Peabody Energy Corporation (BTU) Q2 2018 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to Peabody's Second Quarter Earnings Call. [Operator Instructions]. As a reminder, today's call is being recorded. I'd now like to turn the conference over to Vic Svec, Senior Vice President, Global Investor and Corporate Relations. Please go ahead, sir.

Okay. Thanks, Kim, and good morning, everyone. Welcome to BTU's Second Quarter Earnings Call. And with us today are President and Chief Executive Officer, Glenn Kellow; as well as Executive Vice President and Chief Financial Officer, Amy Schwetz. During our formal remarks, we'll reference a supplemental presentation, and that's available on our website at peabodyenergy.com. On Slide 2 of this deck, you'll find our statement on forward-looking information. We do encourage you to consider the risk factors that are referenced here, along with our public filings with the SEC. And I'd also note that we use both GAAP and non-GAAP measures. We refer you to our reconciliation of these measures in this presentation and our earnings release. So also, as a housekeeping item, I remind you that we adopted fresh-start reporting as of April 1 of last year, so most comparisons to metrics prior to that time do not provide useful information. Second quarter 2018 comparisons are primarily to the April 2 to June 30, 2017 successor period results. And with that, I'll turn the call over to Glenn.

Thanks, Vic, and good morning, everyone. I'm going to start on Slide 3. The benefits of Peabody's diversified portfolio were demonstrated once again this quarter as the company generated substantial returns that were led by the Australian platform's 39% margins. As Amy will expand on in a moment, second quarter revenues net income and adjusted EBITDA all increased nicely over the prior year as the team capitalized on continued high seaborne pricing for both metallurgical and thermal coal. Overall, Peabody delivered on the expectation set earlier this year on a number of fronts. We decreased costs in the PRB and Midwest even though shoulder-season demand played out largely as expected, albeit with much more rainfall at certain of our operations. The Australia export thermal tons sold increased over the previous quarter, as expected. We had strong cash flows and have now collected all remaining cash collateral that had supported reclamation obligations. With our large cash position, we continued to accelerate the return of cash to shareholders. This occurred through additional share repurchases under our expanded program as well as our higher quarterly dividend just announced. In fact, our net debt position has improved nearly $900 million over the past five quarters, even with $1.1 billion of debt reduction and cash returns to shareholders. Once again, I'm pleased with the operational and financial performance delivered this quarter, which in turn generates value for all of our shareholders. I'll now turn the call over to Amy to cover the financials in a bit more detail.

