Good morning, ladies and gentlemen, and welcome to the Peabody Energy Q2 2020 earnings call. I would now like to turn the conference over to Julie Gates. Please go ahead, ma'am.
Thank you. Good morning, and thanks everyone for joining Peabody's earnings call for the second quarter of 2020. With me today are President and CEO, Glenn Kellow, and CFO, Mark Spurbeck. Within the earnings release, you'll find our statement on forward-looking information, as well as a reconciliation of non-GAAP measures. We encourage you to consider the risk factors referenced there, along with our public filings with the SEC. I'd like to now turn the call over to Glenn.
Thanks, Julie. Good morning, everyone. First and foremost, I'd like to thank our employees for their continued dedication to providing essential products that are vital to so many in these uncertain times. As always, the health and safety of our employees is paramount to everything we do. We continue to operate under robust protocols and procedures in line with the CDC and other health department guidelines to help mitigate against COVID. Obviously, COVID has had a significant impact across the global economy.
Specific to coal supply and demand, impacts are key to understanding the backdrop in which we are currently operating. Today, I'd like to start with an overview of current market conditions and then move into actions we have taken to reposition our cost structure. I'll then provide an update on key initiatives before turning the call over to Mark to cover the financials.
While the global economy continues to navigate through the pandemic, the timing, scope, and scale of the recovery remains uncertain. Idle steel capacity across Europe and the Asia Pacific has greatly impacted metallurgical coal demand. Year-to-date through June, global steel production was down 6%. Excluding China, global steel production was down 14%. As a result, demand for major met coal importing countries, excluding China, has been down year-to-date. While we have seen some supply responses, prolonged uncertainty has resulted in continued pressure on seaborne metallurgical pricing. Highlighting how uncertain this market is, China was a net importer of steel for the first time in 11 years in June, that was even with record daily crude steel production during the month. On the thermal side, weak overall electricity generation and competition for both natural gas and LNG has resulted in challenging fundamentals as well.
Slower economic activity continues to weigh on large importing nations. In particular, India's thermal coal imports are down 20 million tons from the prior year through June. Chinese thermal coal imports were up earlier this year, uncertainty around the imposition of import restrictions have begun to impact demand. May thermal coal imports from China were down 20% year-over-year. We've seen some supply responses, seaborne thermal coal prices remain depressed. Indonesia exports are down 17 million tons through June, and U.S. exports down seven million tons through May. We'd expect further supply cuts as most major seaborne suppliers have revised guidance lower. In the U.S., COVID disruptions have been coupled with extremely weak natural gas prices and growth in renewable generation, further pressuring coal demand and potentially accelerating the secular demand decline already underway.
Through June, total load was down 4%, while coal generation fell 31% to just 17% of the generation mix. Natural gas and wind both took share, rising to 39% and 9% of the generation mix respectively. Just recently, we've seen an uptick in natural gas prices that if that holds, should provide a more favorable backdrop for coal and should the railroads be able to flex up to the increased demand. Notwithstanding this, the overall weak demand, coupled with depressed pricing, has required us to continue to aggressively pursue our cost repositioning program. To date, we've made significant progress, and we have needed to, yet still more needs to be done. We have temporarily idled production at some mines, adjusted shift schedules, scaled back our workforce, and reduced the number of units in operation.
I'll go into a bit of the details. From a workforce perspective, we've eliminated an additional 450 positions since April. In total, since the beginning of the year, we've scaled back our global workforce by 15% as we continue to adapt to dynamic conditions. Over the past 18 months, our global headcount has declined by 24% due to a combination of actions taken as well as natural attrition. Where possible, we furloughed workers, allowing them to retain benefits while we adjust to lower demand profiles. Most notably, in mid-June, we furloughed about 280 employees and contractors at our Wambo underground mine. We have restructured the Coppabella and Moorvale mines to operate as a single mining complex. We have parked three production units, which includes trucks, graders, dozers, and supporting equipment. As a result, we've also scaled back our workforce by about 15% from the complex.
We'd expect these structural changes to result in increased efficiencies moving forward. In part, due to these benefits, 10 out of 17 currently owned and operated mines have demonstrated cost per ton improvements when comparing second quarter actual results to the financial year 2019 performance, and that's even with substantially lower volumes.
These improvements are most notable across our surface operations that quickly responded to and overcame rapidly declining demand. Cost per ton at our surface operations improved 6% compared to the prior year, even as volumes dropped nearly 30%. Our underground room and pillar operations have also responded well to challenging conditions. Our longwall operations, however, have not been able to respond as quickly to lower demand. As you could imagine, slowing down production in a longwall operation is a bit more difficult given complexities with fixed costs and often the geotechnical desire to advance the wall.
