Peabody Energy Corp (BTU) 2014 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Peabody Energy second-quarter earnings call.

(Operator Instructions)

The conference is being recorded. I'll turn the conference over to Mr. Vic Svec, Senior Vice President, Global and Corporate Relations. Please go ahead.

Okay, thank you, John, and good morning, everyone. Thanks for taking part in the conference call for BTU. With us today are Chairman and Chief Executive Officer Greg Boyce; President and Chief Operating Officer Glenn Kellow; and Executive Vice President and Chief Financial Officer Mike Crews.

We do have some forward-looking statements. They should be considered, along with the risk factors that we note at the end of our release, as well as the MD&A section of our filed documents. And we also refer you to PeabodyEnergy.com for additional information. And with that, I'll now turn the call over to Greg.

Well, thanks, Vic, and good morning, everyone. In the second quarter, Peabody delivered solid US performance, and we advanced a number of key operational improvements in Australia. I'm very pleased with the team's continued actions to increase safety and productivity, manage costs and drive capital efficiency.

I'd like to begin with Peabody's view of the current market fundamentals, and then we'll discuss our strategic positioning. The seaborne coal markets remain over-supplied, but we are seeing some signs of rebalancing. Coal demand is expected to rise in the second half of the year on improved and global economic growth as result of additional Chinese stimulus, Asia expansion and improving Atlantic steel requirements.

We project further improvement within the metallurgical coal market in 2015 as production growth slows and demand continues to increase. There have been approximately 20 million tonnes of announced metallurgical cutbacks in the first half of 2014, much of which is likely to occur over the coming months. We also expect Australian export growth to slow in the back half of this year and into 2015.

We believe that the long-term metallurgical coal demand thesis remains solid and is supported by growing steel intensity from ongoing urbanization trends in Asia. It's estimated that some 70 million people per year will migrate to cities by 2020, requiring more coal to meet rising steel demands.

Within the seaborne thermal coal market, demand continues to increase as well. India's coal generation is up 12% through June, with imports expected to reach record levels this year. And India's new prime minister recently stated that the government will work toward providing power, water and sanitation for every household by 2020, further driving coal imports.

In China, coal generation is up 5% through June, while domestic coal production is down, leading to rising thermal imports. In addition, more than 2,000 smaller mines are expected to close by 2015 as a growing amount of Chinese coal production is uneconomic.

Developing nations continue to turn to coal for affordable power, with Indonesia expected to double its coal consumption over the next 10 years by adding 60 gigawatts of coal generation capacity. You see, this decade alone, 29 countries have added 335 gigawatts of coal generation. And this trend is expected to continue at the same pace.

Now in the US, market fundamentals remain strong, with 2014 coal demand expected to rise 30 million to 40 million tons, reflecting a continuation of utility switching from gas to coal over the last two years. US coal generation increased 20 million tons year to date through June, while gas generation is down 2%.

PRB inventories are at 49 days use, down nearly 30% from year-ago levels. This reflects a dramatic improvement over the last few years, as inventory overhang has been removed. We expect continued inventory reductions over the next six to eight weeks.

But still, rail performance has been disappointing and continues to impact the PRB. Western rails are hiring additional crews and adding locomotive power to improve the heavily congested system. And this investment may take some time to be fully realized, but will provide continued incremental improvement.

We estimate that 15 million tons of PRB shipments have been missed in the first half of the year due to below-par rail performance and utility coal conservation measures due to inadequate deliveries. In the second quarter, we estimate that Peabody's Western volumes were impacted by 1 million to 2 million tons related to this rail performance. And as a result, we've lowered the top end of our 2014 US sales guidance by 5 million tons.

Now on the public policy front, we've seen changes in carbon dioxide initiatives in both Australia and the United States. Australia just recently repealed its unpopular carbon tax in a major policy reversal, as it resulted in higher electricity rates and negatively impacted businesses and jobs. The repeal is projected to lower power bills and lead to an increase in Australia's global competitiveness.

In the US, the Environmental Protection Agency has proposed carbon dioxide regulations that would require states to reduce emissions from existing electric-generating plants. Should the rules be finalized in their current form, third parties have projected significant potential impacts to generation, electricity rates, jobs and economic development.

Already approximately 20 states have passed legislation or resolutions calling for alternative approaches. And the rules are also being contested by congressional delegations, state officials, labor unions and others. Peabody believes that the proposed regulations represent poor policy, with significant economic harm. These proposals are a long way from being finalized. And when they are, they're very likely to be aggressively litigated.

