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spk05: Welcome to the Peabody second quarter earnings call. All participants will be in a listen only mode. And should you need any assistance during the call, 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, please press star then one on your telephone keypad. To remove a question, please press star then two. Please also note that this event is being recorded. And at this time, I would now like to turn the conference over to Carla Kimrey, Vice President of Investor Relations. Please go ahead.
spk00: Good morning, and thank you for joining Peabody's earnings call for the second quarter of 2023. With me today are President and CEO Jim Grech, CFO Mark Sperbeck, and our Chief Marketing Officer Malcolm Roberts. 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 SEC. I'll now turn the call over to Jim.
spk03: Thanks, Carla, and good morning, everyone. In the second quarter of 2023, our unique diversified portfolio allowed us to successfully execute against our plan while operating in a volatile market environment. In the quarter, we initiated our annual shareholder return program with a fixed dividend and a meaningful share buyback plan. We returned $262 million through our shareholder return program in the last quarter. Before I address the markets, I want to thank our global employees for their continued focus on working safely and efficiently. Now turning to the global coal markets. Seaborne thermal coal markets remain volatile with prices declining during the second quarter. Comparatively high coal and natural gas inventories in the northern hemisphere following an unseasonably warm winter, have weighed on demand, leading to a weaker pricing environment for high-energy thermal coals. China's year-to-date thermal coal imports point to significant increases in consumption of seaborne thermal coal, with an annual thermal coal import run rate of approximately 400 million tons per year, representing approximately a 90% increase over 2022 levels. India, too, has shown signs of improved economic activity during the first half of 2023, and with it, increased power demand, and elevated coal imports. Overall, demand for seaborne thermal coal is robust and supply remains constrained across major supply regions. We anticipate that the onset of peak summer energy demand in the northern hemisphere followed by restocking and preparation for winter will contribute to a normalization of inventory levels, providing support to seaborne thermal coal markets. Within the seaborne metallurgical market, Global crude steel output during the quarter was variable with interruptions at European blast furnaces, offset by notable year-on-year crude steel production growth in both China and India. Metallurgical coal supply has remained constrained primarily due to residual impacts of wet weather events in Queensland during the first quarter of 2023. The rate of exports from Queensland remains below historical rates. and premium hard coking coal pricing remains elevated, finishing the quarter at $233 a ton. The outlook for the metallurgical coal market remains positive, with subdued seaborne supply combined with anticipated increases in import demand for steelmaking raw materials, along with improving crude steel production rates in Europe, North Asia, and India. In the United States, overall electricity demand decreased nearly 4% year-over-year, negatively impacted by weather. Through the six months and to June 30th, 2023, electricity generation from thermal coal has declined year over year due to low gas prices and nearly level renewable generation. Coal inventories have increased approximately 50% during the six months and to June 30th, 2023. Natural gas prices have recovered modestly from the lows of earlier this year with U.S. natural gas prompt pricing at $2.65 per MMBTU. The EIA is currently forecasting U.S. natural gas prices to average $2.80 per MMBTU in the second half of 2023, up from the $2.40 per MMBTU in the first half of the year. Overall, near-term demand for U.S. thermal coal is anticipated to improve in the third quarter in comparison to the second quarter. Now, moving on to our operating segments. As expected, our seaborne thermal coal exports came in at 2.6 million tons. Higher than the prior quarter as the Wambo Longwall move was completed and wet weather, which impacted the first quarter, was abated. Segment costs per ton were in line with the first quarter as higher production was offset by the timing of equipment repair and maintenance costs. Our seaborne met coal shipments were stronger than expected at 2 million tons due to strong sails out of the CMJV complex. In the second quarter, we had good success with our operations at Shoal Creek as we recovered from the first quarter fire. During the second quarter, we were able to seal off the two longwall panels in the J panel area of the mine. We resumed with development coal production