While we have made significant progress, we know we cannot stop here. We will continue to pursue aggressive actions, particularly at our longwall operations, to improve our cost performance across the entire platform. We also continue to advance several commercial processes, including the pending PRB Colorado joint venture with Arch and options for North Goonyella. Closing arguments in the joint venture hearing will be held next week.
While we have always believed in the benefits the joint venture would bring to multiple stakeholders, the case has only grown stronger in 2020. Challenging demand conditions have underscored the need for this transaction to remain competitive with other fuel sources. We look forward to the judge's ruling by the end of the third quarter. We also recently concluded the first round of the North Goonyella commercial process, in which we continue to have interest from multiple counterparties.
The second round is underway and we look forward to providing an update at the appropriate time. We will continue to weigh these options against strategic development alternatives. Market conditions and the status of the commercial process are continually monitored to determine the timing of any incremental spend related to ventilation or reentry of Zone B. With that, I'll now turn things over to Mark in his first official call as Chief Financial Officer to cover the quarterly results.
Thanks, Glenn, and good morning, everyone. I'll start today by walking through a few of the notable items in the financials. Second quarter revenues declined 45% from the prior year to $627 million on significantly lower volumes and depressed pricing. Both seaborne demand and pricing were impacted by the ongoing COVID-19 pandemic. U.S. thermal volumes and prices were negatively impacted by continued weakness in natural gas prices. In addition, the closure of Kayenta in 2019 contributed to lower year-over-year revenues and volumes. Second quarter results include a $1.4 billion impairment charge at our North Antelope Rochelle mine, despite it being a fabulous asset. Lower long-term natural gas prices, changes in timing of coal plant retirements, and continued growth in renewable generation led us to change our long-term life of mine assumptions, resulting in the impairment charge.
While we still believe coal is essential to a reliable energy grid and that our PRB assets are best positioned to serve that demand, as witnessed by our 19% Q2 margins in the PRB, we do expect coal's long-term share of the U.S. generation mix to remain below prior year levels. Competition from other fuel sources, particularly natural gas and wind, remains fierce, underscoring the case for the PRB and Colorado joint venture with Arch Coal.
As litigation continued during the quarter, we incurred $13 million in transaction costs for the proposed joint venture. As Glenn mentioned, we've taken a number of actions across the business to improve our cost structure, resulting in restructuring charges of $16.5 million in the quarter. Some of the benefits from those actions are seen in the reduction in SG&A by 35% from the prior year.
Year to date, SG&A expense of $50 million reflects the lowest level for a comparable period since 2003. Turning now to segment results. Let's begin with Seaborne Thermal. We sold 4.6 million tons with 2.5 million tons exported. Year to date, export sales have totaled just over 5 million tons at an average price of $56 per short ton, largely in line with the average Newcastle benchmark price over the same period. The Seaborne Thermal segment responded well to an extremely weak pricing environment by delivering cost per ton of sub $30, leading to 17% adjusted EBITDA margins. Shipments from our seaborne metallurgical operations were nearly half that of prior year levels as COVID disrupted global demand, and we continue to be challenged by production constraints.
Lower volumes, particularly at Shoal Creek, Coppabella, and Moorvale, contributed to significantly higher cost per ton of $121 for the segment. In addition, unfavorable accounting impacts related to net realizable value adjustments increased met costs. Albeit slower than anticipated, we are continuing to progress the mainline conveyor system upgrade at Shoal Creek. We've also experienced lower yields at the mine, further impacting coal availability.
During the quarter, Coppabella experienced a planned dragline outage on time and budget, which also impacted costs. Cost at Moorvale improved significantly in June, following elevated overburden ratios earlier in the year. Given Moorvale's geology, there are times in which we will be primarily removing overburden, as we were for parts of the first half of 2020. We expect to remain on coal for the remainder of the year. Our U.S. thermal assets responded extremely well to rapidly declining demand, reporting average adjusted EBITDA margins of 20%.
In the PRB, coal shipments declined 28% compared to the prior year, primarily due to continued low natural gas prices impacting demand. Regardless, costs improved 5% to $9.26 per ton. Compared to the first quarter, cost per ton came down $1.02 as we realized the benefit of room and pillar regained in the first quarter and continued to reduce repair and maintenance expense, increase productivity, optimize blending of in-pit inventory, and began to realize benefits of headcount reductions taken earlier in the quarter. These cost improvements contributed to the PRB segment earning 19% adjusted EBITDA margins in the quarter. To put the PRB volume decline in perspective, year-to-date, we have shifted an annual pace of 83 million tons compared to 2019 sales of 108 million tons. Yet, we quickly scaled down operations to meet lower customer demand, all while delivering lower cost per ton.