To summarize our market view, coal is enjoying its largest share of global energy mix since 1970, now representing more than 30% of global energy use. Coal is the fastest-growing major fuel, and is expected to become the world's largest energy source in coming years.

As energy needs rise around the globe, Peabody is well-positioned with an exceptional production base, aimed at the best growth markets served from the US and Australia. And we continue to take the appropriate actions to manage current market challenges. These include our owner-operated implementation in Australia, where we've had great success in reducing cost and better aligning our workforce.

And we continue our focus on portfolio optimization, including the pursuit of non-core asset sales. Since last June, we've sold $160 million worth of non-core assets and are looking at additional opportunities going forward.

I'd now like to take a moment to introduce Glenn Kellow, Peabody's President and Chief Operating Officer. At Peabody, Glenn is responsible for all aspects of our global operations, along with safety, sales and marketing and business development. Glenn joined us last fall from BHP Billiton, where he served as President of it's global aluminum and nickel business. And he's a former Director of the World Coal Association and the National Mining Association.

Glenn has a strong track record of performance, and brings valuable multinational leadership experience across a number of commodities, including coal. At his short time at Peabody, I've already been impressed by his breadth of knowledge and solid contributions to our operational advancements. So with that, I'll now turn the call over to Glenn for an update on our operations.

Thanks, Greg, and good morning, everyone. I look forward to working with all of you and becoming more engaged with Peabody's investor and analyst activities. In my first nine months at Peabody I have been impressed with the quality of the workforce, the world-class assets and the real improvements being made in safety, cost management and capital efficiency.

These are challenging times for coal producers. But Peabody benefits from a solid operating platform, and we are redoubling our efforts to make sustainable improvements to our operations, move down the cost curve and become even stronger as the market improves.

I'd like to begin by reviewing Peabody's operating priorities and my specific focus areas, along with the progress that we've made so far this year. First, we seek to drive strong performance in our operations and build on safety and productivity gains. At Peabody, we believe that strong operations must also be safe operations. Peabody's 2013 global incidence rate was nearly 50% better than the US average. And in Australia, our incidence rate has improved 45% so far this year.

Within our operations, we commissioned a longwall top coal caving system at the Goonyella Mine, which reached stabilized production levels by the end of the second quarter. Output increased over 130% compared to the first quarter, and we are now focused on optimizing the benefits of the new equipment and enhancing yields over the next several months.

We also have completed the installation of a replacement longwall at the Metropolitan Mine late this past quarter. The ramp-up has been very successful, and we expect to realize additional productivity and cost improvements as the year progresses. And we have seen significant first-half productivity improvements across our entire platform, with our Australian productivity increasing 35% and US productivity increasing 11% compared to the prior-year period.

Peabody's solid second-quarter operating performance is due in part to these productivity improvements. Our US platform continued to perform well in the face of railroad bottlenecks, and our Australian thermal mines achieved higher-than-expected production and cost savings that helped offset lower seaborne pricing.

These actions relate to our second focus area: targeting additional cost improvements. This includes the owner-operator strategy Greg mentioned, which eliminates contractor overhead, brings in right-sized equipment to increase productivity, better aligns our workforce and greatly improves our mine planning. We are advancing the conversion at our Moorvale Mine in the third quarter, which will increase our owner-operator production to over 90% of our Australian output.

And while we have implemented significant cost improvements across our platform, we are not done. We look to further reduce our spending both in SG&A and procurement activities, and the team continues to deliver additional reductions.

Our third focus area is continued capital efficiency activities. Capital spending in the first six months totaled $65 million, as Peabody benefits from a well-capitalized platform with the investments that have been made over the last several years. Our team is working to increase availability across our global fleet of equipment, and these efforts have resulted in real reductions to both operating and capital expenditures. We envisage being able to maintain these lower sustaining capital's for several years.

Our US capital spending includes the Gateway North extension, which will provide replacement capacity as the low-cost Gateway Mine transitions to a new long-life reserve area. The slope construction is ahead of schedule and production ramp-up is targeted in the first half of 2015. All of these improvements also put us in a good position for long-term growth, using our leading reserve position, our business development activities and our global network.

That's a review of our top operational priorities for 2014 and our recent performance. I look forward to continuing to update you on Peabody's progress on operating initiatives. For a discussion on our financial results, I'll turn the call over to Mike Crews.

Thanks, Glenn, and good morning, everyone. With higher US Adjusted EBITDA, lower Australian costs, and consolidated Adjusted EBITDA above the high end of our guidance range, Peabody's second-quarter results reflect the continued steps we are taking to offset challenging market conditions.

