Good day, and welcome to the Contura Energy Second Quarter 2020 Earnings Call. All participants will be in listen-only mode. [Operator Instructions]. I would like to turn the conference over to Emily O'Quinn, Vice President and Corporate Communications. Please go ahead.

Thank you, Francesca. And good morning, everyone. Before we get started, let me remind you that during our prepared remarks and the Q&A period, our comments related to expected business and financial performance contain forward-looking statements and actual results may differ materially from those discussed. For more information regarding forward-looking statements and some of the factors that can affect them, please refer to the company's second quarter 2020 earnings release and the associated SEC filings. Please also see those documents for information about our use of non-GAAP measures and their reconciliation to GAAP measures. Participating on the call today are Contura's Chairman and Chief Executive Officer, David Stetson, and Chief Financial Officer, Andy Eidson. Also participating on the call is Jason Whitehead, our Chief Operating Officer, who is available to answer questions on operations. With that, I'll turn the call over to David.

Thank you, Emily. Good morning to everyone and thank you for joining us today. Before I get into the details of our second quarter results, I want to acknowledge the unprecedented circumstances all of us have been experiencing for the last few months, which had made for a strange and difficult quarter for businesses across the world. Unprecedented is a word that has been overused to describe this pandemic, but it's an accurate descriptor. We've all been forced to continuously adapt to a rapidly shifting environment that none of us have ever seen before. As a company, we've done well in implementing additional precautions and protocols in response to ever-changing guidelines and I'm proud of how the Contura team continues to meet, and in most cases, exceed expectations even in such adverse circumstances. This resilience among our workforce is one of the many reasons why I'm so optimistic about Contura's future, even in the midst of challenging conditions we're facing. Not only we've kept up our strong cost performance, but we accomplished this while maintaining consistently high standards in the areas of safety and environmental performance. Across the organization, our second quarter safety performance in the metrics of NFDL and VPID were both favorable to national average, and we continue to perform favorably in these areas on a year-to-date basis. In environmental stewardship, our second quarter water quality compliance rate remained at 99.9% and we achieved a 62% reduction in violations compared to the three-year average. These are not just numbers to us. They are a meaningful measure of success that we take very seriously on a daily basis, and they're even harder to achieve during challenging periods of external pressure and uncertainty like we've experienced this quarter. I commend our people across the organization for their good work. As…

Thanks, David. And thanks, David. Very kind compliments there. So, we did expect the second quarter to be challenging, both operationally and from a planning perspective, and that certainly proved to be true on both accounts. We started the second quarter with higher unit costs on production for the month of April since we did temporarily idle most of the mines for the majority of the month. The good news is that once we returned to effectively normal operations in May and June, we were able to match the outstanding cost performance that we established in the first quarter, with average costs coming in below $70 a ton for our CAPP-Met mines. While we're very proud of how effectively we control the cost across the organization, especially in the met segment, we're certainly not complacent. Our entire industry is still under significant pressure with so many macro issues remaining unsolved. As David mentioned, we're clearly affected by these uncertainties. But instead of dwelling on circumstances we can't control and, for the most part, can't predict, we're focused on controlling what we can control – the effective cost management, careful matching of production with demand, and most importantly, a sharp continued focus on cash flows. We ended the quarter with approximately $238 million in unrestricted cash and total liquidity of $240 million. As David mentioned in his remarks, one of our key goals with the temporary mine idlings in April was to reduce our inventory and hence bolster our cash balances. We successfully converted around $41 million of inventory into cash during that month, which helped us increase our cash balance in the second quarter by $11 million over the first, despite the difficult environment in our end markets. This increase is also net of a $26 million paydown of our…

[Operator Instructions]. The first question is from Scott Schier with Clarksons.

Hi. Good morning, everyone. In the release and in your prepared remarks, you mentioned the costs would have been relatively flat quarter-on-quarter absent COVID-19 impacts and the shutdown. Does that mean that you expect costs to be closer to the low 70s in the second half of the year or is there also some lingering impact that we should expect?

