provide a significant cash tax benefit during 2022. So we've appropriately sized today's announced capital return action to protect those NOLs from any kind of Section 382 limitations that could come into play with this size of a share repurchase, and actually we'll be monitoring that throughout the coming quarters.

So with that, I'll turn the call over to Dan for market analysis.

Thanks, Andy, and good morning, everyone. Before I go through some of the statistics that we usually consider as part of our market overview, I want to mention the very serious circumstances across the globe in Ukraine. In addition to the geopolitical significance of such a phrase and challenge to democracy, there are many other global economic and trade-related impacts of Russia's actions against Ukraine, including increased volatility in stock markets, which we have already seen.

According to the latest data from IHS Markit, Russia accounted for over 37 million tons or over 11% of seaborne metallurgical coal exported in 2021. So the ongoing conflict and related sanctions may result in further supply [chains in the year]. With specific regard to our company, at this time we do not expect any material direct impacts to Alpha as a result of the war. However, the situation in Ukraine, the sanctions imposed on Russia and the diplomatic relations between Russia and other nations continue to evolve, and all of the potential effects of these developments can't be known at this time. And of course, we remain deeply concerned for the people impacted by this fighting, especially our customers in Ukraine. We have been and will continue to be in touch with them as the situation unfolds.

Changing gears to look at some recent steel production statistics. One might have expected that the inconsistent growth landscape [borne] out by the latest World Steel Association data. Globally, the latest crude steel production statistics show a 3% decline in year-over-year total production for December. China's December production was 7% lower than December of 2020. So this was not altogether unexpected given the country was preparing to host the Winter Olympics. Steel production in the EU held roughly flat against the year-ago period with a slight 1.4% decline. However, North American crude steel production increased 7.5% against the year ago period.

U.S. steel mill capacity utilization rates dropped from its highs at the end of 2021 to hover around 80% for the last couple of months as steelmakers here match production to demand. While this indicates a slight slowdown, Alpha continues to receive interest in our products, and we've had quite a few discussions with our domestic customers about potential for incremental tons on top of our committed 2022 volumes.

In the fourth quarter, coal indices remain quite strong in relative terms, but dropped from their record highs by the end of the year. The U.S. East Coast low-vol index represented the largest decline, having started the quarter on October 1 at $412 per metric ton and ended the year at $320. That has since jumped to $440 per metric ton as of Friday. The U.S. East Coast high-vol Index moved from $377 per metric ton at the start of the quarter down to $344 per metric ton on December 31st, and is now up to a level of $445 per metric ton. Finally, the Australian PLV index went from $390 per metric ton at the start of the quarter down to $357 per metric ton at quarter close, and now is up sharply in recent days to over $560 per metric optic. Even at the low points of the fourth quarter, these are still very strong levels historically and we continue to be optimistic about our realizations for 2022, especially at the current committed and price levels for the year.

Before I wrap up my remarks, I also want to briefly touch on the transportation challenges that have been a common topic within our industry. While we have encountered delays in challenging circumstances, so far our team has been able to overcome these obstacles and meet the needs of our customers. We remain in close conversation with our railroad contacts. While we certainly understand the hurdles that many companies have been facing with regard to labor availability and workforce readiness programs as a result of COVID-19, our business relies heavily on the satisfactory performance of our transportation partners. We hope to see continued improvement on those issues, and we welcome the ongoing opportunity to work with our transportation partners towards a goal of consistently reliable service.

That concludes our prepared remarks for this morning's call. Operator, we are now ready to open the call for questions.

(Operator Instructions) Our first question today comes from Lucas Pipes from B. Riley Securities.

Thank you in particular for your comprehensive comments in this really truly unusual times, especially for the commodity markets. And kind of in that vein, I wanted to ask you how you think about kind of capital allocation? And maybe through the medium term, you have had historically the opportunity to kind of grow opportunistically and obviously, in this market that has proven to be a terrific investment. But how do you think about capital returns versus growth from here? Where would you like to be kind of from a net debt perspective at the end of the cycle?

