Alpha Metallurgical Resources, Inc.

Greetings and welcome to the Alpha Metallurgical Resources Second Quarter 2024 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 now begin.

Emily O' 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 second quarter 2024 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 gap 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'll turn the call over to Andy.

Thanks, Emily, and good morning, everyone. This morning, we issued an earnings release detailing our second quarter 2024 financial results, which included adjusted EBITDA of $116 million and 4.6 million tons shipped within the quarter. In spite of a challenging market backdrop, the Alpha team delivered another solid quarter of performance. Both the operations and the sales teams executed very well within the areas they can control by hitting ambitious shipping targets, producing well, and most of all, operating safely throughout the period. As we discussed in our most recent earnings call in May, weakening steel demand has negatively impacted metallurgical coal markets, and our second quarter realizations reflect that negative pressure. This is not a surprise, however, as waning demand and difficult uncertainty or significant uncertainty across the world brought about the difficult market we experienced in Q2. These conditions have intensified in the third quarter emphasis today. As is typical at this time each year, The domestic negotiation process has begun with North American customers for next year's contracts. Over the coming months, we expect to secure commitments for 2025 domestic tons, and we'll provide an update later in the year on those commitments and our overall shipment volume guidance for 2025. In the interim, we continue to ship our contracted tons to our customers, and we're listening closely to the market to hear how we may be able to meet current and future customer needs. Given the recent MET market deterioration and volatility, We remain focused on our first priority of preserving the franchise in order to weather whatever market conditions may lie ahead. To that end, we increased our total liquidity by nearly 25% during the second quarter. We continue to take a wait-and-see approach with regard to capital returns as we monitor the market dynamics. As we've proven with our previous activity in the buyback program, we're eager to return capital to the shareholders when conditions allow. I also want to note particularly with the backdrop that we're dealing with today when the market, it's pretty easy to fall into the trap of thinking right now it's forever. This tough market has lasted a bit longer than it has in recent years, at least in respect to the usual peaks and valleys of the cycle. But the peaks of the past three years also lasted longer than had been expected. One thing is certain, though, and that is that the world needs steel and metallurgical coal makes steel. So the most important thing for Alpha is is that we continue to operate safely, maintain high productivity, and take advantage of every opportunity the market presents to us. That's what our 4,000 team members are good at, and I'm confident that's what they'll do. With that, I'll turn the call over to Todd for details on our Q2 financial results.

Thanks, Andy. Second quarter adjusted EBITDA was $116 million, down from $190 million in Q1. We sold 4.6 million tons in the quarter compared to 4.4 million in Q1. Met segment realizations decreased quarter over quarter with an average second quarter realization of $141.86 compared to $166.68 for the first quarter. Export met tons priced against Atlantic Indices and other pricing mechanisms in the second quarter realized $135.47 per ton while export coal priced on Australian indices realized $153.52. These are compared to realizations of $172.24 per ton and $193.70, respectively, in the first quarter. The Q2 realization for our metallurgical sales was a total weighted average of $145.94 per ton, down from $176.20 per ton in the prior quarter. Realizations in the incidental thermal portion of the MET segment decreased to $75.82 per ton in the second quarter, as compared to $76.53 per ton in the first quarter. Cost of coal sales for our MET segment decreased to $109.31 per ton in the second quarter, down from $115.65 per ton in Q1. The primary drivers of the cost reduction were lower sales-related costs, as a result of softening coal prices and a reduction in third-party purchase coal costs in the quarter. SG&A, excluding non-cash stock compensation and non-recurring items, decreased to $14.2 million in Q2 as compared to $19.9 million in the first quarter. CapEx in the second quarter was $61.1 million, down from $63.6 million in the first quarter. Moving to the balance sheet and cash flows, as of June 30, 2024, we had $336.1 million in unrestricted cash, an increase of $66.7 million, or nearly 25% from our March 31 unrestricted cash figure of $269.4 million. We had $95.6 million in unused availability under our ABL at the end of the quarter. As of the end of June, Alpha had total liquidity of $356.7 million, up from $288.1 million at the end of the first quarter. Cash provided by operating activities was $138.1 million in the second quarter, down from $196.1 million in Q1. As of June 30th, our ABL facility had no borrowings and $59.4 million of letters of credit outstanding. down from $61.3 million in the prior quarter. In terms of our committed position for 2024, at the midpoint of guidance, 71% of our metallurgical tonnage in the MET segment is committed and priced at an average price of $157.97. Another 29% of our MET tonnage for the year is committed but not yet priced. The thermal byproduct portion of the MET segment is fully committed and priced at the midpoint of guidance at an average of $75.96. As we discussed in the last quarterly call, we expected market softness to limit our repurchase activity in Q2, and we communicated our intention of building and maintaining our liquidity position. We did not repurchase any shares in the second quarter under the company's share buyback program. As of July 31st, 2024, the number of common stock shares outstanding was approximately 13 million. The remaining stock buyback program authorization permits approximately $400 million in additional repurchases contingent on cash flow levels and market conditions. We have repurchased a total of 6.6 million shares under the existing plan at an average share price of $165.74. I will now turn the call over to Jason for an update on operations in the quarter.

