Earnings Call Transcript - AMR Q2 2023

Operator, Operator

Greetings, and welcome to the Alpha Metallurgical Resources Second 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. Emily, you may begin.

Emily O'Quinn, Senior Vice President, Investor Relations and Communications

Thank you, Paul, 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 second quarter 2023 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. And with that, I'll turn the call over to Andy.

Andy Eidson, CEO

Thanks, Emily, and good morning, everyone. I'm pleased with our team's performance in the second quarter, especially in light of some challenging circumstances that we worked hard to safely and quickly overcome. Our June operational update press release detailed the circumstances around the events at our Road Fork 52 Mine in West Virginia and the Dominion Terminal Associates terminal in Virginia, so I won't go over them here. But I will say, due to the diligence of our team, each of these challenges was resolved in a satisfactory and quick manner. As our press release this morning stated, the delayed tons from DTA shipped out in July as expected, and the Road Fork 52 production levels are back to normal. We expect to be able to make up the delayed tons impacted by this issue within the third quarter. Despite these hiccups, we produced quite well during the second quarter. In terms of realizations, the metallurgical indexes have experienced volatility in recent months but have generally followed a downward trend coming off the highs of last year. I believe Alpha is well positioned to deal with this volatility in the coal markets and further softness in the indexes should that occur. On the volume side, we are fully committed at the midpoint of guidance across the portfolio for this year as we continue focusing on safely and efficiently producing this coal. For our customers, we are also looking toward next year in the best way to position ourselves for whatever may come in 2024. The current weakness in steel demand, coupled with monetary tightening in the United States and Europe and the residual inflationary pressure on supplies and materials, are all considerations in what we expect the back half of the year to look like. As these and several other geopolitical and economic factors continue influencing the coal markets over the coming months, we plan to keep our focus on producing safely, optimizing our output based on customer market needs, and controlling our costs. These are the priorities that will serve us well in all pricing environments. Turning to our capital return program, we've not only seen great success from the buyback program with more than $850 million returned to stockholders in the form of buybacks since the program's inception roughly 17 months ago, but we've also heard from our investor base with pretty certain unanimity that share repurchases are the preferred method through which they wish to have capital return. With that goal in mind, we decided to consolidate our capital return efforts into an exclusive focus on our share buyback program. The dividend program will cease following the Board's next dividend declaration and payout, both of which are expected to occur in the fourth quarter. We had previously targeted a $28 million annual dividend amount with quarterly unit dividend growth coming from the impact of the share repurchases, but this budgeted amount will now be available for redirection to the buyback program. Management will continue to execute on the Board's current $1.2 billion share repurchase authorization, provided market conditions and cash flow levels allow. I believe utilizing all available funds for the share buyback program is the most efficient option that represents the best return to our shareholders. So that's what we're going to do. With that, I'll turn it over to Todd for a discussion of our second quarter financial results.