This is David. I'll start and pass it over to Andy. Thanks for the question. It's -- as I have said on the 2 previous earnings calls, and I think I said it again on this one, debt elimination is our goal. So from an asset perspective, even our allocation of capital perspective, our goal has been to reduce and now eliminate our long-term debt. We were very fortunate because of our cash position to be able to do a capital return program of $150 million, and we'll continue to evaluate that as we move into future quarters. But these are uncertain times. We had some limitations for the near future on our ability to buy back much beyond what we offered the [150] But our Board on a quarterly basis reviews our cash flows, reviews our future and makes decisions. So we'll do that again. From an acquisition standpoint or a growth perspective, we have a large reserve base. You've heard Jason discuss, the Glen Alum mine and the Cedar Grove mines, we're evaluating some other opportunities to grow internally. We believe organically, we have the ability to utilize capital in that manner currently in a better form than looking to an acquisition. So Andy, did I miss anything there that you'd like to discuss.

No. No, I think that's it. I think it's, again -- and hey, Lucas, by the way, I think it's important to note, as I mentioned, the -- our NOLs are a factor that we're keeping an eye on as far as any kind of a constraint on share repurchases right now. But at the rate that -- look at these prices, we could burn through your NOLs at a relatively quick pace. And that -- if that does indeed happen, that should -- that opens consideration for additional actions in the coming quarters. And then also as far as the debt goes, the plan is, as David mentioned, we keep hammering away with it or add it with as much aggression as we can, really don't stop until it's gone.

Awesome. Really, really good to hear. Super helpful. Then, myself or -- have been made -- asked this question last quarter or 2 quarters ago, I'm starting to lose track of time on how long prices has been high. Good problem to have, but can you remind us about how the pricing book would have kind of take shape from here given what you have committed in terms of fixed prices versus what is left open when prices would be locked in? And you mentioned in your prepared remarks that prices on the index in the high 500s. With those flow through your segment EBITDA or any issues to take into account such as quality and things of that nature? Thank you for your additional guidance.

Hey, Luc, this is Dan. I'll take a stab at that. So when you think of our book and the coal remain to be sold, I guess, as we've outlined, we have a fair amount of exposure, a good amount of exposure to the what we call the Aussie indices. Those are running at pretty high levels these days. So we'll continue to look at that. And if there's opportunities to sell into that market, we will. We do have opportunities in that regard. We also have, as I said, domestic opportunities. What we'll have to do is we'll match the products that we have still available with the requests that our customers are bringing to us and we'll find the best numbers. So there's no single answer there. It's a bit of -- it will depend. But certainly, we're aware of the indices and we'll make the appropriate decisions.

That's helpful. Thank you. And then another question. I'm starting to get a fair bit and I would be curious on your perspective, is around demand destruction. And obviously, that's kind of macro, bigger level problem. But for you specifically, have you had customers turn away because of where prices are? Would you say, look, there's a reason why prices are so high and that is demand is strong and they need the product. How -- what's your read of the market on that?

Well, short answer is no. We have not seen anybody turning away from -- in fact, it's been the opposite, at least so far. Again, things are changing. But we've seen Russian coals coming out of -- theoretically coming out of the market as customers at least initially are moving away from those coals. So that is bringing customers to shippers out of the U.S., and Australia mostly looking to fill those gaps. So that's what we're seeing here in the short term. And I'll step back and say prior to the invasion of Ukraine, we were seeing a strong market. We were seeing good demand coming out of all of our markets, including India and the Far East. So that hasn't changed. So in addition to that, some markets that we're receiving Russian coals are looking to replace those coals.

And our next question comes from Nathan Martin from the Benchmark Company.

Congrats on the quarter.

Thanks, Nathan.

Yes, yes, no problem. I think I'd start with maybe in '22 guidance. Looks like everything largely unchanged. Maybe on the sales side real quickly, given some of the discussions we've already had with what's going on today in the world, rest of Ukraine, obviously extremely tight supply on really both the met and thermal side, successful ramp of Lynn Branch last month. I mean any thoughts on any more incremental production you guys kind of have your eyes on here in the near to medium term?

Nate, I'll let Jason grab that as well. But we like where we are right now. We're in that sweet spot of being able to meet customer needs. We've intentionally diversified our portfolio where we have multiple offerings, which differentiates us from others in the industry. And -- but we feel very comfortable where we are. But Jason, I'll let you add on anything additional to that.

