Alpha Metallurgical Resources, Inc. (NYSE:AMR) Q1 2024 Earnings Call Transcript

Alpha Metallurgical Resources, Inc. (NYSE:AMR) Q1 2024 Earnings Call Transcript May 6, 2024

Alpha Metallurgical Resources, Inc. misses on earnings expectations. Reported EPS is $9.59 EPS, expectations were $9.61. AMR isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings. Welcome to the Alpha Metallurgical Resources First Quarter 2024 Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to your host, Emily O’Quinn, Senior Vice President, Investor Relations and Communications. You may now begin.

Emily O’Quinn: Thank you, Rob, and good morning, everyone. Before we get started, let me remind you that during our prepared remarks, our comments regarding anticipated business and financial performance contain forward-looking statements, and actual results may differ materially from those discussed. For more information regarding forward-looking statements and some of the factors that can affect them, please refer to the company’s first quarter 2024 earnings release and the associated SEC filing. Please also see those documents for information about our use of non-GAAP measures and their reconciliation to GAAP measures. Participating on the call today are Alpha’s Chief Executive Officer, Andy Eidson; and our President and Chief Operating Officer, Jason Whitehead. Also participating on the call are Todd Munsey, our Chief Financial Officer; and Dan Horn, our Chief Commercial Officer. With that, I will turn the call over to Andy.

Andy Eidson: Thanks, Emily, and good morning everyone. Today, we announced financial results for first quarter 2024 with adjusted EBITDA of $190 million. This was another solid quarter of work from the Alpha team, despite some challenging circumstances and the significant softening of met coal markets starting in March. Since the quarter closed, we witnessed further deterioration in market fundamentals, which sets up a challenging backdrop for the second quarter. Although our Q2 performance will obviously reflect the market environment in which we’re operating, I remain confident in Alpha’s strength and ability to weather volatility. For more than a few years now, we’ve used the word nimble to describe how we prefer to operate, constantly evaluating lots of data to find areas that can be optimized or to plug cost leaks.

We believe that this approach is valuable in all market conditions, but especially in down cycles, when quickly adapting to economic reality becomes a true necessity. In response to the sharp market decline that has occurred so far in 2024, we’ve made small adjustments to safely reduce costs where possible by optimizing production and logistics. Given our size and scale, the magnitude of these changes doesn’t impact our previously announced volume expectations for the year, but these adjustments are allowing us to respond appropriately to deterioration in the market. We will continue monitoring external market drivers while also maintaining a close eye on controllable costs within our business and will take further action as necessary. As I visit our operations and talk with employees, I’m consistently impressed by the Alpha drive to overcome challenges and make the most of difficult circumstances.

Our first quarter performance is yet another example of this determination. Subjectively, I see it in mine visits, but there is also objective measures that don’t get a lot of attention. One in particular is a productivity metric called tons per man hour. As is always the case, safe production is our highest priority at Alpha and we continually promote a safety mine set first and foremost. And somewhat counterintuitively, we usually see that safety, efficiency and productivity go hand in hand. MSHA, the Mine Safety and Health Administration, aggregates droves of data each quarter, including production by operator and tons per man hour, which is exactly as it sounds. As a company, Alpha consistently performs well and has led the pack in this measurement among room and pillar or continuous miner operators for the last eight quarters.

Despite the well known differences between continuous miners and longwall operations, Alpha’s operations often perform well against certain longwall operations, too. I’m proud to say that in Q1, Alpha led all of our notable peers, longwall operators included, with the tons per hour metric roughly 14% more productive than the next operator in line. That kind of safe, consistent performance is a testament to the skill and effectiveness of our teams. We encourage this behavior among our operations and are consistently looking for ways to maintain this industry leading position. During our fourth quarter earnings call, we discussed our intention to slow or pause the buyback program in an effort to build cash balances back up to our targeted levels.

Especially given the market dynamics currently at play, we continue to believe this is the right strategy. Our capital return philosophy remains the same and will continue to be driven by our cash flow. As minimum cash levels and market conditions allow, we will utilize available free cash flow for the buyback program. Lastly, we hosted our annual meeting of stockholders on May 2. This meeting included a vote to elect members of our board of directors. All seven of our board members were elected by the shareholders to serve a term of one year. The full results of the annual meeting have been provided through our SEC filings. I will now turn it over to Todd for additional details regarding our first quarter financial results.