I'll begin by discussing our quarterly results, starting with the income statement, and then provide an outlook for the third quarter. Second-quarter revenues increased to $1.8 billion on higher overall volumes in revenues per ton in the West, which more than offset lower realizations in the Midwest and Australia. Adjusted EBITDA of $213 million reflects our cost-containment actions and operational improvements that helped to offset the decline in seaborne market pricing.

Taking a look at the major components, US operations generated Adjusted EBITDA of $292 million, up 12% from the prior year. Volumes rose 5% on growing utility demand, particularly from the Powder River Basin. As we discussed in our outlook last quarter, Western revenues per ton increased 6% with the finalization of a long-term coal supply agreement that will result in higher realizations going forward.

Midwest realizations declined 4% on the roll-off of legacy contracts. Midwest costs per ton were temporarily impacted by higher overburden ratios at multiple surface mines related to sequencing, as well as the timing of maintenance costs in the quarter. We expect costs to improve in the third quarter as stripping ratios normalize. Western US costs declined 3% on cost containment and a greater mix of PRB volumes.

In Australia, Adjusted EBITDA of $12 million reflects $155 million of the lower seaborne pricing compared with the prior year. Nearly a third of this pricing impact was offset through sustainable cost reductions and improved longwall performance that Glenn discussed. These cost and operational improvements also more than offset a significant decline in seaborne pricing from the first quarter, leading to slightly higher sequential quarterly results.

Australian volumes increased to 9.7 million tons in the quarter, while revenues per ton declined 15% on lower seaborne pricing. During the quarter, we shipped 4.8 million tons of metallurgical coal at an average price of $96 per short ton. And we sold 3.1 million tons of seaborne thermal coal at an average price of $69 per short ton, with the remainder delivered under a domestic thermal contract.

Costs per ton declined to $72 due to better longwall production and sustainable cost savings. Strong production from our low-cost thermal mines also contributed to the cost improvement.

Turning to taxes, we realized income tax expense of $5 million compared to a targeted tax benefit due primarily to higher-than-expected earnings from our US operations. Both diluted loss per share from continuing operations and Adjusted Diluted Loss per share totaled $0.28.

That's a review of our income statement and key earnings drivers. Peabody generated positive operating cash flow in the second quarter, while capital expenditures totaled $40 million. With our lower first-half capital expenditures, we are again reducing our full-year capital spending range to $210 million to $250 million. We continue to have substantial liquidity of $2.1 billion, with nearly $500 million of cash and no significant debt maturities until 2016.

I'll close with a review of our outlook. For the third quarter, we are targeting Adjusted EBITDA of $140 million to $190 million, and Adjusted Diluted Loss per share of $0.53 to a loss of $0.40. These ranges reflect longwall moves at three of our four longwall mines, including a move at Metropolitan that was accelerated into the third quarter as result of stronger-than-expected production, lower realizations in Australia and the Western US, higher production rates at North Goonyella and the elimination of the carbon tax in Australia. Along with the implementation of further cost reductions.

I also refer you to our Reg G schedule in the release for additional quarterly targets regarding DD&A, taxes and other line items. So that's a brief review of our second-quarter performance. Operator, we would be happy to take questions at this time.

Certainly.

(Operator Instructions)

First we'll go to Michael Dudas with Sterne, Agee.

Good morning, gentlemen, and welcome, Glenn.

Good morning, Michael.

For Greg or Glenn, it appears, of course, the cost reduction strategies and the improvements that you've had have been quite positive. And it sounds like you mentioned 90% of your fleet will be owner-operated by early next year. How do you think Peabody compares with the rest of the Australian mining operations?

Are there others that have maxed out at the cost-reduction volume opportunities? And given where both met and thermal prices are, we should maybe start to see some more meaningful reductions at the margin from exports out of Australia in each market?

Maybe I'll start, and then let Glenn fill in some more detail. But if you recall, we've had a number of conversations around the competitive advantage that Peabody had with the opportunity to go to these owner-operator conversions. We've been able to move on the cost curve to a much greater degree, I believe, than any of our competitors in Australia because of that unique opportunity.

It's kind of bittersweet; it was bitter when we had all of these contractors, but it's been great that we had the opportunity to replace them, because the cost savings and the productivity improvements, as you heard the numbers, have been significant. So I think that has enabled us to bring our cost positions down to a much greater degree.

I think when you look at year over year, the numbers that I looked at would say that the last half of 2013, met exports are pretty much similar to the first half of 2014 met exports, which shows you that the growth in export volumes and production out of the Australia is starting to significantly slow as those projects came on in the latter part of 2013 and are moving in. So as we look forward, and we indicated, we think the supply growth continues to slow year over year, while demand continues to grow.

