Alpha Metallurgical Resources, Inc.

Greetings and welcome to the Alpha Metallurgical Resources Fourth Quarter 2023 Results Conference Call. At this time, all participants are on 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. You may begin.

Thank you, Rob, 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 fourth quarter and full year 2023 earnings release and the associated SEC filings. Please also see those documents for information about our use of non-GAAP measures and their reconciliation to GAAP measures. Participating on the call today are ALSA'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. With that, I will turn the call over to Andy.

Thanks, Emily. Good morning, everyone. This morning, we announced our fourth quarter results with adjusted EBITDA of $266 million. For the full year, Alpha generated over a billion dollars in adjusted EBITDA, which marks the second year in a row achieving that milestone. While 2023 was not without its challenges, I couldn't be prouder of the way that we responded as a company to those challenges and finished the year strong. The team did an excellent job of identifying issues, building a battle plan, and executing decisively to overcome whatever obstacle we faced. We ended the year within or better than nearly all of our guidance ranges having shipped a total of 17 million tons with 15.3 million of that being met coal. Our overall met segment costs for the year were in line at $111.67, while costs in the all other category came in better than guidance. SG&A, aisle operations expense, DD&A, and tax rate all ended the year within our guidance range. CapEx came in at $245.4 million, which is technically below the low end of the given range. However, when adding the $21 million of carryover that we have rolled into 2023, that puts us nearly exactly at the midpoint of our issued guidance for last year. Another milestone we reached during the fourth quarter was exceeding $1 billion in the share repurchase program. Since the program's inception in March of 2022, we have returned more than $1.1 billion to stockholders in the form of buybacks, repurchasing over 6.6 million shares of alpha stock. We remain committed to our previously stated strategy of utilizing available free cash flow for the program as the preferred method of returning capital contingent upon minimum cash levels and market conditions. As we look ahead, the board has set May the 2nd as the date of our next annual meeting of stockholders. And this morning we announced a list of director candidates who will stand for election to our board at that meeting. We also announced that following significant tenures with the company, two of our current directors have reached the age at which they may no longer stand for election per our corporate governance guidelines. And they've retired from the board effective today. Al Ferrara is our longest serving director, having been with us since 2016. Al has set the template for how an audit committee should be led and we appreciate how his influence has particularly impacted the finance and accounting functions of the company. Mike Quillen, and what can you say about Mike that hasn't already been said, he started this whole thing back in 2002 when he founded Alpha Natural Resources, and he's devoted much of the last two decades to building this company and seeing it through to its current success. It's hard to imagine the board without these two longstanding directors, but we've been blessed to have them at Alpha for as long as we have. And as we announced this morning, Liz Fessenden has also retired from the board effective today. We will miss Liz very much. She's been a director since 2021 and served as chair of the board safety health and environmental committee. She's overseen a time of great accomplishment in environmental and safety awards, better than the national average performance across the portfolio and back-to-back company records in 2022 and 23 for NFDL and TRIR respectively. I personally want to thank Liz for her support over the past year in particular. She's been a great source of encouragement and a wonderful mindset coach during my first year in this seat. We appreciate her leadership and wish her all the best. The good thing for me is that all these folks are still on my speed dial list. The bad thing for them is that all these folks are on my speed dial list, so I will be making frequent use of that list. In connection with these departures, the board sizes contracted from nine to seven seats, and we're excited to welcome a new and highly qualified individual to our board with the appointment of Shelly Lombard. Shelly comes to us with more than 35 years of experience on Wall Street and in other areas of the financial sector. She'll be a valuable addition to our board and audit committee, and I can't wait to begin working with her. I'll now turn it over to Todd for discussion of our fourth quarter and four-year financial results.

