Peabody Energy Corporation

Ladies and gentlemen, and welcome to Peabody Energy's second quarter 2021 earnings conference 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 the star followed by the zero. As a reminder, this conference is being recorded today, July 29, 2021. I would now like to turn the conference over to Alice Larinas. Please go ahead.

Alice Larinas Thank you. Good morning, and thanks for joining PBIE's earnings call for the second quarter of 2021. With me today are President and CEO Jim Grech and CFO Mark Spurback. Within the earnings release, you'll find our statement on forward-looking information, as well as a reconciliation of non-GAAP financial measures. We encourage you to consider the risk factors referenced there, along with our public filings with the FDC. I'll now turn the call over to Jim.

Thanks, Alice, and good morning, everyone. Peabody had an encouraging quarter as our assets are continuing to deliver solid operational performance, and we're seeing robust global coal market demand with strong economic indicators as economies continue to recover from the pandemic. We are progressing on actions to expand our margins and reduce our debt levels and are well positioned to benefit from market recoveries. Higher volumes for the second half of 2021 are projected at a time of robust markets. But before I cover the highlights for the quarter, I'd like to begin by thanking our global workforce for their continued focus on working safely and efficiently. I've been impressed by the dedication and efforts of our team, and I'm confident we will continue to build on improvements we have achieved today. As planned, in every segment, our assets are expected to deliver increased production in the second half of the year as we benefit from our efforts at a time of elevated demand. Within our Seaborn thermal platform, we expect higher volumes from the advancement of development at the Wombo JV and the Wolpenjong extension projects. Within our U.S. thermal platform, we expect PRB demand to continue at the strong pace we have seen in the second quarter, and we are positioned to deliver all customer volumes. And in the Illinois Basin, we're expecting productivity improvements from our Indiana Open Cup Mines due to new pit development and equipment enhancement projects. And finally, at our Met Mines, we expect higher volumes from the CMJV and from the Metropolitan Longwall reaching planned production. Now turning to the quarter. Second quarter results show EBITDA improvements in every operating segment as compared to prior year as our assets are responding favorably to increased market demand with lower costs as a result of improvement efforts across the company. Our seaborne thermal segment benefited from increased prices compared to the prior year, resulting in margins of 37 percent. I'm happy to say that the Wambo JV development and the Wilpin Jong Extension projects, with over 50 million of capital invested year-to-date, are both on target to deliver higher volumes in the second half as compared to the first half of 2021. Our U.S. thermal mines delivered another solid quarter, generating EBITDA of nearly $90 million. The operations continued to deliver low costs while benefiting from market recovery, with more than a 20% year-over-year increase in volumes. In the quarter, we recognized improvements in our seaborne met segment costs with a 14% versus the prior year, led by productivity improvements at the CMJV. At Metropolitan, long-wall production restarted. We are confident a long-term agreement with our domestic customer will be completed within Q3. And at Shoal Creek, we are on target to complete the prep plant upgrade project in mid-Q3. And we continue productive discussions with the union regarding the expired labor agreement and we continue to review options with customers as we see that there is a robust demand for the Shoal Creek product in the near-term market. We also took steps in the quarter to reduce our debt levels and raise cash through the issuance of common shares. Mark will have more detail on this in his comments. We remain committed to enhancing our platform to be resilient in all market cycles by operating within our optimal cost structures with a focus on cost improvements, and a disciplined approach to volumes. Our intent is to opportunistically reduce our debt levels and bolster our liquidity as we have demonstrated with our year-to-date progress. Looking forward, we continue to evaluate alternatives to strengthen our portfolio to achieve our strategic objectives of reweighting investments towards seaborne markets, maximizing U.S. thermal asset cash generation, and maintaining financial strength. We are exploring opportunities to invest in the growth of our Seabourn platform. In the second half, we expect to begin development of Morvale South, which will transition the mine from a greater mix of PCI production to semi-hard coking coal and extend the life of the mine. Based on current economics, we are also progressing plans to develop Longwall 23 panel to extend the life of Lambeau Underground into 2023. Also, subsequent to the quarter, we closed transactions to sell our closed Millennium and Wilkie Creek mines, which will result in reduced administrative oversight and a reduction of our closed mine liabilities. And as a result, in Q3, we'll recognize somewhere between $40 to $50 million net gain and receive a small cash consideration. From a broader market perspective, the near-term outlook for all of our segments is favorable with strong market indicators and increased global demand. The seaborne thermal and metallurgical coal markets are expected to remain tight in the near to medium term as supply response to elevated demand remains muted. Newcastle thermal coal pricing is at levels not seen in over 10 years. In the U.S., Thermal coal market indicators are favorable with increased electricity demand and high natural gas prices. Overall, electricity demand increased 4% over last year, positively impacted by weather and week prior year comparatives due to COVID. Coal share of electricity generation increased to approximately 22% for the first half of 2021. And as a result, coal inventories have fallen by approximately 17 million tons. During the first six months of this year, utility consumption of PRB coal rose approximately 35% compared to the prior year. These global market conditions are showing the strength of our globally diversified asset base, which makes us distinctly unique from any other U.S. coal company. Our Q2 results are a great example of the value we can generate from our asset mix and then use those funds to reduce our debt levels, while investing in assets that strengthen our production positions in the markets where we get the best value for our product. I'll now turn things over to Mark to cover the financials.