Thanks, Glenn, and good morning, everyone. I'd like to start today by going through the income statement and touching on a few key components on Slide 4. Second quarter revenues of $1.31 billion were up 4% over the prior year. Revenues were favorably impacted by 20% higher Australian sales volumes that more than offset the effects of 5% lower U.S. volumes and approximately $48 million of unrealized mark-to-market losses on long-dated new capital hedges given the healthy rise in seaborne thermal pricing. I would note that we will experience volatility on these instruments in revenue and EPS. Given their noncash and reversing nature, they are excluded from adjusted EBITDA. On a year-to-date basis, the second quarter unrealized losses have been largely offset by unrealized gains recorded in the first quarter. Higher met coal volumes contributed to an increase in DD&A of approximately $16 million compared to the prior year. SG&A totaled $44 million for the quarter, coming in a bit higher than previous quarters, which included some project work around the markets and our portfolio. We expect to track to around $40 million per quarter typically. Higher revenues led to an 18% increase in income from continuing operations, net of income taxes, over the prior year. In addition, net income attributable to common stockholders increased $134 million over the prior year to $114 million. We are now in a very positive income position and earnings now fully accrue to common stockholders after the full conversion of preferred shares earlier this year. Diluted EPS from continuing operations improved $1.11 per share to $0.93 per share, primarily driven by Australian met coal margins. Let's now turn to Slide 5, where we'll dive into more detail around this quarter's operating performance. Adjusted EBITDA increased 16% over the prior year to $370 million, and this was led by higher metallurgical volume and continued strength in seaborne pricing. And while we saw rising diesel fuel costs in the quarter, those costs were partially offset by the benefit of a weaker Australian dollar, highlighting the benefits of a diversified portfolio. Once again, our Australian platform generated impressive results, with total adjusted EBITDA of $266 million, an $88 million increase over the prior year. The Australian thermal segment reported notable adjusted EBITDA margins of 40% and total contributions of $108 million. Realized pricing for the Australian thermal segment totaled $53.68 per ton. That's a 4% improvement over the prior year overall and a 12% increase on export realization. Export thermal sales totaled 2.9 million tons at an average realized price of $78.68 per ton. The remaining 2.1 million tons were sold under a long-term domestic contract. I'd like to take a moment to discuss both our thermal realizations and our layering approach as there are multiple moving parts. When considering Peabody's thermal coal pricing, our products that have been sold or layered in represent 3 dynamics at work: first, timing of when agreements were entered into; secondly, temporarily reduced quality relative to our traditional average thermal coal realization; and three, what is currently an unusually high spread between the 6,000 and 5,500 quality products. Regarding the timing, recall that Peabody had 5.5 million short tons of 2018 thermal coal and 2 million tons of 2019 thermal coal priced at the end of the first quarter. These tons were priced over the past year at an average of about $75 per short ton. One other timing element is that the second quarter JFY sales were provisionally priced at a hybrid between the prior year fiscal year settlement and the current market levels. With the recent JFY settlement at $110 per tonne, we now have a total of 9.3 million tons priced for 2018 at an average price of $81 per short ton, leaving us with about 3 million tons to price for the remainder of the year based on the midpoint of our guidance. In addition, we are seeing a wide differential between the higher and low-quality thermal product from Australia, typically known as the 6,000 and 5,500 products. For instance, while the average benchmark Newcastle price was essentially flat from the first to the second quarter, the lower-quality 5,500 price declined 9%. And finally, Peabody's second quarter deliveries represent a lower average quality that is typical, and that's based on two dynamics: a higher percentage of Wilpinjong versus Wambo, and a lower-quality sales mix from Wilpinjong as we sold the higher-ash product related to the paleochannel mine through the first quarter. All of this factors into our expected realizations relative to the benchmark Newcastle product that is widely reported. Whereas we typically guide to 90% to 95% of Newcastle, we now see this widening out to 85% to 95% for 2018 given the higher pricing environment of the premium product. For the first half of the year, we have been at the lower end of this range. Having worked through mine-specific challenges, we expect the range to revert in 2019 should differentials return to more normal levels. We continue to be enthused that current pricing for Aus seaborne thermal product and particularly, the higher-quality coal, with the 12-month index at over $110 per ton currency and $95 per ton for our full year 2019 for the benchmark 6,000 product. Also, unlike the emerging met coal futures, the thermal forward markets are liquid, suggesting favorable implications for new Peabody business. Keep in mind, too, that our average cost for thermal coal was $32.05 per short ton for the quarter, so we generate substantial margins that provide a continuing differentiator for Peabody. Let's now turn to the Australian metallurgical segment, which once again led the company, both in revenue and adjusted EBITDA contribution. Adjusted EBITDA for the met coal platform totaled $159 million, more than doubling prior year results. Met coal revenues rose $130 million to $418 million on a 45% increase in sales volumes. This was largely due to sustained demand for quality met coal and healthy seaborne pricing. You'll also recall that prior year results were impacted by the effects of Cyclone Debbie in Australia. The met segment realized $143.98 per short ton on its 2.9 million tons sold this quarter. As we expected, continued operational improvements and mine sequencing, particularly at the Metropolitan and North Goonyella Mines, drove cost down $19.70 per ton to $89.37 per ton. As a result, the met coal platform delivered attractive adjusted EBITDA margins at 38%, largely in line with the Australian thermal segment's performance. Shifting towards the U.S. Adjusted EBITDA totaled $138 million compared to $176 million in