Thanks, Andy. Fourth quarter adjusted EBITDA was $266 million, up from our third quarter level of $154 million. We sold 4.6 million tons in the quarter, almost all of which came from our MET segment. 42,000 tons came from the all-other category. Quarter-over-quarter realizations increased for the MET segment, with an average realization of $183.76 for the fourth quarter, compared to $154.73 in Q3. Export met tons priced against Atlantic indices and other pricing mechanisms in the fourth quarter realized $175.32 per ton, while export coal priced on Australian indices realized $213.41. These are compared to third quarter's realizations of $136.76 per ton and $158.56, respectively. Realization for our metallurgical sales in the fourth quarter was a total weighted average of $193.54 per ton, up from $160.43 per ton in the prior quarter. Realizations in the incidental thermal portion of the MET segment decreased to $89.76 per ton in Q4, as compared to $92.22 per ton in Q3. Fourth quarter realizations in the all-weather category were $70.14 of as compared to $68.32 per ton in the third quarter. The cost of coal sales for our MET segment increased to $119 per ton in the fourth quarter, up from $109.95 per ton in Q3. The increase was primarily driven by higher sales-related costs and purchased coal costs, both of which were impacted by higher coal indices during the quarter. Higher labor costs were also a significant factor in the increase for the quarter. Cost of coal sales in the all-other category was $60.07 per ton as compared to $84.73 per ton in the third quarter of 2023. With regard to cost, there are a couple of items creating some real-time pressure on our 2024 cost guidance. First, with the indices remaining above the levels indicated by futures trading back in November when our 2024 guidance was issued, we're seeing higher sales-related costs than were budgeted. Also, we have had opportunities to purchase a higher volume of clean coal to add to the portfolio than was budgeted. And to the degree that these purchases continue at material volumes, this will also create pressure on our published cost of coal sales guidance. SG&A, excluding non-cash stock compensation and non-recurring items, increased to $16.9 million in the fourth quarter as compared to $15.1 million in the third quarter. Q4 CapEx was $61.5 million, up from $54.7 million in the third quarter. Moving to the balance sheet and cash flows, as of December 31, 2023, we had $268.2 million in unrestricted cash, down from $296.1 million at the end of the third quarter. We had $94.1 million in unused availability under our EBL at the end of the quarter. Alpha had total liquidity of $287.3 million as of the end of December, which is net of a $75 million minimum liquidity ABL covenant. Cash provided by operating activities increased quarter over quarter to $199.4 million in Q4 as compared to $157.2 million in Q3. As of December 31st, our ABL facility had no borrowings and $60.9 million of letters of credit outstanding which is unchanged from the prior quarter. Turning now to our committed position for 2024, 35% of our metallurgical tonnage in our MET segment is committed and priced at the midpoint of guidance at an average price of $171.33. Another 55% of our MET tonnage is committed but not yet priced. Thermal byproduct portion of the MET segment is fully committed and priced at the midpoint of guidance at an average price of $77.00 Pursuant to our share repurchase program, we repurchased approximately 500,000 shares at a cost of $137 million in the fourth quarter of 2023. Since the beginning of the program, we have spent approximately $1.09 billion to acquire roughly 6.6 million shares of Alpha's common stock at a weighted average price of $164.87 per share. The outstanding share count has been reduced by more than 30% from the time the program began. As of February 19, 2024, the number of common stock shares outstanding was approximately 13 million, which includes the impact of 220,067 net shares issued in December 2023 and January 2024. The shares issued in these periods resulted from vestings of previously granted equity awards under the company's long-term incentive plan. The remaining authorization permits approximately $410 million in additional repurchases, contingent, as always, on cash flow levels and market conditions. We are planning a reduction of the cadence of share buybacks over the next few months, up to potentially pausing the program for a bit to build our cash balances back to our targeted levels. I will now turn the call over to Jason for some details on operations.

