Alpha Metallurgical Resources, Inc.

Greetings and welcome to the Alpha Metallurgical Resources Second Quarter 2023 Results Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to your host, Emily O'Quinn, Senior Vice President, Investor Relations and Communications. Emily, you may begin.

Thank you, Paul, and good morning, everyone. Before we get started, let me remind you that during our prepared remarks, our comments regarding anticipated business and financial performance contain forward-looking statements, and actual results may differ materially from those discussed. For more information regarding forward-looking statements and some of the factors that can affect them, please refer to the company's second quarter 2023 earnings release and the associated SEC filing. Please also see those documents for information about our use of non-GAAP measures and their reconciliation to GAAP measures. Participating on the call today are Alpha's Chief Executive Officer, Andy Edson, and our President and Chief Operating Officer, Jason Whitehead. Also participating on the call are Todd Muncy, our Chief Financial Officer, and Dan Horn, our Chief Commercial Officer. And with that, I'll turn the call over to Andy.

Thanks, Emily, and good morning, everyone. I'm pleased with our team's performance in the second quarter, especially in light of some challenging circumstances that we worked hard to safely and quickly overcome. Our June operational update press release detailed the circumstances around the events at our Road Fork 52 mine in West Virginia and the Dominion Terminal Associates terminal in Virginia, so I won't recount them here. But I will say, due to the diligence of our team, each of these challenges was resolved in a satisfactory and quick manner. As our press release this morning stated, the delayed tons from ETA shipped out in July as expected, and the Road Fork 52 production levels are back to normal. and we expect to be able to make up the delayed tongues impacted by this issue within the third quarter. Despite these hiccups, we produced quite well during the second quarter. In terms of realizations, the metallurgical indexes have experienced volatility in recent months, but have generally followed a downward trend coming off the highs of last year. I believe alpha is well positioned to deal with this volatility in the coal market and further softness in the indexes should that occur. On the volume side, We are fully committed at the midpoint of guidance across the portfolio for this year. As we continue focusing on safely and efficiently producing this coal, for our customers, we are also looking toward next year and the best way to position ourselves for whatever may come in 2024. The current weakness in steel demand, coupled with monetary tightening in the United States and Europe, and the residual inflationary pressure on supplies and materials are all considerations in what we expect the back half of the year to look like. As these and several other geopolitical and economic factors continue influencing the coal markets over the coming months, we plan to keep our focus on producing safely, optimizing our output based on customer market needs, and controlling our costs. These are the priorities that will serve us well in all pricing environments. Turning to our capital return program, we've not only seen great success from the buyback program with more than $850 million returned to stockholders, in the form of buyback since the program's inception roughly 17 months ago. But we've also heard from our investor base with pretty certain unanimity that share repurchases are the preferred method through which they wish to have capital return. With that goal in mind, we've decided to consolidate our capital return efforts into an exclusive focus on our share buyback program. The dividend program will cease following the board's next dividend declaration and payout, both of which are expected to occur in the fourth quarter. We had previously targeted a $28 million annual dividend amount with quarterly unit dividend growth coming from the impact of the share repurchases, but this budgeted amount will now be available for redirection to the buyback program. Management will continue to execute on the Board's current $1.2 billion share repurchase authorization, provided market conditions and cash flow levels allow. I believe utilizing all available funds for the share buyback program is the most efficient option that represents the best return to our shareholders, so that's what we're going to do. With that, I'll turn it over to Todd for discussion of our second quarter financial results.

