Alpha Metallurgical Resources Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 5, 2024

There are 6 speakers on the call.

Operator

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.

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 some of the factors that can affect them, please refer to the company's Q2 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 Edson 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'll turn the call over to Andy.

Speaker 2

Thanks, Emily, and good morning, everyone. This morning, we issued an earnings release detailing our Q2 2024 financial results, which included adjusted EBITDA of $116,000,000 and 4,600,000 tons shipped within the quarter. In spite of a challenging market backdrop, the Alpha team delivered another solid quarter of performance. Both the operations and the sales teams executed very well within the areas they can control by hitting ambitious shipping targets, producing well and most of all operating safely throughout the period. As we discussed in our most recent earnings call in May, weakening steel demand has negatively impacted metallurgical coal markets and our 2nd quarter realizations reflect that negative pressure.

Speaker 2

This is not a surprise, however, as waning demand and difficult uncertainty or significant uncertainty across the world brought about the difficult market we experienced in Q2. These conditions have intensified in the Q3 and persisted today. As is typical at this time each year, the domestic negotiation process has begun with North American customers for next year's contracts. Over the coming months, we expect to secure commitments for 2025 domestic tons we'll provide an update later in the year on those commitments and our overall shipment volume guidance for 2025. In the interim, we continue to ship our contracted tons to our customers and we're listening closely to the market to hear how we may be able to meet current and future customer needs.

Speaker 2

Given the recent met market deterioration and volatility, we remain focused on our first priority of preserving the franchise in order to weather whatever market conditions may lie ahead. To that end, we increased our total liquidity by nearly 25% during the Q2. We continue to take a wait and see approach with regard to capital returns as we monitor the market dynamics. As we've proven with our previous activity and the buyback program, we're eager to return capital to shareholders when conditions allow. I also want to note, particularly with the backdrop that we're dealing with today when the market, it's pretty easy to fall into the trap of thinking there are right now is forever.

Speaker 2

This tough market has lasted a bit longer than it has in recent years, at least in respect to the usual peaks and valleys of the cycle. But the peaks of the past 3 years also lasted longer than it had been expected. One thing is certain though, and that is that the world needs steel and metallurgical coal makes steel. So the most important thing for Alpha is that we continue to operate safely, maintain high productivity and take advantage of every opportunity the market presents to us. That's what our 4,000 team members are good at and I'm confident that's what they'll do.

Speaker 2

With that, I'll turn the call over to Todd for details on our Q2 financial results. Thanks, Andy. 2nd quarter adjusted EBITDA was $116,000,000 down from $190,000,000 in Q1. We sold 4,600,000 tons in the quarter compared to 4,400,000 in Q1. Met segment realizations decreased quarter over quarter with an average 2nd quarter realization of $141.86 compared to $166.68 for the Q1.

Speaker 2

Export met tons priced against Atlantic indices and other pricing mechanisms in the 2nd quarter realized $135.47 per ton, while export coal priced on Australian indices realized $153.52 These are compared to realizations of 172 point $2.4 per ton and $193.70 respectively in the Q1. The Q2 realization for our metallurgical sales was a total weighted average of $145.94 per tonne, down from $176.20 per ton in the prior quarter. Realizations in the incidental thermal portion of the met segment decreased $75.82 per ton in the 2nd quarter as compared to $76.53 per ton in the 1st quarter. Cost of coal sales for our Met segment decreased to $109.31 per ton in the 2nd quarter, down from 115.6 $5 per ton in Q1. The primary drivers of the cost reduction were lower sales related costs as a result of softening coal prices and a reduction in third party purchased coal costs in the quarter.

Speaker 2

SG and A excluding non cash stock compensation and non recurring items decreased to $14,200,000 in Q2 as compared to $19,900,000 in the Q1. CapEx in the 2nd quarter was $61,100,000 down from $63,600,000 in the 1st quarter. Moving to the balance sheet and cash flows. As of June 30, 2024, we had $336,100,000 in unrestricted cash figure of $269,400,000 We had $95,600,000 in unused availability under our ABL at the end of the quarter. As of the end of June, Alpha had total liquidity of $356,700,000 up from $288,100,000 at the end of the Q1.

