Peabody Energy Corporation (BTU) Q1 2020 Earnings Report, Transcript and Summary

Please standby, we're about to begin. Good day everyone and welcome to the Peabody Energy First Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. Following today's presentation instructions will be given for the question-and-answer session. [Operator Instructions]. As a reminder, this conference is being recorded Wednesday, April 29, 2020. I would now like to turn the call over to Julie Gates. Please go ahead.

Good morning and thanks for joining Peabody's earnings call for the first quarter of 2020. With us today are President and CEO, Glenn Kellow; as well as Interim CFO, Mark Spurbeck. Within the earnings release, you will find our statement on forward-looking information as well as a reconciliation of non-GAAP measures. We encourage you to consider the Risk Factors referenced there along with our public filings with the SEC. Given the unique circumstances of COVID-19, we will begin today's remarks with a robust discussion of Peabody's specific actions underway in response to the evolving situation. I'll now turn the call over to Glenn.

Thanks, Julie, and good morning everyone. I'm pleased to note that Julie has recently taken over as Head of Investor Relations and Communications. So welcome. I'd like to start today by extending my sincerest gratitude to our global workforce of more than 6,000 employees, particularly those serving on the frontlines to provide products to meet vital needs. Thank you for all you do each and every day. It has been a challenging start to 2020 and among the most complex global backdrops in my more than three decades in the global resource industry. For context, in just the first quarter, Australia was still facing the impacts of persistent and tragic bushfires immediately followed by some of the heaviest rainfall to hit New South Wales since the 1990s. In the U.S., we saw natural gas prices hit 21-year lows, and now we and the rest of the world are managing through the devastating and complex COVID-19 pandemic. Coal mining has been designated as an essential business by many governments to support coal fueled electric power generation and critical steelmaking needs. Even so, the health and safety of our employees and broader communities remain at the forefront of all we do. We will continue to operate our mines only went decide and economic to do so. We're following recommendations by the CDC and the Australian Department of Health with rigorous protocols, controls, and prevention measures implies at all of our locations. This includes temperature and health screens, paid COVID-19 leaves, enhanced cleaning and sterilization practices, expanded use of personal protective equipment, remote work where possible, and social distancing procedures. We're also utilizing more flexible rosters at many of our sites to reduce exposures. In these times of the great global uncertainty, we're enhancing our efforts to protect our business. We believe it's not enough to simply live within our means; we must take aggressive, decisive action and create our own catalysts for change. As such, we're actively pursuing structural improvements across the enterprise. An internal project team has been formed; with oversight by our Board of Directors to manage a host of initiatives. The project team is tasked with expediting a detailed mine-by-mine analysis to identify structural improvements, identify any gaps, and ensure accountability for operational targets. All mines will be included in the analysis with initial focus on the highest-value opportunities. Let me be clear, mines that cannot demonstrate a path to cash generation at lower pricing levels will be suspended. We've proved that willingness to do so with a suspensional closure of several mines in the Midwest in 2019. In April, we eliminated approximately 250 positions from some of our PRB and Midwest mines to better scale staffing requirements to meet customer demand. With those actions, we would expect the second quarter restructuring charge. This follows the reduction of approximately 215 operational positions across eight mines in the first quarter of this year to better align with industry conditions. Last year, you'll recall we identified $50 million in cost savings that benefited SG&A and operating costs, and it's being implemented throughout the year. As a result of further reductions in the first quarter, we're expecting an additional $20 million of annualized cost savings, about $10 million of which will be a direct benefit to SG&A. Combined these actions have resulted in