Peabody Energy Corporation (NYSE:BTU) Q2 2023 Earnings Call Transcript

Peabody Energy Corporation (NYSE:BTU) Q2 2023 Earnings Call Transcript July 27, 2023

Peabody Energy Corporation beats earnings expectations. Reported EPS is $2.67, expectations were $1.72.

Operator: Welcome to the Peabody Second Quarter Earnings 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 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. Please go ahead.

Karla Kimrey: Good morning. And thank you for joining Peabody’s earnings call for the second quarter of 2023. With me today, our 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.

Jim Grech: 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 through our shareholder return program in the last quarter. For 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 tons 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 at the onset of peak summer energy demand in the northern hemisphere followed by a restocking in preparation for winter will contribute to a normalization of inventory levels, providing support to seaborne thermal coal markets.

Within the seaborne metallurgical market, global crude steel output during the quarter was variable with interruptions that 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 ton. 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 six months ended June 30, 2023, electricity generation from thermal coal has declined year-over-year due to low gas prices and nearly level renewable generation. Coal inventories have increased approximately 50% during the six months ended June 30, 2023. Natural gas prices have recovered modestly from the lows of earlier this year with U.S. natural gas prompt pricing at $2.65 per mmBtu. The EIA is currently forecasting U.S. 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 U.S. 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 tons higher than the prior quarter as a Wambo Longwall move was completed and wet weather which impacted the first quarter was abated. Segment cost per ton were aligned 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 a 2 million tons 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’re able to seal off the two longwall panels in the J panel area of the mine. We resumed with development coal production and the new L panel area were 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 are impacted by low costs — low customer demand due to low natural gas pricing, high coal inventory levels and the June tornado event at NARM. In addition to 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 U.S. thermal shipments are impacted by lower customer demand as a result of low natural gas prices and high utility inventories. Looking solely at our sold position here the volume should increase in the second half. The 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 U.S. market conditions. In addition to our active operations, the company continues to advance redevelopment efforts at North Goonyella with key project milestones and critical cold path items on track. Activity today to have included procuring equipment, refurbishment and replacement of surface infrastructure Zone A remediation, completion of drilling program for Zone B re-ventilation advancing work necessary to reenter Zone B. The next significant milestone re-ventilation and reentry of Zone B is currently targeted for mid September subject to regulatory approval.

Since commencing redevelopment in 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 in 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 my NARM. On June 23, our North Antelope Rochelle Mine and the PRB was struck by an EF-2 tornado. Six people that 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 mind to full operations.

I’ll now turn it over to Mark to cover the financial details.

Mark Spurbeck: 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 EBITA 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 $0.075 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 EBITA 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 margins of approximately $50 per ton.

The seaborne metallurgical segments 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 ton lower primarily due to higher production and lower sales price sensitive costs. The U.S. thermal mines produce $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 for 3.1 million tons lower than the prior quarter. We lost approximately 1 million tons at the end of the quarter due to their tornado that struck the NARM mine and volume on two requirements contracts were 1.2 million tons lower than expected.

The other U.S. 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 tons to 15 million to 16 million tons due to higher expected production at Wilpinjong. Seaborne metallurgical volume is expected to be 500,000 tons lower at 6.5 million to 7.5 million tons due to less than previously anticipated production at the CMJV and Shoal Creek. PRB shipments have been revised downward to 80 million to 85 million tons reflecting the impacts of low natural gas prices, utility inventories and mild weather to-date in major coal generation regions.

For similar reasons other U.S. thermal volumes have been reduced to 16.5 million to 17.5 million tons. 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 tons approximately 300,000 tons are priced on average at $181 per ton and 1.4 million tons of high ash product and a million tons of Newcastle product are unpriced. Costs are expected to be lower quarter-over-quarter at $45 to $50 per ton.

Seaborne metallurgical volumes are projected to be lower than the second quarter at 1.5 million tons due to a longwall move at metropolitan. 200,000 tons 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 ton. In the PRB, we are anticipating shipments to increase to 21 million tons at an average price of $13.80 per ton and cost of approximately $11.75 per ton. Other U.S. thermal shipments are expected to increase from the second quarter to approximately 4.2 million tons an average price of $50.50 per ton and cost 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.

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Q&A Session

Operator: Thank you [Operator Instructions] At this time, we will take our first question from Lucas Pipes with B Riley. Please go ahead.

Lucas Pipes: Thank you very much, operator. Good morning, everyone. And great to see those capital allocation to shareholders during the quarter.

Jim Grech: Thanks, Lucas.

Lucas Pipes: And I wanted to start my first question on that point of shareholder returns, you know that the $142 million that remain available. So we kind of think of as those being used for buybacks over the next three months. So it’s 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 reup it with whatever then free cash 65% of the free cash flow during available free cash flow from Q3 results that kind of the cadence now going forward?

Mark Spurbeck: Yes. Good morning, Lucas. And thanks for hanging in us. And I know what is a very, very busy earnings call day. So appreciate the questions. With regard to the shareholder return program, you are correct. 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 above the 65%.

Lucas Pipes: Got it. Got it. Okay, that’s — but it’s not like it’d be more than $142 million over the next three months in terms of buybacks, you would kind of reconvene in three months look at Q3 results and that would determine the forward pace?

Mark Spurbeck: Again, we’re going to return at least 65% and, 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 didn’t do a bit more than the 65% in the last quarter. But we will [indiscernible] it up each quarter and show 65% on a year-to-date annual basis.

Lucas Pipes: Got it. That’s clear. That’s clear. Thank you for that. 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 longwall mine going forward? Thanks for your color on that.

Jim Grech: So I’ll talk about Shoal Creek first. And hi, Lucas, Jim Grech, here. Good to hear your voice again.

Lucas Pipes: Same here. Thank you, Jim.

Jim Grech: Yes. So the — we have the new longwall coming in delivery has already started. So we’re expecting to get that delivered here by the end of this year and have it operating so very early into 2024. The intention prior to the mine fire was to have the two longwalls operating at the mine. And we saw 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 equipment and what we can do with it? Can we start operating again, in that panel? Do we have to extract the longwall? 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 one longwall mine with the potential for two but we really don’t know till we get back behind those seals, which is at best a couple months away.