Peabody Energy Corporation (NYSE:BTU) Q2 2024 Earnings Call Transcript

Peabody Energy Corporation (NYSE:BTU) Q2 2024 Earnings Call Transcript August 1, 2024

Peabody Energy Corporation beats earnings expectations. Reported EPS is $1.43, expectations were $0.53.

Operator: Good day, and welcome to the Peabody Second Quarter 2024 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Karla Kimrey, VP, Investor Relations. Please go ahead.

Karla Kimrey: Good morning, and thank you for joining Peabody’s call for the second quarter of 2024. With me today are President and CEO, Jim Grech; CFO, Mark Spurbeck; and our Chief Marketing Officer, Malcolm Roberts. Within the earnings release, you will 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. Now I’ll turn the call over to Jim.

Jim Grech: Thanks, Karla, and good morning, everyone. Thank you for taking the time to join us today and for your interest in Peabody. I am pleased to report the second quarter results came in as forecasted, and we have a confident outlook for the second half of 2024. More importantly, to date, Peabody is having a remarkable year with safety, our number one value as five of our mines have had zero reportable injuries. Peabody is committed to increasing shareholder value through a balanced approach of maximizing shareholder returns and investing in organic metallurgical coal growth at Centurion. Our resilient balance sheet allows us to be flexible and dynamic in the prevailing market conditions. As a result, and in accordance with our shareholder return policy and favorable outlook for the remainder of the year, we have committed an additional $100 million for opportunistic share repurchases.

Centurion, our world-class hard coking coal growth project is going very well. The initial underground development rates are exceeding expectations. We are able to mine our first development coal in June, and in July, we commissioned our second continuous miner. We are on budget and expect to ship coal from this mine to customers in the fourth quarter and are on target for longwall coal in the first quarter of 2026. With the recent acquisition of the Wards Well deposit, we have extended the mine life to over 25 years with an average annual production of approximately 4.7 million tons. This quality of coal is an established cornerstone of coking coal blends highlighting the potential for sustainable financial returns and is a unique opportunity to re-weight Peabody’s earnings to Seaborne met.

Now moving on to our operating segments. Overall, second quarter operational results came in as forecasted and our mines performed safely. The Seaborne Thermal Segment performed to expectations. Our Wilpinjong mine continued to operate well with improved equipment availability and truck utilization. As Malcolm address, the Asian thermal market continues to see demand growth for our Wilpinjong product and as such we have increased volume expectations for the remainder of 2024. The Seaborne met segment also came in as forecasted. Our volumes, costs and realized prices were as expected. Australia did experience some significant rain in the last week of the quarter and some shipments out of the CMJV were delayed. Additionally, CMJV will be mining through challenging geotechnical conditions, which is reflected in our reduced full year guidance.

The Demopolis Lock in Alabama was opened ahead of schedule in mid-May. While we were pleased with the U.S. Army Corps of Engineers bringing to the Demopolis Lock online earlier than expected, unfortunately, another lock, the Holt Lock, was determined to be unstable on June 22. The Corp. is planning to install a bulkhead as a temporary fix by the end of September to early October, which can open the lock intermittently to allow traffic to pass until a permanent fix is achieved. As we did while the Demopolis lock was down, we will continue to utilize alternative rail transportation at Shoal Creek and slightly reduced volumes reflected in the full year guidance. I want to thank our rail and other logistics providers for their continued partnership and support.

And the PRB shipments were slightly higher than expectations as we came out of the shoulder season. The segment had strong cash performance with a continued emphasis on operational efficiency, resulting in improved margins. While we expect a stronger second half of the year, we felt it was prudent to reduce full year guidance as customer inventories remain high, along with depressed natural gas prices. Other U.S. thermal costs and revenues were in line with expectations. Shipments were slightly less than expected and up 16% as we began delivering against new contracts originated during the first quarter. In total, for the U.S. thermal markets, we saw nominations and volumes increase as the quarter moved on. We continue to see this in July also.