Speaker 2

Cash provided by operating activities was $138,100,000 in the 2nd quarter, down from $196,100,000 in Q1. As of June 30, our ABL facility had no borrowings and $59,400,000 of letters of credit outstanding, down from $61,300,000 in the prior quarter. In terms of our committed position for 2024, at the midpoint of guidance, 71% of our metallurgical tonnage in the Met segment is committed and priced at an average price of $157.97 Another 29% of our met tonnage for the year is committed, but not yet priced. The thermal byproduct portion of the met segment is fully committed and priced at the midpoint of guidance at an average of $75.96 As we discussed in the last quarterly call, we expected market softness to limit our repurchase activity in Q2 and we communicated our intention of building and maintaining our liquidity position. We did not repurchase any shares in the Q2 under the company's share buyback program.

Speaker 2

As of July 31, 2024, the number of common stock shares outstanding was approximately 13,000,000. Dollars Remaining stock buyback program authorization permits approximately $400,000,000 and additional repurchases contingent on cash flow levels and market conditions. We have repurchased a total of 6,600,000 shares under the existing plan at an average share price of $165.74 I will now turn the call over to Jason for an update on operations in the quarter. Thanks, Todd, and good morning, everyone. I'm pleased to report that our teams continue to operate safely and efficiently in the second quarter.

Speaker 2

We have again achieved safety and environmental performance that's better than the industry average. Over the last few months, our mine rescue teams have received numerous individual and team awards at competitions throughout the region, including many first place finishes. There are simply too many to list here, but we are very proud of each and every member of these outstanding teams and we appreciate their dedication to safety and preparedness. On our last quarterly call, I explained the process we're undertaking to communicate the current market conditions with our partners and suppliers.

Speaker 3

Since then, we've had

Speaker 2

a lot of good conversations, many of which have resulted in improved pricing agreements. In some cases, we have transitioned to new suppliers where viable lower cost options were available to met or match our supply needs with market realities. As these changes take effect, we expect these actions to have a positive impact on our costs. Additionally, we continue to fine tune our in house manufacturing capabilities, which have afforded us increased flexibility and timeliness in replacing certain parts and safely maximizing the lifespans of our existing equipment. We will continue to leverage the talent and the capabilities of our manufacturing teams to assist us in this regard.

Speaker 2

I will now turn the call over to Dan for an update on the markets.

Speaker 3

Thanks, Jason, and good morning. Weaken global demand for steel has persisted, resulting in continued metallurgical coal market softness over the past several months. Factors influencing steel demand include economic policies and conditions globally as well as the health of national and regional economies, some of which have been very negatively impacted by geopolitical unrest and violent conflicts. Additionally, more than 60 national elections are scheduled to occur or have already occurred across the world in 2024, including races for leadership in the United States, India and many European countries, all important destinations for office calls. The higher than usual volume of elections across the globe has created additional geopolitical uncertainty, which affects consumer confidence and demand for steel.

Speaker 3

Metallurgical coal prices softened during the Q2 of 2024. The Australian premium low vol index dropped from $246.50 per metric ton on April 1st to $2.34 per metric ton at the end of the Q2. The U. S. East Coast low vol index decreased from $2.22 per metric ton at beginning of April to $2.18 at the end of June.

Speaker 3

The U. S. East Coast High Vol A Index moved from $2.23 per metric ton at the start of the quarter to $2.12 per metric ton at the end of the quarter and the U. S. East Coast High Vol B Index decreased from $198 per metric ton to $190 at quarter close.

Speaker 3

Since quarter close, all four indices have decreased further. The Australian premium low vol and U. S. East Coast low vol indices fell to $2.15 $2.11 respectively on August 2. U.

Speaker 3

S. East Coast High Vol A and High Vol B indices measured $2.05 and 1.83 per ton respectively as of the same date. In the thermal coal market, the API2 index was $118.05 per metric ton on April 1 and decreased to $107.10 per metric ton at the end of June. And on August 2, the API 2 index was at $122.20 per metric ton. In terms of office performance, we continue to ship contracted tons to our customers as planned.