the reduction of our corporate and support headcount by over one-third in the past two quarters. In addition, we have taken steps to mitigate our financial risk. We previously suspend dividends and share repurchases. During the first quarter, we paused voluntary debt reduction activities and have no current plans to repurchase senior secured notes or the term loan. Then in April, we borrowed $300 million under our revolving credit facility to enhance our financial flexibility. We're also evaluating our portfolio to determine if we have the right mix of assets or certain assets to be candidates for divestiture. A recent example is to sell surplus undeveloped tenements in Australia during the first quarter. We're also continuing to pursue key business initiatives for highly synergistic PRB/Colorado joint venture and the commercial process for the North Goonyella mine. Peabody and Arch are contesting the SEC's negative split decision regarding the formation of the joint venture in court starting in late June. Dependent of course on any scheduling changes by the court, a ruling is expected shortly thereafter. The North Goonyella commercial process is also underway. As you would expect, we are closely monitoring the market situation as we proceed with this process as well as an incremental spending related to the re-entry and development of the mine. We have also been focused on reducing holding costs at North Goonyella. Most recently we successfully entered into commercial agreements to reduce rail and port commitments beginning mid-year 2020. While these reductions, in port and rail commitments span a multi-year period, we maintain sufficient rail and port capacity when the mine resumes operation. Quarterly holding costs are now projected to be about $5 million starting in the third quarter of 2020. This marks an approximately 85% reduction in costs over the past several quarters. Overall, it's a time of significant change for the global economy, our business, and our employees globally. This team continues to step up to each and every challenge, while keeping safety and health top of mind. Turning to industry dynamics now. The impacts of COVID-19 have been widespread with the International Monetary Fund projecting the global economy to contract more than it has in almost a century. National shutdowns are continuing resulting in supply and demand disruptions across the coal industry. So I'd like to focus on several key regions starting with China. While restrictions in China have now been lifted, the cash we reported nearly 7% contraction in first quarter GDP have been enforced large-scale shutdowns and quarantines to contain the outbreak. Despite these conditions, China increased total coal imports by 28%, rebounding from the drop-off late in 2019 when import restrictions were enforced. These strong import levels combined with low domestic prices has ultimately resulted in oversupply of thermal coal in the country pressuring process. Overall Chinese domestic coal prices has been weak with the arbitrage in favor of the imported coals particularly on the met side. We are closely monitoring coals for government intervention in the form of production cuts and potential import restrictions. Steel operations in India have been impacted by multi-week shutdown of the country, triggering a number of ports to close ports mature on seaborne cargos. In addition, Japan recently announced a state of emergency and made a sharp spike in COVID-19 cases. As a result, two of the country's largest producers accounting for about three-fourths of Japanese steel output [ph] have moved to cut production by 25% due to a significant decline in demand. In addition to demand impacts, supply risks continue to emerge as a number of global and domestic producers have curtailed or suspended production. Turning to the U.S., the impacts from the pandemic applies the increased pressure on total load and in turn coal demand. In early April, electricity demand declined to lows not seen since 2003, as major industrial activity has been shutted contributing to depressed power process. During the first quarter, average Henry Hub natural gas prices reached their lowest levels since 1999. Year-to-date through March, coal fuel generation is down 31% with coal production declining 17%. April has been another challenging month reflected limited industrial activity in what is traditionally a shoulder season. Overall, it's a time of significant change for the global economy in our business. With that, I'll now ask Mark to cover the first quarter highlights and our 2020 outlook.

