Good morning, ladies and gentlemen, and welcome to the Peabody Energy Q2 2020 Earnings Call. At this time, all participants are in a listen only mode. Following today's presentation, instructions will be given for the question and answer session. As a reminder, this conference is being recorded today, August 5th. 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 Q2 2020. With me today are President and CEO, Glenn Kellow and CFO, Mark Sperbeck. 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, and good morning, everyone. 1st 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. So 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 still 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. Furthermore, slower economic activity continues to weigh on large importing nations. In particular, India's thermal coal imports are down 20,000,000 tons from the prior year through June. While 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. Even though we've seen some supply responses, seaborne thermal coal prices remain depressed. Indonesia exports are down 17,000,000 tons through June and U. S. Exports down 7,000,000 tons through May.
In addition, 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% 9% of the generation mix respectively.
Preliminary data for July indicates improved coal generation And 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, scale back our workforce and reduce the number of units in operation. I'll go into a bit of the details.
From a workforce perspective, we've eliminated an additional 4 50 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 access 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 3 production units, which includes trucks, graders, dozers and supporting equipment. And 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 2nd 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 tonne 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 PRV Colorado joint venture with Arch and options for North Goonyella. Closing arguments in the joint venture hearing will be held next week. While we've 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 Q3. We also recently concluded the first round of the North Goonyella commercial process in which we continue to have interest from multiple counterparties. The 2nd 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. 2nd quarter revenues declined 45% from the prior year to $627,000,000 on significantly lower volumes and depressed pricing. Both seaborne demand and pricing were impacted by the ongoing COVID-nineteen 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. 2nd quarter results include a $1,400,000,000 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 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 Colorado joint venture with Arch. As litigation continued during the quarter, we incurred $13,000,000 in transaction costs for the proposed joint venture. As Ben mentioned, we've taken a number of actions across the business to improve our cost structure, resulting in restructuring charges of $16,500,000 in the quarter.
Some of the benefits from those actions are seen in the reduction in SG and A by 35% from the prior year. Year to date SG and A expense of $50,000,000 reflects the lowest level for a comparable period since 2003. Turning now to segment results. Let's begin with seaborne thermal. We sold 4,600,000 tons with 2,500,000 tons exported.
Year to date, export sales have totaled just over 5,000,000 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 and 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, Capobella and Moraville 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, Capa Bella experienced a planned drag line 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 twenty twenty.
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 Q1, cost per ton came down 1.02 as we realized the benefit of set room regained in the Q1 and continued to reduce repair and maintenance expense, increased productivity, optimized 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 shipped at an annual pace of 83,000,000 tons compared to 2019 sales of 108 1,000,000 tons. Yet, we quickly scaled down operations to meet lower customer demand, all while delivering lower cost per ton.
The other U. S. 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 $849,000,000 of cash $926,000,000 of liquidity, which marks a $262,000,000 reduction from March 31. During the quarter, dollars 48,000,000 of cash was used for operating activities, including about $25,000,000 of net interest payments and $15,000,000 in ARO cash spend. An additional $79,000,000 was used for investing activities, including $55,000,000 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 Wilpin Young line and the related legal entities as unrestricted subsidiaries in accordance with the negotiated terms of our senior notes and credit agreement. Year to date, Loepen Young 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 further reduced full year 2020 SG and A by 10,000,000
dollars to an estimated $110,000,000
We've also cut capital expenditures by another $35,000,000 to 200,000,000 dollars and deferred $10,000,000 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 the 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 PRD volumes in the second half of the year to increase relative to the first half of the year.
We have 46,000,000 tons committed for second half delivery versus first half shipments of 41,000,000 tons. Other U. S. Thermal shipments are expected to largely be in line with the first half of the year. We also have 2,100,000 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 actions 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?
Thank you, sir. Ladies and gentlemen, at this time, we'll now begin the question and answer Mr. Matt Levin from Benchmark Company, please ask your question.
Okay. Thanks very much. A couple of 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?
Yes. Mark, this is Julie. So obviously, you're right. We've suspended guidance there. It's largely going to be a factor of what demand is, right?
And what we've seen here recently has been met coal demand fall off quite a bit more. Steel production year to date through Zoom is down 14% excluding China. So 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, but it's really just a pretty big unknown at this point.
And in remarks, I'd mentioned the focus on the longwall operations. So 2 of our 3 longwalls are met assets. And as I said, we've been particularly focused on the fixed costs associated with those mines with reduced demand levels. So that continues to be a focus of our ongoing program.
Yes, got it. Absolutely. And it sounds like there's a lot going on in the Q2 that might be one time. I know
you guys had talked in
the past about getting to kind of a $95 cost number. It doesn't look like that would happen this year, but I'm just curious if there's the potential to get costs below $100,000,000 at some point in the back half of the year.
Well, certainly, I'd see over time, we want to target that level, but that would assume that we'd be operating at capacity or at normal rates. And as Julie said, that's going to be dependent upon talking to our customers, working with our customers and what the Durand situation is in the second half of the year. So we're not really able to predict that at this point.
Lucas Pipes from B. Riley FBR. Please go ahead with your question.
Burn. What are your comments on that? Are you seeing increased inbounds with economies opening back up versus still included, especially
Yes. 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? Yes.
Look, I think for us, clearly, China importing steel is probably a general positive, but we do have lockdown securing 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 out. 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 coal 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.
So still a lot of uncertainty is the picture we're trying to paint.
