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spk07: Good morning and welcome to the ARCH Resources second quarter 2023 earnings call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. Please note this event is being recorded. I would like now to turn the conference over to Dex Sloan, Senior Vice President of Strategy. Please go ahead.
spk02: Good morning from St. Louis and thanks for joining us today. Before we begin, let me remind you that certain statements made during this call, including statements relating to our expected future business and financial performance, may be considered forward-looking statements according to the Private Securities Litigation Reform Act. Forward-looking statements by their nature address matters that are, to different degrees, uncertain. These uncertainties, which are described in more detail in the annual and quarterly reports that we file with the SEC, may cause our actual future results to be materially different than those expressed in our forward-looking statements. We do not undertake to update our forward-looking statements, whether as a result of new information, future events, or otherwise, except as may be required by law. I'd also like to remind you that you can find a reconciliation of the non-GAAP financial measures that we plan to discuss this morning in the end of our press release, a copy of which we have posted in the investor section of our website at archrsc.com. Also participating on this morning's call will be Paul Lang, our CEO, John Drexler, our COO, and Matt Gilgham, our CFO. After our formal remarks, we'll be happy to take questions. With that, I'll now turn the call over to Paul. Paul?
spk03: Thanks, Jack, and good morning, everyone. We appreciate your interest in ARCH and are glad you could join us on the call this morning. I'm pleased to report that the ARCH team continued to execute at a high level in its core metallurgical business during Q2, delivering another first quartile cost performance. At the same time, we continue to press ahead with our simple, clear, and actionable plan for long-term success and value creation. During the quarter, the ARCH team showcased the significant cash-generating capability of the company by delivering $130 million in adjusted EBITDA and generating $151 million in discretionary cash flow, despite a softer market environment. The team then drove forward with our ongoing efforts to streamline and strengthen our balance sheet, reducing our already modest indebtedness by an incremental $13 million, and maintaining a significant net cash positive position. Finally, and perhaps most importantly, the team generated significant value for our shareholders through our robust capital return program, declaring a quarterly dividend of $75.4 million, or $3.97 per share, payable in September, and deploying $73.5 million to repurchase over 623,000 shares, or about 3.3% of the fully diluted share count. This last point, the continued generation of significant levels of discretionary cash flow, even in a weakened market environment, is one of ARCH's defining attributes. In fact, in many ways, ARCH was built for this type of environment, given our high-quality, low-cost coking coal portfolio and our ability to maintain healthy margins across the market cycle. Of course, its ability to consistently generate substantial amounts of discretionary cash flow is also the key to our capital return program, which we regard as the centerpiece of our value proposition. Since relaunching the capital return program in February 2022, just 18 months ago, ARCH has now returned nearly $1.2 billion to shareholders, inclusive of the just announced dividend. Even more noteworthy, perhaps, is the fact that when you include the capital returns from phase one of this program in 2017 through 2019 period, we've now returned an aggregate of nearly $2 billion to shareholders. That approximates the total market capitalization of the company at present. Importantly, and in addition to paying out more than $640 million in dividends, at $34.64 per share since the relaunch last year, we've used the capital return program to avoid the dilution of approximately 4.1 million shares. To put it another way, our diluted share count is approximately 18% lower today than it would have been otherwise, absent the share buybacks and the settlement of our convertible securities. And we fully expect this systematic reduction in our diluted share count to continue as we move forward. As indicated, the Board believes the current capital return program has driven and continues to drive substantial value for the shareholders and expects to continue to return 100% of our discretionary cash flows to shareholders going forward. At the same time, the board also believes that it's essential to continuously review the specifics of the capital allocation model as it evaluates the optimal means for deploying discretionary cash flows in the future, including the relative weighting of dividends versus share buybacks. As you might imagine, the board factors changes in circumstances, including movements in the company's share price into its deliberations and decision-making process. and will undoubtedly continue to do so in the future. Let's switch to the coking coal markets, which, as indicated, have softened significantly in recent months. The reason for this softening is relatively straightforward in our view. Global hot metal production continues to be constrained due to a host of macroeconomic concerns and pressures. As evidence of that fact, hot metal production for the world, excluding China, was down 2.8% through May, versus the already depressed level seen in 2022, according to the World Steel Association. Even with this weakness, however, coking coal continues to trade on the seaborne market at prices that still support healthy margins at our low-cost metallurgical operations. Again, this is by design and how the company was built. At present, high-volume coal, our principal product, is trading at $210 per metric ton off the U.S. East Coast. While demand is weak, the supply side of the coking coal markets remain constructive in our view, due principally to years of underinvestment in both new and existing coking coal