Thanks, Todd, and good morning, everyone. I want to start by recognizing the outstanding safety and environmental compliance performance from our teams in 2023. We've maintained our 99% water quality compliance rate for many years now and continued expanding our Beyond Compliance initiatives. For safety, we followed a 2022 company record in NFDL performance with another company record, This time for TR hour in 2023. I can't say enough about our team members making this top priority day in and day out, and that focus has resulted in performance that is consistently better than the national average. We work hard every day to continue this positive trend into the future. While we're highlighting outstanding performance, I also want to publicly congratulate the winners of Alpha's 2023 Best in Class Awards. The competition was tight and we had record-setting teams that didn't end up winning the overall award. That's how difficult it is to claim the top spot. For 2023, the Midwest Virginia surface region won in categories of deep mine, surface mine, and preparation plant. Those winners are Kingston number two, Kingston South surface, and Kingston processing, respectively. Kingston South Surface Mine, also known as Bishop, has won two years in a row. Jimmy Wood and his Midwest Virginia Surface team deserve all the accolades they have received for sweeping those categories, which is very difficult to do. In the loadout facility category, Marmot River Dock won best in class, while Marf proclaimed top honors in the underground belt transfer system. Both of those are back-to-back winners two years in a row as well, and I want to thank all the teams for their determination and commitment to exceeding expectations. Turning to some operational updates, as I mentioned last quarter, we celebrated the first development cuts at our newest highball mine, Checkmate Pouten, in Q4. Also during the quarter, we completed renovations to the formerly retired chest processing plant which is now online and serving this mine. Together, Checkmate Palton and Chest Processing solidify Elk Run as a new complex for Alpha. Also want to mention a couple non-injury incidents we experienced in January at our McClure processing plant and Road Fork 52 deep mine. On January 17th, an ignition occurred near McClure's clean coal belt discharge on top of a clean coal silo We believe the ignition was fueled by dust and ignited by a shorted electrical installation. Again, no injuries, and our team members acted quickly and appropriately to make necessary notifications to agencies and assure there was no fire. Investigations occurred and no contributing citations have been issued. While the exact cause of the ignition is still being analyzed, the silo has been examined and is structurally sound. and designs are underway to make repairs. Due to the swift responses, we were able to reroute belt conveyors within the first few days to exclude the clean coal storage silo as to enable continued processing and shipments at normalized run rates and did not experience any material impact from the non-injury ignition. On January 30th, 2024, Road Fork 52's number three section started retreat mining the fourth and last panel of their active district. Then on January 31st, 2024, a non-injury ignition occurred in by the pillar line in gobbed area of the number three entry. And gobbed area is a term that we use to describe fully depleted and mined areas similar to those areas that are left behind a long walk. Investigations revealed a roof collapse in the gob of the number four entry, exposing an overlying coal seam, and we believe it's likely that coal bed methane entered into the gob from that exposed seam. Other than reports of miners hearing a roof bolt break immediately before the event, an ignition source has not been identified. Investigations resulted in zero related or contributory citations. And personally, I want to thank the team at Road Fork 52 for their actions on the night of January 31st, but more importantly, and in my opinion, their high standards regarding housekeeping and rock dusting that prevented any more serious issues. Despite the tedious nature of investigating an incident like this underground, our team and regulatory investigators concluded in about four business days. Of the five CM sections operating at Road Fork 52, Number three section was the only section idle during that time. I will now turn the call over to Dan for some information on the coal markets.

Thanks, Jason, and good morning. Throughout 2023, metallurgical coal markets generally showed strength with periods of volatility in the face of economic pressures, geopolitical uncertainty, and global recessionary fears. Macroeconomic conditions around the world remain inconsistent, with some economies like the United States exhibiting continued resilience to these external pressures, while others, like the European Union, have experienced significant downturn. While central bankers in the United States and Europe are expected to lower interest rates within the 2024 calendar year in response to easing inflation, uncertainty remains regarding when those actions may be taken and how quickly they may impact overall economic conditions. Organizations such as the International Monetary Fund and the World Bank have issued muted expectations about global growth prospects for 2024 and 2025, citing a slower than historical average pace of expansion and downside risks related to geopolitical shocks, supply disruptions, or prolonged tight monetary conditions. Geopolitical strife, namely the Russian war in Ukraine and the violence in the Middle East, has impacted coal markets by upending natural trade flows and at times causing shipping delays due to violence stemming from these conflicts. While we have not been directly impacted by the well-publicized attacks in the Red Sea, we believe that continued volatility in metallurgical markets is possible as these macroeconomic and geopolitical circumstances evolve. Metallurgical coal indices ended the fourth quarter within a few percentage points of where they started in October, but since then, all four indices have softened. The Australian premium lowball index decreased from $333 per metric ton at the start of the quarter to $323.75 per ton on December 31st. U.S. East Coast lowball index increased from $258 per metric ton at the beginning of October to $268 per metric ton at the end of the quarter. U.S. East Coast High Vol A index slid from $288 per metric ton at the start of the fourth quarter to $281 per metric ton at the end of the year. And lastly, the U.S. East Coast High Vol B index increased from $238 per metric ton at the beginning of October to $252 on December 31, 2023. As of February 23, the U.S. East Coast indices of Low Vol, High Vol A, and High Vol B indices measured $265, $255, and $215 per ton, respectively. The Australian premium lowball index has decreased from its quarter-level close to $314 per metric ton on the same day. In the thermal coal market, the API2 index moved from $124.85 per metric ton at the start of October down to $103.85 per metric ton at the end of the year, and down even further to $90.30 as of February 23rd. Despite some of the challenges we faced, Alpha finished the year strong, as you've heard. I want to specifically commend my team for their outstanding efforts to close out the year on a high note. We worked hard to meet our internal goals, which we were successful in doing, while even setting some new logistic records within the company. The accomplishments of last year are impossible without a dedicated team, and I am proud of what the Alpha Sales team achieved. Of course, we're hoping to continue the good work in this year. And with that, operator, we are now ready to open the call for questions.

Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star one on your telephone keypad. One moment, please, while we hold the questions. Our first question comes from Lucas Pipes with B Reilly Security. Please proceed with your question.

Thank you very much, operator. Good morning, everyone. You make it look really easy, but I know this is a lot of hard work, and I want to congratulate you on that. Great, great, great job. Andy, Todd, Dan, I have a question kind of for all three of you. It starts with how you think about the current market environment, what your longer expectations are, and then how that feeds into your capital allocation priorities. Again, kind of shorter term and longer term as well. Todd, I think you mentioned a little bit of a pullback on the buyback in the near term. If you could elaborate on that as well, I would appreciate it. Thank you.

Hey, Lucas. It's Andy. Thanks for the The comments, and while, as you said, it's not easy looking at the comments that Jason made on a couple of operational things that we ran into, the teams that have managed those situations, and these things happen relatively frequently when you're underground, you're on a big surface mine, things go sideways sometimes, and it's really a testament to the team that they've been able to manage these things and come through safely and and without broader impacts. It's not easy, and I like to pass that along to the operations team. They do make it look easy from my perspective, but I know as well as you do, it's very, very difficult. As far as how the market feeds into the buyback, so the buyback is, as it's always been, it's going to be driven by our cash flow. Every available dollar that we have above a certain liquidity target is going to go into the buyback. As we look at the market, and I'll let Dan comment on that piece of it, but as we see it, if it starts feeling a little bit shaky, then we're going to tend toward probably building a little bit higher, get to the higher end of the liquidity level versus we're a little bit toward the lower end of that range right now, and building cash could come in handy if we do get into some doldrums as we typically do in the spring part of the year. And then also, as Todd mentioned, seeing some of the cost pressures from, particularly at this point in the year, some purchased coal. We've opportunistically been buying some coal where we've had a chance to put it into some of our shipments. And while that ultimately ends up with an incremental EBITDA, it does create kind of a working capital imbalance with the timing of buying the coal versus realizing the ultimate receipt. So that's an additional little bit of pressure on cash that we're watching out for. But as I said, as long as the cash is there, we'll just keep AMRing along and buying those shares. But we have to be cognizant of where the market is. So, Dan, anything you want to add there?

Yeah. Hey, Lucas. I think we're pleased with our book, the way we have it right now. I think looking forward there, we're going to be shipping into the same markets that we've been talking about in previous calls. I think I'm a little bit encouraged talking to some of our European customers. They probably can't have as tough a year as they had last year in Europe. I'm talking to most of the customers. They expect pot metal production in Europe to increase. That's a positive for us. That means they'll need more coke and more coke and coal. So I don't have – look, I spoke in great detail about a lot of the economic and geopolitical uncertainties. We're watching that every day. It seems like every day there's something new to add to the list. But I think for now we're kind of confident with what we see in front of us.

That's very helpful. Thank you. I look forward to the transcript, Andy, on that new word you used. For the – For my second question, I wanted to ask about the cadence of shipments and kind of Q1, Q2, if you could provide a little bit of an outlook. And then to circle up on the cost side, can you speak a little bit to where you still see inflationary pressures today? Were you seeing some easement? What the situation is on the labor front? Thank you very much.

Yeah, Lucas, on the shipment side, so We typically, if you look at the current configuration of Alpha going back to fourth quarter of 2020, basically Q1 of every year has been basically the lightest year, and I'm specifically talking about the MET shipments if you isolate those. Right behind has been Q4. Historically, we've not had very strong Q4s, and that's something else I do want to compliment the team about again. We talked about trying to finish strong this year, and they delivered beyond anything I could have imagined. 4.6 million total tons, 4.5 million of MET is an all-time record for our Q4. Part of that was being aggressive on our shipping schedules and logistics. We probably pulled one or two cargoes that should have been Q1 24 shipments. We pulled those into the fourth quarter, which is a good thing. Anytime you can accelerate that, that's a good thing. It'll probably create even more pressure on Q1, which, again, typically was a little bit lighter. But we would normally see Q1 and Q4 be on the lighter end, 2 and 3 be on the stronger end. But the way Q4 and Q1 have blended into each other, we'll have to see how that plays out. But I think we're still feeling relatively okay about where we'll end up on the quarter just based on shipments thus far. But, Dan, anything you'd like to add to that? No, you covered it. Okay. On the cost side, it's still a story of inflation. It's still a story of labor. I think we've seen supplies and maintenance top costs start to slow down in absolute dollars, but there's still a little bit of inflation. On the labor side, I think we have seen our turnover rates drop over the past quarter, which I think has been a result of our attempts to try to be the you know, the lead employer in Central Appalachian or wage and benefit packages. So the goal was to get people in every seat, and I think to a large degree we've accomplished that, but it will continue. Obviously, there are only a certain pool of candidates to choose from, and everyone wants those people. So right now, I think we feel pretty good about our situation, but, you know, cost trends just across the board continue to be somewhat of a challenge, but we're We're focused on it. We're going to figure out creative ways to either get our productivity up or our costs down in a direct fashion and hopefully start improving that metric.