Malcolm Roberts, our Chief Marketing Officer, will be delivering our outlook on the markets today. Malcom?

Malcolm Roberts: Thanks, Jim. Seaborne thermal coal continue to range trade for the quarter. In Australia, the Newcastle high-energy thermal market is best described as balanced. The United States imposed further economic sanctions on Russia, resulting in some bias reducing Russian coal purchases. Improved Newcastle demand was met with higherrates of production and the Newcastle high energy thermal coal spot price averaged $136 per metric ton during the second quarter. Asian thermal coal imports have grown this year with China continuing to show increases in electricity demand supporting seaborne thermal coal imports, coupled with strong demand growth in Vietnam. Both China and Vietnam have recorded strong year-to-date increases in imports of approximately 15% and 37%, respectively.

Within the Seaborne Metallurgical coal market, premium hard coking coal prices during the quarter averaged $242 per metric ton. Parts of the global steel market reported tepid demand and thin profit margins during the quarter subduing demand growth for metallurgical coal. In India, steel production was disrupted due to election activities and the onset of monsoon season while China steel production was mixed with the historically weak market dragging on demand, partially offset by economic stimulus targeted in the real estate sector. Coking coal prices find periodic support during the quarter because of supply side disruptions, including rail and port maintenance containing exports in Queensland restricted USA exports from Baltimore and historically low production in China.

The June incident at a major hard coking coal mine in Queensland is expected to constrain premium hard coking coal supply in future quarters. Despite these supply side constraints, coking coal supply proved sufficient to meet demand during the second quarter. In the PCI segment, prices improved during the quarter, supported by constrained supply and some buyers switching to Australian supply in place of Russia. The spot price of PCI increased 23% during the quarter to finish the quarter at $182 per metric ton, a 78% relativity to premium hard coking coal. Overall, the metallurgical coal market remains finally balanced exposed to volatility influenced by the rate of exports from Australia and economic performance in China, India and elsewhere.

In the United States, during the six months ended June 30, electricity generation from thermal coal has increased slightly year-over-year, driven by an overall increase in electricity demand. This is despite low natural gas prices and stronger renewable generation. The EIA in its July update to the short-term energy outlook forecast an increase in the use of coal to generate electricity this year, leading to a 12% reduction in inventories by year-end. I’ll now turn over to Mark to cover the financial details.

Mark Spurbeck: Thanks, Malcolm, and good morning, everyone. In the second quarter, we recorded net income attributable to common stockholders of $199.4 million, or $1.42 per diluted share, and adjusted EBITDA of $309.7 million. During the quarter, we reached an insurance settlement for $109.5 million. We included $80.8 million of the settlement in adjusted EBITDA while the remaining $28.7 million was recorded as the recovery of property and underground development that was previously a written off. This element covers all property and business interruption losses suffered at Shoal Creek last year. We received a $5.6 million advance payment in the second quarter and will receive the remaining $103.9 million this quarter. At June 30, we had $622 million of cash after acquiring Wards Well and making $113 million of income tax payments, which were both noted on our last call.

During the quarter, we paid a $0.075 per share cash dividend and for the first quarter since restarting the shareholder return program we didn’t repurchase shares. However, with a strong operational recovery in the second quarter and a favorable free cash flow forecast in the second half of the year, today we announced an additional $100 million available for share buybacks. And for the sixth quarter in a row, declared a $0.075 per share dividend. Turning now to second quarter segment results. Seaborne Thermal recorded $104 million in adjusted EBITDA, $10 million better than the prior quarter on much improved production from the Wambo complex, resulting an additional Newcastle quality export tons. The segment’s adjusted EBITDA margin of 34% was better than the previous quarter as higher realized prices more than offset the increase in costs from a higher mix of Wambo production.

