Good morning, ladies and gentlemen and welcome to the Peabody Energy Q2 2020 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded today August 5. I would now like to turn the conference over to Julie Gates. Please go ahead, ma’am.

Thank you. Good morning, and thanks everyone for joining Peabody's earnings call for the second quarter 2020. With me today are President and CEO, Glenn Kellow; and CFO, Mark Spurbeck. Within the earnings release, you'll 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. I'd like to now turn the call over to Glenn.

Thanks, Julie, and good morning, everyone. First and foremost, I'd like to thank our employees for their continued dedication to providing essential products that are vital to so many in these uncertain times. As always, the health and safety of our employees is paramount to everything we do. We continue to operate under robust protocols and procedures in line with the CDC and other health department guidelines to help mitigate against COVID. Obviously, COVID has had a significant impact across the global economy. Specific to coal supply and demand impacts are key to understanding the backdrop in which we are currently operating. So today, I'd like to start with an overview of current market conditions and then move into actions we have taken to reposition our cost structure. I'll then provide an update on key initiatives before turning the call over to Mark to cover the financials. While the global economy continues to navigate through the pandemic, the timing, scope and scale of the recovery remains uncertain. Idled steel capacity across Europe and the Asia Pacific has greatly impacted metallurgical coal demand. Year-to-date through June, global steel production was down 6%, excluding China global steel production was down 14%. As a result, demand for major met coal importing countries, excluding China has been down year-to-date. While we have seen some supply responses prolonged uncertainty has resulted in continued pressure on seaborne metallurgical pricing. Highlighting how uncertain this market is. China was a net importer of steel for the first time in 11 years in June. And that was even with the record daily crude steel production during the month. On the thermal side, week overall electricity generation and competition for both natural gas and LNG has resolved in challenging fundamentals as well. Furthermore, slower economic activity continues to rely on…

Thanks, Glenn, and good morning, everyone. I’ll start today by walking through a few in notable items in the financials. Second quarter revenues declined 45% from the prior year to $627 million and significantly lower volumes in depressed pricing. Both seaborne demand and pricing were impacted by the ongoing COVID-19 pandemic. U.S. thermal volumes and prices were negatively impacted by continued weakness in natural gas prices. In addition, the closure of Kayenta in 2019 contributed to lower year-over-year revenues and volumes. Second quarter results include a $1.4 billion impairment charge at our North Antelope Rochelle Mine, despite it being a fabulous asset. Lower long-term, natural gas prices changes in timing of coal plant retirements and continued growth in renewable generation led us to change our long-term life of mine assumptions, resulting in the impairment charge. While we still believe coal is essential to reliable energy grid and that our PRB assets are best positioned to serve that demand as witnessed by our 19% Q2 margins of the PRB. We do expect coal is the long-term share of the U.S. generation mix to remain below prior year levels. Competition from other fuel sources, particularly natural gas and wind remains fierce. Underscoring the case for the PRB/Colorado joint venture with Arch, as litigation continued during the quarter, we incurred $13 million in transaction costs for the proposed joint venture. As Glenn mentioned, we’ve taken a number of actions across the business to improve our cost structure, resulting in restructuring charges of $16.5 million in the quarter. Some of the benefits from those actions are seen in the reduction in SG&A by 35% from the prior year. Year-to-date, SG&A expense of $50 million reflects the lowest level for comparable periods since 2003. Turning now to segment results. Let’s begin with seaborne thermal. We…

Thank you sir. [Operator Instructions] Mr. Mark Levin from Benchmark Company, please ask your question.

Okay. Thanks very much. A couple of quick questions, I’m trying to stay away from guidance. Because I know you guys have suspended it, but maybe some thoughts on how to think about net coal volumes and cost in the back half of the year, to the extent you’re able to comment.

Yes. Mark, this is Julie. So obviously, you’re right. We’ve suspended guidance there. It’s largely going to be a factor of what demand is, right? And what we’ve seen here recently has been met coal demand fall off quite a bit more. Steel production, year-to-date through June was down 14% excluding China. So that’s a pretty drastic move. We’re continuing to work with our customers and we’ll continue to work with them to meet their demands. But it’s really just a pretty big unknown at this point.

And in remarks, I’d mentioned the focus on the longwalls operations, two of our three longwalls are mid-assets. And as I said, we’ve been particularly focused on the fixed costs associated with those mines with reduced demand levels. So that continues to be a focus of our ongoing program.

Yes, got it, absolutely. It sounds like there was a lot going on in the second quarter that might be one-time. I know you guys had talked in the past about getting to kind of a $95 cost number. It doesn’t look like that that would happen this year, but I’m just curious, if there’s the potential to get costs below $100 million at some point in the back half of the year.

