Alpha Metallurgical Resources Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 26, 2024

There are 8 speakers on the call.

Operator

Greetings and welcome to the Alpha Metallurgical Resources 4th Quarter 2023 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.

Operator

You may begin.

Speaker 1

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 Q4 and full year 2023 earnings release and the associated SEC filings. 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.

Speaker 1

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.

Speaker 2

Thanks, Emily, and good morning, everyone. This morning, we announced our 4th quarter results with adjusted EBITDA of $266,000,000 For the full year, Alpha generated over $1,000,000,000 in adjusted EBITDA, which marks the 2nd year in a row achieving that milestone. While 2023 was not without its challenges, I couldn't be prouder of the way that we responded as a company to those challenges and finished the year strong. The team did an excellent job of identifying issues, building a battle plan and executing decisively to overcome whatever obstacle we face. We ended the year within or better than nearly all of our guidance ranges having shipped a total of 17,000,000 tons with 15,300,000 of that being met coal.

Speaker 2

Our overall met segment costs for the year were in line at $111.67 while costs in the all other category came in better than guidance. SG and A, aisle operations expense, DD and A and tax rate all ended the year within our guidance range. CapEx came in at $245,400,000 which is technically below the low end of the given range. However, when adding the $21,000,000 of carryover that we have rolled into 2023 that puts us nearly exactly at the midpoint of our issue guidance for last year. Another milestone we reached during the Q4 was exceeding $1,000,000,000 in the share repurchase program.

Speaker 2

Since the program's inception in March of 2022, we have returned more than $1,100,000,000 to stockholders in the form of buybacks repurchasing over 6,600,000 shares of Alpha stock. We remain committed to our previously stated strategy of utilizing available free cash flow for the program as the preferred method of returning capital contingent upon minimum cash levels and market conditions. As we look ahead, the Board has set May 2 as the date of our next annual meeting of stockholders. And this morning, we announced a list of director candidates who will stand for election to our Board at that meeting. We also announced that following significant tenures with the company, 2 of our current directors have reached the age at which they may no longer stand for election per our corporate governance guidelines and they've retired from the Board effective today.

Speaker 2

Al Ferrara is our longest serving Director having been with us since 2016. Al has set the template for how an audit committee should be led and we appreciate how his influence has particularly impacted the finance and accounting functions of the company. Mike Quillen and what can you say about Mike that hasn't already been said, he started this whole thing back in 2002 when he founded Alpha Natural Resources and he's devoted much of the last 2 decades to building this company and seeing it through to its current success. It's hard to imagine the Board without these two long standing directors, but we've been blessed to have them at Alpha for as long as we have. And as we announced this morning, Liz Fessenden has also retired from the Board effective today.

Speaker 2

We will miss Liz very much. She's been a Director since 2021 and served as Chair of the Board's Safety, Health and Environmental Committee. She's overseen a time of great accomplishment in environmental and safety awards better than the national average performance across the portfolio and back to back company records in 2022 and 'twenty three for NFBL and TRIR respectively. I personally want to thank Liz for her support over the past year in particular. She's been a great source of encouragement and a wonderful mindset coach during my 1st year in this seat.

Speaker 2

We appreciate her leadership and wish her all the best. The good thing for me is that all these folks are still on my speed dial list. The bad thing for them is that all these folks are on my speed dial list. So I will be making frequent use of that list. In connection with these departures, the Board size is contracted from 9 to 7 seats and we're excited to welcome a new and highly qualified individual to our Board with the appointment of Shelley Lombard.

Speaker 2

Shelly comes to us with more than 35 years of experience on Wall Street and in other areas of the financial sector. She will be a variable addition to our Board and Audit Committee and I can't wait to begin working with her. I'll now turn it over to Todd for a discussion of our Q4 and full year financial results.