the prior year. Although volumes were 5% lower, favorable mix led to modesty higher revenue per ton of $19.12. America's cost per ton increased 8% to $15.12 per ton, primarily due to wet weather in the PRB and Midwest as well as higher fuel costs across the platform. To put the wet weather in perspective for the PRB, year-to-date, norm has received a record annual rainfall with over 16 inches of rain through the middle of July. This compares to an average of about 13 inches per year and a previous annual record of 15.7 inches in 2014. And that's still with 5.5 months to go in the year. While we expect the volumes to be down due to the traditional shoulder season demand, the unprecedented amount of rainfall impacted volumes by an additional 1.5 million tons at norm. Unfortunately, heavy rainfall didn't stop there. One of our surface operations in the Midwest also has received nearly its annual rainfall in the first half of the year. Given the platform's strong operating performance in the first quarter, year-to-date, Peabody's PRB volumes were down only 1.5% compared to the prior year, while the industry is down some 5%. In addition, Western costs rose $5.23 per ton, largely due to higher ratio of Kayenta and El Segundo due to pit sequencing. As expected, Midwestern costs improved compared to the prior quarter as we worked through some of the challenges encountered in the first quarter. While costs remain a bit elevated, they are expected to moderate in the back half of the year. We are very pleased to be maintaining our full year cost guidance targets for both the U.S. and Australia. In the U.S. in particular, rising fuel prices have had an impact on costs and will be something that we are looking out for in coming quarters. Now let's take a minute and discuss our financial approach on Slide 6. Solid operating results and key financial achievements have once again led to robust operating cash flows of $336 million and free cash flow of $324 million. Quarter-end liquidity totaled $1.78 billion, including $1.45 billion of cash, $220 million of revolver capacity and $104 million available under our accounts receivable securitization. Regarding our financial approach, I might say that we have been as consistent in our intention as we have been relentless in our implementation. We remain focused on generating cash, maintaining financial strength, investing wisely and returning cash to our shareholders. Let's dig into each of this in a bit more detail. As I mentioned, we continue to generate significant operating cash flows through a combination of operational results, cash tax refunds and a return of all remaining restricted cash. In the second quarter, we collected an additional $43 million of cash tax refund, bringing the total for the year to $104 million. We also successfully released the remaining $109 million of cash collateral, supporting reclamation obligations. Now that these milestones are achieved, we plan to continue to generate most of our cash the old-fashioned way going forward. Our Middlemount operation, which you may recall is accounted for as an equity joint venture, continues to generate meaningful cash flows as well, with $35 million in cash contribution this quarter. In addition, we received about $30 million in proceeds from a land sale completed in the first quarter. The second prong of our financial approach is maintaining financial strength. As you may recall, we repaid $46 million in April in conjunction with an amendment to the term loan. The amendment reduced the interest rate as well as provided additional financial and operational flexibility. Gross debt now totals $1.4 billion, at the high end of our previously established long-term debt target range. Last quarter, I discussed that we may pursue an amendment to our bond indentures at the right price to secure incremental flexibility for our shareholder return program. We haven't availed ourselves of the option as of yet, but you can assume that we would pursue this in the ordinary course under the right circumstances. In addition, as part of our active portfolio management activities, we recently agreed to sell Millennium's interest in certain exploration tenements. The sale is expected to close in July. Given the location of the tenements, cost to develop and the pending closure of Millennium, we believe selling these resources represents the best economic decision for Peabody. The sale is expected to generate about $22 million in cash to be collected over the next 12 months, with $4 million to be received in the third quarter. In addition, we expect to report a third quarter gain of approximately $22 million. With regards to investing wisely, we think about this in two main categories: capital investments and equity or asset investment opportunities. This quarter, we invested about $72 million in capital expenditures, in line with our expectation. This is supporting sustaining CapEx as well as life extensions. Recently, the New South Wales court ratified a favorable decision regarding our Wilpinjong Mine, clearing the last hurdle to allow us to move forward with our extension plans. We've been very clear about our filters for investment. We continue to actively evaluate multiple means to create shareholder value. Ultimately, we are guided by our filters and remain highly selective. For now, we are continuing on a path of investing in the company we know and like the best: Peabody. On that front, let's turn to Slide 7, where you can see the progress we've made to date on our newly expanded $1 billion share repurchase program. You'd likely heard me say before that 2018 is the year of the shareholder. Cash returns to shareholders this year have continued to accelerate and far exceed other uses of cash, including those for debt repayment. Share repurchases totaled about $200 million this quarter, with another $25 million bought back in July, bringing total repurchases thus far to $575 million. To date, we have repurchased about 15.6 million shares, representing 11% of shares initially outstanding. In addition, we reinstituted a sustainable dividend program earlier this year, returning about $14 million to shareholders this quarter. In recognition of the scale of our already executed share repurchases, we have increased the quarterly dividend to $0.125 per share. This allows us to return more cash on a per share basis to our shareholders while maintaining our fixed charges. As always, we will evaluate the best means to create value and look forward to continuing to return excess cash to our shareholders. I'll now turn the call over to Glenn to discuss recent updates in the industry condition as well as our focus areas for the third quarter.