So Glenn -- Mike, I think one of the other part of your questions was: Now that we've converted to owner-operator, what more do we think we can accomplish within the context of the operations.

Yes.

Thanks, Greg. Well, certainly, having an owner-operator fleet greatly assists in our overall productivity. We're able to eliminate the contractor margin, greater workforce alignment, having a right-sized and matched equipment is critical going forward. And in instances where we didn't do the mine planning, it enables better mine planning.

We can't speak for the rest of the industry, but we are continuing to aggressively look beyond that in terms of other cost reductions, both through our procurement activities and our SG&A activities. And we believe that there's more opportunities ahead in that space, of which we built some of those factors in the cost guidance we've given for this year.

Excellent. My follow-up is relative to asset monetizations -- maybe an update on where you stand. Were there any targets that shifted? Could we see something that gets done over the next three to six months on the budget similar to what you mentioned in your prepared remarks of $160 million that you've monetized over the last 12 months? Thank you.

Well, I would just say, Michael, that continued asset monetization, particularly non-core asset monetization or specifically non-core asset monetization, is a high priority for us. And Glenn and the business development team are spending a significant amount of time looking at what we can continue to put into that portfolio of assets available for sale, and then where we can market those.

I think if you look out over the next six months to a year, certainly we would expect to be in a position to accomplish more of those. They're always going to be lumpy in their nature, in terms of when they occur. But I can tell you it's a major focus for us right now as we continue to look at increasing our cash intake from the sale of non-core assets.

Thank you, Greg.

John Bridges with JPMorgan.

Good morning, Greg, everybody. Just wanted to dig a little bit deeper into the improved prices that you mentioned. In footnote 2, you've got references to how they impacted with Q2. But I thought you said that they were going to impact going forward as well.

Hi, John; this is Mike. What happened is, with a contract negotiation of this nature, you continue to ship tons on a provisional basis. And then once we agree upon price, there's a cumulative benefit to that. And that's -- when you see in the footnote disclosure, you can see the impact of that adjustment on the second quarter, which equates to about $35 million. So not only do you have a catch-up for prior periods in the first quarter of this year, then we benefit from that higher pricing going forward in the back half of the year, albeit not at that cumulative catch-up level.

Does that run over into 2015?

It does.

What's the length of the contract?

It's multiple-year. I don't know exactly what year; I'd have to go back and check whether it's a 2016 or 2017 contract year.

Okay. And then as a follow-up, Goonyella, the improvement there, what sort of quantum of improvement do you see from the top coal caving? That was going to be pretty significant.

Well, from a design perspective, at the time of the implementation of the project, we talked about at least 0.5 million tons on an annualized basis. As you highlighted, we -- through the commissioning, we've been able to substantially improve output up 130% this quarter versus the previous quarter. We still think there's some further optimization to go, and that's through essentially automation across all shifts, as well as the improvement in yields. But those additional tons are included in the guidance that we've given.

Okay, excellent. Many thanks, guys. Good luck.

Caleb Dorfman with Simmons & Company.

Good morning, gentlemen.

Good morning, Caleb.

Last quarter we talked about the possibility of churning some met production in Australia. Greg or Glenn, can you give us an update on where you are in thinking through that process?

Sure. Couple of things: We talked about how we continually review those operations within our portfolio that are higher cost, and make sure that we can ensure their competitiveness. To the great activities and performance of the team down in Australia, we fundamentally are reshaping our cost profile at our operations.

So where we sit right now is really looking at those operations that remain higher in our portfolio, but with an albeit a lower cost profile than they had even a quarter ago. And looking at how much of those cost reductions are long term, structural, sustainable, and how do they impact the go-forward profitability based on the current market. We are still actively looking at all of those operations.

I would remind everybody: We take action when we have operations that are non-economic. We shut down a couple here in the US over the last two years. We shut down Wilkie Creek in Australia. We curtailed some of our volumes out of Caballo in the Powder River Basin.

So it's something we actively do, but where we find ourself in a situation is, we want to make sure we understand where that competitive endpoint is and how these operations will meet. And particularly, where the team is doing such a fabulous job lowering the cost profile, we want to make sure we get it right. So still on those evaluation stages and probably why it's taken a bit longer than it would otherwise because, frankly, the team is doing much better on the cost performance.

That's helpful. And then as a follow-up, if you are having so much success cutting the cost structure at these operations, what would it take to lower your annual cost guidance? Or is that just not possible yet because we are halfway through the year already and we have three longwall moves in Q3?