Todd Munsey, CFO

Thanks, Andy. Second quarter adjusted EBITDA was $258 million, down from our first quarter level of $354 million. We sold 4.3 million tons in the quarter, 4.1 million of which came from our Met segment and 200,000 tons from the All Other category. Quarter-over-quarter realizations decreased for the Met segment as a whole with an average realization of $172.51 for the second quarter compared to $208.93 for the first quarter. Export Met tons priced against the Atlantic indices and other pricing mechanisms in the second quarter realized $175.69 per ton, while export coal priced on Australian indices realized $159.62. These are compared to last quarter's realizations of $211.31 per ton and $240.76 per ton, respectively, which benefited from a more robust coal pricing environment. Realization for our metallurgical sales in the second quarter was a total weighted average of $176.04 per ton, down roughly 17% against the prior quarter's $213.21 per ton. Realizations in the incidental thermal portion of the Met segment decreased quarter-over-quarter, coming in at $115.50 per ton in Q2 as compared to $137.65 in Q1, reflecting the lower thermal pricing for the period when the tons were sold. Similarly, second quarter realizations in the All Other category were $99.66, down from $109.36 in the first quarter. This quarter-over-quarter drop in realization was due to the declining pricing environment for thermal coal. Cost of coal sales within our Met segment decreased to $106.35 per ton, down from $110.56 per ton in the first quarter. Cost of coal sales in the All Other category increased quarter-over-quarter to $88.59 per ton as compared to $74.69 per ton in the first quarter. This increased cost level in the All Other category is due to expected inefficiencies associated with the Slabcamp mine's approaching end of life. SG&A, excluding noncash stock compensation and nonrecurring items, decreased to $14 million in the second quarter as compared to $17.7 million in the first quarter. Q2 CapEx was $54.9 million, down from $74.2 million in the first quarter of 2023. The lumpiness in CapEx spending we mentioned last quarter has continued, but we have reiterated our previously established CapEx guidance range of $250 million to $280 million for the full year 2023. Moving to the balance sheet and cash flows. As of June 30, 2023, we had $312.4 million in unrestricted cash, up from $222.5 million at the end of the first quarter. We had $93.1 million in unused availability on our ABL at the end of the quarter. Alpha had total liquidity of $405.5 million as of the end of June, which is net of the $155 million in share repurchases during the quarter. By comparison, total liquidity at the end of the first quarter was $315.6 million. Cash provided by operating activities increased quarter-over-quarter to $317.2 million in Q2 as compared to $177.4 million in Q1. As of June 30, our ABL facility had no borrowings and $61.9 million of letters of credit outstanding, unchanged from the prior quarter. Turning now to our committed position for the year, due to some customer deferrals, we have reduced our full year guidance for thermal byproduct coal volumes within the Met segment to 1 million to 1.4 million tons, down from the prior range of 1.4 million to 1.8 million tons. Walking through the committed table, 71% of our metallurgical tonnage in our Met segment is committed and priced at the midpoint of guidance at an average price of $189.15. Another 29% of our 2023 Met tonnage at the midpoint is committed but not yet priced, which means we are fully committed for the rest of the year at the midpoint of guidance. The thermal byproduct portion of the Met segment is 100% committed and priced at the midpoint of the new guidance range at an average price of $99.67. And we are fully committed and priced for this year in our All Other category with an average price of $90.47. Alpha's Board has declared a quarterly cash dividend of $0.50 per share, which will become payable on October 3 for holders of record as of September 15. The Board has also determined that the fixed dividend program will cease at year-end to consolidate our capital return efforts on the buyback program. Pursuant to the share repurchase program, we repurchased just over 1 million shares at a cost of $155 million in the second quarter of 2023. Since the beginning of the program, we have spent approximately $850 million to acquire roughly 5.7 million shares of Alpha's common stock at a weighted average price of $149.64 per share. The outstanding share count has been reduced by roughly 26% from the time the program began. As of July 31, 2023, the number of common stock shares outstanding was approximately 13.7 million. I will now turn the call over to Jason for some details on operations.

Jason Whitehead, President and Chief Operating Officer

Thanks, Todd. Good morning, everyone. As you've seen in our financial results, our cost of coal sale numbers have come down, but not by proportionate margin to the decrease in coal pricing over the last several months. We realized the corresponding drop in sales-related costs of severance taxes and royalties. But the other piece is of the cost equation that tends to take longer to respond to shifting dynamics. Labor, for example, is an area where we have not seen any reversal of the COVID-era inflationary pressure. The extremely tight labor market conditions are causing us to compete for talent with other mining companies, as we normally do, but we now find ourselves competing with companies outside of the industry as well. We are aggressively working to both retain our talented workforce and attract to our team the up-and-coming stars of the next generation. In addition to higher labor costs, we've also seen stickier inflationary pressure within certain aspects of our supply chain. On a positive note, many parts and services have seen their availability improve, and we continue benefiting from our own processing processes of building parts and equipment in-house. Pricing for supplies and materials continues to climb as annual contracts come up for renewal, and vendors are charging more for their products and services. We remain focused on mitigating these cost pressures to the degrees that we can. Looking at the operations portfolio, in addition to the issues at Road Fork 52, which feeds the Kepler processing plant, we experienced some geologic challenges within our Bandmill Group. The Bandmill issues have improved, and the Kepler problems were resolved early in the third quarter. Despite these interruptions, we continue to demonstrate our resiliency by flexing production at other locations within the Alpha enterprise. Our large surface and underground mining fleets, which include 64 active continuous miners, 16 production excavators or loaders, and six highwall miners. I believe that breadth of our operational capabilities gives Alpha a competitive edge by not putting too many eggs in one basket, and we work hard to optimize each piece of the organization to serve us well. As we have spoken about in previous calls, our last remaining thermal coal mine, Slabcamp, has been nearing completion. We have set a date of August 31, 2023, when this operation will mine out and idle. The workforce at Slabcamp and the Mammoth preparation plant that supports Slabcamp have been instrumental in its success. We are excited to transition these employees over to our new Rolling Thunder Deep Mine, which took its first developmental cuts on June 6 and is ready to staff up, making the timing on this transition virtually seamless. While it's something we've talked about for quite some time, Slabcamp mining out at the end of this month means Alpha will complete our years-long transition to a pure-play metallurgical coal company. I'm proud of this accomplishment and all the hard work and planning and implementation from our nearly 4,000 employees. We look forward to marking this occasion. I will turn the call over to Dan for some additional information on the coal markets.