capacity. Exports from Australia, the United States, and Canada, the principal suppliers of high-quality coking coal to the global seaborne market, are down nearly 3 million tons in aggregate year-to-date, against last year's already constrained level. Significantly, this drop in seaboard coking coal volume occurred despite generally strong pricing over the course of the past six years. In addition, there is evidence that recent price levels are beginning to exert pressure on marginal cost producers, news that two U.S. metallurgical complexes have closed in recent weeks. Based on this, we believe the current net back pricing is reaching the marginal cost of production and starting to pressure metallurgical coal volume. In summary, we believe ARCH is exceptionally well positioned to generate significant value in the current market environment and equally well positioned to capitalize when the global economy begins to recover and gather steam. In recent quarters, we've expanded and strengthened our world-class coking coal portfolio, increased the global reach of our high-quality coal products, reduced our indebtedness while building and maintaining a net cash positive position, greatly simplified our capital structure, and extended our industry-leading ESG practices. We're pressing ahead on all these fronts with the objectives of enhancing our position even further. Through these substantial and ongoing efforts, we believe we've laid a strong and durable foundation to the long-term value creation with the capability to generate significant levels of discretionary cash and to return robust amounts of capital to our shareholders in a broad range of market environments. With that, I'll now turn the call over to John Drexler. John?
spk04: Thanks, Paul, and good morning, everyone. As Paul just discussed, the ARCH team maintained excellent operational momentum in Q2, as highlighted by yet another first quartile cooking coal cost performance, along with a stronger than anticipated result from our legacy thermal segment. Let's begin with a brief discussion of ongoing progress in our core metallurgical segment. To begin with, and of particular note, Q2 represented Lear South's strongest production quarter to date, as we continue to systematically drive up productivity rates at that world-class asset. We remain confident we will achieve still stronger execution in the quarters ahead. Coaking coal sales for the metallurgical segment as a whole totaled 2.3 million tons in Q2, consistent with the guidance we provided in April. In addition, the coking coal segment achieved an average cost of $89.94 per ton. This cost performance keeps us on track for meeting our annual coking coal cost guidance. Inclusive of Q1, the metallurgical segment has now achieved an average per ton cost of $86.54 through the first half of the year. Let's turn now to our legacy thermal segment, where the team continued to deliver significant cash flow in excess of capital requirements, and did so even while addressing the previously discussed localized geologic challenges at West Elk. During Q2, the thermal operations contributed total segment-level EBITDA of $29.2 million, which was substantially higher than initially anticipated. In short, the Potter River Basin operations rose to the occasion, demonstrating excellent cost control and delivering solid margins, which acted to counterbalance to some degree the near-term challenges at West Elk. On the West Elk front, we remain on pace to transition through the issues noted last quarter and expect to be back to business as usual at West Elk starting in Q4. As indicated, we continue to harvest significant levels of cash from our thermal operations in keeping with our long-term strategy. Since the fourth quarter of 2016, the legacy thermal segment has now generated a total of over $1.3 billion in adjusted EBITDA while expending just $154 million in capital. Now let's spend a few minutes discussing ARCH's marketing strategy and execution before I pass the baton to Matt for some additional color on our financial position and results. As Paul noted, coking coal demand has been relatively soft of late, despite a degree of resilience in coking coal prices. At present, we have committed more than 80% of our projected coking coal production for the second half of 2023, so our volume exposure is limited. In fact, as indicated, we anticipate a 5% to 10% step-up in coke and coal sales volumes in Q3. As for our thermal segment, we expect to ship approximately 60 million tons from our Potter River Basin operations in 2023, while rolling about 5 million tons of our committed and priced Potter River Basin volumes into 2024. While we would prefer to ship the volumes as planned this year, we are willing to work with our customers in exchange for volume and or price considerations on future shipments. Finally, let me give you a quick recap of our strong ESG performance year to date. In the critically important safety arena, ARCH's subsidiary operations achieved an aggregate lost time incident rate of 0.47 per 200,000 employee hours worked through the first half of 2023. That's nearly five times better than the industry average. At the same time, we maintained our perfect performance in environmental compliance, reaching the midpoint of the year with zero environmental violations and zero water quality exceedances. In addition, we published our 2023 sustainability report in June, which can be found on our website. This report, which I recommend to everyone on this call, details our comprehensive efforts across a wide range of ESG metrics and also reports on the 47% reduction and CO2 equivalent emissions we have achieved at our operations since the base year of 2011. Finally, I would like to highlight the fact that the Black Thunder Mine was honored by the State of Wyoming with the 2023 Excellence in Mining Reclamation Award during Q2. On behalf of the entire management team, I want to extend my congratulations to the workforce for that significant achievement. Again, we are focused on setting the standard for the industry in the sustainability arena And this award is emblematic of our success in doing just that. With that, I will now turn the call over to Matt Gilgen.