Speaker 3

In Q2, our sales, operations and logistic teams were able to hit some internal shipping milestones recording 4,600,000 tons shipped within the quarter. This is even more impressive considering that we worked around a planned week long period in May where one of the DTA stacker reclaimers was down for maintenance. Proud of how our team has risen to the challenge and continued to focus on the controllable aspects of our jobs performing well despite the current core market dynamics. As you will recall from our Q1 earnings call back in May, we spoke about the market deterioration that we were seeing, which has only intensified since then with periods of very little or no spot demand. As we look ahead to the balance of the year, we remain confident in our ability to meet our full year 2024 shipment volume guidance.

Speaker 3

And looking a bit further to 2025, the customary domestic solicitation process has begun and we are in early discussions with North American customers regarding 2025 business. It's much too early in the process to speculate about where volumes or pricing will land, but we will provide an update on Alpha sales commitments at the appropriate time. Finally, I'm pleased to say that rail performance has been solid and we have not experienced material indirect impacts from the Baltimore bridge collapse. As a reminder, with the majority ownership stake in DTA, Alpha does not utilize the Baltimore terminals to export our coals. Despite the disruption to other coal producers and transportation flows, our rail partners have performed well and we have not experienced ancillary challenges from the aftermath of the bridge collapse.

Speaker 3

We remain grateful for the positive rail performance and look forward to continuing to provide excellent service to our customers around the world. And with that, operator, we are now ready to open the call for questions.

Operator

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

Speaker 4

Thank you very much, operator. Good morning, everyone. Really solid cost performance in Q2. And I wanted to ask on those cost reductions, if you could maybe break out the contribution to the reduction from both sales related as well as purchased coal. And then any other kind of buckets that you could point to as major drivers?

Speaker 4

And a little bit higher level, how much purchased coal do you kind of typically blend into your shipments?

Speaker 2

Hey Lucas, it's Andy. I'll hit the first piece myself. The breakdown on the cost reductions is roughly fifty-fifty between those two category items. Combined they may be less than 100 percent and we may have 10% of other just general cost reduction productivity enhancement that kind of stuff. But it's roughly split between those two items.

Speaker 2

As far as how much purchased coal we utilize on a given quarter, I'll let Dan jump on that one.

Speaker 3

Hi Lucas, good morning. Typically several 100,000 tons a year, there's no fixed number. A lot of depends on market conditions. Some of it depends on what our own mines are doing if we have some geology or quality issues. So, I don't know the number off the top of my head, but it's in the several 100,000 ton range.

Speaker 3

And just to put a little more color on, some of those tons purchased are purchased against the indices. So, as the indices have slid down, our purchase coal costs have slid down with it.

Speaker 4

Got it. Thank you. Thank you very much for that, Dan. And on the volume, midpoint of guidance implies call it 8% reduction or so versus first half. So I wondered if you could maybe speak to that.

Speaker 4

Is that reflecting current market conditions, just a degree of conservatism after very strong second quarter. And kind of zooming out on the industry, what's your take on the kind of supply situation more broadly? Is it improving in the sense that some higher cost mines are rationalizing? And then there was also a a major supply disruption in the quarter in North America. I wondered if you could maybe comment on that as well.

Speaker 4

Thank you very much for your perspective.

Speaker 2

Hey Lucas, I'll hit the first piece again and we'll let Dan cover the hard part of it. As far as the cadence on the shipments, there's nothing really intentional there. It's just how the shipments have fallen. We did have very strong production shipment quarters in Q1 and Q2. And so I think that got us a little bit ahead of the curve.

Speaker 2

So it's really just taking the back half of the year, which will probably I mean, it looks like looking in our forecast, it looks like it will be kind of ratable between Q3 and Q4 to get to that midpoint. So with the vast majority of the book being committed, it's really just a function of running through those commitments and getting those tons where they need to be. But as far as the broader market question, Dan, I'll let you answer that one.

Speaker 3

Thanks, Andy. Well, yes, Lucas, I think we've seen some supply coming off around the edges, I guess, due to high costs, But we've also, of course, seen a couple of large met mines idle due to the mine fires. And frankly, even with these plots, some of that supply coming off, the market sort of still continues to balance itself. In other words, take some supply off, but there's also some demand gone. So it's still net net kind of where it is.