Thanks, Jim, and good morning, everyone. Second quarter results continue to demonstrate our focus on cost management and performance improvement. Three out of four operating segments reported lower costs compared to the prior year, and maybe more importantly, Three out of four operating segments reported lower costs compared to the first quarter. Most notably, our seaborne thermal operations reduced costs per ton by 19% quarter over quarter. Second quarter revenue increased 15% from the prior year to $723 million on higher volumes at our U.S. thermal and seaborne med operations and higher average realized pricing for our seaborne thermal export products. Loss from continuing operations, net of income taxes totaled $23 million, including $25 million in unrealized losses on economic hedges. We reported adjusted EBITDA of $122 million, a nearly $100 million improvement compared to prior year second quarter results of $23 million, and doubled the $61 million reported in the first quarter of this year, demonstrating the strength of our diversified assets. Importantly, we took further action to enhance our financial strength. Following the completion of the financing activities in the first quarter, at June 30, we had raised net cash proceeds of $65 million by issuing 8.1 million shares of common stock under the previously announced at-the-market equity program. Subsequent to June 30, we raised an additional $21.5 million and issued 2.7 million shares. We put much of that money to immediate work and retired nearly 84 million of additional debt as of June 30. We completed open market repurchases of 53 million of senior secured debt and completed multiple bilateral debt for equity exchanges, retiring 30.9 million of the 2022 senior secured notes in exchange for 4.5 million shares of common stock. These transactions resulted in a net gain from early debt extinguishment of 11.8 million in the second quarter. We reached further agreements to retire an additional $50 million of debt that will settle after June 30, which is expected to result in a net gain of approximately $15 million in the third quarter. For the year, including amounts that will settle after June 30, we will have reduced debt by a combined $176 million. Turning now to the segment results. the seaborne thermal segment benefited from a $12 increase in average realized price per ton compared to the prior year and held costs nearly flat, despite lower volume, unfavorable exchange rates, and higher fuel and royalty costs. Seaborne thermal volumes were 500,000 tons lower than the prior year due to the transition to the United Wambo open-cut joint venture and timing of shipments from Wilpin Young. Wilpin Young shipped 3.3 million tons in the quarter, including 1.2 million export tons at average costs of $22 per ton. Wilpin Young realized average revenue of $38 per ton, resulting in an EBITDA margin of approximately 41%. Wilpin Young recorded $52 million of adjusted EBITDA and had $102 million of cash at June 30. Operating cash flow of $11 million for the second quarter at Wilpin Young was impacted by an increase in accounts receivable and higher inventory levels. Second quarter MET shipments were approximately 300,000 tons higher than last year due to higher demand for our PCI products from the Capabella and Moorvale mines. Total costs for the Seabourn MET segment improved by over $16 per ton compared to prior year, primarily due to a more than 20% improvement at the CMJV due to fleet optimization efforts and mine sequencing. despite metropolitan ramp-up costs from the restart of the long wall late in the quarter. In the U.S., our mines responded well to improving demand conditions. Our PRB mines shipped 22.5 million tons in the quarter, a 26% increase from 2020 levels, and also a significant increase from just 20.7 million tons in the first quarter. Additionally, we further lowered costs compared to the prior year and prior quarter periods, to just over $9 per ton, despite higher fuel costs. The other US thermal mines also reduced costs by 5% compared to prior year, and generated 27% EBITDA margins. At June 30, we had $562 million of cash, cash equivalents, and restricted cash. In the quarter, cash flow from operating activities was negatively impacted by an increase of approximately $125 million in working capital, primarily from higher accounts receivable and timing of payments. Looking ahead to the remainder of the year, we will continue to be disciplined, taking advantage of increased demand, controlling costs, and taking a measured approach to the balance sheet. In the second half, we anticipate higher seaworn thermal volumes and expect to ship 9 to 10 million tons, between 5 and 6 million export tons, of which 3 to 4 million tons are unpriced. Costs are expected to nudge higher with a greater mix of Guambo underground tons and higher expected royalties. Wilpin Young volumes are expected to increase to over 7 million tons with 3.7 million export tons and finish the year strong. Seabourn Met volumes remain contingent upon a restart at Shoal Creek. Metropolitans expected to ship up to 800,000 tons in the second half and CMJV volumes are expected to remain strong, approximately 2 million tons. We anticipate lower second half costs due to higher metropolitan longwall production and anticipate maintaining year-to-date cost improvements at the CMJV. We are planning for PRV volumes to be higher in the second half and essentially have all planned tons priced. Other U.S. thermal shipments are expected to increase compared to the first half, maintaining 16 to 17 million tons for the full year. Costs for both segments are expected to be slightly higher in the second half due to mix. We are now targeting SG&A of 80 million for the year, an additional 5 million decrease as we continue to realize savings from lower overheads. We are also reducing our capital expenditure guidance to 200 million for the year, including major projects of $100 million for significant reinvestment in our Australian-based seaboard platforms. And lastly, we now expect interest expense for the year to be $190 million, a $10 million reduction from prior guidance as a result of the early debt retirements I spoke of earlier. I'd now like to turn the call over for questions. Operator?

