Alpha Metallurgical Resources - Q1 2023

Transcript

Operator (participant)

Greetings, and welcome to the Alpha Metallurgical Resources first quarter 2023 results conference call. At this time, all participants are on 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. You may begin.

Emily O'Quinn (SVP, Investor Relations and Communications)

Thank you, Rob. 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 first 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. With that, I'll turn the call over to Andy.

Andy Eidson (CEO, Treasurer, and Director)

Thanks, Emily, good morning, everyone. We're pleased to report a very good first quarter performance today, marking steadfast progress toward our ambitious production goals for this calendar year. Our teams performed well both from a production and sales standpoint within the quarter. In addition to the everyday excellence of our workforce that is shown in the results we'll discuss later, several particular Alpha teams have been recognized with noteworthy accolades in recent weeks and months. In terms of safety performance on the national level, our Paramount Group won the Interstate Mining Compact Commission's 2023 Mine Safety and Health Training Industry Award for the underground division. At the state level in West Virginia, eight Alpha properties won Joseph A. Holmes Safety Association Awards in 2022.

Mammoth Processing, Marfork Processing, Black Castle Surface Mine, Kingston South Surface Mine, Workman Creek Surface Mine, Glen Alum Tunnel Mine, Cedar Grove Number 2 Mine, and Road Fork 52 Mine. I'm pleased to announce that the Holmes Safety Association also selected one of our operations vice presidents as the 2022 West Virginia Coal Safety Leader, an individual award recognizing excellence in safety achievements and records. Jimmy Wood, who leads Alpha's Midwest Virginia Surface and Kingston region, was selected as the 2022 recipient of this prestigious award. We're very proud of Jimmy's hard work and dedication to safe production. Alpha won 4 West Virginia Mountaineer Guardian Awards for exceptional safety performance. These winning mines are Workman Creek, Cedar Grove Number 2, Kingston Number 2, and Road Fork 52.

In March, the Paramount mine rescue team competed in the Southeast Regional Mine Rescue Contest, where they took home top honors as the overall contest grand champions, as well as first place in the mine rescue overall, bench competition, and first aid. For outstanding environmental stewardship, Alpha was nationally recognized by the Interstate Mining Compact Commission, with our Deep Mine 26 in Virginia being selected as the winner of their National Mine Reclamation Award for 2023. On the state level, the Black King Mine won the West Virginia Coal Association's Underground Mine Reclamation Award, while Workman Creek and Long Ridge Surface Mine won the organization's Drainage Structures/Water Management Award. We hold ourselves to a very high standard, it's extremely gratifying to see the number of safety and environmental awards earned by the Alpha team. We're very proud of these efforts and strive every day to continue this good work.

Along these lines, I'm also pleased to report that Alpha was recently named as one of the nation's most trustworthy companies by Newsweek magazine. We ranked number 2 in the materials and chemicals industry category, and the recognition is based on independent surveys collected from company stakeholders, like employees, customers, and shareholders. Alpha's culture is built on operating safely and ethically, and we believe in teamwork and treating one another with respect. We also believe in being good neighbors in the communities where we live and work. It's an honor to be nationally recognized for this distinction, and it's a reflection of the quality of people we have across the entire organization. Before Todd and Jason get into the details of our financial and operational performance for Q1, I wanna briefly comment on the recent trucking and manufacturing acquisitions we announced last quarter.

Both have proven valuable to the organization so far, and while we anticipated that Maxim Manufacturing could expand our rebuild capabilities, the additional opportunities we've already discovered have far exceeded our expectations. We're testing out new concepts almost weekly, and the success so far indicates that we will be able to better control our own fate in regard to parts and supplies that have often proven difficult to find. This not only makes us more efficient, but it also helps eliminate some of the supply chain delays and availability hurdles we were experiencing before acquiring the manufacturing company. It's a similar story with Maxim Transportation, as the performance of the trucking operation has also been excellent.

Looking ahead to the second quarter and the rest of the year in terms of our broader market outlook, we believe a number of geopolitical and global economic factors will continue to influence met coal pricing. With this uncertainty alongside the declining met coal indexes we've witnessed in the last several weeks, we're focusing on controlling our internal processes to manage costs to the best of our ability. Customer commitments for the year are very strong, and at the midpoint of guidance, 94% of our metallurgical tonnage is already committed, with 43% committed but not yet priced. It's also important to remember that even after a substantial drop in recent weeks, met coal indexes are playing at historically strong levels. As is our standard, we intend to maintain our focus on safely producing coal and reliably supplying it to our customers.