spk01: Matt? Thanks, John. Good morning, everyone. We are pleased to report another quarter of strong earnings and robust cash flows in the second quarter. Starting with earnings, EBITDA for the quarter totaled $130 million, a result that was lower both sequentially and as compared to last year's second quarter. as market prices for both metallurgical and thermal coal weakened significantly over the course of the quarter. In fact, average high vol A prices in the second quarter were approximately $75 per ton lower than the first quarter average, and more than $200 per ton lower than last year's second quarter. When comparing only to recent quarters, however, it is easy to miss the strength of the earnings, both on a consolidated basis and in our core metallurgical segments. Compared to the quarterly average from 2017 through 2019, a period of fairly strong metallurgical markets, Q2 2023 consolidated EBITDA was approximately 30% higher than the historical average. In our metallurgical segment specifically, this quarter's EBITDA was nearly 80% higher than the historical average, showing the impact of Lear South as it advances toward target production levels. Turning to cash flows, operating cash flow in the second quarter was $197 million, and while that was lower than last year's second quarter, it was an increase of over 56% sequentially. As you recall, cash flows in this year's first quarter were reduced by a substantial increase in working capital. As expected, some of that working capital was converted to cash this quarter, resulting in a benefit of more than $62 million. Capital spending for the quarter totaled just over $46 million, with spending for the first half of the year now ratable with our annual guidance. Discretionary cash flow for the quarter totaled $151 million, and our board has declared a dividend of 50% of that amount, or $3.97 per share. The dividend will be paid on September 15th to stockholders of record on August 31st. Regarding the second 50% of discretionary cash flow, As we discussed on last quarter's call, second quarter efforts were focused on share repurchases, as we deployed over $73 million to buy back more than 623,000 shares. We ended the quarter with cash and short-term investments of $235 million and total liquidity of $361 million, including availability under our credit facilities. On the liability side of the balance sheet, we continued to reduce debt and other liabilities. We paid down an additional $13 million of debt during Q2, bringing the total outstanding to less than $138 million at June 30th. We also completed nearly $8 million of final reclamation in the quarter, with $5 million of that at Black Thunder. And we grew the thermal mine reclamation fund by $1.5 million via interest earnings. Moving on to our capital structure and share count, for the first half of this year, we have reduced our fully diluted count by nearly 1 million shares, including share repurchases and repurchases of convertible bonds, and factoring in shares issued pursuant to warrant exercises. That reduction represents approximately 5% of the year-end 2022 total. Looking forward to the remainder of the year, we expect continued reductions in the diluted share count as we execute on the capital return program. We currently have nearly 419,000 warrants remaining outstanding and expect those to be exercised over the next several months. While those exercises will increase the basic share count, there should be no impact on the diluted count. Finally, while we have repurchased all of the convertible bonds, the cap call that we purchased at the time of the bond issuance remains outstanding. The cap call is not factored into our fully diluted share count or otherwise reflected in our financial statements. but its intrinsic value remains approximately $62 million. Turning now to the remainder of 2023, we have largely maintained our operational and financial guidance in line with last quarter. However, in the thermal segment, we have reduced our expected sales volumes by 2 million tons to reflect additional carryover into future periods. From a timing perspective, thermal segment performance will continue to be impacted in the third quarter, as we transition West Elk to the new longwall panel. We continue to expect a full contribution from West Elk in Q4. Looking at cash flows, I wanted to point out several items that will impact discretionary cash flow over the remainder of the year. First, we expect a working capital benefit in the back half of the year as we continue to unwind some of the build that occurred in the first quarter. While working capital levels will be largely influenced by the direction of metallurgical prices, we would expect the benefit across Q3 and Q4, assuming current prices hold, to be generally in line in aggregate with the benefit that we experienced in the second quarter. Next, as part of our ongoing efforts to reduce liabilities and streamline the balance sheet, we will be terminating our cash balance pension plan later this year. The plan is very well funded, but we anticipate a final contribution of up to $10 million that will be made in the third quarter. Finally, we currently expect capital spending in Q3 to be the highest quarterly spend for the year, with a significant step down in the fourth quarter. With that, we are ready to take questions. Operator, I will turn the call back over to you.