Andy and team, I really appreciate all those comments. Continue best of luck. Keep up the good work.

Thanks, Lucas. As a reminder, if you'd like to ask a question, please press star 1 on your telephone keypad. One moment, please, while we poll for questions. Our next question comes from Nathan Martin with The Benchmark Company. Please proceed with your question.

Hey, thanks, operator. Good morning, guys. Congrats on the strong end of the year, and thanks for taking the questions. Thanks, Nathan. Yeah, no problem. Dan, maybe one for you to start. Spreads between the U.S. MET indices and the Australian indices remain historically wide. It would be great to get your thoughts on how long you think that persists, maybe what could drive improvement there. And then how are you thinking about alpha's mix and maybe the opportunity to sell more tons into Asian markets based on those Aussie indices? and then maybe some comments maybe on the mix that you have committed thus far, which I think is, what, 35% committed and priced and then 55% committed and unpriced. That would be very helpful. Thank you.

Yeah, Nate. Well, I'm not going to pretend to understand exactly how those indices move and when they're in sync with each other, but obviously we'll follow the best realizations for us and for our products So when we look at that, of course, a lot of the Aussie-linked business will be in Asia, as we've said in past quarters. So our eyes will be on that primarily. I think there's a fair amount of talk about the high ball, high ball this, high ball that, and what we don't hear a lot is the strength of the medium ball and low ball sectors. We see real strength here in the demand for that. It's not always reflected directly in the indices right away. I think there's a lot of term business that's already been put to bed. It's a little bit of a soft period here now with the Chinese New Year ending and some of the Indian steel makers out of the market right now. But the sense is things will get back to normal here soon. Our mix is, as I said, going to be focused more on Asia, but I do think there's opportunities in Europe as well as – steel makers come back from a rotten year in Europe.

That's very helpful, Dan. And then, I mean, question as well. Some of the tons that you sell into the Asian markets, are you having to sell any of those at CFR prices?

I don't want to say we have to. We do. Some business is on a CFR business. Most of it is not. Most of it is FOB vessel. But if there are opportunities where we need to sell it on a CFR basis, we can and will do that.

Got it. Perfect. Maybe kind of sticking with that, there have been some numerous logistical hurdles as of late for the entire industry, port delays. You guys mentioned the Red Sea, maybe your prepared remarks, low water levels on the Panama Canal, et cetera. It would be great to get an update on what Alpha is seeing on the transportation and logistics front.

Sure, I'll take a shot at that. As you said, the ocean freight situation is a little erratic right now because of the situation. Vessels that normally would transit through the Suez Canal on their way to Asia from the U.S. now are going around the Horn of Africa. That's adding some days and some cost to those ocean voyages. But as we do most of our business on FOB vessel basis, We don't see that direct impact right now. The freight markets move for other reasons, too. They move during the seasonal grain season, et cetera. Overall, economic weakness probably has a bigger effect on ocean freight than some of these other events. We're certainly aware of it. It hasn't changed our targets at all. With regard to the railroads, they're moving the coal well. We're pleased to see both railroads have moved. been doing a good job for us here in recent months, so I have real no other comments there. The Panama Canal situation seems to be getting a little better as well.

Okay, great. I think I'll leave it there. Appreciate the color, Dan, and best of luck to you guys in 24. Thanks, Nate.

We have reached the end of the question and answer session. I will now turn the call back over to Andy Edson for closing remarks.

Thanks again to everyone for joining us today and for your interest in alpha. We hope you have a great rest of the day.

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.