Dan Horn, Chief Commercial Officer

Thanks, Jason, and good morning, everyone. Due to several economic and geopolitical factors, metallurgical coal markets have continued to soften as economies across the globe attempt to find stable footing. As the Russian war in Ukraine persists, inflationary impacts remain and monetary tightening continues in the United States and Europe. Economic indicators like manufacturing production data indicate that many of the regions of the world are still contracting instead of expanding. The recovery growth expected following China's reopening from its Zero COVID Policy has instead been muted. China's June producer price index continued its multi-month decline, fueling concerns of economic weakness and possible deflation in the world's second-largest economy and a significant consumer of steel. All these factors are influencing steel demand in the metallurgical indices. During the second quarter, coal market indices experienced volatility as they continued the overall downward trajectory of recent quarters. Each of the four indices we closely monitor decreased by 20% or more over the course of the second quarter. The Australian premium low-vol index decreased from $300 per metric ton at the start of the quarter to $233 on June 30. The U.S. East Coast low-vol index decreased from $284 per metric ton at the beginning of April to $227 at the end of the quarter. The U.S. East Coast high-vol A index dropped from $284 per metric ton at the start of the second quarter to $216 at the end of June. Finally, the U.S. East Coast high-vol B index decreased from $265 per metric ton on April 1 to $206 per metric ton on June 30. Following the quarter close, the three U.S. East Coast indices further softened slightly from their June 30 levels with the low-vol, high-vol A, and high-vol B indices measuring $215, $208, and $193 per ton, respectively, as of yesterday. The Australian premium low-vol index, however, has increased from its quarter close level to $246 per metric ton on the same date. The thermal market has also continued its downward trend with pricing dropping at more significant intervals than in the metallurgical markets. The API2 index fell from $146.55 per metric ton on April 1 to $122 per metric ton as of June 30. The most recent report shows the index dropping from its second quarter close levels with the API2 at $112.90 as of August 3. As we announced in late June, DTA, Dominion Terminal Associates, in Newport News experienced a mechanical failure on one of the stacker reclaimer machines, which caused roughly three days' worth of downtime and impacted approximately 250,000 tons of Alpha shipments due to vessel loading delays. These tons were previously expected to ship in the month of June, but they were made up in July once the stacker reclaimer was repaired and came back into operation. In terms of planned maintenance, DTA just successfully completed their annual dumper outage, which occurred in early July. Everything is back to normal throughput levels and operating well. In terms of getting our coal to the port, we continue to be pleased with rail performance to DTA, which has remained positive in recent months. Transportation to and from some of our other locations has been more challenged at times throughout the quarter. But we are continuing to work around those issues with some success and staying in touch with our transportation partners. Finally, as we look ahead to 2024 volumes and where our coal will be sold next year, we are in the early days of discussions with our domestic customers about contracts for the coming year. We look forward to a productive dialogue with them in the weeks and months ahead. And with that, operator, we are now ready to open the call for questions.

Operator, Operator

Our first question is from Lucas Pipes with B. Riley Securities. Please go ahead with your question.

Lucas Pipes, Analyst

Congrats on a very good quarter and also that Rolling Thunder just got a little bit louder. So a great job across multiple fronts. Then I first want to turn to the markets for a little bit. You just gave a good summary. But to hone in on the seaborne market first, what's your assessment? Is the market still a little soft here? Or are you seeing signs of strengthening dynamics, maybe in Asia? I would appreciate it if you could kind of walk us through the different regions across the globe and where are you seeing opportunities and where it may be a little stiffer headwind?