The Seaborne Met segment generated $144 million of adjusted EBITDA, including the insurance settlement, or $63 million related to second quarter production, a 30% increase compared to first quarter’s $48 million result in an apples-to-apples comparison. Each mine in the segment increased shipments quarter-over-quarter. And as noted earlier, we expect to collect over $100 million of cash at Shoal Creek in the third quarter. The U.S. thermal mines produced $53 million of adjusted EBITDA. The PRB shipped 15.8 million tons below first quarter’s volume is expected due to the traditional second quarter shoulder season. The segment reported $17.8 million of adjusted EBITDA as the mines did an outstanding job managing costs, which despite significantly lower tons kept average unit costs flat and increased margin approximately 30% from first quarter levels to $1.13 per ton.

The Other U.S. Thermal segment generated $35 million in adjusted EBITDA. Shipments increased 450,000 tons from the first quarter and we are expecting even stronger shipments in both the third and fourth quarters. Our U.S. thermal platform continues to demonstrate strong, positive margins and free cash flows. On a combined basis, the U.S. thermal operations shipped 19.5 million tons and realized an adjusted EBITDA margin of $2.73 per ton in the second quarter, after shipping 21.9 million tons and an adjusted EBITDA margin of $2.88 per ton, in the first quarter. For the first half of the year, our U.S. thermal mines have produced $116 million of adjusted EBITDA, while requiring only $17.7 million of capital. With the first half in the books, we expect robust free cash flow in the second half despite a couple of challenges.

As Jim noted, we have adjusted full year guidance for three items. Seaborne thermal volume increased 500,000 tons as Wilpinjong continues to outperform expectations, particularly with the strong demand and price support for higher ash products. Seaborne net volume was reduced 600,000 tons due to the challenging geological conditions at the CMJV and the impact of two successive lock outages on the Black Warrior River at Shoal Creek. The combined volume impacts are expected to increase segment costs for the full year by $8 per ton. We lowered PRD volumes by five million tons as customer inventories remained high and natural gas prices remained stubbornly low. We have not negotiated deferrals on any of the 85 million price tons. And as we have done previously, we will manage customer volumes, while maintaining Peabody’s value in all contracts.

Taking a look at the third quarter, we expect another seaborne thermal order very consistent with the first two. Shipments are expected to be four million tons, including 2.5 million export tons. 600,000 tons are priced on average at $120.45, while one million tons of Newcastle product and 900,000 tons of high ash products are unpriced. Costs are anticipated to remain stable at $48 to $53 per ton. Seaborne Met shipments are expected to be 1.7 million tons at the midpoint of the first and second quarters. Lower tonnage from Q2 is due to a planned longwall move at Shoal Creek, and we should also see production and shipment levels rebalance at Metropolitan after shipments ran ahead of production by 200,000 tons in the second quarter. After the recent recovery in PCI prices, we expect to realize better prices relative to the benchmark and achieve 70% to 80% of the premium hard coking coal price.

Costs are expected to be slightly better than the midpoint between the first and second quarters and land between $120 and $130 per ton. Following the traditional shoulder season and building on the momentum we experienced in the latter part of the second quarter, we expect PRB volume to increase nearly six million tons to 21.5 million in the third quarter. With higher shipments, we also expect to benefit from lower fixed cost per unit and are forecasting costs at $11.50 to $12.50 per ton, increasing margin quarter-over-quarter again to $1.75 per ton in the third quarter. Other U.S. Thermal shipments are also anticipated to be ahead of prior quarter at four million tons and costs are expected to remain flat at $44 to $48 per ton. In summary, we hit all operating targets in the second quarter, reached a key milestone by achieving first development coal at Centurion and negotiated a favorable settlement for last year’s loss at Shoal Creek.

The third quarter outlook is equally good. And today, we announced another $100 million available for share buybacks. Operator, I’d now like to turn the call over for questions.

Q&A Session

Operator: We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Lucas Pipes with B. Riley. Please go ahead.