spk07: We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. Our first question comes from Lucas Pipes of B. Reilly Securities. Please go ahead.
spk06: Good morning, everyone. Thanks, operator. My first question is on the cost side. So my quick back of the envelope for the MET segment is $86.53 year-to-date. midpoint of the guidance at 84 would suggest a very nice step down in the second half of the year. And I wondered if you could maybe speak to that and the level of confidence and are you targeting the midpoint or is there maybe a little bit of optimism baked into that? I would appreciate your thoughts on that.
spk04: Hey, Lucas, this is John Drexler. Yeah, I guess on the MET side, on the MET costs, You know, for a year to date, we're at that 86 plus dollar a ton range. As we sit here and we look at the remainder of the year, we've kept guidance the same. We expect to see improvement in our volumes as we work through the back half of the year. and we're comfortable that we're going to be in a position to achieve our guidance. I can't get specific to say we're targeting the exact midpoint of the range, anything like that. This is mining. There can be variability, obviously, as we've seen in this quarter. Some of the influence of this quarter was impacted by higher shipments from our continuous miner operations. Obviously, they have a higher cost structure. That all comes down to just timing of shipments, timing of vessels within a quarter, et cetera. So that did have some influence. But as we sit here for the remainder of the year, we feel good about the cost guidance that we have out there and what we're pushing towards operationally for the remainder of the year.
spk06: Thank you very much, Sean. That's helpful. I want to stay on the MET segment for the second question. Again, kind of anchoring the question around the midpoint of guidance, 9.3 million tons, and you have 8.1 million tons committed. I wanted to get a sense for what the appetite is in the market for spot times. I assume that that delta between 9.3 and 8.1 would go into the spot market. Maybe that's the wrong assumption. But what's the appetite out there and what sort of pricing would you expect to achieve on those uncommitted times? Thank you very much.
spk04: Yeah, Lucas, good question. As we sit here today, we're very confident and comfortable with our MET book and the remaining exposure that we have out there. The sales team has done a great job in managing the portfolio as we've seen a weakening and softening in prices. Given our suite of products, the qualities that we offer into the marketplace, the customers that we've built, and gotten comfortable with our production as we sit here today. We'll continue to manage and are comfortable with the guidance that we have out there for shipments. Obviously, it will continue to be influenced by the market, but as we sit here today, we're comfortable that the team will continue to operate and execute and achieve those levels of sales.
spk06: Very helpful. Thank you. Thank you, John. And then I'll squeeze one. last one in. It's a question I get fairly often from investors. When I look at the asset side of your balance sheet fund for asset retirement obligations, $139 million. And then when I look at the liability side, ARO obligations, $235 million. So I wondered if you could comment on that discrepancy. Is that in the PRB? And if so, are there additional contributions planned for the asset side? How should we think about that? Thank you very much for your additional comment on this.
spk01: Lucas, this is Matt. The funding that you see on the asset side of the balance sheet, that's primarily directed for Black Thunder and the long-term obligations there. Obviously, that's the lion's share of what's on the balance sheet in terms of the liability, but Specifically, we're funding toward that long-term obligation, and that has to do with a variety of factors. One, obviously, because it's the largest and because a lot of that work will be spent after that mine is no longer generating significant cash flows, we're trying to make sure that we're well protected for that, and given uncertainties around the long-term life of coal plants in the U.S., we want to make sure that we have enough funding to be able to make the right decisions with that Regarding the reclamation for the other mines, obviously that will be something that we do on an ongoing basis and we've continued to do and expect that those aren't things that we're going to have to pre-fund to a large degree, although as you get closer to the end of a mine life, that certainly could change. But that's really the funding is basically for Black Thunder. John?
spk04: Yeah, Lucas, in addition, I mean, obviously, as we demonstrated quarter after quarter, year after year, you know, we're very focused on maintaining a small footprint in managing those liabilities aggressively. And I think it's emblematic, as we indicated with Black Thunder winning the reclamation award that it did from the state of Wyoming. You know, it's just a tremendous focus of our team along with environmental stewardship along our ESG principles, and we'll continue to manage all of that aggressively as we move forward.
