Peabody Energy Corporation (BTU) on Q1 2023 Results - Earnings Call Transcript
Operator: Good day, and welcome to the Peabody First Quarter Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Karla Kimrey, Vice President of Investor Relations. Please go ahead.
Karla Kimrey: Good morning, and thank you for joining Peabody’s earnings call for the first quarter of 2023. With me today are President and CEO, Jim Grech; and CFO, Mark Spurbeck. 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. Now, I’ll turn the call over to Jim.
Jim Grech: Thanks, Karla, and good morning, everyone. In the first quarter of 2023, Peabody’s diverse portfolio produced another strong quarter of financial results. For the past 18 months, we have aggressively been de-leveraging our balance sheet and we remain committed to a disciplined approach for capital allocation. In April, we announced a shareholder return program that will consist of a fixed dividend component, share repurchases and variable dividends. We are starting a program with a heavy weighting towards share repurchases and expected transition to a plan including share repurchases, variable dividends, and fixed dividends. Before expand on the markets and operations, I would like to thank our global employees for their continued focus on working safely and efficiently. Without the dedication of our talented workforce, we would not be in the strong financial position we are in today. Now, turning to global coal markets. Global thermal coal prices stabilized in March and recently showed improvement amid supply disruptions in Colombia, South Africa, and ongoing strong demand from India, China, and ASEAN countries. Although shoulder seasoned conditions and healthy fuel stocks are influencing demand elsewhere. China has ended its unofficial ban of Australian coal imports providing additional demand for Australian thermal coal, which has resulted in Australian import rates of over 4 million tons per month. Domestic coal production and renewable generation have been strong to start the year. However, import demand has been higher year-over-year as overall coal demand has been strong. While it is early in the year, the first quarter of 2023 run rate of imports this close to an all time high of approximately 400 million tons. India too has shown signs of improved economic activity early in 2023, resulting in increased power demand, and elevated coal imports despite elevated domestic production. Overall, demand for seaborne thermal coal is robust and supply it remains constrained across the globe. However, we acknowledge that lower LNG prices and high coal inventory levels in Europe are short-term headwinds in terms of pricing across the globe. Within the seaborne metallurgical coal market, the quarter was characterized by ongoing volatility as global macroeconomic turbulence, counteracted improving demand, and further weather induced supply disruptions in Australia. Met coal price volatility continued and early March increases eroded in the second half of the month amid macroeconomic sediment. To the lowest level since mid-January, albeit remaining healthy at around $250 per metric ton for headline hard-coking coal. In the United States this quarter, natural gas prices have weakened further due to near record gas production levels. U.S. natural gas prompt prices are approximately $2.25 per mmBtu. EIA is currently forecasting Henry Hub natural gas spot prices to increase above $3 per mmBtu during the second half of 2023 in response to higher feed end volumes to LNG exports while natural gas production rates remain flat. Overall, near-turn demand for U.S. thermal coal is expected to be muted as a result of low gas prices and stronger renewable generation. However, as summer weather brings stronger total low demand and increased LNG export pressure gas prices, coal demand has the potential to increase in the second half of 2023. Now, moving on to our operating segments. Our seaborne thermal segments first quarter exports were stronger than anticipated due to better than expected production out of [indiscernible] As a result of more efficient mine sequencing and Wambo Open-Cut as a result of improved productivity. Cash cost per tons were lower than anticipated due to the increased coal production as well as lower overall spend. Our Seaborne met production was down from the fourth quarter due to lower volumes at Shoal Creek and rail and transport congestion on Australia due to heavy rains earlier in the year. On March 29, 2023, the Shoal Creek mine experienced and the J2 longwall panel, a fire involving void fill material utilized to stabilize the roof structure of the mine. All mine personnel were safely evacuated from the mine. MSHA has allowed mine rescue equipped personnel into the mine at various times to assess the situation and perform work in preparation for installing temporary seals. On April 26, MSHA approved a temporary sealing program limited to only the affected underground area, which consists of the J2 panel and previously mined J1 panel. At North Goonyella, we continue to advance redevelopment efforts and expect to spend approximately $120 million as planned in 2023. As a reminder, North Goonyella is a premium grade hard coking coal longwall operation in Queensland, Australia with over 70 million tons of reserves. This operation’s grade of coking coal is considered to be the cornerstone of coking coal feedstocks globally. North Goonyella is expected to meaningfully increase Peabody’s metallurgical coal production and generate approximately 25% returns at historical long-term prices in this initial phase. In the U.S., PRB sales volumes recovered due to higher customer nominations and better rail performance. We are able to pull forward some maintenance into the first quarter to improve truck availability and lower cost for the remainder of 2023. Our other U.S. thermal mines continue to perform well as expected. We are still essentially fully committed at our U.S. domestic operations for 2023, and the railroads are showing improvement in their service levels. While we are sold out, we are working with our customers to be responsive to their needs while retaining the value in our contracts. Our guidance reflects our current assessment of sales going forward, taking to account the current U.S. market conditions. I’ll now turn it over to Mark to cover the financial details.