Thanks, Amy. Let's now turn to Slide 8 where we will discuss seaborne industry conditions. Strong seaborne thermal coal demand led to further strengthening in Newcastle benchmark pricing this quarter. Spot pricing reached highs of $116 per metric ton and averaged $104 per tonne, increasing some 30% over the prior year period for 6,000 Newcastle product, which as Amy explained earlier, is currently trading well above the higher-ash 5,500 Newcastle product. Both China and India imports increased substantially year-over-year. Through June, Chinese imports were up 19 million tonnes on strong industrial activity and an 8% rise in thermal generation that was also driven by favorable weather conditions. As you may recall, China experienced extreme cold temperatures this winter and is now enduring a robust summer, similar to many parts of the U.S. On top of weather conditions and continued economic growth, Chinese customers have begun to restock inventory levels. Domestic Chinese coal production has been unable to keep pace with the strong consumption. For some time now, the Chinese government has been using port restrictions as a tool to support domestic coal production while ensuring that coal prices do not spike to the detriment of utilities. Earlier this year, port restrictions were eased due to strong seasonal demand. Just recently though, some restrictions are again emerging, even as China also emphasizes thermal coal imports. India's domestic coal production has also struggled to keep pace with growing electricity demand and low utility stockpiles. Domestic rail performance continues to hamper domestic deliveries, further increasing the need for additional imports. As a result, India thermal coal imports are up approximately 9 million tonnes or 13% through June. ASEAN imports also rose compared to the prior year, driven by ongoing urbanization and general economic growth. Looking ahead, we expect the global build-out of new coal plants to continue. By our analysis, some 56 gigawatts of new coal fuel-generating plants are expected to come online in 2019 across 24 countries on five continents, with the majority of new plants located in the Asia-Pacific region. A number of additional plants have also been announced, which are targeted to come online in future years. Taking a look at the supply side. We see some growth in exports out of Indonesia and the U.S., whereas Australian and South African exports have remained essentially flat year-over-year, and exports out of Colombia, another large supply region, are down in total. In terms of our Japanese reference price settlement for April 1 through March 31 of next year, as Amy mention, reports have emerged around the settlement of $110 per tonne. As we make the assumptions that this $110 price carries through throughout JFY volumes, we will have 4.3 million short tons priced at an average of $85 per short ton for the back half of 2018. Turning now to metallurgical coal. Hard coking coal spot prices eased from the first quarter of 2018 but remained above historical averages. Low-vol PCI prices remained strong, with the second quarter settlement negotiated at $155 per tonne and the third quarter price settled at $150 per tonne, both of which were set by the Peabody sales team. Global steel production continues to grow and is up 4% through May compared to the prior year, with May output increasing over 6% to an all-time high. While Chinese steel production is quite strong, we've seen an increase in domestic coking coal supplies, thus reducing year-to-date imports compared to the prior year. On the other hand, India's metallurgical coal imports continue to rise and are up some 16% through June, driven by a 5% increase in steel production. On the supply side, Australian met coal exports have rebounded from the effects of Cyclone Debbie in the prior year and are up approximately 7 million tonnes through May. As you may recall, second half 2017 rail performance in Australia was extremely strong, so as we look towards the back half of the year, we would expect the comps to moderate a bit. While the Aurizon rail dispute and labor issues in Queensland continue to garner significant media attention, we've yet to see any loss in shipments due to delays in rail service. Our full year met volume guidance remains unchanged at 11 million to 12 million tons, and actually, we're on pace to beat the higher end of that range, and therefore, we'd be able to absorb potential disruptions that may occur in the back half of the year. That said, longer term, we continue to closely monitor the situation and look for an appropriate resolution of this issue between the rail company and the competition authority. I'll turn now to the U.S. industry conditions on Slide 9, where you can see year-to-date coal demand remains challenged. Utility coal consumption declined 5% through June despite a 4.5% increase in total load. Increased natural gas, wind and nuclear generation all weighed on coal demand. Natural gas prices remained weak amid abundant supply, and nuclear generation is up year-over-year, largely due to refueling schedules. In addition, coal plant retirements continue to have a sizable impact on U.S. coal demand, accounting for some 3% of the decline in year-to-date demand based on our estimates. Recent retirements have most impacted Powder River Basin coal demand, which was down 5% through June. Regional natural gas prices continued to trade at a discount to quoted Henry Hub prices and currently range from $2.25 to about $2.90 per million BTU. [Indiscernible] is a good example of a region being impacted by both retirements and regional natural gas prices. Despite weakened domestic demand, U.S. exports have continued to benefit from robust seaborne pricing. Total U.S. exports are up 32% compared to the prior year with thermal exports increasing 48% through May. While Central App continues to be the largest source of export supply, Illinois Basin exports have increased nearly 60% year-over-year. High levels of U.S. exports, coupled with a 4% decline in U.S. coal production, have contributed to an estimated 34 million ton decline in inventory levels compared to June 2017. This equates to about 46 days of inventory on a maximum days used basis. So while U.S. domestic demand has been held down by natural gas prices, lower production and greater exports continued to rightsize inventories. I'd like to take a minute now to discuss the impacts premature coal plant retirements are having on electricity grid and some of the steps being taken to combat that. You've heard me discuss before some of the challenges that Australia is facing regarding blackouts. This is from a country rich in natural resources and one that pays some of the highest electricity rates in the world. And all because of a ship delay in some parts from coal. Unfortunately, we're now seeing those same concerns playing out in the U.S. An example of this is Texas, which is dangerously close to having blackouts this summer as well. [Indiscernible] has warned an increased risk of price spikes and reliability issues due to record summer demand in combination with the lack of sufficient non-intermittent generation capacity. And directly impacting Peabody is the ongoing work to keep the Navajo Generating Station running post 2019. We're encouraged by the progress made to date. In the past several months you've seen the U.S. Department of Interior assert the need for power to continue to be purchased from NGS, and the tribes will name a preferred operator of the plant beyond 2019. We also recognize this is a complex process with much work ahead, including securing power offtake agreements and travel plant lease extensions. While there are tremendous amount of people striving to keep the plant open, for the prosperity of the tribes and security of electricity supply for the Arizona region, our base case remains that the plant in Kayenta Mine would close at the end of next year. Recently, there have been reports of the U.S. administration taking additional steps to stop further premature retirements of coal plants, noting national security concerns. We've also seen reports of significant progress made with the repeal and replacement of the Clean Power Plan and various initiatives advanced to protect the coal fleet for the benefit of consumers. Turning to Slide 10. Let's now discuss our third quarter expectations relative to the second quarter adjusted EBITDA. While we are holding full year guidance for volume, costs and mix for Q3, we expect the longwall move at North Goonyella to impact met segment margins by about $15 per ton on costs and sales mix. This impact should be partly offset by increased export thermal coal sales, high U.S. volumes and positive resource management results relative to the sale of exploration tenements in Australia. Australian thermal volumes are expected to continue to increase throughout the year, with the fourth quarter being the strongest shipment quarter. We've been talking for some time about our North Goonyella longwall move, which commenced in the third quarter. As you may recall, longwall moves at this mine occur only every 12 to 18 months, and therefore, are typically longer than those at other mines. We have built the inventory ahead of the move and will look to capitalize on performance improvements at other operations to lessen the impact. As I said earlier, we're trending at the higher end of our met guidance range. PRB volumes should improve as we have exited from the rain-affected second quarter. In recognition of our focus on value over volume, we have tightened our annual PRB volume guidance range to 115 million to 120 million tons. As we execute against the mine plant designed to meet customer requirements and maximize margins, we thought it best to lower the top end of our guidance range, which we are now fully priced for 2018. Finally, we continue to focus on our stated financial approach, with a particular focus on investing wisely and returning cash to shareholders. That concludes today's formal remarks. At this time, we are happy to take your questions. Operator?

