Good day,
ladies and gentlemen, and welcome to Peabody Energy's Second Quarter 2021 Earnings Conference 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, July 29, 2021. I would now like to turn the conference over to Alice Larenas.
Please go ahead.
Thank you. Good morning, and thanks for joining Peabody's earnings call for the Q2 of 2021. With me today are President and CEO, Jim Grech and CFO, Mark Burback. Within the earnings release, you'll find our statement on forward looking information as well as a reconciliation of non GAAP We encourage you to consider the risk factors referenced there along with our public filings with the I'll now turn the call over to Jim.
Thanks, Alice, and good morning, everyone. Peabody had an encouraging quarter as our assets are continuing to deliver solid operational performance and we're seeing robust global coal market demand With strong economic indicators as economies continue to recover from the pandemic, we are progressing on actions to expand our margins and reduce our debt levels and are well positioned to benefit from market recoveries. Higher volumes for the second half of twenty twenty one are projected at a time of robust markets. But before I cover the highlights for the quarter, I'd like to begin by thanking our global workforce for their continued focus on working safely and efficiently. I've been impressed by the dedication and efforts of our team and I'm confident we will continue to build on improvements we have achieved to date.
As planned, in every segment, our assets are expected to deliver increased production in the second half of the year as we benefit from our efforts at a time of elevated demand. Within our Seapoint Thermal platform, we expect higher volumes from the advancement of development at the Wambo JV and the Wupenjang Extension projects. Within our U. S. Thermal platform, we expect PRB demand to continue At the strong pace we have seen in the Q2 and we are positioned to deliver all customer volumes.
And in the Illinois Basin, We're expecting productivity improvements from our Indiana open cut mines due to new pit development and equipment enhancement projects. And finally, at our Met Mines, we expect higher volumes from the CMJV and from the Metropolitan Longwall reaching planned production. Now turning to the quarter. 2nd quarter results show EBITDA improvements in every operating segment As compared to prior year, as our assets are responding favorably to increased market demand with lower costs as a result of improvement efforts across the company. Our seaborne thermal segment benefited from increased prices compared to the prior year, resulting in margins of 37%.
I'm happy to say that the Wambo JV development and the Wilpinjong extension projects with over $50,000,000 of capital invested year to date are both on target to deliver higher volumes in the second half as compared to the first half of twenty twenty one. Our U. S. Thermal mines delivered another solid quarter, generating EBITDA of nearly $90,000,000 The operations continue to deliver low cost while benefiting from market recovery with more than a 20% year over year increase in volumes. In the quarter, we recognized improvements in our seaborne met segment cost with a 14% decrease versus the prior year led by productivity improvements at the CMJV.
At Metropolitan, longwall production restarted. We are confident a long term agreement with our domestic customer will be completed within Q3. And at Shoal Creek, We are on target to complete the prep plant upgrade project in mid Q3 and we continue productive discussions with the union Regarding the expired labor agreement and we continue to review options with customers as we see that there is a robust demand for the Shoal Creek product in the near term market. We also took steps in the quarter to reduce our debt levels and raise cash through the issuance of common shares. Mark will have more detail on this in his comments.
We remain committed to enhancing our platform to be resilient in all market cycles by operating within our optimal cost structures with a focus on cost improvements and a disciplined approach to volumes. Our intent is to opportunistically reduce our debt levels and bolster our liquidity as we have demonstrated with our year to date progress. Looking forward, We continue to evaluate alternatives to strengthen our portfolio to achieve our strategic objectives of reweighting investments towards seaborne markets, Maximizing U. S. Thermal asset cash generation and maintaining financial strength.
We are exploring opportunities to invest in the growth of our seaborne platform. In the second half, We expect to begin development of Mooresville South, which will transition the mine from a greater mix of PCI production to semi hard coking coal and extend the life of the mine. Based on current economics, we are also progressing plans to develop Longwall 23 panel to extend the life of Wambo Underground into 2023. Also subsequent to the quarter, We closed transactions to sell our closed Millennium and Wilke Creek mines, which will result in reduced administrative oversight and a reduction of our closed mine liabilities. And as a result, in Q3, we'll recognize somewhere between $40,000,000 to $50,000,000 with strong market indicators and increased global demand.
The seaborne thermal and metallurgical coal markets Are expected to remain tight in the near to medium term as supply response to elevated demand remains muted. New capital thermal coal pricing is at levels not In the U. S, thermal coal market indicators are favorable with increased electricity demand and high natural gas prices. Overall, electricity demand increased 4% over last year, positively impacted by weather and weak prior year comparatives due to COVID. Kohl's share of electricity generation increased to approximately 22% for the first half of twenty twenty one.