Speaker 3

Thanks, Andy. 4th quarter adjusted EBITDA was $266,000,000 up from our Q3 level of $154,000,000 We sold 4,600,000 tons in the quarter, almost all of which came from our Met segment. 42,000 tons came from the all other category. Quarter over quarter realizations increased for the met segment with an average realization of $183.76 for the 4th quarter compared to $154.73 in Q3. Export methanons priced against Atlantic indices and other pricing mechanisms in the 4th quarter realized $175.32 per ton, while export coal priced on Australian indices realized $213.41 These are compared to 3rd quarter's realizations of $136.76 per ton and $158.56 respectively.

Speaker 3

Realization for our metallurgical sales in the 4th quarter was a total weighted average of $193.54 per ton, up from $160.43 per ton in the prior quarter. Realizations in the incidental thermal portion of the Met segment decreased $89.76 per ton in Q4 as compared to $92.22 per ton in Q3. 4th quarter realizations in the all other category were $70.14 as compared to $68.32 per ton in the 3rd quarter. Cost of coal sales for our Met segment increased to $119 per ton in the 4th quarter, up from $109.95 per ton in Q3. The increase was primarily driven by higher sales related costs and purchased coal costs, both of which were impacted by higher coal indices during the quarter.

Speaker 3

Higher labor costs were also a significant factor in the increase for the quarter. Cost of coal sales in the all other With regard to cost, there are a couple of items creating some real time pressure on our 2024 cost guidance. 1st, with the indices remaining above the levels indicated by futures trading back in November when our 2024 guidance was issued, we're seeing higher sales related costs than were budgeted. Also, we have had opportunities to purchase a higher volume of clean coal to add to the portfolio than was budgeted. And to the degree that these purchases continue at material volumes, this will also create pressure on our published cost of wholesale guidance.

Speaker 3

SG and A, excluding non cash stock compensation and non recurring items, increased to $16,900,000 in the 4th quarter as compared to $15,100,000 in the 3rd quarter. Q4 CapEx was $61,500,000 up from $54,700,000 in the 3rd quarter. Moving to the balance sheet and cash flows. As of December 31, 2023, we had $268,200,000 in unrestricted cash, down from $296,100,000 at the end of the 3rd quarter. We had $94,100,000 in unused availability under our EBL at the end of quarter.

Speaker 3

Alpha had total liquidity of $287,300,000 as of the end of December, which is net of a 75,000,000 minimum liquidity ABL covenant. Cash provided by operating activities increased quarter over quarter to $199,400,000 in Q4 as compared to $157,200,000 in Q3. As of December 31, our ABL facility had no borrowings and $60,900,000 of letters of credit outstanding, which is unchanged from the prior quarter. Turning now to our committed position for 2024, 35 percent of our metallurgical tonnage in our Met segment is committed and priced at the midpoint of guidance at an average price of $171.33 Another 55% of our met tonnage is committed but not yet priced. Thermal byproduct portion of the met segment is fully committed and priced at the midpoint of guidance at an average price of $77.14 Pursuant to our share repurchase program, we repurchased approximately 500,000 shares at a cost of $137,000,000 in the Q4 of 2023.

Speaker 3

Since the beginning of the program, we have spent approximately $1,090,000,000 to acquire roughly 6,600,000 shares of Alpha's common stock at a weighted average price of $164.87 per share. The outstanding share count has been reduced by more than 30% from the time the program began. As of February 19, 2024, the number of common stock shares outstanding was approximately 13,000,000, which includes the impact of 220,000 and 67 net shares issued in December 2023 January 2024. The shares issued in these periods resulted from vestings of previously granted equity awards under the company's long term incentive plan. The remaining authorization permits approximately $410,000,000 in additional repurchases, contingent as always on cash flow levels and market conditions.

Speaker 3

We are planning a reduction of the cadence of share buybacks over the next few months, up to potentially pausing the program for a bit to build our cash balances back to our targeted levels. I will now turn the call over to Jason for some details on operations.

Speaker 4

Thanks, Todd, and good morning, everyone. I want to start by recognizing the outstanding safety and environmental compliance performance from our teams in 2023. We've maintained our 99% water quality compliance rate for many years now and continued expanding our Beyond Compliance initiatives. For safety, we followed a 2022 company record in an FDL performance with another company record, this time for TR Hour in 2023. I can't say enough about our team members making this top priority day in and day out, and that focus has resulted in performance that is consistently better than the national average.