Todd Munsey: Thanks, Andy. First quarter adjusted EBITDA was $190 million, down from $266 million in fourth quarter 2023. We sold 4.4 million tons in the quarter. Quarter-over-quarter realizations decreased for the Met segment with an average first quarter realization of $166.68, compared to $183.76 for the fourth quarter. Export met tons, priced against Atlantic indices and other pricing mechanisms in the first quarter, realized $172.24 per ton, while export coal priced on Australian indices realized $193.70. These are compared to realizations of $175.32 per ton and $213.41, respectively, in the fourth quarter. Realization for our metallurgical sales in the first quarter was a total weighted average of $176.20 per ton, down from $193.54 per ton in the prior quarter.

Realizations in the incidental thermal portion of the Met segment decreased to $76.53 per ton in Q1 as compared to $89.76 per ton in Q4. Cost of coal sales for our Met segment decreased to $115.65 per ton in the first quarter, down from $119 per ton in Q4. SG&A, excluding non-cash stock compensation and non-recurring items increased to $19.9 million in the first quarter as compared to $16.9 million in the fourth quarter. Q1 CapEx was $63.6 million, up from $61.5 million in the fourth quarter. Moving to the balance sheet and cash flows as of March 31, 2024, we had $269.4 million in unrestricted cash, roughly flat against the $268.2 million at the end of the fourth quarter. We had $93.7 million in unused availability under our ABL at the end of the quarter.

Alpha had total liquidity of $288.1 million as of the end of March, which is net of a $75 million minimum liquidity ABL covenant. Cash provided by operating activities decreased slightly quarter-over-quarter to $196.1 million in Q1, as compared to $199.4 million in Q4. As of March 31, our ABL facility had no borrowings and $61.3 million of letters of credit outstanding, up from $60.9 million in the prior quarter. Turning now to our committed position for 2024, 49% of our metallurgical tonnage in the Met segment is committed and priced at the midpoint of guidance at an average price of $168.26. Another 49% of our Met tonnage for the year is committed but not yet priced. The thermal by-product portion of the Met segment is fully committed and priced at the midpoint of guidance at an average price of $76.10.

With first quarter actuals and increased visibility into the balance of the year, we announced two adjustments to our 2024 guidance. We now expect idle operations expense for the year to be between $25 million and $33 million, up from the previous range of $18 million to $28 million. For the 2024 tax rate we decreased guidance to a range of 10% to 15%, down from the previous expectation of 12% to 17%. During the first quarter, we repurchased approximately 305,000 shares at a cost of approximately $116 million, including shares repurchased from employees in connection with tax withholdings on annual stock vestings. As of April 30, 2024, the number of common stock shares outstanding was approximately $13 million. The remaining stock buyback program authorization permits approximately $400 million in additional repurchases, contingent upon cash flow levels and market conditions.

We continuously monitor market conditions and due to the current weakness in the pricing environment relative to Q1, our focus in Q2 will shift toward maintaining our liquidity position. While we do not guide towards share repurchase activity, we do expect market softness to limit our repurchase activity in Q2. I will now turn the call over to Jason.

Jason Whitehead: Thanks Todd, and good morning, everyone. I mentioned on our last call that our teams continue to achieve new company records in safety and environmental stewardship. Since then, Alpha operations and team members have received public recognition with a number of awards for their work. Our Paramount in Southern West Virginia mine rescue teams placed first and second, respectively, in the Southeast Regional Mine Rescue contest in March. In addition to earning these top spots overall, both teams collected a host of other first aid technician team and bench awards at this event, including Alpha Southern West Virginia team claiming first place in the Mine Rescue and First Aid competition and our Paramount team coming in second.