Hi, Scott. This is Andy. I could let Jason jump in when he feels appropriate. But I think, by and large, again, it's kind of hard to predict where the market is going in the next two quarters. Naturally, if we kind of hold things back with where they are, I do think that expectation is very much in line with what we believe is going to happen from a cost perspective. But again, fluctuations, further pressure on the market can drive cost response via production adjustments. Or as the market rebounds, we will see a natural increase from sales-related costs, which, as a reminder, comprises about 9% to 10% of our total cost. So, we're partially reflecting lower severance taxes, lower royalties, those kinds of things in our current cost base. But I think, by and large, yeah, I think we're pretty comfortable that these costs are sustainable for the long term.

Okay. That's helpful. And the cost reductions that you've made across your operations are very impressive. So, congratulations on that. Switching gears a little bit. Should pricing kind of remain depressed for the rest of the year, maybe kind of even into early 2021 and we don't see a quick rebound? Do you think we may see any additional mine idlings or are most of these kind of behind you at this point?

I'll take that and Jason can provide input as well. We're not anticipating any at this point in time. We think we've matched up production with sales and demands that we're seeing out in the future. We designed a system, Scott, that allows us to flex up, flex down, and so we do have that capability. But as I sit here today, I'm not anticipating any changes in our production outlook for the rest of the year.

The next question is from Lucas Pipes with B. Riley FBR. Please go ahead.

And I'd like to second the congratulations. Really, really well done, especially amidst this very difficult environment. I wanted to kind of ask you about the outlook on the shipment side for the second half of this year. But specifically around met coal, kind of Q3, Q4, not – the more detail you can provide the better, but would like to get a sense for the order flow and what we could then expect with production and such.

Hey, Lucas. It's Andy. That is the question of the hour. Pretty sticky one. Naturally, we were still on a guidance suspension in regards to pretty much everything, except for SG&A and CapEx, but we do have Dan Horn here available to get his view on the market. I doubt we have much to give in the way of true numerical guidance, but he can surely share some anecdotal views of the market. Dan?

Sure. We're watching the steel industry, obviously, very closely. We see a few signs that things are improving versus where they were a few months ago. We all follow some of these announcements, 'Okay, a blast furnace here is starting up here.' We see steel pricing generally around the world starting to increase except here in North America. So, that's a bit of a concern in North America. But we're still struggling to see that coal plants are necessarily picking up any more production. So, it is clearly a wait and see mode, but I do see a few things that give me a little bit of optimism. But I can't – as Andy said, can't really see how it translates into increased shipments at the moment.

I appreciate that. And thank you. And maybe to follow-up on this, you did a really good job destocking during the second quarter. Is there a need to rebuild inventories or would you say you're kind of pretty well positioned from an inventory standpoint here?

I think we're in pretty good shape, Lucas. Again, we've taken our inventory levels from down about 0.5 million tons across the board. I think probably 350,000 tons of the reduction was on the met side. That leaves us around 1.2 million, 1.3 million tons of inventory available, which I think is a pretty good level to allow both the operations and the sales team to do what they need to do to meet orders. So, I think we're in good shape from that perspective. And we certainly don't want to build inventory just to stock it up on the ground. So, it's good that we were able to destock to a level that we're basically we targeted, and it worked out really well in April. So, short answer, I think we're in good shape. We don't need to build anymore nor do we really need to cut anymore. I think our inventory levels are pretty appropriate with what we're seeing in the market.

I'll sneak one last one in. The release of $30 million on the surety side, good to see that. Could we expect more with the strategy of kind of exiting thermal by the end of 2022?

I really wish I had an optimistic answer for you, Lucas. The surety markets right now are really, really challenging. I believe all of our peers are seeing the same things. There's been ESG concerns across the board. And as usual, there's not a good bifurcation between thermal and met coal. Coal seems to be coal. And so, that makes it a little bit of a challenge as far as optimizing our portfolios. I wouldn't expect much in the way of additional release of bonding collateral in the near term. I believe now there's probably more concerns from the credit perspective across the industry, which will keep that cash tied up for a bit longer until we see the market turn. But, hopefully, once we see a return to a better, more normal world that we're used to experiencing, we will see some improvements in surety portfolios and maybe a little bit more collateral to be returned.

We've run out of time. So, Mark can't ask any questions, right? Never mind, Mark. Go ahead.

The next question is from Mark Levin with Benchmark. Please go ahead.