[Operator Instructions]. Our first question is from Lucas Pipes from B. Riley FBR.

Amy, my first question is on your comments in your prepared remarks as well as in the release in regards to the share repurchase program. And I think you mentioned that in recognition of the scale of the share repurchase program, you're increasing the dividend. Is that any insinuation that the pace of the share buyback is slowing down? Or will that continue as is? And on top of that, the investors will receive a higher dividend?

So our board takes a look at the dividend each quarter and determines what to do. What you saw this quarter with respect to the dividend increase is a recognition that we made substantial progress with respect to our share repurchases program. And so it gave us the opportunity to increase that dividend and maintain our fixed charges at a level that we feel is very manageable. With respect to our share repurchase program, I would reiterate what we said before that, one, we've highlighted this as our primary mechanism of shareholder return. And I think we're very pleased that the progress that we've shown and we hope that we build a track record of investors of saying that when we identify an amount for shareholder -- for share repurchases, the first $0.5 billion, coupled by the second $0.5 billion in April, that we have full intention of using that capacity, that those are not shelf programs but ones that we intend to execute on.

That's good to hear. And then switching over to the operational side. Glenn, you mentioned that you're running towards the higher end of the range in met coal volumes. Can you elaborate on what is driving that? And I assume by the end of the third quarter, with the longwall move behind you, you would have maybe a little bit more definitive understanding where you would shake out for the year. Is that a right way to think about it?

I think that's a fair assessment, Lucas. So we continue to be encouraged by the Metropolitan Mine year-on-year as we seek to build a higher level than the 2017 position plus greater stability and reliability through the chain of that mine. We've had a generally good performance across our other operations. As you probably know, the North Goonyella longwall move was expected to commence at the back end of the second quarter. We probably slowed the events down a little bit to set us up for the move, which is now underway. I think your characterization of the way we sit with the longwall move, I know there's been speculation about Aurizon. I'll spend some time talking through that point. As the logistics chain, we're not seeing anything yet. And I think that we'd look forward to giving you an update on our production performance in the third quarter and our guidance at the Q3 earnings call.

And moving on, our next question comes from Daniel Scott from MKM Partners.

First question on the cost guidance again on Australian coking coal. Full year reiterated, 89 to 95. You're 94 year-to-date-ish. And then you talk about the $15 impact from North Goonyella. Can you kind of describe how much of that is mix versus how much of that is higher cost related to the longwall move? Or should we be thinking like $100 cost in the third quarter and then something in the 80s to get the guidance in the fourth quarter?