Thanks, Andy. Second quarter adjusted EBITDA was $258 million, down from our first quarter level of $354 million. We sold 4.3 million tons in the quarter, 4.1 million of which came from our MET segment and 200,000 tons from the all-other category. Quarter-over-quarter realizations decreased for the MET segment as a whole, with an average realization of $172.51 for the second quarter compared to $208.93 for the first quarter. Export met tons priced against Atlantic indices and other pricing mechanisms in the second quarter realized $175.69 per ton, while export coal priced on Australian indices realized $159.62. These are compared to last quarter's realizations of $211.31 per ton and $240.76 per ton, respectively, which benefited from a more robust coal pricing environment. Realization for our metallurgical sales in the second quarter was a total weighted average of $176.04 per ton, down roughly 17% against the prior quarter's $213.21 per ton. Realizations in the incidental thermal portion of the met segment decreased quarter over quarter, coming in at $115.50 per ton in Q2 as compared to $137.65 in Q1, reflecting the lower thermal pricing for the period when the tons were sold. Similarly, second quarter realizations in the all other category were $99.66, down from $109.36 in the first quarter. This quarter-over-quarter drop in realization was due to the declining pricing environment for thermal coal. Cost of coal sales within our met segment decreased to $106.35 per ton, down from $110.56 per ton in the first quarter. Cost of coal sales in the all-other category increased quarter-over-quarter to $88.59 per ton, as compared to $74.69 per ton in the first quarter. This increased cost level in the all other category is due to expected inefficiencies associated with the slab camp mines approaching end of life. SG&A, excluding non-cash stock compensation and non-recurring items, decreased to $14 million in the second quarter as compared to $17.7 million in the first quarter. Q2 CapEx was $54.9 million, down from $74.2 million in first quarter 2023. The lumpiness in CapEx spending we mentioned last quarter has continued, but we have reiterated our previously established CapEx guidance range of $250 million to $280 million for the full year of 2023. Moving to the balance sheet and cash flows, as of June 30, 2023, we had $312.4 million in unrestricted cash, up from $222.5 million at the end of the first quarter. We had $93.1 million in unused availability on our ABL at the end of the quarter. Alpha had total liquidity of $405.5 million as of the end of June, which is net of the $155 million in share repurchases during the quarter. By comparison, total liquidity at the end of the first quarter was $315.6 million. Cash provided by operating activities increased quarter over quarter to $317.2 million in Q2 as compared to $177.4 million in Q1. As of June 30, our ABL facility had no borrowings and $61.9 million of letters of credit outstanding unchanged from the prior quarter. Turning now to our committed position for the year, due to some customer deferrals, we have reduced our full year guidance for thermal byproduct coal volumes within the MET segment to 1 to 1.4 million tons. down from the prior range of 1.4 to 1.8 million tons. Walking through the committed tables, 71% of our metallurgical tonnage in our met segment is committed and priced at the midpoint of guidance at an average price of $189.15. Another 29% of our 2023 met tonnage at the midpoint is committed but not yet priced, which means we are fully committed for the rest of the year at the midpoint of guidance. The thermal byproduct portion of the MET segment is 100% committed and priced at the midpoint of the new guidance range and an average price of $99.67. And we are fully committed and priced for this year in our all other category with an average price of $90.47. Alpha's board has declared a quarterly cash dividend of 50 cents per share, which will become payable on October 3rd for holders of record as of September 15th. The Board has also determined that the fixed dividend program will cease at year end to consolidate our capital return efforts on the buyback program. Pursuant to the share repurchase program, we repurchased just over 1 million shares at a cost of $155 million in the second quarter of 2023. Since the beginning of the program, we have spent approximately $850 million to acquire roughly 5.7 million shares of Alpha's common stock at a weighted average price of $149.64 per share. The outstanding share count has been reduced by roughly 26% from the time the program began. As of July 31, 2023, the number of common stock shares outstanding was approximately 13.7 million. I will now turn the call over to Jason for some details on operations.

Thanks, Todd. Good morning, everyone. As you've seen in our financial results, Our cost of coal cell numbers have come down, but not by a proportionate margin to the decrease in coal pricing over the last several months. We realize the corresponding drop in sales-related costs of severance taxes and royalties, but the other pieces of the cost equation tend to take longer to respond to shifting dynamics. Labor, for example, is an area where we have not seen any reversal of the COVID era inflationary pressure. The extremely tight labor market conditions are causing us to compete for talent with other mining companies as we normally do, but we now find ourselves competing with companies outside of the industry as well. We are aggressively working to both retain our talented workforce and attract to our team the up and coming stars of the next generation. In addition to higher labor costs, we've also seen stickier inflationary pressure within certain aspects of our supply chain. On a positive note, many parts and services, their availability has improved, and we continue benefiting from our own processes of building parts and equipment in-house. Pricing for supplies and materials continues to climb as annual contracts come up for renewal, and vendors are charging more for their products and services. We remain focused on mitigating these cost pressures to the degrees that we can. Looking at the ops portfolio, in addition to the issues at Road Fork 52, which feeds the Kepler processing plant, we experienced some geologic challenges within our band mill group. The band mill issues have improved, and the Kepler problems were resolved early in the third quarter. Despite these interruptions, we continue to demonstrate our resiliency by flexing production at other locations within the Alpha enterprise. Our large surface and underground mining fleets, which includes 64 active continuous miners, 16 production excavators or loaders, 20 D11s, and six high wall miners, I believe that breadth of our operation capabilities give Alpha a competitive edge via not putting too many eggs in one basket. And we work hard to optimize each piece of the organization to serve us well. As we have spoken about in previous calls, our last remaining thermal coal mine, Slab Camp, has been nearing completion. We have set a date of August 31, 2023, when this operation will mine out in idle. The workforce at Slab Camp and the Mammoth Preparation Plant that supports LabCamp have been instrumental in its success. We are excited to transition these employees over to our new Rolling Thunder Deep Mine, which took its first developmental cuts on June 6 and is ready to staff up, making the timing on this transition virtually seamless. While it's something we've talked about for quite some time, Slab Camp Mining Out, at the end of this month, Alpha will compete our years-long transition to a pure-play metallurgical coal company. I'm proud of this accomplishment and all the hard work and planning and implementation from our nearly 4,000 employees. We look forward to marking this occasion. I will turn the call over to Dan for some additional information on the coal markets.