Dan Horn, Chief Commercial Officer

Lucas, this is Dan. I guess, broadly speaking, I'll say we've probably seen a bit of a summer lull in the markets, which is not unusual. A lot of buyers disappear from their desks and then go on holiday. And we've certainly seen some of that this year in the Atlantic Basin. I think opportunities into Asia have been there all year. We're pretty selective on which ones we take. There's pretty low pricing opportunities there, but I think in Alpha's case, I'll just say that I think we're pleased that our contract position this year into particularly in the Atlantic Basin and also in Asia has kind of kept us from having to participate in a lot of those lower-priced spot opportunities. So, I think we think that will continue through 2023 that we won't have to play in some of those lower markets.

Lucas Pipes, Analyst

That is helpful. You commented on the domestic negotiations. And I wondered if you could remind us how much you typically sell into the domestic market on the met coal side? And what is the flexibility to shift more into the seaborne market? I assume there might be transportation considerations. But if you could kind of walk us through some of the flexibility you may have there, depending on how negotiations shape up, I would appreciate how you might think about it?

Dan Horn, Chief Commercial Officer

Yes, Lucas, I have been in this field for a long time, and there isn't a standard number. Based on our historical data, we could potentially sell between 3 million and 5 million tons a year in the domestic market. We'll evaluate this based on customer demand and market opportunities. Therefore, I can't provide a standard figure. Additionally, in certain years, the performance of the steel industry and the production of coke and blast furnaces in the U.S. influence this as well. Regarding the flexibility in quantities, we certainly can adjust our tonnage. We possess the capability to move a significant amount of cargo by sea, and we could increase that if there are viable opportunities.

Lucas Pipes, Analyst

Very helpful, Dan. So kind of historically, what has typically taken you to the 3 million level versus the 5 million level?

Dan Horn, Chief Commercial Officer

Well, I guess those would be in years where historically the North American steel industry would be in a weaker position, with less coke production and less hot metal. But I don't necessarily see that this year. The North American industry is running pretty well, and steel pricing is holding up pretty well.

Lucas Pipes, Analyst

I appreciate it. And to turn over to the cost side really quickly, wanted to ask kind of where you're still seeing, if any, inflationary pressures and also where things might be easing from the cost side? Thank you all for your perspectives on that.

Jason Whitehead, President and Chief Operating Officer

This is Jason. Regarding costs, aside from those related to steel indexes or fuel, we continue to experience pressure across the board. The labor market is highly competitive, making it difficult to find skilled workers. Many annual contracts are approaching renewal, and we’re seeing feedback from contractors indicating they’ve been operating at a loss under current agreements and need adjustments. It’s challenging to identify one specific area, as the issues are widespread. However, I would estimate that we are more than halfway through the contract renewals for 2023. Was there a second part to your question?

Lucas Pipes, Analyst

I think you covered most of it. Are there any signs of relief in terms of costs?

Jason Whitehead, President and Chief Operating Officer

Well, so the supply chain constraints, I guess, the availability of parts and components has improved. So you would expect there'd be some lag where you'd see improvement on the other side, but we just haven't seen that yet.

Andy Eidson, CEO

Yes. And Lucas, this is Andy, if I could throw in one more broader comment on that. I've spoken with some of our suppliers and their issues are the same as ours. I mean these are all the cascading impacts of an extremely tight labor market. So as they staff up to try to get back to their regular run rates, they're paying higher wages, we're paying higher wages. In some instances, we may be competing over similar employee pools. And so it seems to all boil down to just a very constricted labor market.

Lucas Pipes, Analyst

That is very helpful. I guess with the increased investor interest, maybe you should offer internships for finance professionals or something like that. But I'll look aside that. Keep up the great work, really, really great job.

Andy Eidson, CEO

Thank you, Lucas. Appreciate you.

Operator, Operator

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

Nathan Martin, Analyst

I'm going to start on the marketing side as well, keep Dan busy here. We've kind of touched on also price moving up here a little bit to start the third quarter. CFR China price is up about $30 or so as well, likely driven by increased domestic price there in China. But we have seen, again, the U.S. East Coast net price indices creeping lower. So Dan, it would be great to get your thoughts on maybe the dynamics at play there, especially that widening spread of Aussie versus U.S. indices?

Dan Horn, Chief Commercial Officer

I believe some of this can be attributed to supply and demand. Currently, the demand in Asia is stronger than in the Atlantic, which is positively impacting Aussie pricing. As you know, a significant amount of coal in Asia is utilizing that index, and we are pleased to observe this trend. On the U.S. East Coast, increased high-vol supply is entering the market in 2023, with new mines opening in Northern West Virginia, contributing to that price spread. That's my perspective on the situation.