Sure. You've heard our plans for the Glen Alum mine, which will -- it is on pace, and we'll start as planned and that's projected this summer. I think it's just going to be an ongoing evaluation. Where is the market going to go? What used to be looked at as coal resource, so now it's a coal reserve. it's about managing margins, not necessarily managing costs. So we'll continue to evaluate. And if there are opportunities to stretch the mine life that makes good economic sense, then we'll definitely be looking to do that.

Got it. Maybe if I think about shipments kind of as we look across '22, any thoughts on cadence as it relates to that? You guys did give a little color on transportation and labor. How might that affect kind of the progression of shipments throughout the years as we look ahead here?

Nate, this is Dan. I think we look at it as pretty much pro rata. We have a little bit of exposure to some Canadian customers that they're 9-month customers, and then we have a little bit of, again, shipping 12 million tons overseas. We have some lumpiness for lack of a better word. Vessels come in and out during the year. But think of a large lease pro rata. I don't see any one quarter at this point being stronger than another.

Got it, Dan. So basically, just kind of the domestic business just split up equally and hopefully transportation cooperates and exports similar.

Correct.

And maybe, Dan, I had -- you mentioned some customers in Ukraine. Any comments on how much coal you guys sell to Ukraine?

No, I mean, we've -- they've been a regular customer, Nate, and -- but no, I don't -- we're not going to get granular on our individual customers.

Got it. Just figured I'd try. I know people were wondering. So I mean, maybe just one last thing. You guys mentioned, obviously, this quarter a couple of divestitures. I know you continue to kind of look at your assets all the time. Any other potential divestitures you see in the near term? And maybe what kind of potential savings could you see from this?

Well, I'll take a shot at that, Nate, this is David. We're constantly evaluating our portfolio. When we do divestments, you can pretty much guarantee we view those assets as nonstrategic to our long-term future. And we do not usually -- and we won't make comments on either an acquisition or a divestment until it's completed. So I like where we are right now, our portfolio of assets. Our properties are in extremely good shape. We've worked really hard to get to where we are today. So I don't see anything on the horizon that's material that will move the needle for anybody.

Got it. I appreciate that, David. And then maybe actually just one more on the cost side, and it's one that usually kind of hit on. In the prepared remarks I think Jason mentioned cost guidance for '22 unchanged at this point, very fluid situation in the market from a pricing standpoint. It seems like we hit records on the auction side every day now. And maybe just -- any help kind of triangulating where that full year guidance could move? I mean if I just use the fourth quarter as kind of a reference point, we're around 92. [15] on costs on the met side. maybe obviously benchmark was in the [370s] And in the first quarter for 1Q indicates price was in the [390s] I believe. So again, that 9250 is already above your full year '22 guidance. So I mean, any thoughts on how to kind of triangulate where that could move to? If pricing kind of stays even where it was in the first quarter or maybe even just a better way to think about that, what were you guys kind of assuming for full year '22 net price baked into that current guidance?

Nate, it's Andy. Yes, so I guess when we talked about -- when we first introduced guidance, we were kind of talking about -- we base our costs really coming out of our budget and the revenues are assumed to kind of follow the strip -- the futures were showing at that point in time. Naturally, the world has changed substantially since then. So -- and we have been waiting a little bit longer to get further confirmation of how long this market is going to last before we make any significant changes to guidance. But I would say just broadly speaking, when you factor in the sales -- the impact of sales-related costs, the royalties, the severance taxes, those kinds of things that are a percentage of gross sales price, you're probably looking at an $8 to $10 step up. Your 90 can turn into 100 relatively quickly. Now we -- as we see these things going on, we do see some portions being offset by the continued productivity improvements that Jason and the operations team seem to find quarter after quarter. But again, I think it's safe to say if this market holds for the full year, then you're probably looking at some quantum of 8%, 10% bump up in cost of coal sales.

Yes, that's really helpful, Andy. And change substantially is to say the least, right? So obviously a high-class problem to have costs going up and prices have done what they've done. So I totally get it. I really appreciate the thoughts there. So I'll leave it there. Thanks for the time, guys, as always, and best of luck in '22.

Thank you, Nate.

Thanks, Nate. I want to thank everyone again for joining the call this morning and for interest in Alpha Metallurgical Resources. We look forward to updating you on our 2022 progress on our first quarter call in a couple of months. Everyone, have a great rest of your day. Thank you so much.

This concludes today's call. We thank you for joining. You may now disconnect your lines.