Lucas Pipes: Thank you very much, operator. Good morning, everyone. Jim, Mark, my first question is on the capital allocation side. You have a formula for capital returns, I think it’s 65% of available free cash flow. And so two questions on the back of this. One, how should we think about the additional allocation of $100 million to buybacks? Is that you saying, look, with this price environment, we really just want to commit. So, maybe if cash flow is a little lower, you have the available cash to return it. So, you want to make that statement. I was just trying to understand it because presumably with the formula that additional allocation would technically not be necessary. So, I appreciate the context. And then bigger picture with capital allocation.

There are some met coal assets for sale in Australia. I’ve heard of some opportunities in the U.S. market, too. How do you think about M&A more broadly? Or are you really just focused on your organic growth opportunities and returning capital to shareholders? Thank you very much for all your color. Jim, did I. Can you hear me?

Jim Grech: Hi, Lucas. Good morning.

Lucas Pipes: Good morning.

Jim Grech: Lucas, I would like to comment some on your first question and turn it over to Mark, and then we’ll come to your second question. So, on the first question I would like to just note that we say on our 65%, we say at least 65%. And we certainly have the optionality to go above that when we have the cash and we feel comfortable to do so. And so what we’re doing here is a prime example of that and our commitment to be focused on increasing the shareholder value with the share buyback. But I think you have some more detail on that about the rest of the year. So Mark, I’ll let you comment on that.

Mark Spurbeck: Yes, good morning Lucas. Listen, with the continued development, it’s ensuring, and I think $81 million year-to-date on that capital, probably $200 million since starting in the cash purchase award as well here in the second quarter. We always knew we wouldn’t generate a lot of free cash flow in the first half of the year. But as Jim mentioned, our resilient balance sheet allows us to be opportunistic when market presents opportunities. I think our stock recently crossed a 50-day moving average and the 100-day moving average. As coal generally traded off with coal prices. So we see this as a really attractive point in time and an opportunity to further reduce our share count as we steadily march closer to Centurion coming online.

As we noted even on our last call, our program is designed to be flexible and give us an opportunity to be opportunistic with the resilient balance sheet. As far as the remainder of the year, we do see good free cash flows in the second half. And depending on where prices shake out, we should continue to generate free cash flow in the second half and into next year. But to be clear, no change to the program.

Jim Grech: Lucas in repose to your second I’m sorry, go ahead, Lucas. Any questions on your first – you have a follow-up.

Lucas Pipes: No. Yes, that’s – yes, exactly. I think you know what I wanted to follow-up on the M&A side.

Jim Grech: Yes. So Lucas, I just want to stress that as a company, our focus is on creating shareholder value and the focus is on that right now. And with that, there is three or four areas that are at the forefront for that. One is maintaining our balance sheet strength and financial stability, which has taken us a long time to get to, and we’re going to continue doing that. We’re very focused on the share buybacks and maintaining our dividend. As Mark said, we’ve done the dividend seven quarters in a row, and we’ve just put another $100 million into the share buybacks. We are also very focused on our organic growth with the investment that we have in the Centurion mine and also just continuing investment in our operations, keeping reliable, and safe and predictable.

That is the overwhelming focus. Assets come and go on the market and everything that’s out there like with every coal company comes across our desk. But our focus is on maximizing shareholder value. And that’s where the number one focus is, and that’s where we’re at. Assets come by. Certainly, every company takes a look at them. But right now, I think I said up on the points that we’re very much focused on.

Lucas Pipes: Very helpful. I appreciate that. I want to turn for my second question to kind of the operational outlook on the met coal side. First, the anticipated geological issues at CMJV, when did you first become aware of those issues? What exactly is the issue? And then how long do you think those could last, could this split into 2025? And then on the hold lock, if you could maybe elaborate on the mitigation efforts, the anticipated impact to 2024 volumes and any costs that might be associated with your mitigation efforts? And then from a numbers accounting perspective if there are additional costs with that be reflected in your met coal cost guidance or would it actually come out of your realizations that you guide to? So just a clarification on that, would appreciate it. Thank you very much.