Yes, I think you've touched on one of the key issues around the third quarter. It's a culmination of multiple factors. When you undertake a cost-reduction program of this magnitude, there's a huge number of ideas generated that have to be filtered through, evaluated and put into place. So you look for full-year benefits. And some of that we had from last year that carries into this year. So there's more to do there. It's ultimately around how much we can realize from those cost reductions. But at the same time, what you'll see in the second half versus the first half is an increasing mix of metallurgical coal in our overall sales mix, and that raises our overall cost profile. So the culmination of both of those are reflected in our guidance for the year.

The other thing I'll go ahead and point out: We've had the carbon tax repeal. And what we've said previously is that could be a little more than $1-per-ton benefit on an annual basis, and it will benefit the third quarter. But we did incur that cost in the first two quarters, and we had already assumed in our cost guidance that that would not be there in the fourth quarter. So there's a limiting factor there.

So I think it's a function of where our overall volume comes out for the year, our cost-reduction initiatives, how quickly we can bring those together. And that will ultimately drive, along with our mix, what our cost profile will be for the full year.

Thank you.

Brandon Blossman with Tudor, Pickering, Holt & Company.

Good morning, guys.

Good morning, Brandon.

Let's see, let's start with a big one. Greg, obviously, or arguably, we are at the very bottom of this cycle. Is there, in the back of your mind, any opportunities for consolidation, maybe some domestic peers, as you guys go forward? Obviously, you're in a much better position than some of the peer group from a balance sheet perspective.

You know, it's an interesting question. And I think -- I'm sure it's probably one that I would have to ask all of those other peers as to their views.

We've said before that our strategy is, to make any changes to our portfolio, it should be to as portfolio managers upgrade our portfolio of operations. So we would be looking for what we would call tier 1 assets. And, frankly, right now we're not sure we see any of those quickly making it to market.

So we would be looking at asset additions of the highest quality and how they might fit. But in terms of just general industry consolidation, particularly when you're talking about, say, the eastern US, that's really something for others.

Got it. I think I understand the read-through there.

Back to near term -- question on Australian met production. Was that volume, the sales volume, a surprise, relative to where you had expected it to be coming into the quarter? And what were the drivers -- if that was a surprise, what were the drivers of that surprise?

I think if you look ratably, it was pretty well in line with what our expectations were, to perhaps slightly higher, which is -- given the fact that we were trying to ramp North Goonyella up on finalization of the commissioning for longwall top coal caving and we did have the move at Metropolitan, I'd say we were at the upper end of what our expectations are.

Yes, I think if there was any positive, pleasant outcome for the quarter, it was the fabulous performance at Metropolitan, in terms of making that longwall move and getting that new longwall up and running, and exceeding the ramp-up. And then continuing to perform extremely well through the quarter. And that was a big component of the second quarter.

Great. Thank you, guys.

Evan Kurtz with Morgan Stanley.

Hi, good morning, guys.

Good morning.

For my first question, just a quick one on Australia. Can you give us a sense of how much carry-over tonnage on the met side came in from the first quarter into the second-quarter numbers?

Yes, it was about 1.3 million tons of carryover from the first quarter into the second quarter, which is not an uncommon number. But I would just remind everybody, because of roll-over pricing, any carry-over tons for the third quarter is going to be essentially flat pricing.

All right, great, thanks. Second follow-up is just -- hearing some rumblings that, after a very long period of time here, there actually may be some progress being made on renegotiating some of the Australian take-or-pays. And I just wanted to confirm if you're hearing anything along those lines?

We're not hearing anything in particular. As Glenn has talked about, we've got a fairly extensive global outreach program to all of our suppliers as part of our procurement efforts. That includes transportation providers, as well as equipment and fuel and consumable suppliers. But in terms of anything specific, don't have any specific details or really have heard of anything major being announced.

Okay, great. Thanks, guys.

Justine Fisher with Goldman Sachs.

Good morning.

Good morning, Justine.

I just had a follow-up question, first of all, on the Western pricing. So I understood your answer that for the next quarter, PRB pricing will probably be -- or Western pricing, sorry -- will be down quarter over quarter just because the impact to that customer contract won't be as big as it was cumulatively for the second quarter.

But then, another question -- so my question is: How is PRB pricing going for you guys, aside from the customer contract? I know a lot gets lost in the noise with the customer contract, and given the fact that it's all over the West and not just PRB. But I think a lot of people had been focusing on the potential improvement in PRB pricing over the summer because of low inventories, because of where gas was, and we don't seem to have seen that. So are you guys just seeing utilities out of the market just on an overall demand-side because of weather? And do we need a hot August to get the PRB spike that some people had expected?