Thanks, Todd, and good morning, everyone. I'm pleased to report that our teams continued to operate safely and efficiently in the second quarter. We have again achieved safety and environmental performance that's better than the industry average. Over the last few months, our mine rescue teams have received numerous individual and team awards at competitions throughout the region, including many first place finishes There are simply too many to list here, but we are very proud of each and every member of these outstanding teams, and we appreciate their dedication to safety and preparedness. On our last quarterly call, I explained the process we're undertaking to communicate the current market conditions with our partners and suppliers. Since then, we've had a lot of good conversations, many of which have resulted in improved pricing agreements. In some cases, we have transitioned to new suppliers where viable lower cost options were available to better match our supply needs with market realities. As these changes take effect, we expect these actions to have a positive impact on our costs. Additionally, we continue to fine-tune our in-house manufacturing capabilities, which have afforded us increased flexibility and timeliness in replacing certain parts and safely maximizing the lifespans of our existing equipment. We will continue to leverage the talent and the capabilities of our manufacturing teams to assist us in this regard. I will now turn the call over to Dan for an update on the markets.

Thanks, Jason, and good morning. Weakened global demand for steel has persisted, resulting in continued metallurgical coal market softness over the past several months. Factors influencing steel demand include economic policies and conditions globally, as well as the health of national and regional economies, some of which have been very negatively impacted by geopolitical unrest and violent conflicts. Additionally, more than 60 national elections are scheduled to occur or have already occurred across the world in 2024, including races for leadership in the United States, India, and many European countries, all important destinations for office coal. The higher-than-usual volume of elections across the globe has created additional geopolitical uncertainty, which affects consumer confidence and demand for steel. Metallurgical coal prices softened during the second quarter of 2024. The Australian premium lowball index dropped from $246.50 per metric ton on April 1st to $234 per metric ton at the end of the second quarter. The U.S. East Coast Low Vol Index decreased from $222 per metric ton at the beginning of April to $218 at the end of June. The U.S. East Coast High Vol A Index moved from $223 per metric ton at the start of the quarter to $212 per metric ton at the end of the quarter. And the U.S. East Coast High Vol B Index decreased from $198 per metric ton to 190 at quarter close. Since quarter close, all four indices have decreased further. The Australian premium low vol and U.S. East Coast low vol indices fell to $215 and $211, respectively, on August 2nd. U.S. East Coast high vol A and high vol B indices measured 205 and 183 per ton, respectively, as of the same date. In the thermal coal market, the API 2 index was $118.05 per metric ton on April 1 and decreased to $107.10 per metric ton at the end of June. And on August 2, the API 2 index was at $122.20 per metric ton. In terms of office performance, we continue to ship contracted tons to our customers as planned. In Q2, our sales, operations, and logistic teams were able to hit some internal shipping milestones, recording 4.6 million tons shipped within the quarter. This is even more impressive considering that we worked around a planned week-long period in May where one of the DTA stacker reclaimers was down for maintenance. I'm proud of how our team has risen to the challenge and continued to focus on the controllable aspects of our jobs, performing well despite the current poor market dynamics. As you recall from our Q1 earnings call back in May, we spoke about the market deterioration that we were seeing, which has only intensified since then, with periods of very little or no spot demand. As we look ahead to the balance of the year, we remain confident in our ability to meet our full-year 2024 shipment volume guidance. In looking a bit further to 2025, the customary domestic solicitation process has begun, and we are in early discussions with North American customers regarding 2025 business. It's much too early in the process to speculate about where volumes or pricing will land, but we will provide an update on Alpha's sales commitments at the appropriate time. Finally, I'm pleased to say that rail performance has been solid and we have not experienced material indirect impacts from the Baltimore Bridge collapse. As a reminder, with a majority ownership stake in DTA, Alpha does not utilize the Baltimore terminals to export our coals. Despite the disruption to other coal producers and transportation flows, our rail partners have performed well, and we have not experienced ancillary challenges from the aftermath of the bridge collapse. We remain grateful for the positive rail performance and look forward to continuing to provide excellent service to our customers around the world. And with that, operator, we are now ready to open the call for questions.

Thank you. At this time, we will be conducting a question and answer session. 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 first question comes from Lucas Pipes with B. Reilly Securities. Please proceed with your questions.

Thank you very much, operator. Good morning, everyone. Really solid cost performance in Q2, and I wanted to ask on those cost reductions if you could maybe break out the contribution to the reduction from both sales-related as well as purchase coal, and then any other kind of buckets that you could point to as major drivers, and a little bit higher higher level. How much purchased coal do you typically lend into your shipments? Thank you very much.