The other US thermal segment also responded well to challenging industry conditions, leading the company in adjusted EBITDA margins at 22%. Despite volume declines, cost per ton remained in line with the prior year as the team further streamlined its operations by reducing spending on materials, services, repairs, and labor, among other items. Let's turn now to the balance sheet and cash flow. We ended the quarter with $849 million of cash and $926 million of liquidity, which marks a $262 million reduction from March 31st. During the quarter, $48 million of cash was used for operating activities, including about $25 million of net interest payments and $15 million in ARO cash spend. An additional $79 million was used for investing activities, including $55 million for capital expenditures.
In addition to cash usage for operational needs, availability under the accounts receivable securitization facility declined, and we posted additional collateral for certain long-term obligations. To enhance our financial flexibility, we are undertaking a process to evaluate various strategic financing alternatives, including a debt for debt exchange, among other options. In line with this, we've designated our Wilpinjong Mine and the related legal entities as unrestricted subsidiaries in accordance with the negotiated terms of our senior notes and credit agreement. Year-to-date, Wilpinjong has accounted for 74% of total seaborne thermal segment adjusted EBITDA. Given this process is ongoing, we will withhold further comment and refrain from answering questions on this topic today. Given continued uncertainty in global markets, we are continuing the suspension of full-year 2020 guidance. Consistent with last quarter, there are a few known factors I'd like to discuss.
Cash preservation remains key and is something we are focused on across the business. We've further reduced full-year 2020 SG&A by $10 million to an estimated $110 million. We've also cut capital expenditures by another $35 million- $200 million and deferred $10 million of ARO cash spend to future periods based on operational sequencing. Peabody has an outstanding reclamation track record and remains committed to restoring the land in a timely manner and in full compliance with regulatory requirements. Shifting to contracted sales. While sales volumes will ultimately be dependent upon general economic conditions, weather, natural gas prices, and other factors, as we sit here today, we expect PRB volumes in the second half of the year to increase relative to the first half of the year. We have 46 million tons committed for second half delivery versus first half shipments of 41 million tons.
Other U.S. thermal shipments are expected to largely be in line with the first half of the year. We also have 2.1 million tons of export seaborne thermal sales already priced for the remainder of the year. As a reminder, we also sell export volumes on a spot basis. Moving forward, we believe it's necessary to take further action to strengthen our cash flows. Across the business, we are focused on driving improvements to counter the impacts of lower demand and pricing and better position the company for the future. I'd now like to turn the call over for questions. Operator?
Mr. Mark Levin from The Benchmark Company, please ask your question.
Okay. Thanks very much. Couple quick questions. Trying to stay away from guidance because I know you guys have suspended it, but maybe some thoughts on how to think about net coal volumes and cost in the back half of the year to the extent you're able to comment.
Yeah, Mark, this is Julie. Obviously you're right. We've suspended guidance there. It's largely going to be a factor of what demand is, right? What we've seen here recently has been met coal demand fall off quite a bit more. Steel production year-to-date through June was down 14%, excluding China. That's a pretty drastic move. We're continuing to work with our customers, and we'll continue to work with them to meet their demands. It's really just a pretty big unknown at this point.
In remarks, I'd mentioned the focus on the longwall operations. Two of our three longwalls are met assets. As I said, we've been particularly focused on the fixed costs associated with those mines with reduced demand levels. That continues to be a focus of our ongoing program.
Yeah, got it. Absolutely. It sounds like there's a lot going on in the second quarter that might be one time. I know you guys had talked in the past about getting to kind of a $95 cost number. Doesn't look like that would happen this year. I'm just curious if there's the potential to get costs below $100 at some point in the back half of the year.
Well, certainly I'd see over time, we'd want to target that level, but that would assume that we'd be operating at capacity or at normal rates. As Julie said, that's going to be dependent upon talking to our customers, working with our customers, and what the demand situation is in the second half of the year. We're not really able to predict that at this point.
Mr. Lucas Pipes from B. Riley FBR, please go ahead with your question.
Thank you. Good morning. I wanted to also ask a little bit more about longwall and maybe sort out from a market perspective. Some of your peers who reported already, they indicated that kind of customer interest is starting to return. What is your comment on that? Are you seeing increased inbounds with economies opening back up, or is it still with you that, especially kind of with the Asia Pacific market with restrictions in China, particularly specifically around met coals?