Thank you. Ladies and gentlemen, at this time, we will now begin the question and answer session. If you have a question, please press the star followed by the number one on your push button phone. If you are using a speaker equipment, you will need to lift the handset before pressing your numbers. If you find your question has been answered, you may remove yourself from the queue by pressing star two. One moment, please, for the first question. We'll go first to Lucas Pipes with B Reilly Securities.

Thank you very much, and good morning, everyone. Jim, great to hear your voice, and congratulations on a strong quarter. Thank you.

It's good to hear your voice as well.

Jim, maybe to start with a higher-level question, you know, Your background is on the commercial side, and this is a really, really strong market globally, but also it appears there's a resurgence in domestic demand. Can you touch on where you see the opportunities from a pricing perspective as you look across your portfolio?

Well, Lucas, whether it's domestically or internationally, global coal demand is on the increase. Now, some markets like the U.S. over the long term are going to have a secular decline. But in total, globally, we see coal demand increasing. And I'll talk about the supply side response of that. But, you know, my view is that's going to lead to increased price volatility to the upside. And the reason I'm saying that is, you know, the supply response to these increased demands is just not there like it's been historically. the lack of capital available to the space, the trouble with permitting, the difficulty in getting workers, you know, the elasticity of supply demand is just not what it used to be. And so domestically we're seeing that right now. Internationally we're seeing that right now. And I think the volatility to the upside is just going to increase as we go forward because overall I see demand globally increasing with supply not keeping pace with it.