Sure. So Dan, this is Amy. I just wanted to clarify our remarks on the $15 impact. That is a margin impact, so we see really two things happening associated with the North Goonyella longwall move. The first is sort of movement away from the 60-40 split of hard coking coal to PCI in the third quarter as we shift harder out of some of those PCI operations in comparison to HCC. So when we point to mix, it's really mix of product on revenue. And then we would anticipate slightly a higher cost in the third quarter associated with that longwall move. So when we point to mix, it's really around that range. And as we look, you can see what happens during a longwall move quarter. If you look at where we were at in the first quarter of this year, we saw cost just slightly above the high end of our range, and that was one of the things we pointed to in the first quarter was really around the Metropolitan longwall move. We saw everything sort of working as it should in the second quarter, albeit at slightly slower advanced rates at North Goonyella. And you saw that, that cost per ton shift more to the lower half of our guidance range. So that's sort of the relationship that we anticipate occurring. Just might give a shout-out to our Metropolitan Mine as we look at mix. We've been pointing to this as something that was important to us, and Metropolitan sort of went from worst to first in the second quarter being our lowest-cost met coal mine. So they're performing in the way that we thought that they could.

More work to do, though, Andy, if you're listening.

Exactly.

All right. And then as far as kind of ratable capacity, when you're done with this longwall move, what can you do in a quarter? Is it 4 million tons? Is it something less than that? And should that be kind of what the rate is in the fourth quarter?

So at this point in time, I think we're still comfortable at our 11 million to 12 million tons for the full year. Obviously, we had a great performance in both the first quarter despite the longwall move at Metropolitan in the second quarter. And as Glenn noted, we're sort of holding back on any movement from that range given the move into the longwall move at North Goonyella as well as the arising situation, but we're very comfortable within our guidance range right now.

Moving on, we have a question now from Michael Dudas from Vertical Research.

Australian thermal exports. Maybe you can elaborate a little more on maybe your longer-term view from what you shared earlier this year or in last relative to demand transition to be trending a lot more robust than originally thought. And how Peabody can gauge its volumes and its investment towards meeting that type of need relative to quality issues and some of the competing forces that are limiting some of the anticipated supply at the market in the next several years.

Mike, I think you characterized it well. I think as I indicated in the remarks, we can't continue to see new generation being built out in the ASEAN region. That is tending to favor the high efficiency, low emissions type technologies, which tend to favor a higher-quality coal, which brings you back to an Australian coal. And obviously, we are well positioned with our Hunter Valley product. Interesting -- as I know you're aware, we market -- even now 7% of our sales revenues are in China. Being a traditional market relationship model, we target those traditional markets, which do pay for the higher premium type, on average, thermal coals. So that continues to be our strategy. The blending between the Wilpinjong and the Wambo product gives us a great-quality product, as Amy talked about in terms of those differentials, and strategically, we continue to target what we believe is that ongoing demand in the ASEAN and Asia Pacific regions. So in terms of operational production performance, and I don't know if that was the component of it, we did flag last quarter that we expected sequential improvements in export volumes delivered over the quarter. We're continuing to see that play out, and we expect the fourth quarter to be the highest of the year for us. There's been a little bit of a mix variance that Amy explained, and that we were probably weighted a little bit higher on towards the lower end of our realization than what we've otherwise typically envisaged. We expect that to continue to move forward. And also, as Amy has elaborated on, we've been seeing quite a difference between the 5,500 product and the 6,000 products. And I know we talked about this in the PRB for some time around our ability to optimize in blending and our trading platform actually looking at what the best mix is to deliver the product. We've actually been able to do that in the first half of this year. And in some instances rather blending, we've been delivering a lower-quality product to get the realization to enable us to have a higher-quality product being delivered at certain times. So that dynamic is also playing out.

One other thing that I might mention about the thermal coal market that is a positive is really just the liquid nature of the forward. And you've seen us, as I noted some in my remarks, lock in some pricing as it relates to 2019 and 2020 at forward rates we like. Now those are currently slightly below the forward curve today, but that certainty around a small amount of tons or some tons in those years gives us the ability to lock in margins in a way that for the metallurgical coal market can't be done currently. So that is something that as we make investment decisions at our mine, like the Wilpinjong extension project that we have in our current capital plan, helps us get a little bit more line of sight in the revenues.

Amy, that was my follow-up question. But as you think about locking in forward or -- for future investments, is it going to be more opportunistic or formulaic? Or depending on what customer needs relative to some pretty extraordinary market prices for the thermal coal, we feel we're in a pretty deep and relatively liquid forward market?