Yeah, if I understand the question, because we didn't quite hear. If I understand the question you're asking, you're hearing other folks potentially talking about customers being a little bit optimistic about the second half. Is that the sort of general nature of the question?
That's correct.
Yeah. Look, I think for us, clearly China importing steel is probably a general positive, but we do have lockdowns occurring and idle capacity occurring across much of our target customer markets. We are starting to have the same sorts of conversations you're hearing, but I think it's too early to sort of call that. I think there's still a lot of uncertainty in the market and clearly tough conditions out there for seaborne metallurgical coal, and that probably is reflected in why it's been range-bound. I'd also probably indicate that a lot of unknowns around China and the import restrictions on met coal or coals going into China as well, and how quickly those targets are going to be held and would they be relaxed in some way in the second half of this year.
Still a lot of uncertainty is the picture we're trying to paint.
I appreciate that. Then I wanted to follow up on Mark's question regarding met coal cost. I didn't hear it or see it anywhere in regards to the number on what the net accounts for the lower net realizable value. Kind of with met coal cost, what's the amount per ton between coal to lower net realizable value?
Yeah. Lucas, thanks for the question. We had net realizable value adjustments pretty much across our met portfolio. Round numbers, it's probably about a $20 million or $20 a ton impact.
With that being said, it's a non-cash adjustment, I'd just point out, and then when that coal is essentially sold, it would be reversed out essentially. It's just an accounting adjustment, but it did have a sizable impact on our cost performance, no doubt about it. Certainly underscoring what tough market conditions we're in, given it's based off of spot pricing as of the end of the quarter.
Mr. Matthew Fields from Bank of America, please go ahead with your question.
Yes. Good morning. We're going to be your plan for any exchanges, but just wondering how you accomplished the redesignation within the confines of these ventures. Did that come in through the permitted 150 per year of RP carve-out that you were able to redesignate coal from?
Matt, it's Mark. I heard most of your question. We're having some trouble with the line. What I would say is that we effectively designated Wilpinjong Mine as an unrestricted subsidiary in accordance with the negotiated terms of the senior notes indenture and credit agreement. We don't discuss and disclose individual baskets. I will reiterate that everything we've done is consistent with the negotiated terms of the documents.
All right. On the prepared remarks in terms of additional collateralization, by my math, you should have had about $125 million more available than fall. Was that the additional cash collateral you were forced to post in this quarter?
We had about $80 million of collateral that was posted during the second quarter. Was there something additional to that?
One moment, please. Mr. Phillips, please go ahead.
Okay. Yeah. Okay, thank you. Do you anticipate having to post any more collateral going forward throughout the year?
We routinely have negotiations and discussions with our surety providers. Early in the third quarter, there was about $50 million that we have posted here in July. We don't anticipate significantly more at present time. However, we have those negotiations, and the sureties have the contractual right to request additional collateral up to 100% of the surety bond amount.
Matt, I think you're aware, but those are generally in the form of letters of credit, not cash collateral postings.
Mr. David Gagliano from BMO Capital Markets, please go ahead with your question.
Hi, I hope you can hear me. I have a question regarding the changes to the designation of the subsidiaries at Wilpinjong. Does that mean potentially divesting that asset is also under consideration?
No. I'll say that the designation of a restricted or unrestricted subsidiary has no implications of whether or not that asset would be for sale. We have no current plans today to have that asset for sale.
Okay, thanks. I apologize, I think I missed the answer here, but the met coal cash cost in the second quarter, was it just mentioned that there was a $20 negative headwind in the second quarter, and does that go away? All else equal, cash cost should be down $20 a ton in the third quarter in met?
The question was what was the impact of the net realizable value adjustments to inventory that we recorded during the second quarter. That impact is approximately $20 million per ton.
$20.
$20 per ton. I said that twice now. $20 per ton in the second quarter. It's a non-cash charge. Effectively, the inventory that we have on the books is valued at the realizable price, less any cost to get it to market.
Just a little bit of extra color there. That is based on a ton sold, which we're down substantially, so that we only sold about $1 million per ton or 1 million tons. Now I'm doing the same. 1 million tons in the quarter versus 2 million tons in the prior quarter. $20 million impact, roughly, but on a per ton basis, it was outsized given the weak demand that we saw in the quarter.
Going forward, just to reiterate, it's going to be a function of demand or sales that we take in the second half of the year, and also in particular, I keep going back to our longwall operations, their ability to continue to respond to changes in demand profile.