Speaker 3

We haven't I don't think there's been enough supply come off to materially impact the market. Having said that, we're shipping steady. Our order book looks like we'd like it to look and we're just going forward on that basis with kind of a week at a time. We are seeing a little bit of pickup in India, for example, and no surprise monsoon's season is wrapping up and we expect to see a bit more resume a little bit more shipments into India.

Speaker 4

Dan, do you think the market is oversupplied today? And if so, how many tons is it? Is it possible to oversupply?

Speaker 3

Boy, oh boy, that's a tough one, Lucas. I don't know. I'd say it's balanced. I don't think I speak for Alpha. Our inventories were actually we brought our inventories down in Q2 a bit.

Speaker 3

So we're comfortable with our inventory situation. We're not piling the coal up. It doesn't feel that oversupplied to me is what it's worth.

Speaker 4

That's helpful. Thank you very much. I'll try to ask one last question. Andy, could you maybe speak to your strategic priorities at this time? Obviously, the market has changed a bit.

Speaker 4

Broader equity market, coal markets are softer. You are ahead of your kind of cash target. So wondering how you kind of think about everything and how you want to position Alpha optimally during this time? Thank you.

Speaker 2

Yeah, Lucas that one's in markets like these, it's pretty easy. Our strategy is kind of defined for us, which is as I said in the prepared comments, protecting the franchise. And the fact that this market has lasted longer than it typically does when you're talking about the shoulder season. You've got usually a couple, 3 months of doldrums, so to speak. This has gone on a good bit longer than that and don't necessarily see the end of it just yet.

Speaker 2

I mean, we see advance that we see some inklings that things may be on a turn, but it could be like a battleship and it takes a while. So with that in mind, getting above our target liquidity number is more about just creating more of a buffer because we have operated I think we've been most successful because we have operated so conservatively trying to protect the balance sheet. And I think that's going to remain our number one priority until we are comfortable that the market has turned for in a more substantial fashion and for a longer period of time before we get too aggressive on anything but that.

Speaker 4

Andy and team has done a great job managing this market both in the good and bad times. So I'll be looking forward to that. And in the meantime, I wish you continued best of luck.

Speaker 2

Thank you, Lucas.

Operator

Our next question comes from Nathan Martin with The Benchmark Company. Please proceed with your question.

Speaker 5

Thanks, operator. Good morning, everyone. Maybe just digging in a little bit more on Lucas' last question. Obviously, the market is experiencing quite a bit of turmoil right now. Andy, you just touched on that.

Speaker 5

I mean, it sounds like that's where your focus is, the market is looking for signals there. But at what point do you feel like you could get comfortable restarting the buyback? Is it a bigger buffer in cash? Is it the stock price looking opportunistically there? Just any other thoughts would be great.

Speaker 2

Yes, I think that and good morning, Nate, by the way. I think to put a finer point on it, it's really going to be driven by the coal markets, because as long as we remain in this band that we're bouncing around and because if you I mean, right now at a roughly 2.15 PLV, we're at the lowest point we've been in 2 years. And if you exclude by my math about an 11 day period in 2022,

Speaker 5

this is

Speaker 2

the lowest price in 3 years. And so we're back into some territory we've not had to deal with for quite a while. And that's as long as we remain in that band, I think we're going to have to stay focused on keeping the balance sheet strong, giving ourselves plenty of buffer because another turn down and you could quickly go from producing some cash to producing no cash or consuming cash. And that's going to be the real indicator of when it's time for us to start jumping back into the capital returns.

Speaker 5

Makes sense. Appreciate those thoughts, Andy. And I guess thinking about the cost side of the equation, where do you guys think that marginal cost level is? I think, Dan, you mentioned maybe we've seen some tons kind of being left in the ground at this point. Are you guys considering any of that at this point given where the PLV price is or where the U.

Speaker 5

S. Indices are? Also any more commentary around your inventories? I think Dan you said you're pretty comfortable at today's level. Any opportunity to draw them down more or are you looking to build at this point?

Speaker 5

Thanks.