Thanks, Jason, and good morning, everyone. Due to several economic and geopolitical factors, metallurgical coal markets have continued to soften as economies across the globe attempt to find stable footing. As the Russian war in Ukraine persists, inflationary impacts remain, and monetary tightening continues in the United States and Europe. Economic indicators like manufacturing production data indicate that many of the regions of the world are still contracting instead of expanding. The recovery growth expected following China's reopening from its zero-COVID policy has instead been muted, and China's June producer price index continued its multi-month decline, fueling concerns of economic weakness and possible deflation in the world's second-largest economy and the significant consumer of steel. All these factors are influencing steel demand and the metallurgical indices. During the second quarter, coal market indices experienced volatility as they continued the overall downward trajectory of recent quarters. Each of the four indices Alpha closely monitors decreased by 20% or more over the course of the second quarter. The Australian premium low vol index decreased from $300 per metric ton at the start of the quarter to $233 on June 30th. The US East Coast low vol index decreased from $284 per metric ton at the beginning of April to $227 at the end of the quarter. The US East Coast High Vol A Index dropped from $284 per metric ton at the start of the second quarter to $216 at the end of June. And finally, the US East Coast High Vol B Index decreased from $265 per metric ton on April 1 to $206 per metric ton on June 30. Following the quarter close, the three U.S. East Coast indices further softened slightly from their June 30th levels, with the low vol, high vol A, and high vol B indices measuring 215, 208, and $193 per ton, respectively, as of yesterday. The Australian premium low vol index, however, has increased from its quarter close level to $246 per metric ton on the same date. The thermal market has also continued its downward trend, with pricing dropping at more significant intervals than in the metallurgical markets. The API2 index fell from $146.55 per metric ton on April 1st to $122 per metric ton as of June 30th. And the most recent reports show the index dropping from its second quarter close levels with the API2 at $112.90 as of August 3rd. As we announced in late June, DTA, Dominion Terminal Associates in Newport News, experienced a mechanical failure on one of the stacker reclaimer machines, which caused roughly three days worth of downtime and impacted approximately 250,000 tons of office shipments due to vessel loading delays. These tons were previously expected to ship in the month of June, but they were made up in the month of July once the stacker reclaimer was repaired and came back into operation. In terms of planned maintenance, DTA just successfully completed their annual dumper outage, which occurred in early July. Everything is back to normal throughput levels and operating well. In terms of getting our coal to the port, we continue to be pleased with rail performance to DTA, which has remained positive in recent months. Transportation to and from some of our other locations has been more challenged at times throughout the quarter. But we are continuing to work around those issues with some success. and staying in touch with our transportation partners. Finally, as we look ahead to 2024 volumes and where our coal will be sold next year, we are in the early days of discussions with our domestic customers about contracts for the coming year. We look forward to productive dialogue with them in the weeks and months ahead. And with that, operator, we are now ready to open the call for questions.

Thank you. We'll now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. The confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. One moment, please, while we poll for questions. Thank you. Our first question is from Lucas Pipes with B Reilly Security. Please proceed with your question.

Thank you very much, operator. Good morning, everyone. Congrats on a very good quarter. and also that rolling thunder just got a little bit louder, so great job across multiple fronts. Then I first want to turn to the markets for a little bit. You just gave a good summary, but to hone in on the seaborne market first, What's your assessment? Is the market still a little soft here, or are you seeing signs of strengthening dynamics maybe in Asia? Would appreciate if you could kind of walk us through the different regions across the globe and where you're seeing opportunities and where it's maybe a little stiffer headwind. Thank you very much.