Well, certainly, I would see, either time, we want to target that level. But that would assume that we’d be operating at capacity or normal rights. And as Julie said, that’s going to be dependent upon talking to our customers, working with our capitalism. What the – their end situation is in the second half of the year. So we’re not really able to predict that at this point.

Mr. Lucas Pipes from B. Riley FBR, please go ahead with your question.

Thank you. Good morning. I wanted to [Technical Difficult] recorded already indicated that kind of customer interests starting to refer, what is going to your comments on that? Are you seeing increase inbounds for the economies over for still executed especially kind of [Technical Difficult]

Yes, I understand the question. Because we didn’t call it here, but I think the question you’re asking, you’re hearing other folks potentially both talking about customers building a little bit optimistic about the second half. Is that the sort of general nature of the question?

[Technical Difficult]

Yes. I think for us clearly China importing steel is probably a general positive. But we do have lockdown securing and idle capacity occurring across much of our target customer markets. We are starting to have the same sorts of conversations you’ll hearing. But I think it’s too early to sort of call that. I think it’s still a lot of uncertainty in the market, and clearly, tough conditions out there for foreseeable in metallurgical coal. And that probably is reflected in why, it’s been range bound. But also I’d probably indicate that a lot of unknowns around China and the import restrictions on met coal or coals going into China as well. And how quickly those targets are going to be held and would they be relaxed in some way in the second half of this year. So still a lot of uncertainties, as the pitch we’re trying to pipe.

Okay. I appreciate that. And then I wanted to follow-up on Mark’s question regarding principal cost. I hear it or see it anywhere in regards to that, the number on lower accounts for the lower value kind of cost per return [Technical Difficult]

Yes, Lucas, thanks for the question. We had net realizable value adjustments pretty much across to our met portfolio. Round numbers, it’s probably about a $20 million or $20 a ton impact.

Now with that being said, it’s a non-cash adjustment, I’d just point out. And then when that coal is essentially sold, it would be reverses that essentially. So it’s just an accounting adjustment, but it did have a sizable impact on our cost performance. No doubt about it. Certainly underscoring what tough market conditions we’re in, given it’s based off of stock pricing as of the end of the quarter.

Mr. Matthew Fields from Bank of America, please go ahead with your question.

[Technical Difficult] What’s your plan for any exchanges, but just wondering how you accomplished the designation within the confines of the [Technical Difficult] indenture? Did that come in through the permitted 150 per year of RP [Technical Difficult] about that you were able to read the [Technical Difficult]

Matt, it’s Mark. I heard most of your question. We’re having some trouble with the line. But what I would say is, that we effectively designated Wilpinjong mine is an unrestricted subsidiary in accordance with the negotiated terms. So the senior notes indenture and credit agreement, we don’t discuss and disclose individual baskets. But I will reiterate that everything we’ve done is consistent with the negotiated terms of the documents.

All right. And then can you talk about all the expenses in prepared remarks, you have additional collateralization. By my math, you should have had about $125 million more [indiscernible] additional cash collateral you were forced to post in this quarter.

So we had about $80 million of collateral that was posted during the second quarter. Was there something additional for that.

One moment, please. Mr. Fields, please go ahead.

Yes. Okay. Thank you. And then do you anticipate having to post any more collateral going forward throughout the year?

We routinely have negotiations and discussions with our surety providers. Early in the third quarter, there was about $50 million that we have posted here in July. We don’t anticipate a significant more at present time. However, we have those negotiations and the sureties have the right, contractual right to request additional collateral up to a 100% of the surety bond amount.

And Matt, I think you're aware, but those are generally in the form of letters of credit, not cash collateral postings.

Mr. David Gagliano from BMO Capital Markets, please go ahead with your question.

I hope you can hear me. I just have a question regarding the changes to the designation of the subsidiaries at Wilpinjong. Does that mean potentially divesting that asset is also under consideration?

No, I'll say that the designation of a restricted or unrestricted subsidiary has no implications of whether or not that asset would be for sale. We have no current plans today to have that asset for sale.

Okay. Thanks. And then in terms of the NII deposit, I think I missed the answer here. But I met coal cash cost in the second quarter. Was it just mentioned that there was a $20 negative headwind in the second quarter and does that go away all else equal cash costs should be down $20 a ton in the third quarter in that?

The question was, what was the impact of the net realizable value adjustments to inventory that we recorded during the second quarter that impact is approximately $20 million per time per ton – $20 per ton I said that twice now, $20 per ton in the second quarter. The non-cash charge, effectively, the inventory that we have on the books is valued at the realizable price less than it costs to get it to market.

And so just a little bit bucks for color there. That is based on a time sold, right, which were down substantially, so that we only sold about a million bucks per ton or a million tons. Now I'm getting – doing the thing million tons in the quarter versus 2 million ton in the prior quarter. So $20 million impact roughly, but on a per ton basis, it was outside given the weak demand that we saw in the quarter.