Mark Spurbeck: Thanks, Jim. In the first quarter, we recorded net income attributable common stockholders of $269 million or $1.68 per diluted share and adjusted EBITDA of $391 million, a nearly 20% increase from the prior year quarter. We reported operating cash flow of $386 million and had $892 million of cash at March 31, after completing the pre-funding of all long-term mine closure and reclamation and adjusting cash collateral for other performance obligations. More importantly, we delivered on our commitments to amend the surety agreement and eliminate the bank letter of credit facility. With our balance sheet initiatives complete, we were pleased to announce a comprehensive shareholder return program. The board has authorized a $1 billion share buyback program and implemented a regular quarterly cash dividend of $0.075 per share for current yield of approximately 1.25%. Under the program, first quarter performance will result in $170.2 million being returned to shareholders, including nearly $160 million for share buybacks or about 6.6 million shares at the current price, better than 4.5% of outstanding common shares. Turning now to the first quarter segment results. Seaborne Thermal recorded $164 million of adjusted EBITDA. As expected, export shipments were lower than the prior quarter due to a longwall move at Wambo, but exceeded expectations by 300,000 tons due to higher than anticipated production from both Wilpinjong and the Wambo Open-Cut joint venture. Higher production rates help drive cost to a lower than expected $51 per ton. With the winding down of the legacy hedge program, we realized an average export price nearly the same as the fourth quarter, despite a 33% decline in the average New Castle benchmark. Overall, the segment reported a 47% adjusted EBITDA margin. The Seaborne Metallurgical segment generated $90.8 million of adjusted EBITDA. As expected volumes were lower than the prior quarter due to heavy rains in Queensland and the challenging conditions at Shoal Creek. The average realized price was flat quarter-over-quarter, while cost increase to $151 per ton due to lower production, resulting in adjusted EBITDA margins of 31%. The U.S. thermal mines delivered a $100 million of adjusted EBITDA. 21% better than the prior quarter, despite challenging market conditions. The PRB mines generated 35.8 million of adjusted EBITDA. Revenue per ton was a record $13.89 as we continue to benefit from the roll off of lower price contracts. 22 million tons were shipped on forecast, while costs of $12.26 per ton were above expectations as we opportunistically pulled certain equipment repair costs forward into the first quarter. The other U.S. thermal mines delivered 64.2 million of adjusted EBITDA. Production and costs were both in line with expectations resulting in adjusted EBITDA margins of 26%. Now turning to the balance sheet. At March 31, we had $892 million of cash. During the quarter in connection with the surety amendment and elimination of the bank letter of credit facility, we increased restricted cash and collateral to 937 million, including 760 million for reclamation and mine closure and 177 million for other performance obligations such as long-term port and rail commitments, black lung workers’ compensation, and legacy pension requirements. Importantly, the revised surety agreement eliminates a substantial liquidity risk by establishing a collateral cap of 56% of the bonded amount and guarantees Peabody’s access to third-party bonding through December 31, 2026. Combined, we believe we have positioned Peabody with the best balance sheet in the industry, free from uncertain credit markets and built to withstand market cycles. Looking forward, we will maintain rigorous discipline to capital allocation, expecting to return at least 65% of available free cash flow to shareholders will never receive the company’s financial resiliency. Lastly, let’s turn to our outlook. Our full year guidance remains unchanged with updates limited only to priced positions. As a reminder, Shoal Creek was transitioning in 2023 until production ramped up later in the year with better conditions. Currently higher than anticipated production from Metropolitan is partially offsetting lost production from Shoal Creek. For the second quarter, we are expecting improvements in our Seaborne segment’s performance and another consistent reliable quarter from the U.S. thermal segments. Seaborne Thermal export volumes are expected to be 500,000 tons higher as Wambo Underground completed a longwall move in the first quarter and Wilpinjong continues to produce at first quarter’s heightened levels. Approximately 1 million tons are priced on average at 243 and 1.2 million tons of high ash product and 400,000 tons of Newcastle product are unpriced. Costs are expected to remain at $50 to $55 per ton. Seaborne metallurgical volumes are projected to be 400,000 tons higher as CMJV shipments recover from the impacts of heavy rains that impacted logistics in Queensland during the first quarter. Above 500,000 tons are priced on average at 244 and remaining tons are expected to achieve 75% to 80% of prevailing hard coking coal prices. Costs are expected to decline to $135 to $145 per ton. In the PRB, we are projecting shipments of 21 million tons priced on average at $13.70. And costs are expected to be $12 per ton. Full year price volumes of 91 million tons are now 1 million tons less than previous expectations better reflecting contract minimums given market conditions. Other U.S. thermal volumes are expected to be 4.3 million tons at an average price of $52.50 and cost of $41 per ton. Full year priced volumes of 18 million tons are also now 600,000 tons less. We previously anticipated annual cash interest payments of 60 million inclusive of surety bond fees with a substantial increase in restricted cash and collateral generating a conservative U.S. treasury like yield. We no longer anticipate significant net cash interest for the year. In summary, the company continued to generate substantial free cash flow. We amended and extended the surety agreement. We positioned Peabody with the most resilient balance sheet in the industry. We initiated a robust shareholder return program and continued to invest in long-term growth at North Goonyella. I’d now like to turn the call over for questions. Operator?
Operator: [Operator Instructions] The first question today comes from Lucas Pipes with B Riley. Please go ahead.
Operator: The next question comes from Nathan Martin with The Benchmark Company. Please go ahead.
Operator: Next question comes from Katja Jancic with BMO. Please go ahead.
Operator: The next question comes from Michael Dudas with Vertical Research Partners. Please go ahead.
Operator: [Operator Instructions] The next question is a follow-up from Lucas Pipes with B. Riley. Please go ahead.
Operator: There are no further questions at this time. So I would like to turn the conference back over to Mr. Jim Grech for any additional or closing remarks.
Jim Grech: Well, I’d like to thank you all for joining us today, and 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 your continued support. Operator, that concludes our call.
Operator: Thank you. That does conclude today’s teleconference. We do appreciate your participation. You may now disconnect.
