Peabody Energy Corporation

Good day, everyone, and welcome to the Peabody Energy First Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. Following today's presentation, instructions will be given for the question and answer session. If anyone needs assistance at any time during the conference, please press star followed by zero. As a reminder, this conference is being recorded Wednesday, April 29th, 2020. I would now like to turn the call over to Julie Gates. Please go ahead.

Good morning, and thanks for joining Peabody's earnings call for the first quarter of 2020. With us today, our President and CEO, Glenn Kello, as well as Interim CFO, Mark Spurbeck. Within the earnings release, you'll find our statement on forward-looking information, as well as the reconciliation of non-GAAP measures. We encourage you to consider the risk factors referenced there, along with our public filings with the SEC. Given the unique circumstances of COVID-19, we will begin today's remarks with a robust discussion of Peabody-specific actions underway in response to the evolving situation. I'll now turn the call over to Glenn.

Thanks, Julie, and good morning, everyone. I'm pleased to note that Julie has recently taken over as Head of Investor Relations and Communications, so welcome. I'd like to start today by extending my sincerest gratitude to our global workforce of more than 6,000 employees, particularly those serving on the front lines to provide products to meet vital needs. Thank you for all you do each and every day. It has been a challenging start to 2020. and among the most complex global backdrops in my more than three decades in the global resource industry. For context, in just the first quarter, Australia was still facing the impacts of persistent and tragic bushfires, immediately followed by some of the heaviest rainfall to hit New South Wales since the 1990s. In the US, we saw natural gas prices hit 21-year lows, and now we and the rest of the world are managing through the devastating and complex COVID-19 pandemic. Coal mining has been designated as an essential business by many governments to support coal-fuelled electric power generation and critical steelmaking needs. Even so, the health and safety of our employees and broader communities remain at the forefront of all we do. We will continue to operate our mines only when it is safe and economically to do so. We are following recommendations by the CDC and the Australian Department of Health with rigorous protocols, controls and prevention measures in place at all of our locations. This includes temperature and health screens, paid COVID-19 leave, enhanced cleaning and sterilisation practices, expanded use of personal protective equipment, remote work where possible and social distancing procedures. We are also utilising more flexible rosters at many of our sites to reduce exposures. In these times of great global uncertainty, we are enhancing our efforts to protect our business. We believe it's not enough to simply live within our means. We must take aggressive, decisive action and create our own catalyst for change. As such, we are actively pursuing structural improvements across the enterprise. An internal project team has been formed with oversight by our board of directors to manage a host of initiatives. The project team is tasked with expediting a detailed mind-by-mind analysis to identify structural improvements, identify any gaps and ensure accountability for operational targets. All minds will be included in the analysis with initial focus on the highest value opportunities. Let me be clear, mines that cannot demonstrate a path to cash generation at lower pricing levels will be suspended. We proved our willingness to do so with the suspension or closure of several mines in the Midwest in 2019. In April, we eliminated approximately 250 positions from some of our PRB and Midwest mines to better scale staffing requirements to meet customer demand. With those actions, we would expect a second quarter restructuring charge. This follows the reduction of approximately 215 operational positions across eight mines in the first quarter of this year to better align with industry conditions. Last year, you'll recall we identified $50 million in cost savings that benefited SG&A in operating costs and is being implemented throughout the year. As a result of further reductions in the first quarter, we are expecting an additional 20 million of annualised cost savings, about 10 million of which will be a direct benefit to SG&A. Combined, these actions have resulted in the reduction of our corporate and support headcount by over one-third in the past two quarters. In addition, we have taken steps to mitigate our financial risk. We previously suspended dividends and share repurchases. During the first quarter, we paused voluntary debt reduction activities and have no current plans to repurchase senior secured notes or the term loan. Then in April, we borrowed $300 million under our revolving credit facility to enhance our financial flexibility. We are also evaluating our portfolio to determine if we have the right mix of assets or if certain assets would be candidates for divestiture. A recent example is the sale of surplus undeveloped tenements in Australia during the first quarter. We are also continuing to pursue two key business initiatives, the highly synergistic PRB Colorado joint venture and the commercial process for the North Gunilla mine. Peabody and Arch are contesting the FTC's negative split decision regarding the formation of the joint venture in court starting in late June. dependent, of course, on any scheduling changes by the court. A ruling is expected shortly thereafter. The North Canela commercial process is also underway. As you would expect, we are closely monitoring the market situation as we proceed with this process, as well as any incremental spending related to the re-entry and development of mine. We have also been focused on reducing holding costs at North Canela, Most recently, we successfully entered into commercial agreements to reduce rail and port commitments beginning mid-year 2020. While these reductions in port and rail commitments span a multi-year period, we maintain sufficient rail and port capacity for when the mine resumes operation. Quarterly holding costs are now projected to be about $5 million starting in the third quarter of 2020. This marks an approximately 85% reduction in costs over the past several quarters. Overall, it's a time of significant change for the global economy, our business and our employees globally. This team continues to step up to each and every challenge while keeping safety and health top of mind. Turning to industry dynamics now. The impact of COVID-19 had been widespread with the International Monetary Fund projecting the global economy to contract more than it has in almost a century. National shutdowns are continuing, resulting in supply and demand disruptions across the coal industry. Today I'd like to focus on several key regions, starting with China. While restrictions in China have now been lifted, the country reported a nearly 7% contraction in first quarter GDP as it enforced large-scale shutdowns and quarantines to contain the outbreak. Despite these conditions, China increased total coal imports by 28%, rebounding from the drop-off late in 2019 when import restrictions were enforced. These strong import levels, combined with low domestic prices, has ultimately resulted in an oversupply of thermal coal in the country, pressuring prices. Overall, Chinese domestic coal prices have been weak, with the arbitrage in favour of imported coals, particularly on the met side. We are closely monitoring calls for government intervention in the form of production cuts and potential import restrictions. Steel operations in India have been impacted by a multi-week shutdown of the country, triggering a number of ports to declare force majeure on seabourn cargoes. In addition, Japan recently announced a state of emergency amid a sharp spike in COVID-19 cases. As a result, two of the country's largest producers accounting for about three-fourths of Japanese steel output, have moved to cut production by 25% due to a significant decline in demand. In addition to demand impacts, supply risks continue to emerge as a number of global and domestic producers have curtailed or suspended production. Turning to the US, the impacts from the pandemic are placing increased pressure on total load and in turn coal demand. In early April, electricity demand declined to lows not seen since 2003 as major industrial activity has been shuttered, contributing to depressed power prices. During the first quarter, average Henry Hutt natural gas prices reached their lowest levels since 1999. Year-to-date through March, coal fuel generation is down 31%, with coal production declining 17%. April has been another challenging month. reflected limited industrial activity in what is traditionally a shoulder season. Overall, it's a time of significant change for the global economy and our business. With that, I'll now ask Mark to cover the first quarter highlights in our 2020 Outlook.