And going forward just to reiterate, it's going to be a function of demand or sales that we take in the second half of the year. And also in particular, I keep going back to well longwall operations, their ability to continue to respond to changes in demand profile.

Mr. Matt Vittorioso from Jefferies, please go ahead with your question.

Yes. Thanks for the question. Could you discuss the – I don’t know if there is any covenant issues with your credit facility and clearly, you've got a bunch of cash, but you're using the credit facility to post collateral and some of those other liabilities. So other maintenance covenants or, or any other covenants issues that are coming down the pipeline on that facility?

Matt, yes, one I'll just reiterate or confirm, we are in compliance with all the covenants in our debt documents. The covenant that is probably what you're referring to is the net leverage ratio of two times. And as we progress through the back half of the year here that firstly net leverage ratio will start to get tight. We are going to do whatever it takes to maintain compliance and access to the revolving credit facility.

Okay. And then I guess I'll just make more of a statement than a question. I mean, you guys spent a bunch of money on buying back equity while back and no one knew what conditions were going to look like in 2020, but not to the extent that your lenders are getting on this call, asking you legitimate questions about how you're maneuvering assets and what you're going to do with your cash. And I think a little bit more transparency would be appreciated just given that, we didn't need to be in this tight spot. So maybe just consider that. Thanks.

Thanks, Matt. I'll just – as I mentioned before, we won't discuss any specific plans today, but as I mentioned in my remarks, a debt for debt exchange is one of many financing options that we are considering.

Matt, and I think it's important also to recognize that the market landscape has changed considerably and drastically within just the last six months of the year. I mean, even if we just look at net prices in Q2 versus – of 2019 versus Q2 of 2020, I mean, we were talking about over $200 of tons versus $118. And so if you think about the backdrop of when we were making those decisions versus where we sit here today, things have drastically changed and nobody could have known that. And then COVID has obviously, add it to that uncertainty as well. So we're taking multiple steps across all areas of the business. Glenn, talked quite a bit today about the cost repositioning program. We've taken drastic actions on that front as well. I mean, over the past 18 months, we've eliminated 24% of our head count. So we're taking actions throughout the business and tackling it from every way that we can. No doubt about it. Preservation remains key here, but we believe we're doing what we need to do.

Mr. Scott here from Clarksons. Please go ahead with your question.

Hi, good morning, everyone. If I could also follow up on some of the questions about net coal costs. Some of the reasons you decided for the elevated costs in the quarter, other than the lower volume impact to their system upgrade took sequencing in the plant drive. On average, are all of these situations kind of behind you at this point or more some of these impacts per system of the third quarter?

Yes. So the dragline outage at Coppabella scheduled outage was done on time on budget. At Moorvale because of pit sequencing, we expect to be on call in the second half of the year. So I guess, entering the year we knew the first couple of quarters we're going to have those factors. The conveyor upgrade is taking a little bit longer at Shoal Creek than we envisage. But we would expect to conclude that in the second half of the year. I think ultimately costs are going to be more of a factor of volume. That's moved and our ability to respond particularly with fixed costs. We've taken steps across really the entire platform. But if I single last say metropolitan, one of my underground mines longwell operations, we have looked to supply that advance and take out fixed costs with new schedules and reduce contractors and workforce at that mine.

Okay. That's helpful. I appreciate that. And then staying on costs, but moving to thermal and then the PRB, costs were pretty impressive this quarter. But I think part of that was due to less maintenance expense. Do you kind of see this cost level is being repeated more through the remainder of the year or should we expect them to require in the quarters?

Well, I'm not sure we singled out maintenance expense. But look, the team has done a fabulous job across our entire U.S. thermal platform in being able to respond to significantly lower volumes. We might – we started to – when we sold a lot of natural gas prices and the impact on demand that was occurring in that first quarter, I think we've taken steps to respond. It's also a part of our ongoing cost improvement program that's really across the entire business, but I think clearly the U.S. thermal activity has really has really stepped up. And I would say that what we are looking at is sustainable cost improvement. Now it's fair to say that we've got some particular surface operations. We've got some tailwinds with respect to low of diesel process. But we are looking – not withstanding that we are looking at ways in which we can capture sustainable costs not only for the next six months, but over the life of mine plans.

There are no further questions at this time.

Well, thank you. And thank you all for participating in today's call. I'd like to especially thank you all employees for their continued dedication to reducing your quality products and for the heighted commitment to health and safety. Even with multiple changes to the business, you've all shown the ability to quickly adapt. I'm grateful for the unwavering focus as we adapt to a new global landscape. So, please stay safe and well. And operator, that that concludes today's call.

This concludes the Peabody Energy Q2 2020 earnings call. Thank you for participating.