Each year, the West Virginia Office of Miners’ Health, Safety & Training presents Mountaineer Guardian awards to operations that exhibit high safety standards. For 2023, six Alpha operations were named Mountaineer Guardian recipients. Cedar Grove Number 3 Mine, Bandmill Prep Plant, Kingston Prep Plant, Kingston South Surface Mine, Rolling Thunder Mine and Workman Creek Surface Mine. Additionally, last week, a number of Alpha operations were recognized at the Holmes Mine Safety Awards Banquet, in the surface mines category, Black Castle Surface Mine, Kingston North Surface Mine, Kingston South Surface Mine and Workman Creek Surface Mine were award winners, in the underground mines category, the Marfork Belt Transfer System, Cedar Grove Number 2 Mine, Slabcamp Mine, Glen Allen Mine, Kingston Number 2 Mine, Horse Creek Eagle Mine and the Road Fork 52 Mine were recognized.

In the plants and load outs category, Pax Loadout, Marmet Dock, Feats Loadout, Mammoth Plant and River Loadout, Power Mountain Processing Plant, Bandmill Prep Plant and Marfork Processing Plant, all received awards. Finally, I’m proud to announce a couple of individual achievements. [Indiscernible] received the Sharon Cook award for his outstanding safety service and positive impact on the training and retraining of miners. Archie [ph] is a safety representative at our Midwest Virginia Surface region, and exemplifies an unwavering commitment to safe production. Brian Keaton, our Senior Vice President of Safety and the author of Safe Production brought home the Safety Leader of the Year Award, and I’ll point out that’s two years in a row that an Alpha leader has received this award.

I want to congratulate Archie [ph], Brian and all the individuals at the award-winning locations I just mentioned. It’s a long list, which is an accurate reflection of how important safety is within this company. Turning to environmental. In West Virginia, Alpha operations received three environmental awards for 2023. The West Virginia DEP recognized Workman Creek for exemplary reclamation of surface mine operations on their Middle Ridge permit and Kingston for exemplary construction techniques of Valley Fill on their Kingston North Surface Mine permit. The West Virginia DEP also awarded Elk Run for exemplary reclamation of the Queen and Black Queen Mines. In Virginia, Alpha operations received five awards for environmental performance. Paramont’s Deep Mine 26 received awards for the Met Coal Producers Association for Best AML Dangerous Highwall Elimination, and from the Interstate Mining Compact Commission, they received the National Reclamation Award.

The MCPA also awarded Paramont for best completed deep mine at Deep Mine 25 and best active deep mine at Deep Mine 41. Lastly, the MCPA awarded Dickerson Russell for Best Active fill at our McClure preparation plant. I want to congratulate both of our environmental and operations teams for their commitment to environmental excellence, and all that they do to go beyond compliance. First quarter performance for operations was solid, especially in light of some challenges we face, and I’ll expand on that shortly. As Andy mentioned before, I could not be prouder that our teams sell in both safety and in productivity measures like tons per man hour. We can be safe and productive at the same time, which is exactly what we aim to do every day. As we all know, much has changed since spring of 2020 when the COVID-19 pandemic took the world by storm.

Already such a competitive labor market became even more challenging, recruiting new talent to work in a crowded hands-on environment seemed almost impossible times. As a result, inflation caused business costs like supplies and labors to grow to unprecedented highs, while critical supply component availability created. Frankly, in some cases, you just couldn’t get supplies. As we’ve discussed on previous calls, Alpha mitigated many of these hurdles by increasing the scale of our rebuild facilities, stocking our warehouses with parts and supplies to weather the storm and with acquisitions like Maxim Manufacturing and Maxim Transportation. Todd spoke to the quarter-over-quarter decrease in Australian index export realizations of approximately $20 a ton, which is representative of the recent downward trend in coking coal price.

This trend is also shedding light on the softening of the supply competition in our industry, which has eased in recent quarters. Now, we’re facing a very different set of circumstances than the ones we navigated successfully after COVID and in many ways more challenging. The decisions are harder to make the necessary with the uncertainty of how long the markets will stay in this current trough. Year-to-date 2024, there’s been a lot of behind-the-scenes work going on to steer Alpha through these headwinds. With over 1,200 active suppliers, it takes some time to communicate what is happening in the market as well as Alpha’s needs and expectations going forward, but we are well underway with this process, while we value the partnership formed with suppliers over the years, we have not hesitated to change the viable lower-cost options as they present themselves.