Okay. I appreciate that. And then I wanted to follow-up on Mark's question regarding the whole cost. I didn't hear it or see it anywhere in regards to the number on lower what would then accounts for the lower net sizable value kind of with the net full cost, what's the amount per tonne in terms of attributable to lower net realized value?
Yes, Lucas, thanks for the question. We had net realizable value adjustments pretty much across our met portfolio. Round numbers, it's probably about $20,000,000 or $20 a ton impact.
Now 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 reverse that essentially. So 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 stock pricing as of the end of the quarter.
Mr. Masterfield from Bank of America, please go ahead with a question.
I'm not looking at the plan for any changes, but just wondering how you accomplished the redesignation within the confines of these ventures. Did that come in through the permitted $150,000,000 per year of RP carve out that you were able to redid and make a little punch on?
Matt, it's Mark. I heard most of your question where we're having some trouble with the line. But what I would say is that effectively in designated Wilpin Young 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, but I will reiterate that everything we've done is consistent with documents.
All right. And then on the prepared remarks of additional collateralization, by my math, you should have about $125,000,000 more available to recover. Was that the additional cash collateral you were forced to post in this quarter?
So we had about $80,000,000 of collateral that was posted during the second quarter. Was there something additional to that?
One moment, please. Mr. Fields, please go ahead.
Okay. Yes. Okay. Thank you. And then 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 Q3, there was about $50,000,000 that we have posted here in July. We don't anticipate significantly more at present time. However, we have those negotiations and the surety have the right, the contractual right to request additional collateral up to 100% of the share e bond amount.
And Matt, I think you're aware, but those are generally in the form of letters of credit, not cash collateral postings.
Mr. David Gabriel from BMO Capital Markets, please go ahead with your question. Hi.
I hope you can hear me. I just have a question regarding the changes to the designation of the subsidiaries at Wolfingjohn. Does that mean potentially divesting that asset is also under consideration?
No, I'll say that the designation of a restricted 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. And then in terms of the and I apologize, I think I missed the answer here, but the met coal cash cost in the Q2, was it just mentioned that there was a $20 negative headwind in the Q2 and does that go away? All else equal, cash cost should be down $20 a ton in the Q3 in that?
The question was what was the impact of the net realizable value adjustments inventory that we recorded during the Q2. That impact is approximately $20,000,000 per ton. $20 per ton. $20 per ton. I said that twice now.
Dollars 20 per ton in the 2nd 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.
And so just a little bit of extra color there, that is based on a ton sold, right, which were down substantially, so that we only sold about 1,000,000 dollars or 1,000,000 tons. Now I'm doing the same, 1,000,000 tons in the quarter versus 2,000,000 tons in the prior quarter. So $20,000,000 impact roughly, but on a per ton basis, it was outsized given the weak demand that we saw in the quarter.
And 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 Vitorioso from Jefferies. Please go ahead with your question.
Yes. Thanks for the question. Could you discuss or let us know if
there are
any covenant issues with your credit facility? And clearly, you've got a bunch of cash, but you're using the credit facility to post collateral on some of those other liabilities. So are there maintenance covenants or any other covenant issues that are coming down the pipe on that facility?
Matt, yes. 1, I'll just reiterate or confirm, we are in compliance with all the covenants in our debt documents. The covenant that is probably what you're referring to is the net leverage ratio of 2 times. And 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. And then I guess I'll just make more of a statement than a question. I mean, 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. But 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. So maybe just consider that.
Thanks.
Thanks, Matt. I'll just 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.
Yes. And I think it's important also to recognize that the market landscape has changed considerably and drastically within just the last 6 months of the year. I mean, even if we just look at net prices in Q2 versus of 'nineteen versus Q2 of 'twenty, I mean we're talking about over $200 a ton versus $118. And so 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. And then COVID has obviously added to that uncertainty as well.
So we're taking multiple steps across all areas of the business. Glenn has talked quite a bit today about the cost repositioning program. We've taken drastic actions on that front as well. I mean over the past 18 months, we've eliminated 24% of our headcount. So 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 Sheer 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 costs in the quarter other than the lower volume impact with the conveyor system upgrade, peak sequencing and the planned dragline outage. Are all of these situations kind of behind you at this point? Or will some of these impacts persist into the Q3?
Yes. So the dragline outage at Coppabella was 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. So 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 envisage, but 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 in our ability to respond particularly with fixed costs. We've taken steps across really the entire platform. But 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. And then staying on costs, but moving to thermal and the PRB, costs were pretty impressive this quarter, but I think part of that was due to less maintenance expense. Do you kind of see this cost level as being repeated more through the remainder of the year?
Or should we expect it to be higher in the 3rd or 4th quarters?
Well, I'm not sure we singled out maintenance expense. But look, the team has done a fabulous job across our entire U. S. Thermal platform and being able to respond to significantly lower volumes. We made we started to when we saw low natural gas prices and the impact on demand that was occurring in that Q1, 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. But I think clearly the U. S. Thermal activity has really stepped up. And I would say that what we are looking at is sustainable cost improvement.
Now it's fair to say that we've got some particularly our surface operations, we've got some tailwinds with respect to lower diesel prices. But we are looking notwithstanding that we are looking at ways in which we can capture sustainable costs not only for the next 6 months but over the life of mine plants.
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 reducing your quality products and for their heightened commitment to health and safety. Even with multiple changes to the business, we'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. And operator, that concludes today's call.
This concludes the Peabody Energy Q2 2020 earnings call. Thank you for participating.