Yes, Justine, a couple things, to respond. I think in terms of customer activity, clearly we are seeing customers sit on the sidelines because you don't really need to buy something that you can't get delivered. And so while there's tremendous interest, there really isn't anything getting concluded because everybody is focused on getting their original 2014 contract deliveries. So that clearly is impacting the OTC market in what's happening there.

I will tell you that our conversations with utilities in a general perspective is extreme interest in looking at 2015, 2016, 2017 -- looking at now rethinking their inventory level targets for 2015 and 2016. And so I think the real step change will be as we continue to finalize 2015, and then multi-year contracts for 2015, 2016, 2017 and beyond, out of the Powder River Basin.

You'll note that during the quarter, we priced 35 million tons. About 27 million tons of that was under re-openers under existing contracts. Just for a flavor of that, almost all of that was priced in the early part of the quarter, and when obviously things were a bit stronger.

So I think for this year, we are going to have to really look at -- to the extent that the railroads continue to improve -- they're adding power, they're adding crews, they're getting through their maintenance period. And as that volume continues to flow, I think we will see utilities begin to step in and buy incrementally more tons, and then contract heavily or more heavily for 2015.

Okay, thanks for that color; that was interesting. And then the second question that I have is on China. I think that that was probably where a lot of us got the met market forecast wrong. Everyone knew that Australian supply was coming on line, and to your point made earlier, the export growth out of Australia has slowed. But I think that one thing that has kept met coal prices lower than what some may have expected is just a lack of aggressive Chinese buying in the market, driven by Chinese internal supply and demand.

So my question to you is: What are you guys hearing from Chinese buyers of met coal? Are they sitting on the sidelines now? How are their inventories? And are they much more comfortable sitting on their inventories because they view domestic supply as available, or for some other reason? What are you guys hearing out of China? And when do you think we could see that buying come back?

Yes, I think our sense out of China is it probably has a little bit more to do with the ratio of pig iron production to steel production. Steel production -- China is up around 3% year to date, which is pretty much in line with what the World Steel Institute forecast for the year. But pig iron production is only up about 1%, so clearly there's been destocking of steel inventory within China.

We are now seeing increase in iron ore imports. And starting to see signs that going into the back half of the year -- now that there's been a better balance between pig iron and steel production, and with the stimulus that China is -- that's starting to take hold -- we think the met coal demand imports through the back half of the year are going to pick up from the first half of the year.

So I don't think the answer is that China believes that they've got the ability to satisfy their own met coal production. I think the real question was the type of steel production or the pig iron production was not growing at the same rate, so it was softer than overall steel demand. And we see that reversing as we go through the back half of the year.

Great. Thanks very much.

Paul Forward with Stifel.

Thanks. Good morning.

Good morning, Paul

Just to follow up on that last question on the outlook for met coal, when you evaluate the customers' needs and inventory levels in this depressed market over the next few quarters, can you contrast the outlook that Peabody has for PCI compared to coking coal, and what's going to lead the way out of this downturn?

Well, certainly in terms of growth rates' demand, we see PCI within the context of the overall coking coal market, PCI growing faster than the other types. And that's just merely a reflection of the new steel capacity that's been built, which can all accept PCI-type coal. So we see that growth rate faster. I think when you look overall at where we're at in the met coal markets, there's no question that we've talked about having significant seaborne export growth as a result of projects that were commissioned back in the 2011/2012 time frame coming into the market.

We've also seen all of the major producers respond the way you would expect them to respond, in terms of driving costs down. One of the components and ways to drive cost down is to obviously increase productivity and reduce your output.

But we think when you look at both of those, we are through the, if you will, the low-hanging fruit or the large volumes that come into the supply side from either new projects or major productivity pushes. It's probably one of the reasons why the six-month to six-month last half of last year, first half of this year exports out of Australia are relatively flat, in terms of the change. And so as demand continues to grow and we are no longer seeing that volume growth, obviously these markets can turn very quickly.

All right. I appreciate the commentary, thanks.

Neil Mehta with Goldman Sachs.

Good morning.

Good morning, Neil.

You've done a great job here on CapEx; you continue to find a way to cut here, quarter after quarter. Do you think this new guise is a reasonable run rate to assume post-2014? How should we think about pluses and minuses, relative to this baseline on a go-forward?

Well, thanks for your comments. As you said, what we said in the past, that we are benefiting from a well-capitalized platform from investments that have been made over the recent past. We're still ensuring that we are making investments with a focus on safety and productivity. And in this year, we also -- particularly in the back half -- we also have Gateway North and some ongoing modernization work at Metropolitan to take advantage of what has been a great start-up of that activity. We think we can maintain these levels while sustaining capital for several years to come.