spk01: The last thing I'd mention is that with the interest rate environment that we have today, obviously much more favorable than when we put the funds in place. We would expect that the interest earnings on that fund are going to do most of the work in terms of growing that to the ultimate level that we need, and we probably, as we forecast it today, need something less than $20 million of contributions from cash flow to be made sometime over the next handful of years in order to make sure that we've got a fund that matches the liability when it ultimately needs to be paid out.
spk03: You know, this is Paul. I think the last bit of color I'd give you is that, you know, as you look back, you know, the last couple of years, the concern really was the liability of Black Thunder. And that's what the reclamation fund was really sent out to address. you think about the other minds that make up the rest of that difference, you know, those are all 20 plus years out and there just isn't a concern or a clamoring to do anything right now about those liabilities. So I think we feel good about where we're at. I think that the black thunder fund is really the fees, the concerns. So I, you know, I think what we've done is put it in a very good place.
spk06: Very, very helpful. So, so, so, um, Matt, if I understood this right, tens of millions of dollars over the next couple of years, so like maybe an incremental $5 million or so of cash outflow per year, is that a reasonable ballpark, or would you comment on that?
spk01: Yeah, I would say that that is reasonable, Lucas. The only thing I would say is if we happen to have periods where pricing is very strong and we have windfalls like we had last year, we'd We showed last year we're not afraid to take care of that when times are good. And so if there were periods where cash flows were maybe a lot stronger than what we see today, we could try to move more aggressively to just put that behind us. But given where we stand today, we think something more modest and incremental over the next few years makes sense.
spk06: Very helpful. I appreciate the comments and answers and continue best of luck. Thank you.
spk03: Thank you, Lucas.
spk07: Our next question comes from Nathan Martin of The Benchmark Company. Please go ahead.
spk05: Hey, good morning, guys. Thanks for taking my questions. Matt, let me start with, I'm doing great. Thanks. Matt, can I just start with you? I think a clarification point on your working capital return comments. I think you said 3Q, 4Q should be equal to and kind of in balance with the aggregate for the second quarter return. The second quarter return is about $62 million. Are you saying around $30 million each then to be returned in 3Q and 4Q is the way you see it today?
spk01: Nate, I would say we're certainly expecting around that $60 to $65 million over the course of the back half of the year. I would caution that that may end up sliding more into Q4 returns, Just the way the vessel timing shapes up here in Q3, it does look like we may end up with shipments weighted toward the back half of the quarter, which could push some of that benefit more into Q4. The way I'm looking at it today is probably more, you know, call it one-third in the third quarter with the remainder in Q4. But obviously, changes in both pricing and vessel timing could have a big impact on them. Got it. That makes sense.
spk05: But just to confirm, it's kind of an aggregate of that $60 to $65 million is what you would see in the back house? That's correct. Okay. Got it. Perfect. And then maybe shifting over to the MET side of the business, John, maybe for you, any thoughts on where you are in driving the costs at Lear South down to kind of the expected levels post-ramp?
spk04: Yeah, Nate, we've continued to see ongoing improvement at Lear South in productivity and managing the cost, culminating here in achieving the highest quarterly volumes that Lear South has had since the long wall has started up. So the team is very focused on continuing those efforts. Clearly, we're expecting an improvement. and shipment levels in the back half of the year that would align with, you know, ongoing improvements across the entirety of the portfolio, MET portfolio, including LearStyle. So, you know, LearStyle is starting to find their groove and really move things along, and I'm proud of them for the efforts that they've had in taking that forward.
spk05: And, John, while I have you, would you kind of expect, at least the way you see, you know, shipping schedules currently, would you kind of expect a shift back more towards, you know, a normal mix of longwall coal versus CM coal into the back of the half of the year?
spk04: Yeah, as we play out the entirety of the year, Nate, I would absolutely agree with that statement that we would expect just the typical back half of the year splits between the various qualities of coal that we have.
spk05: Okay, great. And then maybe, you guys also mentioned a high vol A spot price is about $210 a metric ton today. Could you just maybe walk us through the math to get to an indicative net back there? You know, what kind of rail and port fees should we assume, you know, kind of at that price? That would be very helpful.