And as a result, coal inventories have fallen by approximately 17,000,000 tons. During the 1st 6 months of this year, utility consumption of PRB coal rose approximately 35% compared to the prior year. These global market conditions are showing the strength of our globally diversified asset base, which makes us distinctly unique from any other U. S. Coal company.
Our Q2 results are a great example of the value we can generate from our asset mix and then use those funds to reduce our debt levels while investing in assets that strengthen our production positions in the markets where we get the best value for our product. I'll now turn things over to Mark to cover the financials.
Thanks, Jim, and good morning, everyone. 2nd quarter results continue to demonstrate our focus on cost management and performance improvement. 3 out of 4 operating segments reported lower costs compared to the prior year and maybe more importantly, 3 out of 4 operating segments reported lower cost Compared to the Q1, most notably our seaborne thermal operations reduced cost per ton by 19% quarter over quarter. 2nd quarter revenue increased 15% from the prior year to $723,000,000 on higher volumes at our U. S.
Thermal and seaborne met This totaled $23,000,000 including $25,000,000 in unrealized losses on economic hedges. We reported adjusted EBITDA of $122,000,000 a nearly $100,000,000 improvement compared to prior year's Q2 results of $23,000,000 and double the $61,000,000 reported in the Q1 of this year, demonstrating the strength of our diversified assets. Importantly, we took further action to enhance our financial strength following the completion of the financing activities in the Q1. At June 30, we had raised net cash proceeds of $65,000,000 by issuing 8,100,000 shares of common stock under the previously announced at the market equity program. Subsequent to June 30, we raised an additional $21,500,000 and issued 2,700,000 shares.
We put much of that money to immediate work and retired nearly $84,000,000 of additional debt as of June 30. We completed open market repurchases of $53,000,000 of senior secured debt and completed multiple bilateral debt for equity exchanges, Retiring $30,900,000 of the 2022 senior secured notes in exchange for 4,500,000 shares of common stock. These transactions resulted in a net gain from early debt extinguishment of $11,800,000 in the second quarter. We reached further agreements to retire an additional $50,000,000 of debt that will settle after June 30, which is expected to result a net gain of approximately $15,000,000 in the 3rd quarter. For the year, including amounts that will settle after June 30, We will have reduced debt by a combined $176,000,000 Turning now to the segment results.
The Seaborne Thermal segment benefited from a $12 increase in average realized price per ton compared to the prior year and held costs nearly flat despite lower volume, unfavorable exchange rates and higher fuel and royalty costs. Seaborne thermal volumes were 500,000 tons lower than the prior year due to the transition to the United Wambo Open Cut joint venture and timing of shipments from Wilpinion. Wilpinion shipped 3,300,000 tons in the quarter, Including 1,200,000 export tons at average cost of $22 per ton, Wilpin Young Realized average revenue of $38 per ton resulting in an EBITDA margin of approximately 41%. Wilpin Young recorded $52,000,000 of adjusted EBITDA and had $102,000,000 of cash at June 30. Operating cash flow of $11,000,000 for the Q2 at L'Opanyang was impacted by an increase in accounts receivable and higher inventory levels.
2nd quarter met shipments were approximately 300,000 tons higher than last year due to higher demand for our PCI products from the Capobella and Warvale mines. Total costs for the Seaboard Met segment improved by over $16 per ton compared to prior year, Primarily due to a more than 20% improvement at the CMJV due to fleet optimization efforts and mine sequencing. Despite metropolitan ramp up costs from the restart of the longwall late in the quarter. In the U. S, Our mines responded well to improving demand conditions.
Our PRD mines shipped 22,500,000 tons in the quarter, A 26% increase from 2020 levels and also a significant increase from just 20,700,000 tons in the 1st quarter. Additionally, we further lowered costs compared to the prior year and prior quarter periods to just over $9 per ton despite higher fuel costs. The other U. S. Thermal mines also reduced costs by 5% compared to prior year and generated 27% EBITDA margins.
At June 30, we had $562,000,000 of cash, cash equivalents and restricted cash. In the quarter, cash flow from operating activities was negatively impacted by an increase of approximately $125,000,000 in working capital, primarily from higher accounts receivable and timing of payments. Looking ahead to the remainder of the year, will continue to be disciplined, taking advantage of increased demand, controlling costs and taking a measured approach to the balance sheet. In the second half, We anticipate higher seaborne thermal volumes and expect to ship 9000000 to 10000000 tons, between 5000000 and 6000000 export tons, of which 3000000 to 4000000 tons are unpriced. Costs are expected to nudge higher with a greater mix of Wambo underground tons and higher expected royalties.