Thanks, Glenn. Against this difficult backdrop, I'd now like to touch on a few of the key financial results in the first quarter. Revenue totaled $846 million compared to $1.25 billion in the prior-year largely due to the impact of reduced volumes and lower pricing. As a reminder, our Kayenta mine ceased production in the third quarter of 2019. DD&A in the first quarter totaled $106 million representing a 39% decline from the prior-year. DD&A reflects the closure of Kayenta as well as lower contract amortization expense and volumes. First quarter SG&A improved 32% versus the first quarter of 2019 down to $25 million. This reflects the benefit of actions taken to-date as well as lower share-based incentive compensation. Earnings from equity affiliates reflect the loss of approximately $9 million related to the independently operated Middlemount joint venture due to the impacts from heavy rainfall in January and February. The joint venture recently agreed to have one of Peabody's General Managers run the day-to-day operations at the mine. As expected, first quarter adjusted EBITDA of $37 million was impacted by lower realized pricing and higher seaborne metallurgical costs. We continue to see strength from our seaborne thermal segment. Adjusted EBITDA margins of 27% were driven by $32 costs per ton even as drilling and blasting at Wilpinjong were impacted by wet weather. As expected results from our seaborne met segment reflected the impacts of an extended longwall move at Metropolitan, pit sequencing at Moorvale, and the start of the mainline conveyor system upgraded at Shoal Creek. We also completed high wall mining at the Millennium mine in the first quarter. Lastly, U.S. thermal demand has been challenging as indicated by first quarter volumes. In the PRB, a ton rose 4% due to pit sequencing and an increase in the federal coal excise tax. Higher costs were partially offset by lower diesel costs and favorable mix. Beginning this year our former Midwest and Western segments were consolidated into other U.S. thermal for purposes of segment reporting following several mine closures in 2019. This segment delivered 20% adjusted EBITDA margins in the first quarter driven by lower repairs and maintenance costs and favorable diesel pricing. Focusing now on our balance sheet, we have total liquidity of nearly $1.2 billion and carried net debt of $624 million at quarter-end. As Glenn mentioned, we elected to borrow $300 million under our revolving credit facility after quarter-end in light of the global uncertainty related to the COVID-19 pandemic. This step is just one of many actions we are taking to mitigate financial risk and ensure we have adequate financial flexibility. While we're suspending full-year guidance given uncertainties with respect to COVID-19, I'd like to review what we do know today. Currently, second quarter headline spot pricing for our seaborne products is significantly below first quarter averages and may substantially impact the company's second quarter results. Within our seaborne metallurgical segment, we are continuing with the upgrade of the Mainline Conveyor system at Shoal Creek in the second quarter. In Metropolitan, we have resumed mining in the new panel following a Q1 longwall move. At Coppabella, we are mining through a relatively lower ratio pit, which is projected to mitigate the cost impacts of a major dragline repair in the second quarter. Within seaborne thermal we have just over three million tons of export thermal coal priced for the remainder of the year at an average price of $64 per short ton. In the PRB, we have 88 million tons priced at an average price of $11.46 per ton for delivery in 2020. We also have 19 million tons of other U.S. thermal business priced at an average of $36 per ton. Our U.S. sales agreements include a blend of fixed volume commitments as well as requirements and options contracts that do allow for some volume flexibility. Given rapidly changing market conditions, we have had several customers notify us of changes in nominations, we've also had customers' book new business. Ultimately deliveries will be dependent on weather, natural gas prices and other factors. We're closely monitoring these volumes given ongoing industry weakness and are aggressively protecting our contractual rights. Current conditions underscore our strategy to have a strong book of business to start the year. As we think about other business drivers, we expect to realize lower diesel prices and Australian dollar exchange rates this year. We also expect to accelerate the collection of our remaining $24 million of AMT credits and defer approximately $18 million of FICA tax payments into 2020 and 2021 under the CARES Act. These tiny benefits come in addition to the $24 million in AMT credits already collected in March. 2020 SG&A has been lowered to about $120 million. Reduced capital expenditures of approximately $235 million are dedicated to sustaining and compliance activities, joint venture commitments, and midstream projects with rapid cash paybacks. In addition, we have scaled back ARO cash spend to approximately $60 million. I'd now like to turn the call for questions. Operator?