spk02: Yeah, Nate, so, sorry. Excuse me, guys. So, yeah, at that 210 level, you know, the way you would think about that is that's a metric time delivered in the vessel, and that's the U.S. East Coast assessment. So, you know, $210, that takes you down, you know, call it $20 for the easy math to $190. You know, look, our rail rate has been sort of capped out, and it was capped out again in Q2 at around $60. And the reason that is is that the rail rate and the way the contracts work is dictated by pricing that prevailed in Q1. And as you'll recall, in Q1, the average high ball A price was $307. So at that level, we sort of capped out at the rail rate. That was with us again in Q2 because we're effectively one quarter in arrears. Well, that should be beneficial to us in Q3 and going forward, given that prices have come down. Now, the counterbalance is that prices have come down. So, you know, we get lower prices, but we'll have less, we'll have a lower rail rate. So that's useful. But if you take that, you know, if you go to the 210 to the 190, and then you say it's 60 bucks, that puts you, you know, at the roughly, you know, 130 level is kind of where that puts you. And quite frankly, if you run the math, that's kind of where we ended up for the quarter. It's... the step down from Q1 to Q2 was relatively predictable. And then again, we should get some benefit in Q3.
spk05: Okay, Jack, that's very helpful. And then my kind of back of the envelope math for incremental net tons that you guys priced was in roughly the high 130s. So I think that makes sense and I appreciate that.
spk02: And remember, really, there's not much you can read into what we priced simply because almost everything you saw that rolled into the sort of, you know, from the committed but unpriced column in the seaborne market was really just what we shipped. So for the most part, the seaborne market, you know, our seaborne volumes, you know, are going to be driven by what the price is in Q3 and Q4 as opposed to, you know, any sort of fixing of price because it happens in sort of a real-time basis and very prompt. So, you know, what you saw with the change was really just tons that were committed but unpriced, became fixed price in the most real sense of the word, they shipped.
spk05: Okay, got it. Appreciate that, Jack. And then maybe just one more to kind of slip in on the thermal side. You guys had called out last quarter, you know, potentially 5% of PRV volumes, you know, getting deferred into 2024. You put a finer point on that. This go around 5 million tons of PRV tons. Looks like they'll be deferred into 2024. Do you feel like you've fully incorporated kind of the expected deferrals, you know, at this point, at least the way you guys see the market?
spk04: Yeah, Nate, as we look at the market today, just given the soft thermal market, the price of gas, you know, kind of where we see things, stockpiles, et cetera, we're real comfortable kind of with the strategy that we have in place, where if, you know, we see customers that have an issue that we have conversations with, If they're willing to work with us, we'll consider rolling tons over. But clearly we want to make sure we're preserving the value or optimizing the value of that opportunity, either through additional volumes or additional price. And that 5 million ton range we've given where we see things now is kind of what we expect between now and the end of the year. You know, I will say as we sit here today, The team's done a great job of building out future years volumes in the book and at pricing that's very attractive. So we feel real good at how this year's playing out, how we're managing it, and then how that's going to roll and play into future years as well.
spk02: And, Nate, just to expand on that, I mean, you know, really that's how we built out the book that we've built out is through opportunities like this. You know, we don't view this as a negative. We're happy to work with our customers as long as we get additional and incremental value, and that's how we've built out the out years. And so while $60 million is where we think we'll shake out and, you know, we'd like to ship 60 million tons, as long as the opportunity creates more value for shareholders longer term, we're willing to have those conversations. And so we don't view it as a negative, and quite frankly, again, as you look to next year, we're starting to have a really, you know, quite solid position for another year you know, significant contribution from the thermal segment that's, you know, already baked in. So we feel good about it.
spk05: Jack, anyway, you want to put a number on how many tons you have committed on the thermal side for next year yet?
spk02: You know, all I would say is that, look, if we're going to ship 60 million tons this year, whether we can get to 60 million tons for next year is, you know, to be determined. But again, we are in a position where that's not unachievable. So I think that's, you know, that tells you that even in a market that's declining, we continue to to have a very substantial book even for 2024. And look, a good start on 2025 as well. So in fact, a really solid position for 2025 as well. So feeling really good about the visibility there. And then obviously as you get into the out years, we'll see where the market goes and we're ready to be nimble and react to whatever the demand picture in fact proves to be.
spk05: Great. Very helpful, guys. I'll leave it there. Appreciate the time and best of luck in the second half. Thank you.
spk07: Our next question comes from Katia Jancic of BMO Capital Markets. Please go ahead.