Mr. Matt Vittorioso from Jefferies, please go ahead with your question.
Yeah, thanks for the question. Could you discuss or let us know if there are any covenant issues with your credit facility? Clearly you've got a bunch of cash, but you're using the credit facility to post collateral on some of those other liabilities. Are there maintenance covenants or any other covenant issues that are coming down the pipe on that facility?
Matt, yes. One, I will just reiterate or confirm, we are in compliance with all the covenants in our debt documents. The covenant that is probably what you are referring to is the net leverage ratio of two times. As we progress through the back half of the year here, that first lien net leverage ratio will start to get tight. We are going to do whatever it takes to maintain compliance and access to the revolving credit facility.
Okay. I guess I'll just make more of a statement than a question. You guys spent a bunch of money on buying back equity a while back, and look, no one knew what conditions were going to look like in 2020. To the extent that your lenders are getting on this call asking you legitimate questions about how you're maneuvering assets and what you're going to do with your cash, I think a little bit more transparency would be appreciated just given that we didn't need to be in this tight spot. Maybe just consider that. Thanks.
Thanks, Matt. As I mentioned before, we won't discuss any specific plans today, but as I mentioned in my remarks, a debt for debt exchange is one of the many financing options that we are considering.
Yeah, I think it's important also to recognize that the market landscape has changed considerably and drastically within just the last six months of the year. Even if we just look at net prices in Q2 2019 versus Q2 2020, we're talking about over $200 a ton versus $118. If you think about the backdrop of when we were making those decisions versus where we sit here today, things have drastically changed, and nobody could have known that. COVID has obviously added to that uncertainty as well. We're taking multiple steps across all areas of the business. Glenn's talked quite a bit today about the Cost Repositioning Program. We've taken drastic actions on that front as well. Over the past 18 months, we've eliminated 24% of our headcount.
We're taking actions throughout the business and tackling it from every way that we can. No doubt about it, cap preservation remains key here, but we believe we're doing what we need to do.
Mr. Scott Schier from Clarksons, please go ahead with your question.
Hi, good morning, everyone. If I could also follow up on some of the questions about net coal costs. Some of the reasons you cited for the elevated cost in the quarter, other than the lower volume impact were the conveyor system upgrade, pit sequencing, and the planned dragline outage. Are all of these situations behind you at this point, or will some of these impacts persist into the third quarter?
Yeah. The dragline outage at Coppabella was a scheduled outage, was done on time, on budget. At Moorvale, because of pit sequencing, we expect to be on coal in the second half of the year. I guess entering the year, we knew the first couple of quarters were going to have those factors. The conveyor upgrade is taking a little bit longer at Shoal Creek than we envisaged, we would expect to conclude that in the second half of the year. I think ultimately costs are going to be more of a factor of volume that's moved and our ability to respond, particularly with fixed costs. We've taken steps across really the entire platform.
If I single out, say, Metropolitan, one of our underground mines, longwall operations, we have looked to slow that advance and take out fixed costs, work on new schedules, and reduce both contractors and workforce at that mine.
Okay, that's helpful. I appreciate that. Staying on costs, but moving to thermal and then the PRB, costs were pretty impressive this quarter, but I think part of that was due to less maintenance expense. Do you see this cost level as being repeatable through the remainder of the year, or should we expect them to be higher in the third and fourth quarters?
Well, I'm not sure we singled out maintenance expense. Look, the team has done a fabulous job across our entire U.S. thermal platform in being able to respond to significantly lower volumes. When we saw the low natural gas prices, and the impact on demand that was occurring in that first quarter, I think we've taken steps to respond. It's also part of our ongoing cost improvement program that's really across the entire business. I think clearly the U.S. thermal activity has really stepped up. I would say that what we are looking at is sustainable cost improvement. Now, it's fair to say that, particularly at our surface operations, we've got some tailwinds with respect to lower diesel prices.
Notwithstanding that, we are looking at ways in which we can capture sustainable costs, not only for the next six months, but over the life of mine plans.
There are no further questions at this time.
Well, thank you, and thank you all for participating in today's call. I'd like to especially thank our employees for their continued dedication to producing a quality product and for their heightened commitment to health and safety. Even with multiple changes to the business, you've all shown the ability to quickly adapt. I'm grateful for the unwavering focus as we adapt to our new global landscape. To all, please stay safe and well. Operator, that concludes today's call.
This concludes the Peabody Energy Q2 2020 earnings call. Thank you for participating.