Wilpin Young volumes are expected to increase to over 7,000,000 tons with 3,700,000 export tons and finished the year strong. Seabourn met volumes remain contingent upon a restart at Shoal Creek. Metropolitan is expected to ship up to 800,000 tons in the second half and CMJV volumes are expected To remain strong, approximately 2,000,000 tons. We anticipate lower second half costs due to higher Metropolitan longwall production and anticipate maintaining year to date cost improvements at the CMJV. We are planning for PRB volumes to be higher in the second half and essentially have all planned tons priced.
Other U. S. Thermal shipments are expected to increase compared to the first half, maintaining 16,000,000 to 17,000,000 tons for the full year. Costs for both segments are expected to be slightly higher in the second half due to mix.
We are now targeting
SG and A of 80,000,000 to $200,000,000 for the year, including major projects of $100,000,000 for significant reinvestment in our Australian based And lastly, we now expect interest expense for the year to be $190,000,000 a $10,000,000 reduction from prior guidance as a result of the early debt retirements I spoke of earlier. I'd now like to turn the call over for questions. Operator?
Thank you. Ladies and gentlemen, at this time, we will now begin the question and answer We'll go first to Lucas Pipes with B. Riley Securities.
Thank you very much and good morning everyone. Jim, Great to hear your voice and congratulations on a strong quarter.
Thank you, Luca. Good to hear your voice as well.
Maybe to start with a higher level question. Your background is on the commercial side and this is a really Strong market globally, but also it appears there's a resurgence in domestic demand. Can you touch on where you see the opportunities from a pricing perspective as you look across your portfolio?
Well, Lucas, whether it's domestically or internationally, global coal demand Is on the increase now some markets like the U. S. Over the long term are going to have a secular decline, but in total, globally we see coal demand increasing. And I'll talk about the supply side response to that, but my view is that's going to lead to increased price volatility to the upside. And the reason I'm saying that is the supply response to these increased demands is just not there like it's been historically.
The lack of capital available to the space, the trouble of permitting, the difficulty in getting workers, the elasticity Supply demand is just not what it used to be. And so domestically, we're seeing that right now. Internationally, we're seeing that right now. And I think the volatility The upside is just going to increase as we go forward because overall I see demand globally increasing with supply not keeping pace with it.
Very, very helpful. And a quick follow-up question on that. When you think about when you look across the space, a number of your peers to your point Are considering reducing their thermal coal footprint in the seaborne markets as well. What role could Peavody play in that, is M and A feasible here? And how would you think about Financing opportunities, any thoughts you can appreciate any thoughts you could share, I would really appreciate that.
Thank you very much.
Lucas, if there's ongoing M and A activities, we don't comment on them. But I would say that we are showing Our commitment to the seaborne thermal markets with the investments we're making at Wambo Underground with extending another panel there, the 23 panel, the Wilpin Young extensions that we have going on there right now. So these are our assets that we have in hand and we are putting capital into them for their expansion their continued life because we see the seaborne thermal market as a good market to be in.
Thank you. Really appreciate that. And then Last one for now to switch topics. When I look at your guidance for 2021, roughly across 3 different buckets, dollars 95,000,000 in legacy liability costs. Can you share a perspective on What the tail is to those liabilities?
Are some of them more one off? Or How should we model them going forward? Thank you very much.
Lucas, it's Mark. I think a couple of things that you're referring to in the release and in our guidance table, dollars 60,000,000 for final reclamation. I think that $50,000,000 to $60,000,000 is a pretty good run rate for the future here in the next few years as we continue to do the right thing and reclaim lands. There's also $30,000,000 of retiree healthcare. That is there that's probably a pretty good run rate as well for the next few years.
It is related to retiree healthcare and it will reduce Over time, but for the foreseeable future, I'd use that number. And then the last thing on that list, there's $15,000,000 For the settlement of the multi employer pension plan, that is actually had been a series of payments. That $15,000,000 this year was the last Payment that we have to make for that settlement. We actually completed that in July.
Very helpful. Really appreciate all the color. Best of luck and I'll turn it over. Thank you.
Thank you. We'll take our next question from Nathan Martin with The Benchmark Company.
Great, thanks. Good morning, everyone, and welcome, Jim, and Congrats on the quarter.
Thank you, Nathan.
I appreciate all the guidance you guys provided in the earnings release. I want to start with some questions, I guess, on the seaborne met side. Could you give us an idea of what the quality split It's looking like for this year between the hard coking coal and PCI products within your seaborne met volume guidance. And then maybe what kind of discounts, if any, are you guys seeing relative To those indices.