As previously announced, Alpha's annual meeting of stockholders was held last week, all directors standing for re-election were elected to serve another 1-year term. I look forward to working with them all to keep Alpha moving forward, I thank them for their leadership and service to the company. Speaking of the board, management continues to execute on the board's $1.2 billion share repurchase authorization, with more than $700 million returned to shareholders in the form of buybacks since the program's inception just 14 months ago. We stated before, we remain committed to share repurchases as our preferred capital return vehicle, and we expect to continue buying back shares, providing marketing conditions and cash flow levels allow. With that, I'll turn it over to Todd for discussion of our 1st quarter financial results.

Todd Munsey (Executive VP and CFO)

Thanks, Andy. First quarter adjusted EBITDA was $354 million, up from our fourth quarter level of $248 million. We sold 3.9 million tons in the quarter, 3.7 million of which came from our met segment and 200,000 tons from the all other category. Quarter-over-quarter realizations increased for the met segment as a whole, with an average realization of $208.93 for the first quarter, compared to $186.29 for the fourth quarter 2022. Export met tons priced against Atlantic indices and other pricing mechanisms in the first quarter realized $211.31 per ton, while export coal priced on Australian indices realized $240.76.

Realization for our metallurgical sales in the first quarter was a total weighted average of $213.21 per ton, an increase of roughly 12% against the prior quarter's $190.94 per ton. Realizations in the incidental thermal portion of the met segment decreased quarter-over-quarter, coming in at $137.65 per ton in Q1 as compared to $146.24 in Q4, reflecting the lower thermal pricing for the period when the tons were sold. Similarly, first quarter realizations in the all other category were $109.36, down from $126.10 per ton in the fourth quarter.

This quarter-over-quarter drop in realization is also due to the declining pricing environment for thermal coal. Cost of coal sales within our met segment decreased to $110.56 per ton, down from $112.97 per ton in the fourth quarter. Cost of coal sales in the all other category also decreased quarter-over-quarter to $74.69 per ton, down from $80.76 per ton in the fourth quarter of 2022. SG&A, excluding non-cash stock compensation and non-recurring items, decreased to $17.7 million in the first quarter as compared to $19 million in the fourth quarter. Q1 CapEx was $74.2 million, up from $61 million in the fourth quarter 2022.

This increase includes some rollover expenditures from the previously mentioned prior year delays. Over the last few quarters, supply chain issues have contributed to some lumpiness in CapEx spending that we expect to continue throughout the remainder of the year. Moving to the balance sheet and cash flows, as of March 31st, 2023, we had $222.5 million in unrestricted cash, down from $301.9 million at the end of the fourth quarter. We had $93.1 million in unused availability on our ABL at the end of the quarter.

Alpha had total liquidity of $315.6 million as of the end of March, which is net of the $145 million in share repurchases during the quarter, of which $136 million was pursuant to our share repurchase program and $9 million related to shares repurchased for taxes on equity awards. By comparison, total liquidity at the end of the fourth quarter was $441.1 million. Cash provided by operatig activities decreased quarter-over-quarter to $177.4 million in Q1, as compared to $185 million in Q4. The first quarter operating cash flows were negatively impacted by an increase of $133.8 million in working capital.

The primary drivers were higher accounts receivable and inventory balances, partially offset by accounts payable. As of March 31st, our ABL facility had no borrowings and $61.9 million of letters of credit outstanding, unchanged from the prior quarter. In terms of our committed position for 2023 sales, 51% of our metallurgical tonnage in our met segment is committed and priced at the midpoint of guidance at an average price of $203.86. Another 43% of our 2023 met tonnage at the midpoint is committed but not yet priced. The thermal byproduct portion of the met segment is 75% committed and priced at an average price of $108.77.

We are fully committed and priced for this year in our all other category with an average price of $88.74. We adjusted the tax rate guidance for the year to 12%-17%, down from the previous range of 15%-20%. All other guidance ranges remain the same as previously issued. Alpha's board has declared a quarterly cash dividend of $0.50 per share, an increase from the prior quarter's $0.44 per share. Which will become payable on July 5th for holders of record as of June 15th. Pursuant to our share repurchase program, we repurchased 870,000 shares at a cost of $136 million in the first quarter of 2023.

Since the beginning of the program through May 4, 2023, we have spent approximately $715 million to acquire 4.8 million shares of common stock at an average price of $148.74 per share. The outstanding share count has been reduced by roughly 23% from the time the program began. As of May 4, 2023, the number of common stock shares outstanding was approximately 14.4 million. I will now turn the call over to Jason for some details on operations.

Jason Whitehead (President and COO)

Thanks, Todd. Good morning, everyone. I'm pleased to report that the Alpha mines are operating very well so far in 2023, and Q1 was Alpha's highest production quarter in at least the last 5 years. Our captive mine production was nearly 4.4 million tons, and I'd also like to congratulate our Deep Mine 41 guys at McClure for setting their own personal record of 638,000 tons in the quarter. Based on Q1 MSHA data for the Central Appalachian Basin, Alpha operations claimed 5 of the top 9 producing coal complexes. Our Marfork complex took 1st place in the quarter, while our McClure and Bandmill operations claimed 3rd and 4th. We're always looking for opportunities to efficiently improve our output, bringing on additional continuous miners in mines that are performing well.