in the new L panel area where we anticipate better mining conditions. A new longwall kit for the mine is expected to be delivered by the end of the year. In the PRB, shipments were lower than anticipated. Shipments were impacted by low customer demand due to low natural gas pricing, high coal inventory levels, and the June tornado event at Narm. In addition, the basin had an abnormal amount of rainfall, which caused a slowdown at some of our operations. The second quarter is typically the wettest in the basin, which also impacts the transportation corridors. In other U.S. thermal, shipments were impacted by lower customer demand as a result of low natural gas prices and high utility inventories. Looking solely at our sole position, PRB volume should increase in the second half, but consumption of PRB coal has been down given low natural gas prices and generally unfavorable weather conditions in the first half. We are working with our customers to be responsive to their needs while retaining the value in our contracts. Our adjusted guidance reflects our current assessment of sales going forward, taking into account the current U.S. market conditions. In addition to our active operations, the company continues to advance redevelopment efforts at North Ginella with key project milestones and critical path items on track. Activities to date have included procuring equipment, refurbishment and replacement of surface infrastructure, Zone A remediation, completion of drilling program for Zone B reventilation, and advancing work necessary to reenter Zone B. The next significant milestone, reventilation and reentry of Zone B, is currently targeted for mid-September, subject to regulatory approval. Since commencing redevelopment at North Ginella in late 2022, The company has invested $53 million of the initial approved redevelopment capital expenditures, which includes further ventilation, equipment, conveyors, and infrastructure updates in anticipation of reaching development coal production, subject to regulatory approvals, in the first quarter of 2024. Before I turn it over to Mark, I would like to address a tornado event that impacted NARM. On June 23rd, our North Antelope Rochelle mine in the PRB was struck by an EF2 tornado. Six people did have to temporarily go to the hospital, but fortunately, no one was critically injured. While we were back to full shipments, we did have considerable damage to the surface buildings. We appreciate all our employees' efforts in returning the mine to full operations. I'll now turn it over to Mark to cover the financial details. Thanks, Jim.
spk04: In the second quarter, we recorded net income attributable to common stockholders of $179 million. or $1.15 per diluted share, and adjusted EBITDA of $358 million. The second quarter results included a $34 million charge for the write-off of certain underground development and equipment at Shoal Creek and property losses related to the tornado at Narm. The company's leading diversified portfolio of mines generated $353 million of cash flow from operations, enhanced by $109 million working capital benefit, which will largely reverse next quarter. With our balance sheet built to withstand the volatility and lower prices we saw in the second quarter, we were pleased to return $262 million to shareholders, including a cash dividend of $11 million and share repurchases of $251 million. This reduced our share count by 8.3% in just one quarter. We currently have $749 million of remaining authorization under the $1 billion share repurchase program. We remain committed to returning at least 65% of annual available free cash flow, keeping returns right-sized based on operating and financial performance. After the recently declared second quarter cash dividends of $0.75 per share, at least $142 million remains available for shareholder returns, expected to be used for additional share repurchases. Turning now to the second quarter segment results. Seabourn Thermal recorded 198 million of adjusted EBITDA, 20% higher than the prior quarter, despite a significant decline in the average Newcastle benchmark price. Higher production rates drove costs to the low end of our guidance range, and higher export shipments resulted in adjusted EBITDA margin of approximately $50 per ton. The Seabourn Metallurgical segment generated 103 million of adjusted EBITDA. Shipments of 2 million tons exceeded expectations, and were over 50% higher than the previous quarter due to higher sales from the CMJV as they recovered from first quarter rains. Costs were $13 per ton lower, primarily due to higher production and lower sales price sensitive costs. The U.S. thermal mines produced $78 million of adjusted EBITDA, impacted by fewer shipments due to low natural gas prices and higher utility customer inventories. The PRB mines generated $26 million of adjusted EBITDA. Tons sold were 3.1 million tons lower than the prior quarter. We lost approximately 