Peabody Energy Corp (BTU) 2023 Q2 法說會逐字稿

Welcome to the Peabody second quarter earnings call. (Operator Instructions) Please also note that this event is being recorded. And at this time I would now like to turn the conference over to Karla Kimrey, Vice President of Investor Relations.

Good morning and thank you for joining Peabody's earnings call for the second quarter of 2023. With me today are President and CEO Jim Grech, CFO Mark Spurbeck and our Chief Marketing officer, Malcolm Roberts. Within the earnings release you'll find our statement on forward looking information as well as a reconciliation of non-GAAP financial measures. We encourage you to consider the risk factors referenced there along with our public filings with the SEC. I'll now turn the call over to Jim.

Thanks, Karla, and good morning, everyone. In the second quarter of 2023, our unique diversified portfolio allowed us to successfully execute against our plan while operating in a volatile market environment. In the quarter we initiated our annual shareholder return program with a fixed dividend and a meaningful share buyback plan. We returned $262 million to our shareholder return program in the last quarter. Before I address the markets, I want to thank our global employees for their continued focus on working safely and efficiently. Now turning to the global coal markets. Seaborne thermal coal markets remain volatile with prices declining during the second quarter. Comparatively high coal and natural gas inventories in the northern hemisphere following an unseasonably warm winter have weighed on demand, leading to a weaker pricing environment for high energy thermal coals.

China's year to date, thermal coal imports point to significant increases in consumption of seaborne thermal coal, with an annual thermal coal import run rate of approximately 400 million tonnes per year, representing approximately a 90% increase over 2022 levels. India too has shown signs of improved economic activity during the first half of 2023 and with it increased power demand and elevated coal imports. Overall demand for seaborne thermal coal is robust and supply remains constrained across major supply regions.

We anticipate that the onset of peak summer energy demand in the northern hemisphere, followed by restocking and preparation for winter, will contribute to a normalization of inventory levels providing support to the seaborne thermal coal markets. Within the seaborne metallurgical market, global crude steel output during the quarter was variable with interruptions at European blast furnaces offset by notable year on year crude steel production growth in both China and India. Metallurgical coal supply has remained constrained primarily due to residual impacts of wet weather events in Queensland during the first quarter of 2023.

The rate of exports from Queensland remains below historical rates and premium hard coking coal pricing remains elevated, finishing the quarter at $233 a tonne. The outlook for the metallurgical coal market remains positive with subdued seaborne supply combined with anticipated increases in import demand for steelmaking raw materials along with improving crude steel production rates in Europe, North Asia and India.

In the United States, overall electricity demand decreased nearly 4% year over year, negatively impacted by weather. Through the 6 months ended June 30th, 2023. Electricity generation from thermal coal is declined year over year due to low gas prices and nearly level renewable generation. Pull Inventories have increased approximately 50% during the 6 months ended June 30th, 2023. Natural gas prices have recovered modestly from the lows of earlier this year with US natural gas prompt pricing at $2.65 per MMBtu. The is currently forecasting US natural gas prices to average $2.80 per MMBtu in the second half of 2023, up from the $2.40 per MMBtu in the first half of the year. Overall, near-term demand for US thermal coal is anticipated to improve in the third quarter in comparison to the second quarter.

Now moving on to our operating segments. As expected, our seaborne thermal coal exports came in at 2.6 million tonnes. Higher than the prior quarter as the Womble longwall move was completed and wet weather, which impacted the first quarter, was abated. Segment costs per ton were in line with the first quarter as higher production was offset by the timing of equipment repair and maintenance costs. Our seaborne met coal shipments were stronger than expected at 2 million tonnes due to strong sales out of the CMJV complex. In the second quarter. We had good success with our operations at Shoal Creek as we recovered from the first quarter fire. During the second quarter we were able to seal off the 2 longwall panels in the panel area of the mine. We resumed with development coal production in the new panel area where we anticipate better mining conditions.

A new longwall kit for the mine is expected to be delivered by the end of the year. In the PRB shipments were lower than anticipated. Shipments were impacted by low cost, low customer demand due to low natural gas pricing, high coal inventory levels and the June tornado event at Nahm. In addition, the basin had an abnormal amount of rainfall which caused a slowdown at some of our operations. The second quarter is typically the wettest in the basin, which also impacts the transportation corridors. In other US thermal shipments were impacted by lower customer demand as a result of low natural gas prices and high utility inventories.

Looking solely at our sole position, PRB volumes should increase in the second half. But consumption of PRB coal has been down, given low natural gas prices and generally unfavorable weather conditions in the first half. We are working with our customers to be responsive to their needs while retaining the value in our contracts. Our adjusted guidance reflects our current assessment of sales going forward, taking into account the current US market conditions. In addition to our active operations, the company continues to advance redevelopment efforts at North Goonyella with key project milestones and critical path items on track.