No, you probably would have been doing everybody a favor, a big favor. So, just a couple of quick ones. So, without getting into guidance because I know met prices are volatile and the market is exceedingly volatile, any feeling as to whether or not Q2 looks like the trough? It sounds like when one thinks about Q3, volumes, I would think, would be higher and, as a consequence, costs would be lower. I know the price is sort of the key delta. But maybe, Andy, are you thinking that Q3 just sort of naturally should be a step up, if you were to let's just hold met prices flat or equal to Q2?

As far as shipments, Mark?

Well, no. I'm just thinking like the EBITDA bridge from Q2 to Q3. Like, you should have higher volumes, you should have lower costs just because you'll have higher volumes. And then, if I were just to assume that met prices, all else being equal, were flat Q2 to Q3, is it reasonable to assume that Q2 is the EBITDA trough for the year?

Absolutely. If those particular assumptions hold true, I think that math works. I think based on what we just heard from Dan, I think anecdotally, I'm not sure it's safe to assume that Q3 will be an improvement. It has the potential to, but the market is still pretty tough. The math works, but everything hinges on shipments and market demand. That's the sticky wicket.

And it looks like from a CapEx perspective, you spent $90 million or so in the first half. So, getting to your guidance, maybe another $50 million or so in the second half. So, even from a cash burn perspective, you could be in better shape, particularly with the $66 million coming in, I guess, right?

Absolutely. Yeah.

Just making sure. Now on to less positive stuff. Domestic met, so I know sensitive, and Dan and others probably don't want to talk a whole lot about it. So, I just want to talk a little bit about strategy. Given where netbacks are in the market and how tough it is out there, as you've mentioned, what's kind of the thought process in terms of mix, meaning domestic versus export, 2021 versus 2020, given what you're seeing right now?

Well, I'll start it off. We seldom like to provide our strategy – our sales strategy to all of our competitors. So, you probably won't hear much from me on that point. We have never really said we have a fixed target as to domestic versus export. And historically, like in 2019, we were about 66% export and this year we're about 73%. And a lot of that cadence are from some deferrals that were coming in on the domestic side. We pushed that coal into the international markets. Unless Dan wants to share our playbook on our coal sales strategy with everyone, Dan would you like to share that book with Arch and everybody else?

I'll pass on that, David. I think we're comfortable on the low end. We're comfortable on the high end. We'll wait into the season, Mark, and see what the volumes and prices look like and we'll make our decisions. We're comfortable…

I figured I might get answers like that, but I thought it was worth a try.

Good try, Mark.

And then, on the pricing side, speaking very generally – I'm not talking domestic. I'm just talking across the board. When we look at the assessments from Platts either for A and B and US low vol, do you feel like those are accurate representations of what you guys are realizing in the markets or are there discounts that you have to take in a tighter market or in a more oversupplied challenging market today or are those pretty good representations of what you guys are seeing then?

Mark, they're assessments. You're right. They are assessments. And I think, directionally, they're correct. We sell so many products. I think I've said this before that there's no strong correlation necessarily between what the products we sell and the indices directly because of differences in specs, differences in volumes. But I think directionally, they're okay. But in a weak market – I've said this before, in a weak market, we tend to sell at discounts; and in a rising market, we tend to sell at premiums.

No. That makes sense. And Dan or anybody else, how about on the rail side? Are the eastern rails – given that there's so much challenge in the market right now, both from a price and from a demand perspective, have you seen a corresponding decrease in rates? Have they been willing to work with you and help everybody get through these tough times or have the rates been kind of sticky at higher levels?

Broadly speaking, Mark, the rail rates move with the coal pricing and they depend on the products. We have rates for different types of coal. So, they move accordingly. So, they're better for us at this pricing level [indiscernible] $250 a ton.

Well, great job on the cost side, in particular, echoing what everybody else said before, and look forward to chatting next quarter.

This concludes our question-and-answer session. I would like to turn the conference back over to David Stetson for any closing remarks.

Again, I want to thank everyone for joining us on the call today and your interest in Contura and wish everyone a great day and a great weekend. Thank you so much.

The conference call has now concluded. Thank you for attending today's presentation. You may now disconnect.