Thank you. [Operator Instructions]. And we will first hear from Lucas Pipes of B. Riley.

Hey, good morning everyone. I hope you're all doing well and staying safe.

Good morning, Lucas. Thank you. Same to you.

Thank you, thank you. I first wanted to ask you about the metal business and in the release, you mentioned how you're going to be rebuilding essentially all the operations for profitability and when you look at Q1, obviously costs were unusually high and I assume you don't really see the benefit yet of oil and exchange rate changes, but now kind of second quarter prices have come down a lot more and how should we think about that business and how should you maybe adjust to this current market environment? I appreciate your thoughts and color on that.

Yes, thanks. Thanks, Lucas. So as we indicated in the previous quarter and call and also in this release, we were expecting some activities that would give elevated costs in that first quarter. One was the extended outage at our Metropolitan mine. The second was pit sequencing and coal activities at our Coppabella and Moorvale mine. And we also commenced the upgrade project at Shoal Creek. So we were expecting higher costs and that continuing to set us up in terms of operational capability at a later point. Our met business unfortunately did make a loss in the quarter. As you've indicated, prices have moved further which would continue to impact that that business into the second quarter. I think and this is a general across all of our portfolio our first priority is obviously the health and safety of our workforce and the communities in which we operate. And then we're thinking about the challenge really at two ends. Firstly is staying very close to our customers, understanding our markets, understanding our customers, understanding their requirements. And then from our business in the -- through that lens of safe operations, being able to adjust our operations, production plans to meet those customer needs. You saw us tight action progressively in the first quarter and again through the month of April as we continue to adjust our mine plans to meet those customer requirements. On top of that, we do have a number of activities underway which you would expect in order to appropriately respond and position our business. We would expect our mines if they come pressured at low price environments to be able to identify a path to cash generation. Otherwise, we've had a track record of acting to suspend or curtail mine -- mine production. The particular practice of our activity, Lucas, as you have alluded to would be our met platform for some of the reasons that I've indicated.

That's very helpful. I appreciate all the color. Switching -- switching topics, on the liquidity side, you've taken some measures to further bolster that. And then when I looked at some of the working capital changes, big benefit on the inventory side, but then on the payable side, that also looked like a change quite substantially from the end of the year. What were some of the big drivers behind that? And if you could maybe wrap that into a broader discussion of how you think about liquidity in this market environment, what's adequate et cetera, that that would be very helpful. Thank you.

Yes, good morning, Lucas. Couple of things on the working capital, the payable side, a couple of biggest movers was timing related to network research and royalty payments, compensation as well, accruals for payroll. So normal working capital items, nothing -- nothing out of the ordinary from that perspective. As you mentioned, given the uncertainty around the COVID-19 pandemic, we certainly are protecting the company's liquidity and cash position. After quarter end, as Glenn mentioned, we drew down $300 million on the revolver to bolster the company's cash position. Certainly, without knowing the depth and severity of the pandemic, the company has taken a very cautious approach today.

Matt Vittorioso from Jefferies.

Glenn, good morning. Thanks for taking my questions. I guess I have two questions first, just on the potential monetization at Goonyella, is there any way to help us think about the magnitude or the size of the proceeds you might be able to get or what the valuation is there. I know there are other miners that are right there in the vicinity that probably have their eye on at least each of those assets. And maybe you could tell us around what you're thinking as far as the size or what approaches might be from potential monetization there?

Good morning. Thank you for the question. Given that we have a commercial process underway, you'd naturally expect us not to comment on views around that. Having said that significant reserve position, high quality, coking coal routinely would be able to sit, start has been participating setting the benchmark for that particular product. Good infrastructure, good location. So we like the asset. But there is a commercial process underway, yes, you would and you wouldn't expect me to comment. But with respect to North Goonyella, you also took the source type significant steps as we've indicated over the last couple of quarters; our focus was on reducing the holding cost. And we've been successful in being able to do that particularly now, not only in the activities that are occurring on the ground, but the take or pay commitments we expect to be mitigated from the third quarter.

Okay, great. And then my second question, I guess would just be on capital allocation. You were, I guess, pretty clear that you have to spend a debt reduction activity and are not looking to repurchase any of your secured notes in the open market. I guess I find that a little disappointing from a debt perspective. You've got $1.2 billion of liquidity. You've got a 2022 maturity that's trading at a pretty deep discount. You guys were out buying equity. When the equity implied a $4 billion or $5 billion valuation, you now have bonds that imply the company; the enterprise is worth less than $500 million. And you've got liquidity. It feels like this is a real opportunity to create equity. And then you're basically saying you're not going to do anything. I was just hoping comments on that.

Yes, sure. Happy to add a little more color there. As we noted last quarter, we intend to reduce debt over time. The pacing and quantum of debt reduction, however, is dependent on both industry and company specific factors. The overall uncertainty related to COVID-19 resulted us in suspending guidance. It certainly muddies the water from a liquidity perspective. Rather you saw a straw on the revolver to protect the company's cash position and financial flexibility in these uncertain times. We also have no further clarity with regard to the PRB joint venture with Arch or at North Goonyella since the last time we spoke. So, the answer to your question, we've taken a cautious approach. We think that's prudent given the industry conditions and the overall uncertainty in the market today.