Hey, Lucas. It's Andy. I'll hit the first piece myself. The breakdown on the cost reductions is roughly 50-50 between those two category items. Combined, they may be less than 100%. We may have 10% of other just general cost reduction, productivity, enhancement, that kind of stuff. But it's roughly split between those two items. As far as how much purchased coal we utilize on a given quarter, I'll let Dan jump on that one.

I will, Chris. Good morning. Typically, several hundred thousand tons a year. There's no fixed number. A lot of it depends on market conditions. Some of it depends on what our own mines are doing, if we have some geology or quality issues. So I don't know the number off the top of my head, but it's in the several hundred thousand ton range. And just to put a little more color on it, some of those tons purchased are purchased against the indices. So as the indices have slid down, our purchase coal costs have slid down with it.

Got it. Thank you. Thank you very much for that, Dan. And on the volume, midpoint of guidance implies, call it 8% reduction or so versus first half, So I wondered if you could maybe speak to that, is that reflecting current market conditions, just a degree of conservatism after a very strong second quarter, and kind of zooming out on the industry, what's your take on the kind of supply situation more broadly? Is it improving in the sense that some higher cost mines are rationalizing, and then there was also a major supply disruption in the quarter in North America. I wondered if you could maybe comment on that as well. Thank you very much for your perspective.

Hey, Lucas. I'll hit the first piece again. We'll let Dan cover the hard part of it. As far as the cadence on the shipments, there's nothing really intentional there. It's just how the shipments have fallen. We did have very strong production and shipment quarters in Q1 and Q2. And so I think that got us a little bit ahead of the curve. So it's really just taking the back half of the year, which will probably, I mean, it looks like, looking at our forecast, it looks like it'll be kind of ratable between Q3 and Q4 to get to that midpoint. So with, you know, the vast majority of the book being committed, it's really just a function of running through those commitments and getting those tons where they need to be. But as far as the broader market question, Dan, I'll let you answer that one.

Thanks, Andy. Well, yeah, Lucas, I think we've seen some supply coming off, you know, around the edges, I guess, due to high costs. But we've also, of course, seen a couple of large met mines idle due to the mine fires. And frankly, you know, even with some of that supply coming off, the market can, you know, sort of still continues to balance itself. In other words, you know, take some supply off, but there's also some demand gone. So, It's still net-net kind of where it is. I don't think there's been enough supply come off to materially impact the market. Having said that, we're shipping steady. Our order book looks like we'd like it to look, and we're just going forward on that basis kind of a week at a time. But we are seeing a little bit of take-up in India, for example. And no surprise, the monsoon season is wrapping up, and we expect to see a bit more – resume a little bit more shipments into India.

Dan, do you think the market is oversupplied today? And if so, how many tons is it possible to supply it?

Boy, oh boy, that's a tough one, Lucas. I don't know. You know, I'd say it's balanced. I don't think, you know, I can speak for Alpha. You know, our inventories, we're actually, we brought our inventories down in Q2 a bit. So, you know, we're comfortable with our inventory situation. We're not piling the coal up. But you hear. Yeah, it doesn't feel that oversupplied to me.

That's helpful. Thank you very much. I'll try to ask one last question. Andy, could you maybe speak to your strategic priorities at this time? Obviously, the market has changed a bit. Broader equity market, coal markets are softer. You are ahead of your kind of cash targets. So wondering how you kind of think about everything and how you want to position alpha optimally during this time. Thank you.

Yeah, Lucas, that one's, in markets like these, it's pretty easy. Our strategy is kind of defined for us, which is, as I said in the prepared comments, protecting the franchise. And the fact that this market has lasted longer than it typically does when you're talking about the quote unquote shoulder season, you know, you've got usually a couple, three months of doldrums, so to speak. This has gone on a good bit longer than that and don't necessarily see the end of it just yet. I mean, we see, as Dan said, we see some inklings that things may be on a turn, but it could be like a battleship and it takes a while. So with that in mind, getting above our target liquidity number is more about just creating more of a buffer because We have operated, I think we've been most successful because we have operated so conservatively trying to protect the balance sheet. And I think that's going to remain our number one priority until we are comfortable that the market has turned in a more substantial fashion and for a longer period of time before we get too aggressive on anything but that.

Andy and team has done a great job managing this market, both in the good and bad times. So I'll be looking forward to that. And in the meantime, I wish you continued best of luck.

Thank you, Lucas.

Our next question comes from Nathan Martin with the Benchmark Company. Please proceed with your question.