All right. And then, Aussie currency here has ticked up a little bit. How sensitive is BTU to every $0.05 change in the AUD/USD exchange rate, or whatever sensitivity metric that you can provide?

Sure. This is Mike, and that is typically the sensitivity that we look at. So for the rest of this year, a $0.05 change in the exchange rate has a sensitivity of about $25 million. We're relatively well hedged for the rest of the year at an average rate that's a bit below where the spot is today.

And for 2015, more of an unhedged year?

Yes, 2015 is a bit lower; it's mid-50% range. Ultimately, that's going to depend on what our cost profile is. Actually, our hedge rates have been ticking up a bit as we've taken cost out of the platform. But it's in the mid-50%s, so the sensitivity would be a bit higher. A $0.05 change would be about $60 million, holding everything else constant.

Perfect. And then, one of the things that's been striking is the lack of volatility in the global met markets. We've been stuck here at $113, or whatever the spot is, for several months. Why do you think volatility is this low in met right now? And how much liquidity is there in the spot markets that we see on a daily basis?

Well, a couple of things. First of all, you really do have to start with what the market fundamentals are. And we are going through and we've gone through a period of oversupply, ample supply, at a time when, even though demand was growing, it was growing at a slower rate than it was before.

So if you look at where we have been in terms of pricing for the last two quarters, and obviously we look towards the market turn, but you're really seeing a floor. And as the price has stayed longer at this level, we're seeing more and more of this high-cost production exit the market. And of course, when it exits the market, it's probably exiting the market for a fairly long period of time, if not permanent exits out of the market.

So I think, in terms of the turnaround, it doesn't take much to get this market in balance, and then it doesn't take much -- because there's no new capital going into this sector -- to where demand is going to outrun supply. And we all can see in the past what happens when that occurs. Sometimes it's a nice orderly ramp-up, and sometimes the discontinuity in the ramp-up can be pretty quick and pretty dramatic.

We'll just have to see what factors relative to production volumes and demand going forward look like. So overall, I think you really always have to come back to what are the market fundamentals underlying the price and the volatility at any point in time.

Perfect. Thanks, Greg; thanks, Mike.

Lucas Pipes with Brean Capital.

Good morning, everybody.

Good morning.

Glenn, my first question is on the owner conversions in Australia. I think you mentioned you're targeting over 90% by year end. Are you planning to take that to 100%? And if not, could you maybe elaborate on the reasons why some operations would be left out?

That's right, we think about 90% is about the levels we've got. And when we look forward, we've got some mines operating under a long-term contract. We've got others that perhaps the shorter life of those mines don't lend itself to going through the owner operator conversion. So as you've indicated, Moorvale, which we expect to get through at the end of this quarter, we're probably comfortable with that level of the overall portfolio.

That's helpful, thank you. And then, Mike, to go back to the third-quarter guidance versus second-quarter performance, would you directionally agree with the approach of taking out the $35 million from the Western segment?

And then, my numbers -- there would be a roughly $13-million gap between second-quarter performance and the midpoint of third-quarter guidance. Would that $13 million then essentially be a combination of slightly higher Australian costs to the longwall moves, and then also some of these carry-over tons that wouldn't be available in the third quarter?

I don't know if I can comment on the specific dollar amounts. As I mentioned previously, there is a cumulative effect on that contract that will tick down in the third quarter you've got. And with the longwall moves -- there's two longwall moves. In Australia, typically you have higher costs and lower volume. The third one is one that we begin in Colorado that's largely going to be driven by cost.

But those are the -- and then we'll have lower realizations on Australia pricing, as Greg noted, with carry-over pricing on met, as we said, with 20% -- or excuse me, with roll-over pricing on met. Since we typically would have a carry-over benefit in a falling market, since that's flat quarter to quarter, then there's no benefit there as well. So it's a combination of all of those, slightly offset by the benefit from the carbon tax repeal.

Great. Well, I appreciate it. Thank you.

Mitesh Thakkar with FBR Capital Markets.

Good morning, gentlemen. Congratulations on the quarter.

Thank you, Mitesh.

My first question is on the Gateway mine. The transition to the new reserve development -- how would it impact OpEx, if it all? And any additional CapEx you need to spend -- if you can split it out of the total guidance, that would be great.

Sure. In terms of the capital for the Gateway development, my recollection is it's somewhere in that $60 million to $65 million range.

This year.

This year. And then, there'll be some additional capital next year. Glenn, maybe you want to fill in.

