CONSOL Energy Inc. (CEIX) on Q1 2021 Results - Earnings Call Transcript
Operator: Good morning, and welcome to CEIX First Quarter 2021 Earnings Call. All participants will be in a listen-only mode. After this presentation, there will be an opportunity to ask questions. Please note that, this event is being recorded. I'd like to turn the conference over to Mr. Nathan Tucker, Director of Finance and IR. Please go ahead.
Nathan Tucker: Thank you, Nick and good morning, everyone. Welcome to Consol Energy's first quarter 2021 earnings conference call. Any forward-looking statements or comments we make about future expectations are subject to some risks, which we have outlined in our press release and in our SEC filings and are considered forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934.
Jimmy Brock: Thank you, Nate and good morning, everyone. Let me start by saying, I'm extremely proud of our employees and the response we've had throughout our organization to manage through a very challenging 2020 and get off to a strong start in 2021 all while standing very much on target with our core values and priorities. On the ESG front, we're pleased to announce the release of our 2020 corporate sustainability report, our fourth since becoming an independent company in 2017. The report demonstrates our continued pursuit of industry-leading ethical, social and environmental performance and disclosures. As a Bettercoal supplier throughout the report, we highlight the alignment of our practices with the internationally recognized Bettercoal code of ESG operating principles specific to coal mining supply chain. Our 2020 performance included achieving an environmental compliance record exceeding 99.9% for the 8th consecutive year, reducing our water withdrawals by 24% and reclaiming 2.9 acres for every acre disturbed across our operating footprint. The report emphasizes the synergy between our sustainability, technology and financial strategies, which together inform and support our growth and diversification goals. At the same time, our ESG performance enables our active operations to continue to provide the coal that is reliable and affordable and is vitally important toward improving the quality of life of its end users, specifically, in developing countries. Ultimately, the alignment of our strategic initiatives in these areas will drive sustainable value creation for our stakeholders.
Mitesh Thakkar: Thank you, Jimmy and good morning, everyone. I will start with an update on the progress we have made on our financial priorities. I will then review our first quarter 2021 results and our full year 2021 guidance. We continue to remain laser-focused on generating free cash flow, maintaining strong liquidity, reducing outstanding debt and further strengthening our balance sheet. After setting the stage in 2020 through the acquisition of CCR and retiring of a significant amount of our debt we achieved a major milestone at the end of 1Q 2021. Our net leverage ratio declined to just under two times, which as many of you know, creates significant flexibility for us going forward. However, we recognize that we have more work to do and have several initiatives underway that we believe will create long-term value for our shareholders. First, we continue to focus on our cost containment efforts. And as a result, we achieved a new record low cash cost of coal sold per ton at the Pennsylvania Mining Complex in the first quarter of 2021. To highlight the importance of that, consider the following: In full year 2019, we generated $16.2 per ton cash margin, when our revenue per ton averaged $47.17. For 1Q 2021, we generated $16.95 per ton cash margin even with a $5.78 per ton lower revenue. This is a result of the large step down in our operating costs which has positioned us to generate significant cash flows even in lower revenue environments. It means, we are more productive from a labor standpoint, use supplies more efficiently and have a more optimized mine plan. Second, on the legacy liabilities front, I'm very pleased to announce that under our current actuarial assumptions, we have a funded status of approximately 103% on our defined benefit pension plan. At this point, we do not have any funding requirements for the foreseeable future and have significantly lowered our exposure to equity market volatility.