Very, very helpful. And a quick follow-up question on that. When you look across the space, a number of your peers, to your point, are considering reducing their thermal coal footprint in the seaborne markets as well. What role could Peabody play in that? Is M&A feasible here, and how would you think about financing opportunities? Any thoughts you could share, I would really appreciate that. Thank you very much.

Lucas, if there's ongoing M&A activities, we don't comment on them, but I would say that we are showing our commitment to the seaborne thermal markets with the investments we're making at WAMBO. underground with extending another panel there, the 23 panel, the Wilpin Young extension that we have going on there right now. So these are our assets that we have in hand, and we are putting capital into them for their expansion and their continued life because we see the seaborne thermal markets as a good market to be in.

Thank you. Really appreciate that. And then last one's for now, to switch topics. When I look at your guidance for 2021, roughly across three different buckets, $95 million in legacy liability costs, can you share a perspective on what the tail is to those liabilities? Are some of them more one-off, or how should we model them going forward? Thank you very much.

Lucas, it's Mark. I think a couple of things that you're referring to in the release and in our guidance table. $60 million for final reclamation. I think that $50 to $60 million is a pretty good run rate for the foreseeable future here in the next few years as we continue to do the right thing and reclaim lands. There's also $30 million of retiree health care. That's probably a pretty good run rate as well for the next few years. It is related to retiree health care, and it will reduce over time. But for the foreseeable future, I would use that number. And then the last thing on that list, there's $15 million for the settlement of the multi-employer pension plan. That actually had been a series of payments. That $15 million this year was the last payment that we have to make for that settlement. We actually completed that in July.

Very helpful. Really appreciate all the color. Best of luck, and I'll turn it over. Thank you.

Thank you. We'll take our next question from Nathan Martin with the Benchmark Company.

Great, thanks. Good morning, everyone, and welcome, Jim, and congrats on the quarter. Thank you, Nathan. I appreciate all the guidance you guys provided in earnings relief. I want to start with some questions, I guess, on the Seabourn Met side. Could you give us an idea of what the quality split is looking like for this year between the hardcore control and PCI products within your Seaborn Med volume guidance? And then maybe what kind of discounts, if any, are you guys seeing relative to those indices?

Yeah, Nathan, it's Mark. I'll take a stab at this. Looking at 2 million tons for the CMJV in the second half and up to about 800,000 tons from Metrop. CMJV generally produces a benchmark PCI product. That's near $145 a ton today. Metrop produces really a blend, a soft, semi-soft cocaine coal and a PCI blend. we probably realize about 80% of the premium hard coking cold benchmark from a pricing perspective on that. With a little over 2 million tons on price for the remainder of the year, there's certainly some upside here in the portfolio on prices given the current conditions. There is a bit that is priced. There's probably about 400,000 tons of the CMJV currently priced at about $100 a ton.

Thank you. That will conclude our question and answer session. That will conclude our question and answer session.

Operator, I think there was a follow-on from Nathan, if we can give him a second.

Okay, just a moment. Nathan, if you would signal again. Please press star 1 on your telephone keypad. Mr. Martin, your line is open.

Yeah, I apologize for that, guys. I was on mute. Mark, I appreciate that color. So I just look at the cost as well on the Seabourn Met side of the business. You know, I see it's full year guidance now at $93, excluding Shoal Creek. Maybe can you guys give us an idea of the ongoing costs, you know, for Shoal Creek or maybe even North Vanilla, you know, because obviously the reported costs in the first half were over $100 a ton. Is that still a good way to think about it on a reported basis, or should that come down? Just any thought there.