1 million tons at the end of the quarter due to their tornado that struck the Narm mine, and volume on two requirements contracts were 1.2 million tons lower than expected. The other U.S. thermal mines delivered 52 million of adjusted EBITDA. Tons sold decreased by approximately 700,000 tons compared to the prior quarter, but a laser-like focus on operations drove costs down to less than $40 per ton, maintaining adjusted EBITDA margins of 26%. With the first half complete, we've updated our outlook for the remainder of the year. Seabourn thermal volume has increased 500,000 tons to 15 to 16 million tons due to higher expected production at Wilpin Young. Seabourn metallurgical volume is expected to be 500,000 tons lower at 6.5 to 7.5 million tons due to less than previously anticipated production at the CMJV and Shoal Creek. PRB shipments have been revised downward to 80 to 85 million tons, reflecting the impacts of low natural gas prices, utility inventories, and mild weather to date in major coal generation regions. For similar reasons, other U.S. thermal volumes have been reduced to 16.5 to 17.5 million tons. We should note that committed sales volumes exceed our thermal guidance. Given the continued low natural gas price and rail limitations, we expect customers in limited situations to request deferral of volume into next year. We will only entertain such requests if we preserve the full economic value of existing commitments. Specifically for the third quarter, seaborne thermal export volumes are expected to increase to 2.7 million tons. Approximately 300,000 tons are priced on average at $181 per ton, and 1.4 million tons of high ash product and a million tons of Newcastle product are unpriced. Costs are expected to be lower quarter over quarter at $45 to $50 per ton. Seabourn metallurgical volumes are projected to be lower than the second quarter at 1.5 million tons due to a long wall move at Metropolitan. 200,000 tons are priced at 216, and the remaining unpriced volumes are expected to achieve 70 to 80% of the premium hardcoking coal price index. Lower premium hardcoking coal prices and a widening gap to PCI coals are anticipated to result in more favorable price-sensitive costs, lowering expected costs to $115 to $125 per ton. In the PRB, we are anticipating shipments to increase to 21 million tons at an average price of $13.80 per ton, and costs of approximately $11.75 per ton. Other U.S. thermal shipments are expected to increase from the second quarter to approximately 4.2 million tons, at an average price of $50.50 per ton, and costs of approximately $41 per ton. In summary, we have a unique, diversified portfolio of assets. and the necessary financial flexibility to succeed in all markets. We will maintain rigorous discipline to capital allocation and expect to return at least 65% of annual available free cash flow to shareholders. Operator, I'd now like to turn the call over for questions.
spk05: Thank you. Again, to ask a question, you may press star, then 1 on your touch-tone phone. If you're using your speaker phone, please pick up your handset before pressing the keys. And to withdraw your question, please press star, then two. At this time, we will take our first question from Lucas Pipes with B. Riley. Please go ahead.
spk02: Thank you very much, operator. Good morning, everyone. And great to see those capital allocation to shareholders during the quarter.
spk04: Thanks, Lucas.
spk02: And I wanted to start my first question on that point of shareholder returns. You noted the 142 million that remain available. Should we kind of think of as those being used for buybacks over the next three months? So kind of you deploy 142 million to buybacks. between now and the time you report Q3 results, and then essentially when those Q3 results get announced, you re-up it with whatever the free cash, 65% of the free cash flow during available free cash flow from Q3 results. Is that kind of the cadence now going forward?
spk04: Yeah, good morning, Lucas, and thanks for hanging in on us. I know it is a very, very busy earnings call day, so appreciate the questions. With regard to the shareholder return program, you are correct. We remain committed to returning at least 65% of available free cash flow on an annual basis. And you'll see the calculation in the earnings release that sums up to that. Certainly, last quarter, we did above the 65%. Got it. Got it. Okay.
spk02: But it's not like it'd be more than $142 million over the next three months in terms of buybacks. You would kind of reconvene in three months, look at Q3 results, and that would determine the forward pace.
spk04: Again, we're going to return at least 65%, and we don't share any specific details. It's fair to think of it that way, Lucas, but I'll refer you to last quarter where we did do a bit more than the 65% in the last quarter. But we will true it up each quarter and show 65% on a year-to-date annual basis.