We've added our ninth continuous miner to our Road Fork 52 mine at Kepler. At Marfork, our Panther Eagle has ramped from 3 to 4 continuous miners. We continue working on the development projects we've recently announced, like Rolling Thunder and Checkmate Powellton deep mines, to replace tonnage from locations that are mining out and aid in future capacity. We're making progress in nearly completing our prep plant enhancements as well. As a reminder, once fully implemented, these upgrades will allow us to recover additional coal in the washing process, yielding combined additional tonnage of roughly 160,000 tons per year at a very low incremental cost, all while increasing the rate of raw coal processing. We've also been pleased with the vertical integration of our Maxim Rebuild division that we announced last quarter to address supply chain issues.

Maxim Transportation, which includes more than 70 on-road coal trucks and several pieces of supporting equipment and the team members, is at nearly fully staffed levels. As we continue to refine schedules and processes within this division, we have seen increased coal flows to and from preparation plants and load outs. Maxim Manufacturing has been a reliable supplier for gear cases as we originally intended, but they've also proven capable of much more. In the first quarter, we tested out a number of additional equipment parts, successfully integrating the development of several other continuous miner parts into the pipeline. Bringing this work in-house has been a game changer for our rebuild and maintenance teams, allowing them to expand their calendar for the year and streamline the supply chain by eliminating many delays and reliability problems from various other third-party suppliers.

I can't say enough about the employees involved in these efforts. They work to integrate a manufacturing company into Alpha while also far exceeding our expectations about the immediate and future usefulness of Maxim Manufacturing. Congratulations to all involved in these successful efforts. With that, I'll turn the call over to Dan for some additional information on the coal markets.

Dan Horn (Executive VP and Chief Commercial Officer)

Thanks, Jason, and good morning, everyone. Since the beginning of the year, metallurgical coal markets have softened amid broader recessionary concerns, uneven recoveries in manufacturing demand, and most recently, economic unease stemming from regional bank failures in March. Persistent inflation and rising interest rate environments in many economies, including the U.S., have hampered steel demand. As global geopolitical issues continue, the strength of China's reopening, or the lack thereof, after its years-long strict zero-COVID policy is a factor that we expect will continue to influence demand. Additionally, the duration and potential outcome of Russia's invasion of Ukraine could significantly impact Europe's resiliency and growth prospects. Despite these uncertainties, the World Steel Association's most recent short-range outlook projects a 2.3% rebound in steel demand this year, bringing expected global demand to 1.82 billion metric tons.

The organization expects steel demand of 1.85 billion metric tons in 2024, a further increase of 1.7%, likely led by manufacturing and accelerating growth in most regions, with the exception of China, where World Steel expects deceleration due to population decline. In terms of the indices and first quarter price movements for metallurgical coals, the Australian Premium Low Vol index increased slightly from $294.50 per metric ton on January 1 to $301 per ton at quarter close.

The US East Coast Low Vol index increased from $280 per metric ton on January 1 to $287 on March 31. US East Coast High Vol A index moved from $276 per metric ton at the start of the quarter to $285 per ton at the end of March. US East Coast High Vol B fell from $275 per metric ton at the beginning of January to $265 per metric ton at the end of March. Throughout April and into the early days of May, all four indices have softened considerably from their quarter close levels. As of May 5, 2023, Australian PLV has decreased to $240.25 per metric ton, and US East Coast Low Vol has dropped to $246 per metric ton.

US High Vol A and High Vol B indices were $238 and $218 per ton, respectively, on the same date. Turning now to thermal coal market, where the pricing has very significantly fallen off from the highs of last year. The API2 index continued its several month decline, moving from $188.05 per metric ton on January 3rd to $138 per metric ton as of March 31st, 2023. This softening trend has continued into the second quarter with the API2 at $122.05 as of May 5th. In terms of logistics, we experienced a short period of downtime in the first quarter at DTA, Dominion Terminal Associates in Newport News. A temporary equipment issue slowed down our ability to load vessels in mid-March.

This required some rescheduling, but the issue was quickly resolved and DTA is back up to normal throughput rates. Additionally, despite many challenges that our railroad partners faced in the first quarter, rail performance to and from our properties has largely been positive in recent months, especially in terms of service to DTA. We continue to work closely with our transportation partners to efficiently move our coal from our operations to customers across the world. With that operator, we are now ready to open the call for questions.

Operator (participant)

Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star one on your telephone keypad. One moment, please, while we poll for questions. Our first question comes from Lucas Pipes with B. Riley. Please proceed with your question.