Speaker 2

Nate, I'll get the first piece. As far as marginal cost and the cost curves, I know there's been a lot of conversation about that. I do think that the curve number, the call it 200 to 225 zip code is probably reasonable for where the all in cost is sitting globally. I don't think that kind of data is terribly predictive on how companies are going to behave, because it doesn't take into account the relative strength of their balance sheets. It doesn't take into account their ability or their desire to capture market share, while they might be losing a little bit of sacrificing some EBITDA.

Speaker 2

And it also doesn't necessarily take into account fixed and variable cost splits, which also can become pretty important when you're looking at thinking about idling or shutting down an operation. So at this point, we're still comfortable. We're moving the tons that we're producing at margins that we feel are acceptable. So we'll just we'll continue doing that until the situation dictates otherwise. But as far as inventory levels, Dan, do you have anything else on that?

Speaker 3

Not particularly, Andy. Nate, we're certainly not looking to build inventories. I would say that if we don't find the market to our liking, we're not afraid to build a little bit of inventory, particularly at DTA. But we've just been able to move along maintaining the inventories we have. I'd say we're comfortable with it, but we don't have any specific plans to build or reduce more than we already are.

Speaker 3

We already our guidance is our guidance and we hit that. We'll maintain comfortable inventories.

Speaker 2

Yes. And Nate to add one more thing on to that, that's just offering my appreciation and congratulations to all the 4,000 plus employees of Alpha for what I believe actually was I called it a solid quarter. It was better than a solid quarter from execution. With this kind of market, it's easy for people to lose focus. Sometimes you see your injury rates creep up or your violations, environmental, something goes sideways usually when we're in these markets like this because people can feel the stress.

Speaker 2

And both the sales and the operations team have done an incredible job maintaining a sprint pace just to keep things moving along. And it's a shame that the market is not giving us something that can really show what that kind of performance look like from a financial standpoint. But that being said, the people doing the work have done an incredible job and I just want to make sure that's not lost.

Speaker 5

Appreciate that guys. And then maybe Jason one for you not to lead you out. I think in your prepared remarks you called out some recent renegotiations with suppliers that should result in improving those costs even more. I mean, obviously, in the second quarter, the net segment cost number was below your full year guide. So any way to quantify how much those recent improvements with suppliers could help the costs for the full year?

Speaker 5

And maybe if we take a step back, kind of where in that full year range would you guys expect cost to come in based on let's just say the futures price which is around $2.40 a metric ton or so for the Aussie benchmark today?

Speaker 2

Well, I don't think I can answer all that at this point. But I can tell you that it's a grueling process. Our suppliers have they've dealt with the exact same problems that we have since COVID with inflation and just prices rising and labor shortages and they have all the exact same reasons or excuses if you will as the coal companies do. So there's a lot of back and forth or several meetings with each vendor and they have to go to their suppliers and kind of do the same thing. So it's a seems like a months long process to gain an inch, but we are starting to see things move in a positive direction.

Speaker 5

Okay. Appreciate that. Any thoughts around where pricing excuse me, cost could land in that full year range, just assuming kind of a flat $2.40 price?

Speaker 2

Yes. I think we're just going to stick with our guidance at this time. And if there's reason to update it later in the year, we'll do that.

Speaker 5

Okay. Got it. Yes, just curious because again you guys did a fantastic job this quarter kind of coming below that range at that price. So Okay, I'll leave it there. Appreciate the time guys and best of luck in the second half.

Operator

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

Speaker 2

Well, thanks everyone for joining the call today. We appreciate your interest in Alpha as always and 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 Q2 adjusted EBITDA of $116 million on shipments of 4.6 million tons, though metallurgical coal realizations declined due to softer steel demand.
  • Cost of coal sales in the Met segment decreased to $109.31/ton, driven roughly equally by lower sales-related expenses and reduced third-party coal purchases.
  • Global steel demand weakness and geopolitical uncertainty have pressured metallurgical coal indices, prompting Alpha to focus on preserving its franchise amid market volatility.
  • Total liquidity increased by nearly 25% to $356.7 million, and no share repurchases occurred in Q2 as the company remains cautious on capital returns.
  • Negotiations for 2025 domestic contracts are underway, and Alpha maintains its full-year 2024 shipment volume guidance, with updates on pricing commitments expected later this year.
A.I. generated. May contain errors.
Earnings Conference Call
Alpha Metallurgical Resources Q2 2024
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