Speaker 4

We work hard every day to continue this positive trend into the future. While we're highlighting outstanding performance, I also want to publicly congratulate the winners of Alpha's 2023 Best in Class Awards. The competition was tight and we had record setting teams that didn't end up winning the overall award. That's how difficult it is to claim the top spot. For 2023, the Midwest Virginia surface region won in categories of deep mine, surface mine and preparation plant.

Speaker 4

Those winners are Kingston 2, Kingston South Surface and Kingston Processing, respectively. Kingston South Surface Mine, also known as Bishop, has won 2 years in a row. Jimmy Wood and his Midwest Virginia surface team deserve all the accolades they have received for sweeping those categories, which is very difficult to do. In the loadout facility category, Marmet River Dock won best in class, while Marfork claimed top honors in underground belt transfer system. Both of those are back to back winners 2 years in a row as well, I want to thank all the teams for their determination and commitment to exceeding expectations.

Speaker 4

Turning to some operational updates. As I mentioned last quarter, we celebrated the first development cuts at our newest high vol mine, Checkmate Fountain in Q4. Also during the quarter, we completed renovations to the formerly retired Chests processing plant, which is now online and serving this mine. Together, Checkmate Fountain and Chest Processing solidify Elk Run as a new complex for Alpha. Also want to mention a couple of non injury incidents we experienced in January at our McClure processing plant and Road Fork 52 Deep Mine.

Speaker 4

On January 17, an ignition occurred near McClure's clean coal belt discharge on top of a clean coal silo. We believe the ignition was fueled by dust and ignited by a shorted electrical installation. Again, no injuries and our team members acted quickly and appropriately to make necessary notifications to agencies and assure there was no fire. Investigations occurred and no contributing citations have been issued. While the exact cause of the ignition is still being analyzed, the silo has been examined and is structurally sound and designs are underway to make repairs.

Speaker 4

Due to the swift responses, we were able to reroute belt conveyors within the 1st few days enable continued processing and shipments at normalized run rates and did not experience any material impact from the non injury ignition. On January 30, 2024,

Speaker 5

Road Fork

Speaker 4

fifty two's number 3 secondtion started retreat mining, the 4th and last panel of their active district. Then on January 31, 2024, a non injury ignition occurred in by the pillar line and gobbed area of the number 3 entry. And gobbed area is a term that we use to describe fully depleted and mined areas similar to those areas that are left behind

Operator

the longwall.

Speaker 4

Investigations revealed a roof collapse in the gob of the number 4 entry, exposing an overlying coal seam, and we believe it's likely that coalbed methane entered into the gob from that exposed seam. Other than reports of miners hearing a roof bolt break immediately before the event, and ignition source has not been identified. Investigations resulted in 0 related or contributory citations. And personally, I want to thank the team at Road Fork 52 for their actions on the night of January 31, but more importantly, and in my opinion, there are high standards regarding housekeeping and rock dusting that prevented any more serious issues. Despite the tedious nature of investigating in this incident like this underground, our team and regulatory investigators concluded in about 4 business days.

Speaker 4

Of the 5 Centimeters sections operating at Row 452, number 3 secondtion was the only section idled during that time. I will now turn the call over to Dan for some information on the coal markets.

Speaker 5

Thanks, Jason, and good morning. Throughout 2023, metallurgical coal markets generally showed strength with periods of volatility in the face of economic pressures, geopolitical uncertainty and global recessionary fears. Macroeconomic conditions around the world remain inconsistent with some economies like the United States exhibiting continued resilience to these external pressures, while others like the European Union have experienced significant downturn. While central bankers in the United States and Europe are expected to lower interest rates within the 2024 calendar year in response to easing inflation, uncertainty remains regarding when those actions may be taken and how quickly they may impact overall economic conditions. Organizations such as the International Monetary Fund and the World Bank have issued muted expectations about global growth prospects for 2024 and 2025, citing a slower than historical average pace of expansion and downside risks related to geopolitical shocks, supply disruptions or prolonged tight monetary conditions.