Activities to date have included procuring equipment, refurbishment and replacement of surface infrastructure Zone A remediation completion of drilling program for Zone B, re ventilation and advancing work necessary to reenter Zone B. The next significant milestone reventilation and reentry of Zone B is currently targeted for mid September subject to regulatory approval. Since commencing redevelopment at North Goonyella in late 2022, the company has invested $53 million of the initial approved redevelopment capital expenditures, which includes further ventilation, equipment, conveyors and infrastructure updates and anticipation of reaching development coal production.

Subject to regulatory approvals in the first quarter of 2024. Before I turn it over to Mark, I would like to address a tornado event that impacted NARM on June 23rd. Our North Antelope, Rochelle Mine and the PRB was struck by an F2 tornado. Six people did have to temporarily go to the hospital, but fortunately no one was critically injured. While we are back to full shipments. We did have considerable damage to the surface buildings. We appreciate all our employees efforts in returning the mine to full operations. I'll now turn it over to Mark to cover the financial details.

Thanks, Jim. In the second quarter we recorded net income attributable to common stockholders of $179 million or $1.15 per diluted share and adjusted EBITDA of 358 million. The second quarter results included a $34 million charge for the write off of certain underground development and equipment at Shoal Creek and property losses related to the tornado at NARM. The company's leading diversified portfolio of mines generated 353 million of cash flow from operations enhanced by 109 million working capital benefit, which will largely reverse next quarter With our balance sheet built to withstand the volatility and lower prices we saw in the second quarter, we were pleased to return 262 million to shareholders, including a cash dividend of 11 million and share repurchases of 251 million. This reduced our share count by 8.3% in just one quarter. We currently have 749 million of remaining authorization under the 1 billion share repurchase program.

We remain committed to returning at least 65% of annual available free cash flow keeping returns right sized based on operating and financial performance after the recently declared second quarter cash dividend of 7 and one half cents per share, at least 142 million remains available for shareholder returns expected to be used for additional share repurchases. Turning now to the second quarter segment results. Seaborne thermal recorded $198 million of adjusted EBITDA, 20% higher than the prior quarter despite a significant decline in the average Newcastle benchmark price. Higher production rates drove costs to the low end of our guidance range and higher export shipments resulted in adjusted EBITDA margin of approximately $50 per tonne.

The seaborne metallurgical segment generated 103 million of adjusted EBITDA. Shipments of 2 million tons exceeded expectations and were over 50% higher than the previous quarter due to higher sales from the CMJV as they recovered from first quarter rains. Costs were $13 per tonne lower, primarily due to higher production and lower sales price sensitive costs. The US thermal mines produced 78 million of adjusted EBITDA impacted by fewer shipments due to low natural gas prices and higher utility customer inventories. The PRB mines generated 26 million of adjusted EBITDA tons sold were 3.1 million tons lower than the prior quarter. We lost approximately 1 million tons at the end of the quarter due to the tornado that struck the mine.

And volume on 2 requirements contracts were 1.2 million tons lower than expected. The other US thermal mines delivered 52 million of adjusted EBITDA tons sold decreased by approximately 700,000 tons compared to the prior quarter. But a laser like focus on operations drove costs down to less than $40 per ton. Maintaining adjusted EBITDA margins of 26%. With the first half complete, we've updated our outlook for the remainder of the year. Seaborne thermal volume has increased 500,000 tonnes to 15 to 16 million tonnes due to higher expected production at Wilpinjong. Seaborne metallurgical volume is expected to be 500,000 tonnes lower at 6.5 to 7.5 million tonnes due to less than previously anticipated production at the CMJV and Shoal Creek.

PRB Shipments have been revised downward to 80 to 85 million tonnes, reflecting the impacts of low natural gas prices, utility inventories and mild weather to date in major coal generation regions. For similar reasons, other US thermal volumes have been reduced to 16.5 to 17.5 million tonnes. We should note that committed sales volumes exceed our thermal guidance given the continued low natural gas price and rail limitations, We expect customers in limited situations to request deferral of volume into next year. We will only entertain such requests if we preserve the full economic value of existing commitments specifically for the third quarter. Seaborne thermal export volumes are expected to increase to 2.7 million tonnes.