Jimmy Brock: Thank you, Mitesh. Before we move on to the Q&A session, let me take this opportunity to provide a recap of our accomplishments in the first quarter and reiterate our priorities as we move forward. We continue to prioritize strengthen our balance sheet and improving liquidity and financial flexibility. Access to capital for coal companies has been shrinking. However, we have been extremely dedicated to identifying and executing alternative sources of capital. As Mitesh alluded to, we're remaining laser-focused on continuing to drive down costs at our operations through efficiencies and a focus on reducing discretionary spending. The team continues to look for ways to effectively drive costs down without sacrificing the effectiveness of our operation. Our significant reduction in cash cost of coal sold per ton over the past several quarters is proof that if we set a target, we intend to achieve or beat it. Third, we will continue to pursue our targeted growth and diversification strategy as we move forward. On previous calls, we highlighted the many projects we have been working on and remain excited about. I won't rehash all of those, but I want to reiterate that in the near term, our most important growth and diversification vehicle remains our Itmann Metallurgical Coal project in Southern West Virginia. We are continuing with development mining where we are operating a single section one ship per day at minimal costs, while evaluating all options associated with ramping the project back up. We believe this project provides a solid pathway for organic growth and diversification. Finally, we continue to focus on ways to leverage one of the most important assets that we have in our portfolio, the CONSOL Marine Terminal. As we highlighted, we successfully shipped 48% of our total sales volumes into the export market in Q1 of 2021. We expect this trend to continue as we move further into the year. As an operator, owning our own terminal is a huge differentiator for us compared to our peers, especially when you consider the continued strong coal demand that is expected from growing economies across the globe. And the attractive quality characteristics of our coal that make it a sought-after product in seaborne industrial and metallurgical as well as power generation markets. Before handing the call over, I want to end as I always do by thanking our entire workforce for their continued hard work and commitment to achieving the strategic goals we've laid out. While there's always more work to do, we are extremely proud of our accomplishments to-date and believe we have a lot of opportunity in front of us to build upon our strategic priorities. We once again showcased why we believe our high-quality low-cost assets are truly in a class of their own. We can generate cash in almost all parts of the commodity cycle as we proved last year and we really demonstrated our earnings potential in improving markets in Q1 of 2021. We continue to focus our goal of building a robust balance sheet and creating long-term value for our shareholders. With that, I will hand the call back over to Nate for further instructions.
Nathan Tucker: Thank you, Jimmy. We will now move to the Q&A session of our call. Nick, can you please provide the instruction to our callers?
Operator: First question comes from Lucas Pipes with B. Riley Securities. Please go ahead.
Lucas Pipes: Hey, good morning everyone, and congratulations on a very strong start to the year especially on the side.
Jimmy Brock: Good morning, Lucas.
Lucas Pipes: I wanted to follow-up on the cost side just a bit. And you didn't raise the guidance. In your prepared remarks you mentioned the longwall moves. You mentioned some inflationary pressures. But to what extent do you see the inflationary pressures kind of coming through today? And is that on the labor side? Is it on the raw material 0side steel side? Would you say there's also just a degree of conservatism maybe embedded in your numbers just given how strong you were in the first quarter? Appreciate your thoughts. Thank you.
Jimmy Brock: Thanks, Lucas. Well, when we look at guidance, as you know is something that we take very seriously. We like to be within a close range on our guidance and our forecast as we move forward. The one reason we didn't raise the guidance on many fronts cost or sales price or production. When we look at that today, there's still all of the uncertainties as of COVID. It's very easy to say, well, production you mined 7 million tons if you multiply that by four quarters it should be 28 million. We know that typically our second quarter due to summer shutdown and we have two longwall moves in here, the production will be less than the 7 million tons. Now I would be happy if we hit 7 million tons, but we're trying to be realistic about that. So I look for us to take a real close look. When we get through Q2, we should know more about the COVID-related shutdowns, if there are any and those things, and we probably will update our guidance at that point in time, but we'll have a half a year underneath our belt, and certainly have more certainties. On the cost front, it's something that I've emphasized on almost every call we've had. It's something that we do daily. We emphasize on cost. Our mine managers, our employees at the mine did an extremely good job in this quarter of the things that they control. So commodities, I think there is -- we are seeing some inflation, small inflation in the commodities that we use to produce the coal. But we'll continue to monitor those and we think it's well within our guidance range where we are now. And I would expect as Mitesh alluded to in his comments that we will be somewhere in the mid to lower end of our guidance for the full year when you look at cost.
Mitesh Thakkar: And Lucas also remember like cost is partially driven by volume. So assuming this COVID situation does not result in any impact on the volumes, I think, if the volumes remain strong we'll look to beat and improve on our cost guidance.