Speaker 5

Geopolitical strife, namely the Russian war in Ukraine and the violence in the Middle East, has impacted coal markets by upending natural trade flows and at times causing shipping delays due to violence stemming from these conflicts. While we have not been directly impacted by the well publicized attacks in the Red Sea, we believe that continued volatility in metallurgical markets is possible as these macroeconomic and geopolitical circumstances evolve. Metological coal indices ended the 4th quarter within a few percentage points of where they started in October, but since then all four indices have softened. The Australian premium low vol index decreased from $3.33 per metric ton at the start of the quarter to $323.75 per ton on December 31. U.

Speaker 5

S. East Coast Low Vol Index increased from $2.58 per metric ton at the beginning of October to $2.68 per metric ton at the end of the quarter. U. S. East Coast High Vol A Index slid from $2.88 per metric ton at the start of the Q4 to $2.81 per metric ton at the end of the year.

Speaker 5

And lastly, the U. S. East Coast High Vol B Index increased from $2.38 per metric ton at the beginning of October to $2.52 on December 31, 2023. As of February 23, the U. S.

Speaker 5

East Coast indices of low vol, high vol A and high vol B indices measured $265, 2.55 $2.15 per ton, respectively. The Australian premium low vol index has decreased from its quarter level close to $3.14 per metric ton on the same date. In the thermal coal market, the API2 Index moved from $124.85 per metric ton at start of October down to $103.85 per metric ton at the end of the year and down even further to $90.30 as of February 23. Despite some of the challenges we faced, Alpha finished the year strong as you've heard. I want to specifically commend my team for their outstanding efforts to close out the year on a high note.

Speaker 5

We worked hard to meet our internal goals, which we were successful in doing, while even setting some new logistic records within the company. The accomplishments of last year are impossible without a dedicated team and I am proud of what the Alpha sales team achieved. Of course, we are hoping to continue the good work in this year. And with that, operator, we are now ready to open the call

Operator

Our first question comes from Lucas Pipes with B. Riley Securities. Please proceed with your question.

Speaker 6

Thank you very much, operator. Good morning, everyone. Look, you make it look really easy, but I know this is a lot of hard work and I want to congratulate you on that. Great, great, great job. Andy, Todd, Dan, I have a question kind of for all three of you.

Speaker 6

And it starts with how you think about the current market environment, what your longer expectations are and then how that feeds into your capital allocation priorities? Again, kind of shorter term and longer term as well. Todd, I think you mentioned a little bit of a pullback on the buyback in the near term. If you could elaborate on that as well, I would appreciate it. Thank you.

Speaker 2

Hey, Lucas, it's Andy. Thanks for the comments. And while as you said, it's not easy looking at the comments that Jason made on a couple of operational things that we ran into. The teams that have managed those situations These things happen relatively frequently when you're underground, you're on a big surface mine, things go sideways sometimes and it's really a testament to the team that they've been able to manage these things and come through safely and without broader impacts. So it's not easy and I like to pass that along to the operations team that they do make it look easy from

Operator

my perspective. But I know as

Speaker 2

well as you do, it's very, very difficult. As far as how the market feeds into the buyback, so the buyback is as it's always been. It's going to be driven by our cash flow, Every available dollar that we have above a certain liquidity target is going to go into the buyback. And so as we look at the market and then I'll let Dan comment on that piece of it. But as we see it, if it starts feeling a little bit shaky, then we're going to tend toward probably building a little bit higher, get to the higher end of the liquidity level versus we're a little bit toward the lower end of that range right now and building cash could come in handy if we do get into some doldrums as we typically do in the spring part of the year.