Approximately 300,000 tonnes are priced on average at $181 per tonne and 1.4 million tonnes of high ash product and a million tonnes of Newcastle product are unpriced. Costs are expected to be lower quarter over quarter at $45 to $15 $50 per tonne. Seaborne metallurgical volumes are projected to be lower than the second quarter at 1.5 million tonnes due to a longwall move at metropolitan. 200,000 tonnes are priced at $216 and the remaining unpriced volumes are expected to achieve 70% to 80% of the premium hard coking coal price Index. Lower premium hard coking coal prices and a widening gap to PCI coals are anticipated to result in more favorable price sensitive costs, lowering expected costs to $115 to $125 per tonne.

In the PRB, we are anticipating shipments to increase to 21 million tons at an average price of $1,380 per ton and cost of approximately $11.75 per ton. Other US thermal shipments are expected to increase from the second quarter to approximately 4.2 million tons at an average price of $50.50 per ton and costs of approximately $41 per ton. In summary, we have a unique diversified portfolio of assets and the necessary financial flexibility to succeed in all markets. We will maintain rigorous discipline to capital allocation and expect to return at least 65% of annual available free cash flow to shareholders. Operator I'd now like to turn the call over for questions.

(Operator Instructions) At this time we will take our first question from Lucas Pipes with B. Riley?

And great to see those capital allocation to shareholders during the quarter. And I wanted to start my first question on that point of shareholder returns. You noted the 142 million that remain available. So should we kind of think of as those being used for buybacks over the next 3 months? So kind of you deploy 142 million to buybacks between now and the time you report Q3 results? And then essentially when those Q3 results get announced, you re-up it with whatever the free cash, 65% of the free cash flow during available free cash flow from Q3 results. Is that kind of the cadence now going forward?

Yes. Good morning, Lucas and thanks for hanging in on us on I know it is a very, very busy earnings call day so I appreciate the questions. With regard to the shareholder return program, you are correct know we remain committed to returning at least 65% of available free cash flow on an annual basis and you'll see the calculation in the earnings release that sums up to that. Certainly last quarter we did we did above the 65%.

That's but it's not like it's not like it'd be more than 142 million over the next 3 months in terms of buybacks. You would you would kind of reconvene in 3 months, look at Q3 results and that would determine the forward pace.

Again, we're going to we're going to return at least 65%. And you know, we don't we don't share any specific details. It's fair to think of it that way. Lucas But I'll refer you to last quarter where we did do a bit more than the 65% in the last quarter, but we will chew it up each quarter and show 65% on a year to date annual basis.

Now that's clear. And then turning to operations. Good to see the increase in the thermal guidance for the year. I wondered if you could maybe elaborate a little bit on the key drivers for that and then on Shoal Creek. Should we think of that mine as a one long wall mine going forward?

Yes, I'll talk about Shoal Creek first and Hi Lucas Jim Grech here. Good to hear your voice again. Yes so-- the we have the new long wall coming and it's a delivery has already started. So we're expecting to get that delivered here by the end of this year and have it operating very early into 2024. The intention prior to the mine fire was to have the 2 longwalls operating at the mine and we still have the second longwall. It's behind the sealed area and we have to wait until we have permission to enter back into that area, Lucas to see the status of the of the equipment and what we can do with it. Can we start operating again in that panel? Do we have to extract the long wall? So I would say the timing and the certainty of the second one is in question. The first one, the new longwall certainly is on track to be installed. So I would say by the end of this year we're certainly a one longwall mine next year we're for sure a one longwall mine with the potential for 2. But we really don't know till we get back behind those seals which is, you know, at best a couple of months away.?

And maybe I'll follow up on the seaborne thermal. A couple of things for the additional tonnes, you know, more higher ash tonnes out of Wilpinjong and the Wambo Open cut joint venture doing extremely well. So volumes are up there. You also note a pretty good reduction in costs for the next quarter and again I think it's Wambo open cut the production going up and costs doing better as well as some additional wilpinjong tonnes there and also some lower sales price sensitive costs?

And Lucas, another point I wanted to make on Shoal Creek was even though we're looking at the one longwall, it's in the panels where we have started our development Coal mining and the coal seams look very good, very good conditions for us right there. So we've given you know, we've talked about the output of the mine before and I'm confident with the one longwall mine in the mining conditions we're in, you know, there's going to be no drop off from our expectations from the production levels that we've had in the past. We're going to be again, the panel has some very, very good mining conditions from what we're seeing so far.

Very helpful color on both fronts. Thank you for that. And then a quick follow up on the on the on the JV And I looked at the cash flow statement for the quarter and contributions to JV were roughly equal to distributions from the JV and that's if that only Middlemount or does that also include Wambo And if it is Middlemount what we expect maybe additional cash to come in from that side would appreciate your perspective and clarification on that point.

Yes, Lucas, It is only Middlemount there, so not a lot of cash flow from Middlemount currently. I'd expect the results to be kind of similar in the second half of the year as well. Certainly not what we saw last year.