spk00: Hi. Thank you for taking my question. First on the West Elk. I think last quarter the expectation was for West Elk to improve in 3Q and then reach more normalized level in fourth quarter. Is that still true?
spk04: Yeah, Katya, I think as we sit here today, what we're doing at West Elk and the challenges we've encountered, what we represented last quarter and as we're communicating this quarter, I think we continue to feel real good and we are on plan as we developed our plans to manage through the issue. You know, I can report, you know, we indicated that we were going to be moving along while from a panel that was creating the challenges that we had to an area of the reserve that was gonna be higher quality where we wouldn't have the types of challenges that we've had. The team's done a great job and I can report that we're actually beginning the process of that long wall move in the next couple of days. That sets in play kind of that process to get and get ramped up in that next panel. Once again, we expect better conditions. So as we've indicated, You know, Q2, Q3 would be meaningfully impacted by the issues and the challenges, but back to more normal conditions and expectations, normal operations in Q4.
spk02: And, Connie, it's Dak. I would just say, look, we did, you know, talk about maybe a step change, you know, in the right direction in Q3, but we're just going to grind through these two panels. And, you know, Q3... Probably doesn't look that different from Q2 when you think about the thermal segment as a whole, and we'll see where that all shakes out. But the key piece here is that over 15 years of West Elk operating at a very high level, we've had these two quarters we kind of have to gut it out through because of this surprise with the quality and this mudstone. And so, look, I wouldn't expect any significant change. Another modest contribution in Q3 from the thermal segment and then Q4, we should be back on our horse.
spk00: Okay, and then, Paul, I think in your prepared remarks, you briefly mentioned the relative weighting of dividends versus share buybacks. Are you potentially thinking of shifting that weighting from 50-50?
spk03: You know, Katia, the real option of the Catholic Career Program, I think, has really gone well, and kind of the fulfillment of the commitment that the board management made the shareholders following development of Lear South during COVID, which we had to do a lot of creative things to get by. And I think it's worth repeating that since relaunching the program 18 months ago, you know, just 18 months, we've returned nearly $1.2 billion shareholder, including the just about dividend. And in addition to that, we've cut the share count by almost 18%. And you keep that in the context at the same time, when we returned all that cash to our shareholders, We reduced our debt by 80% to a debt cash positive position. We pre-funded the mine reclamation liability. And we greatly enhanced liquidity. And as you point out, and as our shareholders should expect, capital return program is discussed at every meeting by the board. And we clearly challenge ourselves if circumstances have changed, as well as what is the best and most value driving use of our discretionary capital. You know, if you remember that phase one of our capital return program in the 2017 through 2019 time period, we had a really heavy emphasis on buybacks, and we repurchased about 40% of the shares outstanding over a two-year period. So I think as you can tell from that, we're clearly comfortable with a different allocation formula. Standing here today, we've now returned about $2 billion to shareholders through both phases of the program. which I think is an amazing accomplishment given it approximates really our market cap today. I think it also underscores why ARCH is such good value. So I guess getting around to the absolute final is that with all that background and color, I think the message here is that the board is committed to the capital return program, but we still expect buybacks and dividends to play a significant role in any allocation going forward. However, by that same token, we could envision a scenario in which the board would logically adjust the relative weighting of those two components as circumstances change and our shareholder preferences evolve. As I've said many times in the past, relative to the allocation model, there is no perfect solution for all of our shareholders that works 100% of the time. Hence, I think we'll talk about it quarterly. We need to be deliberate. We'll review it continuously and If it makes sense, I think the board will react appropriately.
spk00: Perfect. Thank you so much. Thank you, Katia.
spk07: The next question comes from Alex Hacking from Citi. Please go ahead.
spk08: Yeah, morning, everyone. Hey, how are you? So you mentioned that Lear South had a record quarter. What is the cadence for the rest of the ramp-up look like there? Thanks.
spk04: Alex, I think, you know, as we sit here today, I can't get specific into that expected cadence. You know, it's obviously influenced by long-wall moves, just ongoing ramp, et cetera. So, you know, once again, I think we just expect ongoing improvement as we move forward, and we'll continue to drive that way for the Mets segment as we go forward.
spk08: Okay, thanks. And then I don't know if you disclosed this, but how much coal have you sold into Asia in the first half of the year?