Speaker 2

And then also as Todd mentioned seeing some of the cost pressures from particularly at this point in the year some purchase coal we've opportunistically been buying some coal where we've had a chance to put it into some of our shipments and while that ultimately ends up with the incremental EBITDA, it does create a kind of a working capital imbalance with the timing of buying the coal versus realizing the ultimate receipt. So that's an additional little bit of pressure on cash that we're watching out for. But it's as I said, as long as the cash is there, we'll just keep AMRing along and buying those shares, but we have to be cognizant of where the market is. So, Dan, anything you want to add there?

Speaker 5

Yes. Hey, Lucas. I think we're pleased with our book the way we have it right now. I think the looking forward there, we're going to be shipping into the same markets that we've been talking about in previous calls. I think I'm a little bit encouraged talking to some of our European customers.

Speaker 5

It probably they probably can't have as tough a year as they had last year in Europe. And talking to most of the customers, they expect pot metal production in Europe to increase. That's a positive for us. I mean, they'll need more coke and more coking coal. So I don't have look, I spoke in great detail about a lot of the economic and geopolitical uncertainty.

Speaker 5

We're watching that every day. It seems like every day there's something new to add to the list. But I think for now, we're kind of confident with what we see in front of us.

Speaker 6

That's very helpful. Thank you. I look forward to the transcript, Andy, on that new word you used. For my second question, I wanted to ask about the cadence of shipments and kind of Q1, Q2, if you could provide a little bit of an outlook. And then to circle up on the cost side, can you speak a little bit to where you still see inflationary pressures today?

Speaker 6

Were you seeing some easement? What the situation is on the labor front? Thank you very much.

Speaker 2

Yes, Lucas. On the shipment side, so we typically if you look at the current configuration of Alpha going back to Q4 of 2020, basically Q1 of every year has been basically the lightest year and I'm specifically talking about the mesh shipments if you isolate those. Right behind us being Q4, I mean historically we've not had very strong Q4s and that's something else I do want to compliment the team about again. We talked about trying to finish strong this year and they delivered beyond anything I could have imagined. 4,600,000 total tons, 4,500,000 of met is an all time record for our Q4.

Speaker 2

And so part of that was being aggressive on our shipping schedules and logistics and we probably pulled 1 or 2 cargoes that should have been Q1 'twenty four shipments. We pulled those into the Q4, which is a good thing. Anytime you can accelerate that, that's a good thing. So it will probably create even more pressure on Q1, which again typically was a little bit lighter, but we would normally see Q1 and Q4 be on the lighter end, 23 be on the stronger end. But we've the way Q4, Q1 have blended into each other, we'll have to see how that plays out.

Speaker 2

But I think we're still feeling relatively okay about where we'll end up on the quarter just based on shipments thus far. But Dan, anything you'd like to add to that?

Speaker 5

No, you covered it.

Speaker 2

Okay. On the cost side, it's still a story of inflation, it's still a story of labor. I think we've seen supplies and maintenance, top costs start to slow down in absolute dollars, but there's still a little bit of inflation. On the labor side, I think we have seen our turnover rates drop over the past quarter, which is I think that's been a result of our attempts to try to be the lead employer in Central Appalachia in our wage and benefit packages. So the goal is to get people in every seat and I think to a large degree we've accomplished that, but it will continue.

Speaker 2

Obviously, there are only a certain pool of candidates to choose from and everyone wants those people. So right now, I think we feel pretty good about our situation, but cost trends just across the board continue to be somewhat of a challenge, but we're focused on it. We're going to figure out creative ways to either get our productivity up or our cost down in a direct fashion and hopefully start improving that metric.

Speaker 6

Andy and team, I really appreciate all those comments. Continue. Best of luck. Keep up the good work.

Speaker 2

Thanks,

Operator

Lucas. Our next question comes from Nathan Martin with The Benchmark Company.

Speaker 7

Congrats on the strong end of the year and thanks for taking my questions. Thanks.

Speaker 6

Yeah, no problem.

Speaker 7

Dan, maybe one for you to start. Spreads between the U. S. That indices and the Australian indices remain historically wide. It would be great to get your thoughts on how long you think that persists, maybe what could drive improvement there?