A couple of thoughts. One, you know, North Guinea is completely out. You know, the holding costs there have been held stable here for the last six months to a year. Shoal Creek is out. Holding costs there are about $10 million and a quarter so far. Obviously, you know, we're reinvesting in that asset, looking to move forward when opportunity presents. You know, in the current quarter, I'd say that we had some costs. You know, METROP ramping up, there's probably a $4 million cost on the ramp up. There was also a full month of holding costs there. So there's probably $7 or $8 million of costs at METROP that were included in the quarter that wouldn't be there on a go-forward basis.

Got it, Mark. Thank you for that. And then I guess just sticking with Coal Creek for a second, You guys still expect a prep plan to be finished sometime here in pre-Q. Labor negotiations ongoing. I guess if we assume a contract gets worked out, are there any limitations to ramping the mine back up immediately, whether that's geology or customer related? I think as Jim pointed out in his prepared remarks. Thanks.

Well, Nathan, with the mine having sat for a while, there's going to be a gradual ramp up back to full production. So on day one, it would not come back at full production. And, you know, we put money into the prep plant and into other parts of the facility. So, you know, there would be some commissioning period of starting the mine up before we could hit full production at some point, you know, a few months after startup.

Can you remind us what full production might look like at this point, 2 million, 3 million tons, something around there?

It can produce about 2, 2.5 million tons a year in that range.

And is that, again, like a high vol A or more of a low vol product?

That's more of a high vol A product.

Perfect. And then just one final question from you guys. You know, thinking about CapEx, Obviously, nice to see you lowered the guidance here by $25 million to $200 million this year, which does include, you know, the $100 million for those ultrathermal projects, I'm assuming. If you look ahead, you know, at what point does the major project spending, you know, wrap up? I think, you know, Jim, you mentioned a couple other projects. You know, when can you guys think you can move down to more maintenance-like levels of spending, and what might that look like on an absolute dollar basis? Thanks.

Yeah, Nathan, a couple of things. You know, we lowered that guidance $25 million to $200 million this year. There is, you know, some additional further out project capital of $25 million that really resulted in that number. We've said it before, I'd still say $100 million on a sustaining basis is the right number. You know, if you look at that $25 million reduction, does that fall into $22 most likely? So, maybe we got about $25 million, but the Wilpin Young Extension project and the WAMBO open-cut joint venture, those projects substantially complete this year. So we should be at a much closer to a sustaining $100 million next year with maybe that $25 million reduction falling in to $22 from this year.

Any early thoughts, Mark, on the projects that Jim mentioned, the Moorvale South or the Longwell 23 panel at WAMBO?

Yeah, you know, both are great projects for the company. At Moravelle South, we will be on that in the second half of this year. And it looks obviously quite promising. And then at today's prices and current economics, the Wombo Longwall Panel 22, we announced we had done that earlier this year. Looking at 23 now, certainly looks to be quite attractive and very similar to 22.

Great. Great. I appreciate the time and all the information, guys, and best of luck in the second half.

Thank you. Thanks, Nathan.

Thank you. We'll take our next question from Matthew Field with Bank of America.

Hey, everyone. Welcome, Jim. Thank you, Matthew. My first question is on the Australian thermal side. Obviously, with the Newcastle price as strong as it is, you're seeing more of a lag due to the domestic contract. What can you do about that kind of domestic tonnage and maybe is there a price escalator in there? Is there a way to kind of shift more into the export market while prices are so strong? What can you do to kind of help realizations on the thermal side in Australia?

Yeah, Matt, the domestic tonnage out of Wilp and Young there is really based on customer needs and really gets the first coal from the mine, I'll say. That's pretty radical over the year. But we are expecting volumes to increase in the second half. So, you know, while we only exported 2.3 million tons in the first half, we're looking at exporting about 3.7 million tons in the second half. Two and a half million of those tons are unpriced, with the remainder priced at about $63 a ton. So, certainly looking at some higher prices in the second half and higher volumes on the export side in particular.

Okay, thanks.

As a reminder... Go ahead, Matt.

No, no, please finish.

I was just going to say, and as a reminder, Wolf & Young sells at a discount, a high-ash product at a discount to the API 5 index, which is currently above $90. But don't confuse that with a Newcastle benchmark product.