Thanks, operator. Good morning, everyone. Maybe just Just digging in a little bit more on Lucas's last question. Obviously, the market is experiencing quite a bit of turmoil right now. Andy, you just touched on that. I mean, it sounds like that's where your focus is, you know, the market's looking for signals there. But, you know, at what point do you feel like you could get comfortable restarting the buyback? Is it a bigger buffer in cash? Is it the stock price looking opportunistically there? Just any other thoughts would be great.

Yeah, and good morning, Nate, by the way. I think to put a fine report on it, it's really going to be driven by the coal markets because as long as we remain in this band that we're bouncing around in, because if you, I mean, right now at a roughly 215 POV, we're at the lowest point we've been in two years. And if you exclude, by my math, about an 11-day period in 2022, this is the lowest price in three years. And so we're back into some territory we've not had to deal with for quite a while. And as long as we remain in that band, I think we're going to have to stay focused on keeping the balance sheet strong, giving ourselves plenty of buffer because, you know, another turn down and you could quickly go from, you know, producing some cash to producing no cash or consuming cash. And that's going to be the problem.

real indicator of when it's time for us to start um jumping back into the capital returns makes sense appreciate those thoughts andy and i guess you know thinking about the cost side of the equation um where do you guys think that marginal cost level is i think dan you mentioned maybe we've seen some tons kind of being left in the ground at this point um are you guys considering any of that at this point given where the plv price is or where the us indices are uh you know also any more commentary around your inventories i think dan you said you're pretty comfortable at today's level um any any opportunity to to draw them down more or are you looking to build at this point thanks um nate i'll get the first piece um as far as

marginal cost and the cost curves. I know there's been a lot of conversation about that. I do think that the cost curve number, call it 200 to 225 zip code is probably reasonable for where the all-in cost is sitting globally. I don't think that kind of data is terribly predictive on how companies are going to behave because it doesn't take into account the relative strength of their balance sheets, it doesn't take into account their ability or their desire to capture market share while they might be losing a little bit of sacrificing some EBITDA. And it also doesn't necessarily take into account fixed and variable cost splits, which also become pretty important when you're looking at thinking about oddling or shutting down an operation. So at this point, you know, we're still comfortable. We're moving the tons that we're producing at margins that we feel are acceptable. So we'll continue doing that until, you know, the situation dictates otherwise. But as far as inventory levels, Dan, do you have anything else on that?

Not particularly. Nate, we're certainly, you know, not looking to build inventories. I would say that, you know, if we don't find the market to our liking, we're not afraid to build a little bit of inventory, particularly at DTA. But, you know, we've just been able to move along quickly. maintaining the inventories we have. I'd say we're comfortable with it, but we don't have any specific plans to build or reduce more than we already are. Our guidance is our guidance, and if we hit that, we'll maintain comfortable inventories.

Yeah, and Nate, to add one more thing onto that, this just offered my appreciation and congratulations to all the 4,000-plus employees of Alpha for what I believe actually was, I called it a solid quarter. It was better than a solid quarter from execution with this kind of market it's easy for people to lose focus sometimes you see your your injury rates creep up or your your your violations environmental something goes sideways usually when we're in these markets like this because people can feel the stress and both the the sales and the operations team have done an incredible job maintaining a sprint pace just to keep things moving along And, you know, it's a shame that the market is not giving us something that can really show what that kind of performance looked like from a financial standpoint. But that being said, the people doing the work have done an incredible job, and I just want to make sure that's not lost.

Appreciate that, guys. And then maybe, Jason, one for you, not to leave you out, I think in your prepared remarks you called out there's some recent renegotiations with suppliers that should result in improving those costs even more. I mean, obviously in the second quarter, the MET segment cost number was below your full year guide. So any way to quantify how much those recent improvements with suppliers could help the costs for the full year? And maybe if we take a step back, kind of where in that full year range would you guys expect cost to come in based on, let's just say the futures price, which is around $240 a metric ton or so for the offshore benchmark today?

Well, I don't think I can answer all that at this point, but I can tell you that it's a grueling process. Our suppliers have dealt with the exact same problems that we have since COVID with inflation and just prices rising and labor shortages, and they have all the exact same reasons or excuses, if you will, as the coal companies do. So there's a lot of back and forth. There's several meetings with each vendor, and they have to go to their suppliers and kind of do the same thing. So it seems like a months-long process to gain an inch, but we are starting to see things move in a positive direction.

Okay, appreciate that. Any thoughts around, you know, where pricing, excuse me, costs could land in that four-year range, just assuming kind of a flat 240 price?

Yeah, I think, you know, we're just going to stick with our guidance at this time, and, you know, if there's reason to update it later in the year, we'll do that.

Okay, got it. Yeah, just curious, because, again, you guys did a fantastic job this quarter kind of coming below that range at that price, so... Okay, I'll leave it there. I appreciate the time, guys, and best of luck in the second half.

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

Well, thanks, everyone, for joining the call today. We appreciate your interest in alpha, as always, and 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.