(Operator Instructions) Our next question here will come from Nathan Martin with The Benchmark Company.

Maybe I'll just start on North Goonyella. Appreciate the update there in the release. Could we maybe get a refresher on the expected spending and timing of that spending on the project as you guys move towards anticipated longwall production in 2026? And then what and when are some of the regulatory hurdles you expect?

Yes. Nate the first we've got it in 2 tranches of spending as we've discussed in the past. The first one is $140 billion, which we're spending this year. A lot of that this year and into early next year. And the and what we're saying is the major regulatory hurdle that we have to overcome or I shouldn't say overcome to get approval of is the permission to reenter the Zone B area which is the sealed area. And that's a combination of degassing that area and the ventilation of that area.

And we expect to be able to reenter Zone B in sometime in September. That is the major regulatory hurdle that we have to get through. So after we can reenter Zone B and we get, you know, a good assessment of the situation there, then we have to go back to with our board and get the, you know, the approval to spend the remaining. It's approximately $230 to $240 Million. And then that would get us into, you know, full longwall production there early in 2026. So again, I'd just like to reiterate the major regulatory hurdle that we have to get through is the permission to reenter Zone B and we're looking for that to come sometime in September of this year?

Great. Jim, appreciate that refresher there. And then maybe just shifting gears over to the domestic thermal side of the house. You did obviously update your guidance there. You talked a little bit about some of the conversations you're having with your utility customers. Do you guys believe, at least at this point that that guidance fully incorporates potential domestic thermal deferrals or do you still having ongoing conversations and negotiations?

Nate, we believe that fully encompasses all of the potential deferrals in the guidance that we've shown there?

Okay. Got it. And then actually I'll have you as well. In the past you've been helpful kind of given us an idea of where you guys are committed for 2024 in PRB and other thermal. Any updates you can give us there. Maybe what percentage of tons are committed there and off of what base would be great as well.

Yes, it's about 70% committed at midpoint of guidance. I'd say there hasn't been a specific change over the quarter that was specifically done on purpose given the fact that it's been a pretty slow market declining price market. So we'll look to see more coming through here in the in the next quarter as the market picks up. So again, 70% on the Illinois Basin and probably about 85% in the PRB for next year?

Perfect. Appreciate that update there, Mark. And then maybe just one kind of bigger, bigger picture question for you, Jim, to wrap up. There's some M&A opportunities out there, a few medical assets in Australia up for sale. I know you likely can't make specific comments regarding Peabody and M&A, but could you kind of remind us how you guys think about and rank potential purchases of maybe seaborne med assets or thermal assets and how you kind of compare those to maybe the progress you're making on reopening North Goonyella?

Nate what I would say is in orders of prioritization, you know, organic growth, investing in our own assets, extending leases, investing in equipment to bring down costs, increase efficiencies. Those always have the best returns for our shareholders and those always are our number one emphasis or number one priority and that's what's exhibited by North Goonyella. Then secondly, if we do get into M&A and I'm not saying we are or we aren't, you know, we've stated many times and it hasn't changed that our focus is on the seaborne markets. You know, we see the seaborne markets as growth markets in demand in both metallurgical and thermal. You know, we have more much more of a focus on the metallurgical seaborne markets, but we certainly would look at both markets for potential growth in the future?

Very helpful. I appreciate the time, guys. Best of luck in the second half?

Our next question will come from Lucas Pipes with B Riley.

It's a quick one. In terms of hedges on the thermal coal side, I may have missed it, but I didn't see a disclosure in the press release this morning. And so I wondered if you could remind us what's outstanding there. And I know there was cash collateral requirement in the past as those hedges roll off. Could there be cash coming back here in the third quarter from that side would appreciate just discussion and I think we're close to the end. So it would be good to just make sure I have everything in my model as that program concludes.

Yes. Lucas, the program has fully been unwound at June 30th, so all the initial margin is returned. I think it was about 11 million in the second quarter and all the variation margin was returned via, you know, higher realized prices and baked into our EBITDA results. So program is fully, unwound and we're no longer got hedges for coal sales.

That's very good to hear. That's it from now. I appreciate the color and best of luck to you and the team?

And with that there are no further questions. So I'd like to turn the conference back over to Mr. Jim Grech for any additional closing remarks?

Thank you all for joining us today. I'd especially like to thank our employees for remaining focused on safety and for continuing to execute on our various initiatives. I'd also like to thank our customers, investors, insurance providers and vendors for their continued support. And finally, I'd like to thank everyone in the Gillette community who responded during the tornado at NARM.

Operator, that concludes our call.

The conference has now concluded. Thank you very much for attending today's presentation. You may now disconnect your lines and have a wonderful day.