Alpha is also shifting focus on our rebuild and manufacturing facilities. As I mentioned, the availability of certain supplies has improved. We are not always in a situation where we have to make it to have it, and our initiatives are centered around maximizing margin. Any component we build is at a discount versus sourcing it from a third-party, but we’re evaluating every planned project with the goal of utilizing our facilities in a way that brings the highest return to Alpha. It is a blessing to have the expertise in house to seamlessly move from machining things like tracks and chains for continuous miners to fabricating chute work for preparation plants. Lastly, while citing and communicating the current market trend to our employees, Alpha has made the difficult decision to make certain incentives cuts across the organization.

These reductions equate to about $35 million per year. But with the seasoned workforce we have, I believe they understand how cyclical the markets are. And although no one likes it, most understand actions like these are necessary to ensure sustainability. I’ll now turn the call over to Dan for an update on the markets.

Dan Horn: Thanks, Jason, and good morning, everyone. In recent months, metallurgical coal markets have softened due to weakened global demand for steel. Economic pressures, geopolitical uncertainty and global recessionary fears have contributed to the demand dynamics and volatility in metallurgical coal markets. Economic conditions remain uneven across the world with generally stronger circumstances in the United States than in Europe and in certain parts of Asia, which continue to experience significant geopolitical strife. Metallurgical coal prices fell significantly during the first quarter of 2024. All four indices that Alpha closely monitors saw a drop of 16% or more within the quarter, with the Australian PLV index representing the largest reduction of 25%.

The Australian Premium Low-Vol index dropped from $324.75 per metric ton on January 2, 2024 to $244.50 per metric ton at the end of the first quarter. The U.S. East Coast Low-Vol index decreased from $268 per metric ton at the beginning of January to $225 per metric ton at the end of March. U.S. East Coast High-Vol A index moved from $281 per metric ton at the start of the year to $225 per metric ton at quarter close, and U.S. East Coast High-Vol Bdecreased from $252 per metric ton to $200 per metric ton at the end of the quarter. Since then, the PLV has dropped from its quarter close level to $238 per metric ton on May 3. The other three indices have also softened from their end of quarter levels, with U.S. East Coast indices of Low-Vol, High-Vol A and High-Vol B measuring $217, $220, and $195 per ton, respectively, as of May 3.

In the thermal coal market, the API2 index moved from $101.55 per metric ton on January 2 to $118.25 per metric ton at the end of March, and on May 3, the API2 was at $109 per metric ton. These met coal index numbers certainly suggest softness, but from Alpha’s perspective, we believe they may not reflect the full extent of the market deterioration that has occurred in recent weeks or the significant drop off in sales activity. Before I close my remarks, I want to briefly discuss the March 26 Francis Scott Key Bridge collapse in Baltimore, which has blocked shipping access to and from Baltimore Harbor. In terms of coal markets and Alpha specifically, we have not used the Baltimore terminals to export our coal in nearly a decade and thus did not have any coal stored there at the time of the bridge collapse.

Instead, the vast majority of our export business travels through Dominion Terminal Associates, in which we hold a 65% ownership interest and comparable throughput capacity rights. We also have the ability to use other East Coast terminals for export shipments as necessary or in cases where it is opportunistic for us to do so. Therefore, we do not believe that the bridge’s collapse will have direct effects on our business. We, like other producers, may experience some indirect effects, such as greater competition for rail capacity as companies who have historically exported their products through Baltimore’s port seek alternate options. This increased demand for rail transport may also result in rail congestion, longer shipment times or higher costs.

However, our majority ownership in DTA continues to service well and we do not expect any material adverse effects from the Baltimore bridge collapse to Alpha’s business. Lastly, speaking of DTA, the team recently completed a planned week long outage for ship loader maintenance. The maintenance was successful and the terminal is back to operating at full capacity. Another scheduled equipment maintenance outage is scheduled to occur in the middle of May. The downtime is expected to be roughly one week and will only impact one of the stacker/reclaimer machines at the terminal. This means DTA will be able to continue operating with the other equipment, but overall throughput will be less during the time when this machine is down for maintenance.

And with that operator, we are now ready to open the call for questions.

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Q&A Session

Operator: Thank you. At this time, we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Lucas Pipes with B. Riley Securities. Please proceed with your question.