Mark Levin with The Benchmark Company. Hearing no response, we'll take a question from Matthew Fields from Bank of America.

Hey everyone. Can you hear me?

Yes, Matt.

Yes, thanks. I just like to echo Matt Vittorio comments and just kind of note that it reminds me a lot of in 2015 and 2016, when analysts begged Plastic Energy to repurchase their bonds at a discount, and they chose not to. But I guess that's a story for another day. So I guess in that light, what is the difference from your point of view between available revolver and having the cash on the balance sheet unless you think that the banks that lend to you are going to become insolvent? Like, what's the difference between $630 million of cash and $930 million of cash when you're operating in that margin; you have full, full access to your revolver?

Yes, Matt. It's Mark. Just again, I think there's two things. There's available liquidity on the revolver when we decided to draw down after quarter end, it's really to have that cash on the balance sheet. Given the uncertainty and the unknown depth and severity of the crisis as it rolled out here, so an additional cash on the balance sheet was a better position to be in. I think you saw in many companies, including ourselves in the industry as well as the broader industry do the exact same thing.

Okay, happy. Thanks very much. I just would sort of echo the other questions about buying back bonds at a steep discount that could create equity value and give you further runway and sort of do all sorts of good things for the company. But thanks very much and good luck.

Thank you, Matt. Appreciate those thoughts.

Dave Gagliano of BMO Capital Markets.

Hi, thanks for taking my questions. I just wanted to perhaps drill down a little bit on some near-term operating metrics. I know obviously guidance is suspended. I think obviously the met business generated [ph] operating loss in the first quarter on two million tons. I think it was two million tons of shipments. Can you at least give us a sense as to what you're thinking in terms of the volumes for the remainder of the year on the met side? And are related sort of within that question, can you give us a sense as to obviously with the weakness in pricing now, how much of the -- previous target was 8.3 million for the year you did two, so let's say 6 million left to go. How much of that is actually EBITDA positive in the current environment?

I will take the first one, Dave. I think we, as we said, we suspended guidance but also in Q1 there were factors around positioning the business that are just planned as part of the mine change or in the case of Shoal Creek, some flag work we were doing on our price. The part answer is around the market. And as I said this -- need to addresses this problem a challenge of both ends. The first is for the met market in particular, the extent to which nations will be under enhanced restrictions and how quickly they will recover. And two important markets, I think from a metallurgical coal perspective will be India, which extended its second three weeks shutdown. That is a large importer of met coal and Japan. And Japan's important I guess from two perspectives not only met coal and I talked about the decline in steelmaking that have taken place there with current conditions, but also it's a major consumer of high quality thermal coal. So an important market from both perspectives. China, of course just because of the size and scale and importance on the seaborne market will be another factor. And we've seen encouraging signs in China. But the question remains, how quickly will let that recovery take place? And then what if any additional restrictions, import requirements will work across that. So those things are really lead to uncertainty and being unknown and essentially a frustration but that's what led to the removal of guidance, just the nature of trying to call things we just don't know. Having said that we actively with our customers try and understand those markets try and understand those requirements. But there's a lot, I don't know at this point in time as well.

Maybe I would just add. From an EBITDA perspective, I think your last the second part of that question how much that was EBITDA positive? Given the fact that we pulled guidance, we wouldn't be able to speak to that either. Certainly, we expected improvement in costs in the second half of the year. But without knowing where prices are going to be, as I mentioned in my remarks earlier, prices have been volatile, and they're certainly lower than that first quarter and that will have a negative impact on Q2 and then the rest of the year if prices stay where they're at.

Okay, and that's really the nature of the question. I appreciate that. It's challenging extremely challenging environment, but at the same time obviously in this environment burning cash is not an option for an extended period. So I guess the question really I'm getting at is why not shutdown more capacity now given the environment, are the cost savings expected to offset where we are in pricing at this point?