Sure, thank you. And then on the balance sheet side, your release said that you had another $50 million of debt retirements to be settled after the quarter end. Can you just give us some detail on what tranches that $50 million entails?

Yeah, most of that $50 million is in the term loan. It's just a delayed settlement of those. We've reached agreements to repurchase those at a substantial discount, as you saw from the expected gain in the quarter. Just a matter of timing, getting those settled. And then we had... Go on. Yeah, most of that was the term loans I mentioned. There's about $5 million of additional 2022 notes that we've done debt for equity exchanges for as well. Some of the ones that we closed in the quarter.

Okay, thank you. And then, you know, you're poised to generate a decent amount of cash flow in the back half here. Where in your capital structure do you intend to kind of target that cash generation? Is it in Australia? Is it in the BTU corporate notes or the term loan? Can you just give us an idea of what your priorities are?

Yeah, Matt, as you said before, priority number one is to maintain... operating liquidity, and that hasn't changed. Certainly in the current price environment, much higher cash flow generation opportunity if these prices prevail. I'll remind everyone the Wilpin Young free cash flow, which we just got done talking about the volumes and the pricing there. There is an excess cash flow sweep that's embedded with those notes, so anything generated at Wilpin Young, 100% of that excess cash flow will be swept to reduce the debt there at Wilpin Young. both the notes and the term loan at Wilp and Young. And then we'll continue to opportunistically look at opportunities to find ways to continue to deleverage and reduce debt if remaining cash flows provide that opportunity.

All right, great. Thanks very much, and good luck in the back half.

Thanks, Matt.

Thanks, Matt. We'll go next to Lucas Pipes with B. Reilly Securities.

Thank you very much for taking my follow-up question. And I want to return to the market for just a moment here. Jim, when we talked about the market earlier, you mentioned the strength and your positive outlook. And I think what's so remarkable here is that the strength is occurring despite the the Chinese ban of Australian coal. And you're in a unique position with your Australian portfolio to maybe comment on what is driving the strength, right? If you're not selling directly to China from Australia, what is driving prices higher in your opinion? We'd really appreciate your thoughts on that. And then anything as it relates to CFR prices in China and how you might be able to take advantage of that in the future. would also appreciate your thoughts on that. Thank you very much.

Well, Lucas, first off, historically, like in 2020, for example, only about 2% of our coal was sold into China. So we didn't have to rebalance our portfolio very much with the ban of the Australian coal going into China. And the market in general or in total, though, has rebalanced, right? There's so much demand out there that the Australian coal that isn't going to China is finding its way to other markets, and then American coal, as an example, is finding its way to China. So I think the strong demand that's out there is certainly having an impact with the Chinese ban on Australian coal, and now you're starting to see the Atlantic prices, metallurgical prices, rising as well. So the market has found a way to balance itself, but again, for us, we historically have not been a seller of a lot of our coal into China.

And if you look to restart Shoal Creek, how accessible would the Chinese market be for that product?

Well, Shoal Creek historically has had customers that are not in the market in China. But when we restart that mine, that would certainly, you know, some of the customer inquiries we are getting for coal are from that market. So, you know, we have commitments to our existing customers and we have loyalty to our existing customers as well. So we'll make sure that we're meeting their needs. They are not in the China market. But we'll also, if we have the opportunity, certainly place some coal in that market.

Got it. Okay. That's very helpful. Really appreciate all the extra color and, again, best of luck.

Thank you, Lucas.

Thanks, Lucas.

That will conclude our question and answer session today. At this time, I'd like to turn the call back over to Jim Grech for any additional closing remarks.

Well, thank you all for joining us today. I'd especially like to thank our employees for remaining focused on safety and for continuing to execute on our various productivity and cost-approval initiatives. I'd also like to thank our customers, investors, insurance providers, and our vendors for your continued support. Operator, that concludes our call.

Thank you. That will conclude today's call. We appreciate your participation.