spk02: Got it. No, that's clear. That's clear. Thank you for that. And then turning to operations, good to see the increase in the thermal guidance for the year. I wondered if you could maybe elaborate a little bit on the key drivers for that. And then on Shoal Creek, should we think of that mine as a one-long-wall mine going forward? Thanks for your color on that.
spk03: Yes, I'll talk about Schilt Creek first. And hi, Lucas, Jim Grech here. Good to hear your voice again. Same here. Thank you, Jim. Yeah, so we have the new longwall coming, and its delivery has already started. So we're expecting to get that delivered here by the end of this year and have it operating very early into 2024. The intention prior to the mine fire was to have the two longwalls. operating at the mine. And we still have the second long wall there. It's behind the sealed area. And we have to wait until we have permission to enter back into that area, Lucas, to see the status of the equipment and what we can do with it. Can we start operating again in that panel? Do we have to extract the long wall? So I would say the timing and the certainty of the second one is in question. The first one, the new longwall, certainly is on track to be installed. So I would say by the end of this year, we're certainly a one longwall mine. Next year, we're for sure a one longwall mine with the potential for two, but we really don't know until we get back behind those seals, which is at best a couple months away.
spk04: Maybe I'll follow up on the Seabourn thermal. A couple of things for the additional tons. You know, more higher ash tons out of Wilpin Young and the Wambo Open Cut joint venture doing extremely well. So volumes are up there. You also note a pretty good reduction in costs for the next quarter. And, again, I think it's Wambo Open Cut, the production going up and costs doing better, as well as some additional Wilpin Young tons there and also some lower sales price sensitive costs.
spk03: And, Lucas, another point I wanted to make on Shoal Creek was, Even though, you know, we're looking at the one long wall, it's in the L panels where we have started our development coal mining. And the coal seems to look very good, very good conditions for us right there. So, you know, we've given, you know, we've talked about the output of the mine before. And I'm confident with the one long wall mine and the mining conditions we're in, you know, there's going to be no drop off from our expectations from the production levels. that we've had in the past. We're going to be, again, the L panel has some very, very good mining conditions from what we're seeing so far.
spk02: Very helpful color on both fronts. Thank you for that. And then a quick follow-up on the JV. And I looked at the cash flow statement for the quarter, and contributions to JV were roughly equal to distributions from the JV. And Is that only middle mount, or does that also include WAMBO? And if it is middle mount, would we expect maybe additional cash to come in from that side? Would appreciate your perspective and clarification on that point.
spk04: Yeah, Lucas, it is only middle mount there. So not a lot of cash flow from middle mount currently. I'd expect the results to be kind of similar in the second half of the year as well. Certainly not what we saw last year.
spk02: All right. Well, I have more questions, but I'll jump back in the queue. Thank you very much.
spk04: Thank you.
spk05: And again, if you have a question, you may press star, then 1 to join the queue. Our next question here will come from Nathan Martin with the Benchmark Company. Please go ahead.
spk01: Hey, good morning, everyone. Thanks for taking my questions. Morning, Nate. Maybe I'll just start on North and Yellow. Appreciate the update there in the release. Could we maybe get a refresher on the expected spending and timing of that spending on the project as you guys move towards anticipated lawnmower production in 2026? And then what and when are some of the regulatory hurdles you expect?
spk03: Yeah, Nate, the first, we've got it in two tranches, the spending, as we've discussed in the past. The first one is $140 million, which we're spending this year, a lot of that this year and early next year. And what we're saying is the major regulatory hurdle that we have to overcome, or I shouldn't say overcome, to get approval of is the permission to reenter the Zone B area, which is the sealed area. And that's a combination of degassing that area and the ventilation of that area. And we expect to be able to reenter Zone B sometime in September. That is the major regulatory hurdle that we have to get through. So after we can reenter Zone B and we get a good assessment of the situation there, then we have to go back with our board and get the approval to spend the remaining. It's approximately $230 to $240 million dollars. and then that would get us into full longwall production there early in 2026. So, again, I'd just like to reiterate, the major regulatory hurdle that we have to get through is the permission to reenter Zone B, and we're looking for that to come sometime in September of this year.