Yes, Nathan, it's Mark. I'll take a stab at this. Again, Looking at 2,000,000 tons for the CMJV in the second half and up to about 800,000 tons from Metrop, CMJV generally produces a benchmark PCI product. That's near $145 a ton today. Metrop produces really a blend of soft hardcoke semi soft coking coal and a PCI blend.
We probably realize about 80% of the premium hard coking coal benchmark from a pricing perspective on that. With a little over 2,000,000 tons on price for the remainder of the year. There's certainly some upside here in the portfolio on prices given the current conditions. There is a bit that is priced. There's probably about 400,000 tons of the CMJV currently priced at about $100 a ton.
Thank you. That will conclude our question and answer session. At this time, I'd like to turn the call
over to you.
Operator, Operator,
I think there was a follow on from Nathan, if we can give him a second.
Okay. Just a moment. Mr. Martin, your line is open.
Yes, I apologize for that guys. I was on mute. Mark, I appreciate that color. If I just look at the cost as well in seaborne met side of the business, I see full year guidance now at $93 excluding Shoal Creek. Maybe can you guys give us an idea of the ongoing costs For Shoal Creek or maybe even North Goonyella, because obviously the reported costs in the first half were over $100 a ton.
Is that still a good way to think about it on a reported basis? Or should that come down? Just any thought there.
A couple of thoughts. 1, North Goonyella is completely out. The holding costs there Had been held stable here for the last 6 months to a year. Shoal Creek is out, holding costs there about $10,000,000 a quarter so far. Obviously, we're reinvesting in that asset, looking to move forward when the opportunity presents.
In the current quarter, I'd say that we had some costs. Metrop ramping up, there's probably about a $4,000,000 Cost on a ramp up, there was also a full month of holding costs there. So there's probably $7,000,000 or $8,000,000 of costs At Metrop that were included in the quarter that wouldn't be there on a go forward basis.
Got it, Mark. Thank you for that. And then I guess just sticking with Shoal Creek for a second, so you guys still expect the prep plan to be finished sometime here in 3Q, Labor negotiations ongoing. I guess if we assume a contract gets worked out, are there any limitations Ramping the mine back up immediately, whether that's geology or customer related, I think as Jim pointed out in his prepared remarks. Thanks.
Well, Nathan, with the mine having sat for a while, there's going to be a gradual ramp up back to full production. So on day 1, it would not come back At full production and we've put money into the prep plant and into other parts of the So there would be some commissioning period of starting to mine up before we could hit full production at some point a few months after startup.
Can you remind us what full production might look like at this point, 2,000,000, 3,000,000 tons, something around there?
It can produce about 2,000,000 tons to 2,500,000 tons a year in that range.
And is that again like a high vol A or more of a low vol product?
That's more of a High Vol A product.
Perfect. And then just one final question from you guys. Thinking about CapEx, obviously nice to see lower guidance here by $25,000,000 to $200,000,000 this year, Which does include the $100,000,000 for this altothermal project, I'm assuming. If you look ahead, at what point does the major project spending wrap up? Jim, you mentioned a couple of other projects.
When can you guys think you can move down to more maintenance like levels of spending and what might that look like on an absolute dollar basis? Thanks.
Yes, Nathan, a couple of things. We lowered that guidance $25,000,000 to $200,000,000 this year. There is Some additional further out project capital of $25,000,000 that really resulted in that number. We said it before, I'd still say $100,000,000 on a sustaining basis is the right number. If you look at that $25,000,000 reduction, does that fall into $22,000,000 most Likely so, maybe we got about $25,000,000 but the Wilpin Young extension project and the Wambo Open Cut joint venture, those projects Substantially complete this year.
So we should be at a much closer to a sustaining $100,000,000 next year with maybe that $25,000,000 reduction falling It's 22 from this year.
Any early thoughts, Mark, on those projects that Jim mentioned, the Mooresville South Or the Longwall 23 panel at Wambo?
Yes. Both are great projects for the company. At the Moravell South, We will be on that in the second half of this year. And it looks obviously quite promising. And then at Today's prices and current economics, the longwall panel, 22, we announced we had done that earlier this year.
Looking at 23 now, certainly looks to be quite attractive and very similar to 2022.
Great. Great. I appreciate
Question from Matthew Fields with Bank of America.
Hey, everyone. Welcome, Jim.
Thank you, Matt.