Speaker 7

And then how are you thinking about Alpha's mix and maybe the opportunity to sell more tons into Asian markets based on those Aussie indices? And then maybe some comments maybe on the mix that you have committed thus far, which I think is what 35% committed and priced and then 55% committed and unpriced? That would be very helpful. Thank you.

Speaker 5

Yes, Nate. Well, I'm not going to pretend to exactly how those indices move and when they're in sync with each other. But obviously, we'll follow the best realizations for us and for our products. So when we look at that, of course, a lot of the Aussie linked business will be in Asia, as we have said in past quarters. So our eyes will be on that primarily.

Speaker 5

I think there's a fair amount of talk about the high vol, high vol this, high vol that and what we don't hear a lot is the strength of the medium vol and low vol sectors. We see real strength here in those in the demand for that. That's not always reflected directly in the indices right away. I think there is a lot of term business that's already been put to bed that it's a little bit of a soft period here now with the Chinese New Year ending and some of the Indian steelmakers out of the market right now. But I have the sense is things will get back to normal here soon.

Speaker 5

Our mix is, as I said, going to be focused more on Asia, but I do think there's opportunities in Europe as well as the steelmakers come back from a rotten year in Europe.

Speaker 7

That's very helpful, Dan. And then, I mean, question as well, some of the tons that you sell into the Asian markets, are you having to sell any of those at CFR prices?

Speaker 5

I don't want to say we have to. We do. Some business is on the CFR business. Most of it is not, most of it is FOB vessel. But if there are opportunities where we need to sell it on a CFR basis, we can and will do that.

Speaker 7

Got it. Perfect. Maybe kind of sticking with that, there have been some numerous logistical hurdles as of late for the entire industry, port delays, you guys mentioned the Red Sea and maybe in your prepared remarks, low water levels on the Panama Canal, etcetera. It would be great to get an update on what Alpha is seeing on the transportation and logistics front.

Speaker 5

Sure. I'll take a shot at that. As you said, the ocean freight situation is a little erratic right now because of the situation. Vessels that normally would transit through the Suez Canal on their way to Asia from the U. S.

Speaker 5

Now are going around the Horn of Africa. That's adding some days and some cost to those ocean voyages out. But as we do most of our business on FOB vessel basis, we don't see that direct impact right now. The freight markets move for other reasons too. They move during the seasonal grain season, etcetera.

Speaker 5

Overall economic weakness probably has a bigger effect on ocean freight than some of these other events. We're certainly aware of it. It hasn't changed our targets at all. With regard to the railroads, they're moving the coal well. We're pleased to see both railroads been doing a good job for us here in recent months.

Speaker 5

So I have no other comments there. The Panama Canal situation seems to be getting a little better as well.

Speaker 4

Thanks,

Speaker 2

Nate.

Operator

We have reached the end of the question and answer session. I will now turn the call back over to Andy Eidson for closing remarks.

Speaker 2

Thanks again to everyone for joining us today and for your interest in Alpha. We hope you have a great rest of the day.

Operator

This concludes today's conference. You may disconnect your lines at this time and we thank you for your participation.

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Key Takeaways

  • Alpha reported $266 million adjusted EBITDA in Q4 and over $1 billion for full-year 2023, marking the second consecutive year above that milestone on shipments of 17 million tons.
  • Since March 2022, the company has returned more than $1.1 billion to shareholders through buybacks, repurchasing over 6.6 million shares and cutting the share count by over 30%, with approximately $410 million remaining authorized.
  • Elevated coal indices are driving higher sales-related and purchased coal costs, prompting management to consider slowing or pausing buybacks to bolster cash and maintain liquidity against cost pressures.
  • Operational teams achieved outstanding safety and environmental results in 2023, including a company record TRIR, 99% water quality compliance and multiple “Best in Class” awards across deep mines, surface mines and processing plants.
  • The board contracted from nine to seven directors following the retirement of three long-tenured members and welcomed Shelley Lombard, adding over 35 years of financial sector expertise to the audit committee.
A.I. generated. May contain errors.
Earnings Conference Call
Alpha Metallurgical Resources Q4 2023
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