Jim Grech: Yes, Lucas. So first off, on the lock outage, as we said, we were expecting that bulkhead to be installed here towards the end of September. The stability is there on the lock, then the lock would then be expected as well to be opened back up for shipments, maybe not as efficiently as they would without the issue, but for those shipments to resume. We don’t think the overall expense that we’ll see is material between now and the end of the year. On the high side, may be an incremental $8 million to $10 million of expense if this goes through the end of the year and we keep shipments going. But that’s – that would be the extent of it. And again, we’re looking at ultimate trans. And that’s the cost of alternate transportation and we have a couple of different routes we’re looking at again to try to bring that expense down even further.

So that would be the extent of the lock outage. As far as Coppabella, defaulting is standard that occurs in the coal seams there. We have it all the time. And what happened is we had more faulting than we anticipated. It’s not uncommon to occur. We work through it, and we’re working through the section right now that, again, had more than we anticipated, and we expect to get through that here through the end of the year. So again, there’s nothing out of the ordinary with what’s going on at Coppabella. There’s always faulting. We’ve got a little bit more than anticipated, and we’re just working through that right now.

Lucas Pipes: That’s helpful. On the $8 million to $10 million of potential costs with the hold lock, would that go through met coal unit costs? Or would it kind of come out of the realizations?

Mark Spurbeck: Yes. Lucas, its Mark. That’s all included in our segment costs. And it’s included at 93%.

Lucas Pipes: Excellent. I really appreciate all the color. And to the entire team continued best of luck. Thank you.

Karla Kimrey: Thank you, Lucas. We can take the next question.

Operator: The next question comes from Katja Jancic with BMO Capital Markets. Please go ahead.

Katja Jancic: Hi, thank you for taking my questions. Maybe staying for a bit on the met segment. Can you provide a little more color on the 600,000 tons decline? How much of that reduction, how much of that is hold lock?

Jim Grech: The majority of that is going to be with the CMJV. I think maybe about 100,000 tons of that may be with the approximate catch, about 100,000 tons is the whole lock and the other 500 or so is with the CMJV.

Katja Jancic: And then maybe I think last quarter, the indication was that two-thirds of Shoal Creek will ship in the second half because of the Demopolis locked outage. So is there a difference between these two locks, how much of impact they can have?

Jim Grech: We have the impacts of both of them. But again, in the overall impact because we’ve been looking at alternate transportation routes, it’s all factored into the guidance we have and that’s as I said, we think it’s going to be about 100,000 tons reduction net after we do the ultimate logistics to the tonnages for Shoal Creek for the year.

Katja Jancic: Okay. And then on the Centurion, can you remind us how much you expect to ship the development tons in 4Q? And how we should think about shipments going into next year?

Mark Spurbeck: Yes. Look, definitely [ph]. Last time, I think we said around 100,000. Right now, we’d be saying probably 60,000 to 70,000 by the end of the year.

Katja Jancic: And for next year?

Mark Spurbeck: I’d call around 200,000 tons.

Katja Jancic: Perfect. Thank you so much.

Operator: The next question comes with Nathan Martin from The Benchmark Company. Please go ahead.

Nathan Martin: Yes. Thanks operator. Good morning everyone. Congrats on the second quarter results, guys. Maybe just sticking with Centurion for a second. Could you just remind us, are there any permit or regulatory hurdles remaining before you get to the anticipated longwall start up in the first quarter of 2026.

Jim Grech: No, Nate. We have all the permits and regulatory regulation hurdles passed. So what we’re doing right now is we were focused on the development. And in the month of June, as we said in the comments, development went better than expected in the month of June, we actually developed about three times the amount of footage that we had anticipated getting the prep plant up and running right now and degassing the longwall section ahead of mining. Those are – if you’re looking at the thing that we’re focused on that we need to stay focused on to get us to mining, and those are really the issues ahead of us not really permitting or regulatory.