So I guess, one, as we think about that, we do believe that our investors like some exposure to the market. And you see that even with 2018 with although we've got a nice setup for the back half of the year in terms of price tons, we still have about 3 million tons at the midpoint of our range to lock in, in the current environment. But more on an opportunistic basis, you'll see us look to layer in some forward or bilateral contracts in future period really when we like the price. This was about sort of the carry on the forward curve and our desire to lock in margins in those years.

Our next question is from Nathan Martin from Seaport Global.

Just wanted to kind of dig in a little bit more on the $15 sequential pressure on the Aussie met margins. I think kind of based on earlier response, it sounds to me, and please correct me if I'm thinking about this wrong, but it sounds to me maybe the Q3 met cost number looks somewhat similar to the Q1 result, which is kind of over the high end of your cost guidance of 95. So could you kind of maybe -- on the other side of the equation, as you pointed out, as well as the sales mix, where the PCI is going to be maybe above that normal 60% mix, can kind of maybe break it out, that $15, in the two buckets, like maybe is half of that then kind of on cost side, and the other half is on the sales mix side? And in your sales side, are you kind of assuming that the benchmark price does retreat a little bit from these Q2 levels that we've seen thus far?

I think what we would say about the benchmark price is we probably want to call it, although we'd say at this point with sort of two-plus months down, we would see sort of benchmark flattish based on the information, I think, that we all have with the second quarter. Realistically, all we can sort of say about the cost guidance is that we are going to trend up quarter-over-quarter on cost, and on that average realization, we would anticipate, all things equal, that we will trend down. But there are still other mix components that play that we would say would factor into that. What we feel very confident saying is that for the full year, we are very comfortable reiterating our cost guidance, that at $85 to $95 a ton. As you've noted, you've seen us dip slightly above that at a point in the year and come back down based on operating performance in the second quarter. I would say that is not -- that won't be uncommon with our met coal platform over the year. And that from a mix perspective, we're also very confident in that relative 60-40 split as it plays out over the full year.

So Amy, then, even though it might be a little bit higher than that in Q3, because of the longwall move at North Goonyella, you think it reverts kind of back to that average for the full year?

We do.

Okay. And then just real quick on the sales side of things. How do you guys see, and I know Glenn and Amy, you said as well that for the full year, you're still very comfortable with the 11 million to 12 million tons of met coal. Can you kind of give me some thoughts maybe around the back half? I mean, Q3 naturally kind of seems that, that number maybe would come down slightly sequentially from 2.9 million tons given the longwall move. But maybe can give us some color on the timing in Q3, Q4?

Yes. I think that you characterized it pretty well, but frankly, if we would continue to operate exactly as we have in the first quarter and the second quarter, we'd be at a very high end of the range or even slightly above that. We didn't raise our guidance range this quarter, and we kept that open for two reasons, as Glenn pointed out: one, we still have some time to go yet with respect to the Aurizon dispute. We've not been impacted by that to date, but we feel very comfortable within our current guidance range given that timing. We also, within that mix, have the longwall move coming into play. And before we would look at the adjusting that guidance range upward, we want to see sort of how both of those things play out over the next quarter. I will point out that the thermal story is a different side of the coin here, with really ASEAN anticipating a ramp-up in volumes both in the third quarter and then moving sequentially into the fourth quarter, we would anticipate that fourth quarter being the high watermark in terms of our thermal export volumes.

Our next question today is from Jeremy Sussman from Clarksons.

I guess, when I think about your second quarter, U.S. EBITDA was about 1/3, Australia was about 2/3. If you look at the kind of one large publicly traded Australian company, historically, it trades at a pretty nice premium to the U.S. names. Is there a point sort of given the earnings mix where you'd kind of try and take advantage of this dynamic, whether it be sort of a dual listing, reducing your U.S. asset footprint? Or do you still sort of like the kind of current diversification that the platform ensures?

We like the current diversification is the short answer to that. But we're agnostic as to how the U.S. traded through that process. We've been doing a lot of work around broadening or working with an international investor base, reintroducing Peabody back into those markets. And we certainly see some headway within continuing to broaden the investor base outside the U.S. to a more international investor base. But we like the diversification in the portfolio. And look, you mentioned the profitability of the U.S. in the quarter. But we did -- this isn't a traditional shoulder season, trailing a little bit of the weather-related incidents from that and that the U.S. platform can continue to be a very, very strong cash generator going forward into the mix. Obviously, our thesis has been and continues to play out that the location important, the quality of product is important, and the Asia Pacific region will continue to grow. And that is continuing to play out through the course of 2019.

I think, Jeremy, we do hope that investors see this disconnect and see it as an opportunity to capture value going forward.

And the other I'd belabor around is, which we haven't mentioned, that you're seeing it in the high amount of EBITDA, the cash generation is -- the position of the net operating losses that exist within both platforms. So that's an important piece of the financial story as well.