Lucas Pipes: Thank you very much, operator. Good morning, everyone. Andy, first, I want to tip my hat, because you’re probably the only executive who mentions lots of data in the prepared remarks without also mentioning AI, so well done there. But in all seriousness, great, great job on the cost and productivity side in Q1. And I wondered if you could maybe speak to kind of from here on out, what are some of the key initiatives? They were partially discussed on the prepared remarks, but maybe you could expand on where you’re really looking to drive cost savings from here on out and manage what you describe as a weaker market environment. Thank you.

Andy Eidson: Sure, Lucas and I hate that you beating me to the punch on the AI. We’ll get to that maybe next earnings call. We’ll have a lot of work to do on that. But as far as – I think Jason covered a good portion of that, a lot of this is organic productivity improvements. And I got to say, it’s amazing watching Jason and the team work the level of detail that they review their operations at. It really is, I mean, it would be something that could be a test case for AI. It requires a much bigger brain than I currently contain to monitor all the things that they’ve got going on. But the sheer volume of metrics down to whether it’s equipment uptime or any number of things that are being evaluated real time is pretty incredible.

And it’s really – again, across the number of operations we have and the fact that we’re pushing out 17-ish million tons, small changes have pretty significant snowball effects when they’re applied across the entire portfolio. So I don’t really want to get into any specifics unless there’s some things that Jason would like to throw at you. But again, it goes back to capturing all the appropriate data that covers every aspect of operations and then being able to cut it in a way that you can really derive some wisdom from. I mean information without wisdoms kind of pointless and we’ve got the right team to take this data and make some significant impact out of it.

Jason Whitehead: This is Jason. I’ll follow up a little bit. I mean, Andy covered the first half of it really well. And I guess the second part that we’re really keying in on now is just with the softening, I guess, of the supply market and things are easier to get now relative to maybe even a few quarters ago, things have really turned around there. So, we want to make sure that we’re utilizing our rebuild facilities and our manufacturing facilities to get the absolute best return for Alpha. So, as we’re able to pick things up off the shelf, we may see in some cases, it makes sense to shift the things that we’re fabricating and we’re making for internal use.

Lucas Pipes: Thank you very much, Andy and Jason. I want to touch on the market a little bit. From my vantage point, there are kind of a lot of mixed signals. Pricing is seemingly holding in there, but you described demand is softer and maybe softer than the behold. So, I wondered if you could maybe expand on that and where you see the market today, if there are green shoots or if there are maybe more signs of caution ahead. And you repeated the outlook on the buyback is maybe more muted here in this environment. How should we think about that, and is it – would it be reasonable to expect that if you get to $300 million cash balance, for example, that you would resume cash – sorry, we resume share purchases with any cash in excess of that. Just wondering how you think about that. Thank you.

Andy Eidson: Yes. Lucas, I’ll hit the second part of the question first, and then I’ll let Dan deal with the market. But on the buyback, we’ve talked about it before. We’re kind of slaves to our 13-week cash flow forecast. We’re obviously, we’re not ambivalent to the method of the capital return. We’re all in on the buyback, but we are somewhat agnostic as far as following what the forecast is. It’s a kind of a – there’s a cold logic to it. And naturally, job one is to protect the franchise. And when we’re in market a market with choppy waters like this, we do want to make sure that we have enough dry powder to withstand any maintained down legs, even if we get below some previously tested marks of whether we call it 225 [ph], the bottom or 200 at the bottom or even less, who knows.

I don’t think we’re going to see things like that, but the world changes quicker than we can keep up with. But we’ve got approximately a month before our trading window closes, and that means that we’ll have the opportunity to play with the 10b5 programming up until probably the first week of June before we have to lock it down and leave it. And so we’ve got some time to analyze the market, get more information, see if we’re seeing some reversal in trend that would support firing up the buyback in earnest again. But until then, I’m not – I don’t want to commit one way or the other. We’re just – we’re going to play it as required to keep our cash balances at a comfortable place to where we don’t have to stay up, but not worrying about where the – where everything is going to come from.

But Dan, I’ll let you comment on the market piece on that.

Dan Horn: Yes. Good morning, Lucas.

Lucas Pipes: Good morning.