Nathan Martin: Okay. Got it. Thanks, Jim. And then just related to the spend, I think you guys mentioned in the release, you spent about $200 million thus far of the expected $489 million. Mark, I think I caught you saying you spent about $81 million year-to-date versus that correct? Secondly, how much would that leave for the second half? And then how much of the remaining that $489 million would be spent in 2025 and 2026 at this point.

Mark Spurbeck: Yes, that’s right, Nate. We got about $81 million through the June 30. There’s probably about $75 million more for the second half of the year. That would bring us up to about $275 million from the start of the project. We probably have about $165 million in 2025 and the remainder of $30 million, $40 million would be in 2026. Still on budget for the $489 million.

Nathan Martin: Okay. Perfect. Thanks, Mark. And then maybe over to CMJV. I know Lucas asked a little bit about this. But I guess, maybe my question is – and I’ll tie it into this other piece, too. I know you guys mentioned, I think it was you, Mark, as well that we now expect to achieve roughly 70% to 80% of the [indiscernible] benchmark net price versus 65% to 70% previously. I think I heard part of that with the increase in PCI prices likely driven by some of the Russian PCI full coming out of the market. But is there anything else that’s driving that increase there? I was curious to CMJV, what kind of coal qualities are you mining right now that are going to be reduced? Is that helping your mix overall? Just it would be great to get any thoughts there.

Jim Grech: Look, no I’ll say that our mix is pretty constant, and our full year guidance has about 55% PCI sales incorporated within it.

Mark Spurbeck: Yes. So most of that – most of that increase is the PCI price recovery relative to the benchmark. I think there is a slight increase in the mix with in semi-hard coming out of Moorvale to improve the mix as well.

Nathan Martin: Okay. Great. Appreciate the time guys. Best of luck in the second half.

Mark Spurbeck: Thanks, Nate.

Jim Grech: Thanks, Nate.

Operator: The next question comes from Lucas Pipes with B. Riley. Please go ahead.

Lucas Pipes: Thank you very much operator. Thank you very much for taking my follow-up question. In the release this morning, you described Centurion as a 25-year opportunity at 4.7 million tons. And I remember February 26 presentation where you kind of break out Centurion volumes by year 2026, 3.7, 3.5, the year after, 4.5, 4.4, 3.4. So obviously below that the 4.7 million you cited this morning. Is the 4.7 million is that reflecting words well. And if I remember right, you were planning to update the market maybe on a more comprehensive mine plan update. So just wondering if that process has been completed, and if we should expect anything else. Thank you very much for your color.

Mark Spurbeck: Lucas a couple of things. One, the – you’re right; the presentation only showed the GM South or the North Goonyella proper area that we originally acquired. Those guidance, those tons, 3.7 million to 4 million tons for the first four years has not changed. The 4.7 million tons over the 25-year life takes into account the awards well area as well. Longer panels, more tons between longwall moves, we’re going to get more production on an annual basis. But nothing’s changed in those first few years. It just again, demonstrates the value of the awards well brings to this project. As far as an overall update, we are still doing that study, again, maximizing those volumes, figuring out costs and integrating that plan together. We do plan to come to the market here in the second half of the year and give a full update and maybe a presentation on a project on a stand-alone basis.

Lucas Pipes: Really appreciate the clarification. Look forward to that. And again, best of luck.

Mark Spurbeck: Thanks, Lucas.

Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Jim Grech for any closing remarks.

Jim Grech: I’d like to thank everyone for joining our call today, and I’d especially like to thank our employees for their outstanding focus on safety in the first half of 2024. Also you at our Kayenta Mine and our North Antelope Rochelle Mine, they were both recognized for their outstanding reclamation efforts, and I really want to thank our employees for the work they’ve done on the reclamation at those mines to achieve those awards. I’d also like to thank our investors, customers and vendors for their continued support. Operator, that concludes our call.

Operator: This concludes the conference call. Thank you for attending today’s presentation. You may now disconnect.