My first question is on the Australian thermal side. Obviously, with the Newcastle price As strong as it is, you're seeing more of a lag due to the domestic contracts. What can you do about that kind of domestic Tonnage and maybe is there a price escalator in there? Is there a way to kind of shift more into the export market while prices are strong. What can you do to kind of help realizations on the thermal side in Australia?
Yes, Matt, the Domestic tonnage out of Wilpinion there is really based on customer needs and really gets the first coal from the mine, I'll say. That's pretty ratable over the year, looking at exporting about 3,700,000 tons in the second half, 2,500,000 of those tons are unpriced, With the remainder priced at about $63 a ton. So certainly looking at some higher prices in the second half and higher volumes on the export side in in particular.
Okay, thanks.
Go ahead, Matt.
No, no, please
I was just going to say and as a reminder, Wolf and Young and ourselves at a discounted high ash product, a discount to the API 5 index, Which is currently above $90 but don't confuse that with the Newcastle benchmark product.
Sure. Thank you.
And then on the balance sheet side, your release said that you had another $50,000,000 of debt Retirement is to be settled after the quarter end. Can you just give us some detail on what tranches that $50,000,000 entails?
Yes, most of that $50,000,000 is in the term loan. It's just a delayed settlement We've reached agreements to repurchase those at a substantial discount as you saw from the expected gain in the quarter. Just a matter of timing getting those settled. And we had
Go on.
Yes. Most of that was the term loans I mentioned. There's about $5,000,000 of additional 2022 notes that we've done debt for equity exchanges as well, some of the ones that we closed in the quarter.
Okay. Thank
you. And then you're poised to generated decent amount of cash flow in the back half here. Where in your capital structure do you intend to kind of target That cash generation, is it in Australia? Is it in the BTU corporate notes or the term loan? Can you just give us an idea of what your priorities are?
Yes. Matt, as you said before, priority number 1 is to maintain Operating liquidity, and that hasn't changed. Certainly, in the current price environment, much higher cash flow generation opportunity These prices prevail. I'll remind everyone the Wilp and Yang free cash flow, which we just got done talking about the volumes and the pricing there, There is an excess cash flow sweep that's embedded with those notes. So anything generated at Wilpinion, 100% of that excess cash flow will be swept To reduce the debt there at Wilpinion, both the notes and the term loan at Wilpinion.
And then we'll continue to opportunistically We look at opportunities to find ways to continue to deleverage and reduce debt if remaining cash flows provide that opportunity.
We'll go next to Lucas Pipes with B. Riley Securities.
Thank you very much for taking my follow-up question. And I want to return to the market for just a moment here. Jim, when we talked about the market earlier, right, you mentioned the strength and your positive outlook. And I think what's So remarkable here is that the strength is occurring despite the Chinese ban of Australian coal and you're in a unique Position with your Australian portfolio to maybe comment on what is driving the strength, Right. If you're not selling directly to China from Australia, what is driving prices higher in Europe?
And we would really appreciate Your thoughts on that and then anything as it relates to CFR prices in China and how you might be able to take advantage of that in the future? We'd also appreciate your thoughts on that. Thank you very much.
Luca, first off, historically, like in 2020, for Only about 2% of our coal was sold into China. So the We didn't have to rebalance our portfolio very much with the ban of the Australian coal going into China. And the market in general or in Total though has rebalanced, right? There's so much demand out there that the coal the Australian coal that isn't going to China is finding its way to other markets. And American Coal as an example is finding its way to China.
So I think the strong demand that's out there It's certainly having an impact on the with the Chinese ban on Australian coal and now you're starting to see The Atlantic prices, metallurgical prices rising as well. So the market has found a way to balance itself. But again for us, We historically have not been a seller of a lot of our coal into China.
As you look to restart Shoal Creek, could how accessible with the Chinese market be for that product?
Well, Shoal Creek historically has had customers that are not in the market in China. But when we restart that mine, that would certainly some of the customer inquiries we are getting for coal From that market. So we have commitments to our existing customers and we have loyalty to our existing customers as well. So we'll make sure that We're meeting their needs. They are not in the China market, but we'll also, if we have the opportunity, certainly place some coal in that market.
Got it. Okay. That's very helpful. Really appreciate all the extra color and again, best of luck.
Thank you, Lucas. Thanks, Lucas.
That will conclude our question and answer session today. At this time, I'd like to turn the call back over to Jim Breck for any
Thank you all for joining us today. I'd especially like to thank our employees for remaining focused on safety And for continuing to execute on our various productivity and cost improvement initiatives. I'd also like to thank our customers, investors, insurance providers and our vendors
For your continued
support. Operator, that concludes our call.
Thank you. That will conclude today's call. We appreciate your participation.