spk01: Great, Jim. Appreciate that refresher there. And then maybe just shifting gears over to the domestic thermal side of the house. You did obviously update your guidance there. You talked a little bit about some of the conversations you're having with your utility customers. Do you guys believe, at least at this point, that that guidance fully incorporates potential domestic thermal deferrals, or are you still having ongoing conversations and negotiations?
spk03: Nick, Nate, we believe that fully encompasses all of the potential deferrals in the guidance that we've shown there.
spk01: Okay, got it, Jim. And then actually, I'll have you as well. In the past, you've been helpful kind of giving us an idea of where you guys are committed for 2024 in PRB and other thermal. Any updates you can give us there? Maybe what percentage of tons are committed there and off of what base would be great as well?
spk04: Yeah, it's about 70% committed at midpoint of guidance. I'd say there hasn't been a specific change over the quarter. That was specifically done on purpose, given the fact that it's been a pretty slow market, declining price market. So we'll look to see more coming through here in the next quarter as the market picks up. So again, 70% on the Illinois Basin and probably about 85% in the PRB for next year.
spk01: Perfect. Appreciate that update there, Mark. And then maybe just one kind of bigger picture question for you, Jim, to wrap up. You know, there's some M&A opportunities out there, a few met coal assets, you know, in Australia up for sale. I know you likely can't make specific comments, you know, regarding Peabody and M&A, but could you kind of remind us how you guys think about and rank, you know, potential purchases of maybe seaborne met assets or thermal assets and how you kind of compare those to maybe the progress you're making on reopening North Virginia? Thanks.
spk03: Nate, what I would say is in orders of prioritization, organic growth, investing in our own assets, extending leases, investing in equipment to bring down costs, increase efficiencies, those always have the best returns for our shareholders, and those always are our number one emphasis or number one priority, and that's exhibited by North Gunyella. Then secondly, if we do get into M&A, not saying we are or we aren't, we've stated many times, and it hasn't changed, that our focus is on the seaborne markets. We see the seaborne markets as growth markets in demand in both metallurgical and thermal. We have much more of a focus on the metallurgical seaborne markets, but we certainly would look at both markets for potential growth in the future.
spk01: Very helpful. I appreciate the time, guys. Best of luck in the second half.
spk00: Thanks so much.
spk01: Thank you, Nate.
spk00: Next question.
spk05: Our next question will come from Lucas Pipes with B. Riley. Please go ahead with your follow-up.
spk02: Thank you very much for taking my follow-up question. It's a quick one. In terms of hedges on the thermal coal side, I may have missed it, but I didn't see a disclosure in the press release this morning. And so I wondered if you could remind us what's outstanding there. And I know there was cash collateral requirement in the past as those hedges roll off. Could there be cash coming back here in the third quarter from that side? But would appreciate just discussion. And I think we're close to the end, so it would be good to just make sure I have everything in my model as that program concludes. Thank you.
spk04: Yeah, Lucas, the program has fully been unwound at June 30. So all the initial margin has returned. I think it was about $11 million in the second quarter. and all the variation margin was returned by higher realized prices and baked into our EBITDA results. So program's fully unwound, and we're no longer got hedges for coal sales.
spk02: That's very good to hear. That's it from now. I appreciate the color, and best of luck to you and the team. Thanks, Lucas.
spk05: And with that, there are no further questions. So I'd like to turn the conference back over to Mr. Jim Grech for any additional closing remarks.
spk03: Thanks. 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 initiatives. I'd also like to thank our customers, investors, insurance providers, and vendors for their continued support. And finally, I'd like to thank everyone in the Gillette community who responded during the tornado at NARM. Operator, that concludes our call.
spk05: The conference has now concluded. Thank you very much for attending today's presentation. You may now disconnect your lines and have a wonderful day.
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