I indicated that we were looking mine-by-mine, obviously a particular focus on our met business. Look for opportunities and activities. If mines can’t demonstrate a path to cash generation, we would make those decisions.

And when do you expect those decisions to be announced within the next three months, or on the next earnings call?

No, we will provide updates as appropriate. You could consider it's an ongoing process. We took actions, there are over 500, I think 570 positions that we took across the first four months of 2020. And we will continue to take actions, we took actions to meet changes in demand, you would expect us to continue to take those actions going forward.

Okay, appreciate it. I realize it's an extraordinarily difficult time and these are not easy decisions to make. I just appreciate the update. Thanks very much.

Okay, thank you.

Next, we'll hear from Mark Levin of The Benchmark Company.

Sure my [Indiscernible] gets cut off the floor and I apologize if I missed any answer to this question, but realize you guys aren't giving guidance going forward. So I don't want to go directly to that but maybe more anecdotally and what you're observing, as it relates to Australian Thermal or seaborne thermal segment, the global LNG price is around two bucks or so, are you guys seeing any customer pushback on volume from maybe some of your key importing countries in Southeast Asia ex-China, some of the other countries? Just kind of curious what the demand environment looks like right now for seaborne thermal?

I indicated its important markets for seaborne, important customers obviously Korea and Taiwan so continue to move through reasonably well versus other environments. I mentioned China seeking to recover. The extent to which coal stocks are hot there and the extent to which they work their way through. The real key is going to be their impact on import restrictions, if any, how quickly we see that being applied. I mentioned Japan as the activities there and India really being a key market particularly on metallurgical coal having a second of its extension. So they are all key markets, Peabody on a seaborne perspective in key markets, I guess for the global seaborne industry in general.

Glenn, are you getting pushback I guess maybe as it relates to the seaborne met and the seaborne thermal side, are you having customers approach you looking to defer deliveries, delay deliveries, buyouts, whatever the case may be, what's sort of been the discussions with customers?

The discussions with customers to try to understand their requirements and there's a great deal of uncertainty around them working with customers, if that's appropriate, but also defending our contractual rights as well.

Yes, that makes sense. And then last question from me. I think 2020 you guys lowered CapEx to $235 million. I think you got to finish up spending on Wilpinjong and Wambo. Sounds to me like and maybe Shoal Creek, so it sounds like Wilpinjong and Shoal Creek will be done this year, a lot of Wambo will be done next year. So when you think about 2021 CapEx is it -- it sounds like it would be maintenance plus, whatever's left it at Wambo. How much would you have left at a) is that correct and b) how much left to spend would you add at Wambo in 2021?

Yes, Mark. Two points, one first, I'd make you’re right, we initially was guiding toward $250 million for the year. You remember that was a significant reduction from probably the building block that we put out earlier about $400 million. So took a significant reduction in CapEx heading into the year, did find $15 million of opportunities to reduce that again here for this announcement going forward. And you're right outside the sustaining CapEx, the two large projects this year at the Wambo, Open Cut joint venture with Glencore, as well as the Wilpinjong expansion project. Wilpinjong that was started last year significantly finishing up this year with maybe just a little bit of spend next year. And then the joint venture there's going to be some significant spend next year for the joint ventures that continues to ramp-up. So that would be the biggest thing outside of routine sustaining CapEx.

And that will conclude today's Q&A session. At this time, I would like to turn the call back over to Glenn for any additional or closing comments.

Thank you, operator, and thank you to all on today's call. These are certainly unusual and difficult days and Peabody like the rest of the world is navigating uncharted waters of the pandemic. I continue to be impressed however by our team's ability to react quickly to the evolving situation and a new way of doing business as we work to provide an essential service that is vital to so many. Thank you to all our employees for your tremendous efforts. I'd also like to thank our investors for your ongoing support as we tackle near-term headwinds and advance robust, aggressive actions targeted towards the most structural improvements. With every positive near-term action, we believe, we are best positioning Peabody for longer-term success. We look forward to keeping you apprised of our progress. So all please stay safe and well and operator, that concludes today's call.

Thank you. Once again, that does conclude today's conference. You may now disconnect.