Lucas Pipes: Very helpful. Thank you. And then my second question is on the ESG side. Earlier in your prepared remarks you commented on your profile and how consistently you've been working towards continued advancement of your profile there. And I congratulate and commend you on all those efforts. I want to ask to what extent you think stakeholders be it on the bonding side, surety side financial markets at large are recognizing your efforts instead of just looking at US as another coal company to put it bluntly? But I would appreciate your thoughts on that. And again, I really comment all the work you've been doing on that front?
Jimmy Brock: Yes. It's a very good question. And it is on the minds of many investors. It is an important issue. And at the end of the day we want to be responsible for our employees, the communities in which we work. So we will continue to work on the ESG part of our business. Our Corporate Sustainability Report that we posted late last night on the website, has a lot of the details in it. But it is something that we take very seriously. It's on the minds of many investors. Biden administration and a lot of others one of the first things we hear about is ESG concerns. And we strongly believe that we can be compliant with ESG issues and produce a low-quality energy source that's needed particularly in these developing countries.
Mitesh Thakkar: And Lucas, I think your comment about how much credit do we get from insurance companies and sureties and some of the other stakeholders, I think they do recognize that we are the best-in-class, I think in terms of how we deal with environmental issues and reclamation work that we do. I think we also need to do a little bit better job on our front to communicate the various markets that we supply coal to. I think historically we have been a thought of as predominantly thermal coal. And today like you probably noticed in our presentation deck, it is amazing when you look at things how we have gone from 75-plus percent of our coal going into thermal market to just around 62% going into thermal market in the first quarter of 2021. So I think part of that is on us that we need to do a better job of communicating it. But I think generally we -- the stakeholders do realize that we do good, from an environmental perspective reclamation work and some of the other things that you mentioned. So, I think it is a marathon not a sprint. We'll have to continue to making sure that we convey our story correctly.
Jimmy Brock: But we do get a lot of credit for at least disclosing what we do. And we're going to continue to be very transparent about that moving forward and continue to be very responsible as an operator.
Lucas Pipes: Terrific. That's really good to hear. I'll try to sneak in one last one. Mitesh, you spoke a fair bit about kind of reduce leverage in your prepared remarks. And could you share your thoughts on where you see kind of long-term optimum capital structure for this business, and especially in light of the prior comments just a moment ago? So thank you for your perspective.
Mitesh Thakkar: Yes. Thank you, Lucas. And I'm sure you noticed that like even though sub two times is something that was important from a credit agreement perspective, I did mention that we still have some wood to chop here. So, we are not done yet. We'll continue to de-lever. I think it is really hard for me to answer right now what is the right leverage for this business. But as you can see, we have generated free cash flow in all parts of the cycle now, and 2020 was particularly challenging but we demonstrated that we can generate free cash flow. So, I think I feel a lot better. Having said that, we'll have to be watchful. Like, if you asked me three years ago, what the right leverage ratio was, I would have told you probably 1.5. Now it's lower, and given our comments about access to capital that number will continue to go lower. And I think there is a good understanding in the entire management team is deleveraging is not something that we are going to achieve a certain level and call it a day. It's going to be a continued work in progress this year, next year and as we look out. I think the tax-exempt financing, for instance, allowed us to push the maturity to 2028, so to speak. And those are the kind of things that we are going to block and tackle, but generally speaking, we're going to continue to delever our balance sheet to reduce the overall and -- reduce the overall debt level. I wish, I can give you an exact fine number. If things continue the way it is, I think you could make a case for zero leverage.
Lucas Pipes: Very helpful. Really appreciate all the detailed answers and continued best of luck. Thank you.
Mitesh Thakkar: Thanks, Lucas.
Operator: At this time, we have no further questions. I'd like to turn the call back over to Mr. Nathan Tucker for final remarks.
Nathan Tucker: Thank you, Nick. We appreciate everyone's time this morning and thank you for your interest in and support of CEIX. Hopefully, we were able to answer most of your questions today. We look forward to our next quarterly earnings call. Thanks everybody.
Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