spk04: So, Alex, what we typically do is we generally talk about the splits of our sales volumes for the guidance that we provide. It's about 20% stays in the North American market and the domestic volumes there. About 80% goes into the seaborne market. And as a general rule of thumb, what we've seen is an ongoing significantly increased amount going into Asia. And right now that's probably at around 50-50 of that export volume that's going into Asia as opposed to Europe or South America.
spk02: And Alex, really, we've focused huge amount of attention on building out that Asian presence and helping the Asian market understand the unique qualities that we have with our high-volume product. And I know you and I have talked about it, and we've all talked about it a lot. The fact is that our HPA product from Lear & Lear South is such a great fit for the Asian market because they're looking to blend a lot of disparate products. And the nature of Lear & Lear South is that it really promotes excellent bonding, particle bonding, so that you – you know, you end up with a much better and more homogeneous Coke out the back end of the Coke oven when you're using our products because of their plastic qualities and, you know, all the things we've discussed. So, look, that's a huge focus for us. And I would add, look, we also understand that's where the market is going to be, right? That's where the growth is going to be when you look at, you know, what Wood McKenzie is projecting in terms of growth in blast furnace, you know, capacity in Asia. when you look at where coking coal consumption is likely to go as a result of that increase in blast front capacity, we're seeing about an 80 million ton increase between now and 2030 in Asian demand for coking coal. So that's where the market is going to be, and that's a huge focus for us, and the team's done an amazing job, I think, of educating that Asian market marketplace about the qualities of our coals and why they can be such a great fit in their blends.
spk04: Alex, it wasn't all that long ago that we had minimal amounts of volumes going into the Asian markets. And for the team to achieve what they've done, secure the customers that they've been able to secure, to grow the consumption of our coal there, 50-50 split of our exports is a real testament, once again, to the entirety of the portfolio and the work they're doing, as Dec indicated, for an area that's going to be very important for us as we go forward.
spk02: So, Alex, if we had to say, I mean, it's going to be systematic, but, you know, as John said, of our total volumes, we would expect 40% or so, you know, going to the Asian market. You know, is that 45% next year, 50% the year after? Who knows? But it's going to be that sort of, you know, systematic increase in all likelihood, and quite frankly, that's where those incremental volumes go. As Lear South continues to operate at higher and higher productivity levels, those volumes are going to go in all likelihood into the Asian market. So, again, we feel good about sort of where that is all trending.
spk08: Okay, thanks. I appreciate the call. That's kind of where I was going. I was trying to track that acceptance. And then I guess just finally on the domestic side, you know, not to throw the cat amongst the pigeons, but, you know, a large U S blast furnace steel maker on their conference call suggested that, you know, they were looking for a significant, you know, cut in the thermal coal price for next year. Um, you know, I guess, how, how do you think about, you know, as you head into next year, kind of a trade off between, you know, domestic market and, and, and seaborne market and how much flexibility, um, you know, do you have to put incremental tons into the seaboard market if you, you know, if that seems like the best economic option for you? Thanks.
spk03: Hey, Alex, this is Paul, and I'll start this off if the others want to weigh in. But, you know, I go back to where we left off on the other answer, which is, you know, you back up, you know, not that long ago, five, six, seven, eight years ago, we were 50% North American and roughly 50% Europe and South America. As time has evolved, we've clearly pushed our volumes heavier into Asia with a lot less reliance on the U.S. and Europe. I've said this many times in the past. If we ultimately have to, we're ready to go 100% export. The North American business has some advantages. It's FOB buying generally. It has a lot less working capital implications, but There is a cost to keeping it in North America, or excuse me, if there's a discount to keeping it in North America versus what we view as the seaborne market. We're quite willing to go into the seaborne market and just sell on an index basis rather than lock in a lot of volume in North American business.
spk08: Okay. Thanks, Paul, and everyone. I appreciate the color. Thanks, Al.
spk07: This concludes our question and answer session. I would like to turn the conference back over to CEO Paul Lang for any closing remarks.
spk03: I want to thank you again for your interest in ARCH. While the global cooking coal market has entered a soft patch, I want to reiterate once again that ARCH was built for just such conditions. Indeed, we see the current market weakness as an opportunity to differentiate ourselves even further by highlighting our low-cost position and demonstrating that we can thrive, and continue to generate substantial amounts of free cash flow across a broad spectrum of the coal market cycle. With that, operator, we'll conclude the call, and we look forward to reporting to the group in late October. Stay safe and healthy, everyone.
spk07: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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