Hey, Lucas. This is Dan. I guess Broadly speaking, I'll say we've probably seen a bit of a summer lull in the markets, which is not unusual. A lot of buyers disappear from their desks and then go on holiday. And we've certainly seen some of that this year in the Atlantic Basin. I think opportunities into Asia have been there all year. We're pretty selective on which ones we take. There's some pretty low pricing opportunities there. But I think in Alpha's case, I'll just say that I think we're pleased that Our contract position this year, particularly in the Atlantic Basin and also in Asia, has kind of kept us from having to participate in a lot of those lower-priced spot opportunities. So we're, you know, I think, you know, we think that'll continue through 2023, that we won't have to play in some of those lower markets.

Thank you for that, Dan. That is helpful. You commented on the domestic negotiations and I wondered if you could remind us how much you typically sell into the domestic market on the medical side and what is the flexibility to shift more into the seaborne market? I assume there might be transportation considerations, but if you could kind of walk us through

uh some of some of the flexibility you may have there uh depending on how negotiations shape up would appreciate how you how you might think about it thank you yeah lucas well i guess you know i've been doing this a long time there's really no typical number i mean you can look at our historical numbers it could be somewhere between three million and five million tons a year we could place into the domestic market and we'll we'll wade into that and see uh you know see what our customers want and look at the opportunities in those markets. So I don't have a typical number for you. And in some years, it depends on the strength of the steel industry. And the coke and blast furnace production in the US dictates that as well. And as far as flexing the tons, we certainly can do that. We have the ability to move a lot of tons seaborne, as you know. And we could increase that if the opportunity made sense.

Very helpful, Dan. So kind of historically, what has typically taken you to the $3 million level versus the $5 million level?

Well, I guess, as I said, those would be in years where historically the U.S., the North American, let's say the North American steel industry would be in a weaker position, less coke production, less hot metal. But I don't necessarily see that this year. The North American industry is running pretty well. Steel pricing is holding up pretty well.

Appreciate it. Thank you, Dan. And to turn over to the cost side really quickly, I wanted to ask kind of where you're still seeing, if any, inflationary pressures and also where things might be easing from the cost side. Thank you all for your perspectives on that.

Hey, this is Jason. You know, really it's on the cost front with supplies and repairs, it's Other than those that are linked to steel indexes or fuel or something like that, really, the cost pressure continues across the board. It's very competitive on the labor side. It's very hard to find skilled labor. A lot of annual contracts are coming up for renewal as we work throughout the rest of the year. And, you know, a lot of these people are coming and saying, you know, look, we've been, we've been underwater, you know, this contract and, you know, it's time to, you know, we've got to fix this. So it's, there's really not one area that you can pinpoint. It's, it's more or less across the board. Uh, but I would speculate that, you know, we're, we're more than halfway through it, um, as far as contractor rules for, for 2023. And was there a second, second part of your question?

I think you touched on most of it. It was kind of where you're seeing pressures easing. Is there any relief on any cost side?

Well, so, you know, the supply chain constraints, I guess, the availability of parts and, you know, components, that has improved. So, you know, you would expect there would be some lag where you'd see improvement on the other side, but we just haven't seen that yet.

Yeah, and Lucas, this is Andy. If I could throw in one more broader comment on that. I've spoken with some of our suppliers, and their issues are the same as ours. I mean, these are all the cascading impacts of an extremely tight labor market. So as they staff up to try to get back to their regular run rates, they're paying higher wages. We're paying higher wages. In some instances, we may be competing over similar employee pools. And so it seems to all boil down to just a very constricted labor market.

That is very helpful. I guess with the increased investor interest, maybe you should offer internships for finance professionals or something like that. But all those aside, keep up the great work. Really, really great job. Thank you. Thank you, Lucas. Appreciate you.

Thank you. Our next question is from Nathan Martin with the Benchmark Company. Please proceed with your question.

Thanks. Good morning, guys. Happy Friday. Thanks for taking my questions. Hey, Nate. I'm going to start on the marketing side as well. Keep Dan busy here. You know, we've kind of touched on the offset price moving up here a little bit to start the third quarter. I think the CFR China price is up about $30 or so as well. likely driven by increased domestic price here in China. But we have seen, again, the U.S. East Coast net price indices creeping lower. So, Dan, it would be great to get your thoughts on the dynamics that play there, especially that widening spread of Aussie versus U.S. indices.

And I guess I'll attribute some of that to supply and demand. I think the demand in Asia is stronger than it is in the Atlantic at the moment. So you're seeing some of the benefits of that demand on the Aussie pricing. And as you know, we sell quite a bit of coal in Asia using that index. So that's, you know, we're pleased to see that. On the U.S. East Coast indices, probably some of that supply, you know, there's some increased high vol supply coming into the market here in 2023, some new mines in northern West Virginia. So there's some additional supply out there that might be contributing to that spread a little bit. But, you know, that's kind of how I view it.