Nathan Martin, Analyst

Got it. That's helpful, Dan. And then I would say related to that somewhat, you guys mentioned you're now 100% committed for '23 at the midpoint within the Met segment. So it'd be really helpful maybe to get some insight into how you're thinking about Alpha's export mix in between this Alpha index ton and maybe some of the other pricing mechanisms for the back half of the year?

Dan Horn, Chief Commercial Officer

I think the breakdown that you see in our tables is probably similar to what we expect the rest of the year, Nate. I mean, shipments will come and go. There will be some vessels, some changes. But broadly speaking, the breakdown that we gave you this quarter is probably a good barometer for that going forward.

Nathan Martin, Analyst

The breakdown between the exports on…

Dan Horn, Chief Commercial Officer

Yes, we have a pretty detailed table there that breaks out on.

Nathan Martin, Analyst

Got it. Yes, it's roughly 30% or so there, about one-third to 40% to other mechanisms with the rest being domestic. That's helpful. I appreciate those thoughts. Shifting to the domestic market, you mentioned some high-volume production likely coming online towards the end of the year, but we've also seen some supply coming offline in the U.S., some of it due to operational reasons and some idling as well. Assuming tightness is beneficial for you, it would be great to hear your thoughts on supply and demand specifically in the U.S. Do you think there needs to be any more idlings? Or do you expect any more? It would be great to get some insight.

Dan Horn, Chief Commercial Officer

There's a lot to discuss. Regarding the domestic market, I don't want to elaborate too much, but I will say that the types of coals typically purchased there are generally of higher quality. Therefore, some of the supply and demand issues relevant to the seaboard market aren't necessarily applicable to the domestic market. On a global scale, the supply and demand situation remains fairly tight, and it only takes a single event to cause fluctuations. I believe all the coals entering the market will find a buyer. If they can't be sold in the domestic market, they will be sold in the seaborne market.

Nathan Martin, Analyst

Got it. I appreciate that. I think that's all I have left, guys. So, I really appreciate the time and best of luck in the second half.

Andy Eidson, CEO

Thanks, Nate.

Operator, Operator

Our next question is from Jonnathan Navarre with Cowen & Company. Please proceed with your question.

Jonnathan Navarrete, Analyst

I believe the markets are currently well-covered. I only have one question regarding the dividend. What would need to happen for the dividend to be reinstated? For example, if metallurgical pricing significantly increases, would share repurchases still be the preferred method of returning capital, or would the dividend be reconsidered in the future?

Andy Eidson, CEO

Jonnathan, it strictly has to do with how the market values our company. If we believe the valuation is appropriate, then we might consider going in that direction. But it seems like we're pretty long ways away from that. And as we saw back in the last two years, we've seen coal market prices spike to $600 a ton and $400 in everywhere in between, and company valuations didn't catch up. So, I think we're very content to get to this pure share buyback program and stay there until the market determines it's going to appropriately value us, and then we'll consider some adaptation to the program.

Operator, Operator

Thank you. Our next question is from Lucas Pipes with B. Riley Securities. Please proceed with your question.

Lucas Pipes, Analyst

Thank you very much for your time. I appreciate everyone for bearing with one more question. There has been significant media attention on the tax initiatives in Elk Valley regarding the separation of coal assets. There's considerable discussion about interest from steelmakers worldwide, including those from India and Japan. This raises an interesting point about the strategic importance of met coal. As you interact with steelmakers globally, are you noticing any interest in vertical integration? I would value any insights you could share on this, even though it's a broader question.

Andy Eidson, CEO

Yes, Lucas, I don't consider myself a mind reader, so these are just educated guesses. My data set is limited, and it's not a large sample size. Over the last 13 years, while I've been closely observing the M&A landscape, there have been many discussions about vertical integration. There has been a lot of buzz and activity, but nothing substantial has come from it. I believe these conversations tend to ramp up when the market weakens and people sense opportunity. However, until a significant event takes place, it's hard to envision it happening in the current environment. There are certainly cases where it makes a lot of sense, but I just don't know when someone will actually proceed with such an initiative.

Operator, Operator

Thank you. There are no further questions at this time. I would like to turn the floor back over to Andy Eidson for any closing remarks.

Andy Eidson, CEO

Well, thanks again, everyone, for dialing in. We appreciate your time and your interest in Alpha, and we hope you have a great rest of the day and a great weekend.

Operator, Operator

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