All very helpful points. And if I just kind of do a quick follow-up. When I look to your -- to the strength of your U.S. platform, to that degree, you are the only sizable player in the market with sub-$10 PRB costs. And when I look at this, in addition to your high-quality product, obviously, your margins have been able to comfortably remain above $2 a ton. And that's been kind of challenging as a whole for the region. I guess, can you sort of talk to that dynamic, sort of the key differentiating points where you -- assuming you do, where you do expect this sort of advantage to remain?

Well, we talked about this a little bit in the past. With over 12 open pits across the three mines, running those mines is a complex, being able to move people, equipment, in some instances, contractors seeking to maximize margins and having that focus, delivering to the customers their exact specifications through our blending technologies. They're all important attributes that we would see as part of the Peabody brand delivery performance. So that's been a secret to those 20% margins. And Amy, you have a shout-out to one of our Australian mines. But despite the weather, the U.S. team actually performed very well, lower costs and raised margins in the PRB from one quarter to another. So I'll leave in the score by the shout-out to the U.S. team.

And we'll take our next question from John Bridges from JPMorgan.

I'd like to sort of follow on with the U.S. as well. The tonnage on short were lower. You're attributing that to floods. But some mines in the region did recently okay. Was this topography that caused the problem? Is this something you can sort of ensure against going forwards a little bit in the way that the floods in Australia led to increased pumping and that sort of thing?

Well, water management is actually a pretty active area on there. I think one thing, as you know, John, one thing you've got to appreciate about the sheer size and scale of the geography out there, our closest neighbor that we share a front fence is 100 square miles of real estate around -- between the properties. So you do get an unusual effect in the West. We can get some rain in one area and 10 miles down the road, it can be somewhat dryer. So I actually think that water management performance from the team was great given that they had more than the annual average and the annual record -- the previous annual record in the first six months of the year. So they have a lot of water. I think they managed it well, but it did impact volumes by about 1.5 million tons was the number Amy put forward. I'd say, John, as we expected, this is a shoulder season for us. And even though it was a somewhat sharper spring, it was expected to be that traditional shoulder period. And we would, as we now move more fully into the summer, expect that those volumes to improve.

Okay. And costs. You have this dial-a-mix system, whereby you probably need to keep a lot of capacity open or flexible to deliver that. What do you see happening with costs running into the second half? Do you see yourself getting back to the sort of strong market share that you've had in previous quarters?

I am going to talk about the cost performance question, which as Amy indicated, she was -- we're pleased to be holding our full year cost guidance targets. The theatrics around that, obviously, as we continue to manage costs, is diesel pricing. And so for the U.S. platform, that would probably be the major driver of our cost position as we see it going forward. For Australia, I'd not only add diesel prices. I'd add the Australian dollar, which is tended to be moving in our favor at the moment. And I'd probably add price-linked costs as being a factor there. But we've also held the Australian cost targets as well. I'm not going to comment about production shares and those sorts of things. We deliver against customer specifications. You saw us taking the higher end of the range down with that move over value maximization versus volume. And other producers will do what the other producers do.

Yes, John, just to give you some idea. I think it's either 1 of 2 things in the quarter didn't happen. One, either diesel fuel prices were closer to where they were at in 2017 or we didn't have the amount of rain that we had. We would have actually seen sequential improvement in PRB costs year-on-year. So it kind of gives you an idea of the magnitude of the impact. So as you've noted, coming out of shoulder season, getting up to sort of more of our regular volumes is going to be helpful from a cost perspective. But frankly, the cost performance was pretty darn good in the quarter given both an external pressure in terms of fuel, which we would anticipate will continue to some large degree. But we'd like to make our way out of what is usually wet conditions for North [indiscernible]

And in some instances, as we talked about in the past, some of our lower-quality mines or low-quality pits actually delivered lowest cost and, therefore, can potentially lead to higher margins. So it's that combination as well that plays in.

And that's all the time we have for questions today. Mr. Kellow, I'll turn the conference back to you for additional and closing remarks.

Well, thank you for your questions and for taking part in today's call. I'm pleased to be part of a team that continues to have significant accomplishments quarter in and quarter out. And we continue to execute on our stated financial approach, which starts with generating cash. Certainly, from a number of questions we've received just on the call, recognize the importance of cash generation and our cash balance and use of cash remaining top of mind to investors. We are taking advantage of these robust seaborne markets and executing from an operational perspective to continue to create value for our shareholders. I'd especially now like to thank our employees for their continued focus on safe and productive workplaces. And to our shareholders, bondholders, lenders and sell-side analysts, thank you for your ongoing interest in BTU. Operator, that concludes today's call.

Thank you. That does conclude our conference for today. Thank you for your participation. You may now disconnect.