Yeah, no, that's helpful, Dan. And then I would say related to that somewhat, you guys mentioned, you know, you're now 100% committed for 23 at the midpoint within the MET segment. So it would be really helpful maybe to get some insight into how you're thinking about alpha's export mix in between, you know, this off the index tons and maybe some of the other pricing mechanisms for the back half of the year?

I think that the breakdown that you see in our tables is probably similar to what we expect the rest of the year, Nate. I mean, shipments will come and go. There'll be some vessels, some changes, but broadly speaking, the breakdown that we gave you this quarter is probably a good barometer for that going forward.

The breakdown between the exports linked to Austin? Okay.

Yeah, we have a pretty detailed table there that breaks that down.

Got it. Yeah, it's roughly, you know, 33% or so to a third to Aussie and then about 40% or so, I think, to other mechanisms with the balanced domestic. Okay, good. That's helpful. I appreciate those thoughts. And then, you know, maybe shifting to the domestic market, you just mentioned some, you know, high vols. Tybalt production likely coming online here towards the end of the year. But we've also had some supply kind of coming offline in the U.S., some of it operational. I think there's been some idlings as well. So, you know, assuming tightness is helpful to you guys, but it would be great to get your thoughts, you know, specifically on supply demand here in the U.S. And then, you know, do you think there needs to be any more idlings or would you expect any more? It just would be great to get some color.

There's a lot to unpack there. I guess what I'll say is the domestic market, I really don't want to touch on that other than to say that the types of coals that the domestic market typically buys are on the higher quality end of the spectrum. And so some of the supply-demand issues that might apply to the seaboard market don't necessarily apply to the domestic market. But I think the demand, I think I would say that across the globe, Supply-demand is still fairly tight, and it doesn't take a lot of – it just takes one event to make it move up or down a little bit. And I think all the calls that are coming onto the market will find a home. If they don't find a home in the domestic market, they'll find a home in the seaboard market.

Got it. I appreciate that. I think that's all I have left, guys. So I really appreciate the time, and best of luck in the second half. Thanks, Nate.

Thank you. Our next question is from Jonathan Navarette with Cowan and Company. Please proceed with your question.

Great. Thank you. Good morning. I think markets have been pretty much well covered right now, so only one for me, and that is relating to the dividend. So what would need to occur to reinstate the dividend? And let's say, I'm going to give you a scenario. Let's say medical prices skyrocket. Would share repurchases remain the preferred method of of capital return, or would the dividend be considered again in the future? Thank you.

Hey, Jonathan. It strictly has to do with how the market values our company. If we believe the valuation is appropriate, then we might consider going that direction. But it seems like we're pretty long ways away from that. And as we saw back in the last two years, we've seen market cold market prices spiked to $600 a ton and $400 and everywhere in between, and company valuations didn't catch up. So I think we're very content to get to this pure share buyback program and stay there until the market determines it's going to appropriately value us, and then we'll consider some adaptation to the program. Thanks. Sure.

Thank you. Our next question is from Lucas Pipes with B. Reilly Securities. Please proceed with your question.

Thank you very much, operator. Thank you all for enduring one more question from me. So there's extensive media coverage of tech's efforts up in the Elk Valley and separating the coal assets. there's a lot of talk of steel makers from around the world, India, Japan, being potentially interested. And so one, you know, very interesting just in terms of how strategically met coal is important. And so my question to you is, as you engage with steel makers around the world, are you sensing uh are you also having a sense um that there's interest in on the vertical integration side uh would appreciate your your color on that i know it's a kind of higher level uh question but but any color you could provide would be would be interesting thank you yeah lucas um you know i don't i don't want to declare myself a mind reader here so these are strictly guesstimates but um and and my

data set is limited, not a huge sample size here, but over the past 13 years or so that I've been closely monitoring back in the M&A world, there's been waves of discussions around vertical integration. A lot of heat, a lot of activity, and nothing really has ever happened. Nothing material. So I think things get stirred up when the market gets weak and Perhaps people smell a little bit of blood in the water that these discussions begin. But until a big one happens, it's kind of hard to imagine it in this current world. So I don't know. There are some instances where it makes a lot of sense, but I just don't know when anyone will actually get to the point of executing on something like that.

That is helpful. Andy, really appreciate the color. Again, best of luck to you and to teams. Thanks, Lucas.

Thank you. There are no further questions at this time. I would like to turn the floor back over to Andy Edson for any closing remarks.

Well, thanks again, everyone, for dialing in. We appreciate your time and your interest in alpha, and we hope you have a great rest of the day and a great weekend.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.