And in terms of cost, it's a low-cost mine. Operating in that region has been highly successful for us, and we expect a very similar cost profile going forward by taking the same team and same equipment overall. So it's a pretty low-cost solution to continue to sustain the production that we've seen, the success that we've seen from Gateway, across to that northern area.

All right. And just a follow-up to that: When you think about your total CapEx spending for this year, obviously you have been bringing it down over the last several quarters. And then you think about the $60 million, $65 million still from the Gateway contribution. Shouldn't your more normalized maintenance CapEx be lower by almost that amount? If not, what am I missing here?

I think that the difference would be: You've got sustaining capital, and in the past we've said that's $1.25 per produced ton, or something in that range. And then that gets supplemented by some of these projects as we have replacement mines, organic growth and things of that nature. So our sustaining capital has come down over time as we benefited, as Glenn noted, from the prior investments that we've made.

So as that starts to filter its way through, as we said, we can keep capital at these levels through the period of the LBA payments. Eventually you get to the point where some of those replacements have to take place. So while the Gateway North spending may come off or the replacement activity, it's going to get replaced somewhat by some more sustaining capital, as you move back into that phase.

Great. And can you remind us when does the PRB LBA go off?

Through 2016.

2016. Okay, perfect. Thank you very much, guys; I appreciate it.

Timna Tanners with Bank of America Merrill Lynch.

Good morning.

Good morning, Timna.

I have maybe a really basic question. But I was just hoping you could provide some color with regard to the third-quarter guidance. As usual, it's a pretty wide amount of EBITDA forecasting, which I appreciate. But in light of the known price for a lot of your PRB and your met tons, I was just wondering if you could help us understand what kind of factors could drive the lower-end or the higher-end range that we can try to keep an eye on, and maybe the sensitivities to the extent possible? Thanks

Sure, Timna; this is Mike. So one of the things we talked about are our three longwall moves, which is quite a few in any given quarter. When I had mentioned previously around our expectations on met production, Metropolitan in the second quarter was part of that. So it's one of these as to longwall moves -- we do a lot of these. We're very good at it, but sometimes things happen, so we built some variability into our guidance for things like that.

We continue to look at our shipments; shipment deferrals can impact us. We had some weather at the end of the first quarter, so that will drive some variability as well. And I think that those are probably two of the largest. The third one would be, given the rail issues that we've had in the Powder River Basin, that that could potentially impact what our volume is for the third quarter.

That's more volume- and cost-driven than anything on the price side?

That would be volume- and cost-driven, yes.

Got you. Okay, that's all for me. Thanks a lot.

Jeremy Sussman with Clarkson.

Hi, good morning. Greg, you mentioned rail issues in the Powder River Basin. Any sense if they're actually getting better? And what -- if you can elaborate on what exactly do you think has been the issue on that front?

Well, couple of things, Jeremy. If you just look at July performance over June, I think June was one of the lowest-performing months that we've seen in a number of quarters. July is falling in right behind that, even though we've started to see some incremental improvement. But if you go back year over year, year to date in 2014 versus the same period in 2013, the railroads are up about 4% in volume. The issue is: The demand was significantly higher than a 4% up.

So the railroads in the past, when they find themselves in these situations, it's all about adding power and it's all about adding crews. And then it's all about rebalancing their network to try and get higher fluidity and higher speeds on the track. Now, the weather has not helped them. We've had a number of weather situations that have caused derailments just about the time that they were getting up to speed.

So while it's frustrating for us, it's frustrating for everybody else in the coal sector. I'm sure it's extremely frustrating for the railroads as well. But this is a situation we've worked through before. It is about crews and it's about power, and getting out of and then completing some critical maintenance, and then not having that as an impediment to free-flowing rail systems.

So traditionally, the third quarter of the year is one of the highest shipping quarters of the year. As we continue to work through the rest of this month, August and September, we would expect to see the rail system begin to increase and perform much better, and then hopefully that continues through the end of the year. And then with the changes that they are making, we would expect their ability to deliver in 2015 to be much higher.

Okay, so not a whole lot of improvement at least yet, but they're making the changes that you expect. That should be the case more in the back half of this year into next year?

Correct.

Great. All right, well, thanks for the call.

And with that, I'll turn it back to you, Mr. Boyce, for any closing comments.

Well, thanks, operator. And I want to thank everybody on the call today. Also would really want to thank the entire Peabody team for their hard work and efforts to improve productivity, reduce costs and ensure safety. We're all seeing the results of that for the second quarter.

We continue to have a leading presence in the high-growth regions, and we will continue to take those steps necessary to deliver increasing shareholder value. So with that, I appreciate your interest in BTU, and we look forward to keeping you appraised of our progress during the quarter. Thank you.

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.