Lucas Pipes (Managing Director, Senior Vice President, and Equity Analyst)

Thank you very much, operator. Good morning, everyone, and congratulations on a good quarter and the many environmental safety and social recognitions. That's terrific to see. My first question is on the sales outlook for the remainder of the year when I Q1 was good, but when I look at the full year midpoint, it seems like there's still a step-up coming. I wondered if you could maybe articulate the timing, and the outlook on that front. Thank you very much.

Dan Horn (Executive VP and Chief Commercial Officer)

Hey, Lucas, it's Dan. Good morning. Well, you know, I think in spite of some of the issues I mentioned with DTA and with the railroads, you know, we probably would have shipped a little more coal if it wasn't for those. We'll catch those tons up. Going forward, I think I mentioned on previous calls, we took some more contract positions in 2023 than in recent years. You know, we have good confidence in our numbers because, you know, these tons, regardless of which direction the market indices go, these tons are going to ship. You know, I think we have pretty good confidence in those numbers.

Certainly, there's been some demand softening, in some of the markets, but when that happens, it's good to have tons under contract.

Todd Munsey (Executive VP and CFO)

Yeah. Hey, Lucas, this is Andy. Just to add a fine point on that, I think historically, you see that the second and third quarters of our years are probably a little bit more, a little bit higher volumes, at least they have been in the last three or four years. That's if you're looking at a curve, we're pretty close to being ratable, but there's typically a little bit of a bump up entering and exiting summer. I think that's where you'll see the, you know, the numbers start looking closer to what the annualized guidance number is.

Lucas Pipes (Managing Director, Senior Vice President, and Equity Analyst)

Got it. Very helpful. Then, the reduction in the tax rate, what was the driver of that? Kind of going forward, should we think more kind of that 15%-20%, or how would you frame that out?

Todd Munsey (Executive VP and CFO)

Hey, Lucas, it's Todd. really, that's just, you know, a passage of time, having a little more granularity into the calculation. Our tax rate is dependent upon some pretty large permanent differences that affect the rate. It's really just having more granularity as we progress through the year. In terms of looking forward, obviously, we adjusted the range down. We feel like that's kinda where things will finish out this year.

Lucas Pipes (Managing Director, Senior Vice President, and Equity Analyst)

Got it. Very helpful. Thank you for that. Top one last one. Could you remind us of how you think about minimum liquidity and minimum cash requirements? Terrific to see that Rolling Thunder is progressing well, just wanted to get a quick take on those other two items. Thank you.

Todd Munsey (Executive VP and CFO)

Yeah, yeah, our view on minimum liquidity hasn't changed, Lucas. I mean, we wanna keep, you know, $250 million-$300 million of cash. I mean, we do have the DOL matter that we've talked about before that's still in process. Markets being a little bit choppy. I mean, we're pretty resolute that that's the area we need to stay to move things forward.

Lucas Pipes (Managing Director, Senior Vice President, and Equity Analyst)

Got it. Very helpful. Gentlemen, really appreciate the color and continued best of luck.

Todd Munsey (Executive VP and CFO)

Thanks, Lucas. Appreciate it.

Operator (participant)

As a reminder, if you'd like to ask a question, please press star one on your telephone keypad. One moment, please, while we poll for questions.

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

Nathan Martin (Senior Equity Research Analyst (Coal and Railroads))

Hey, good morning, guys. Congrats on the quarter, and the awards as well. Thanks for taking my questions.

Andy Eidson (CEO, Treasurer, and Director)

Thanks, Nathan.

Nathan Martin (Senior Equity Research Analyst (Coal and Railroads))

Maybe kind of going back to Lucas's question on shipment cadence. I mean, looks like, again, I think as Jason mentioned, a very strong production quarter, maybe you built around 250,000 tons or more of inventory, just comparing MSHA numbers and your reported sales. Any idea when you kind of expect to ship that inventory? You know, again, are we kind of above ratable maybe in 2Q, 3Q? Or just any more color would be helpful.

Andy Eidson (CEO, Treasurer, and Director)

Yeah. Hey, Nathan, it's Andy. as I mentioned to Lucas, I think that, you know, Q1 typically, all the quarters, and it varies across years. They do tend to be somewhat ratable, we do tend to see bumps in the second and third quarter of higher volumes. That's for, you know, numbers of reasons, I don't think this year is gonna be different from that. I do think you'll see a spike in the middle of the year as we see more shipments. Building some inventory in Q1 was pretty helpful for the shipment requirements that we'll be seeing over the next 3, 4, 5 months. I can't stress enough how the incredible job that the production team did.

I mean, operations, Jason and his crew, absolutely crushed it this quarter, setting records across the board, on the volumes they were pushing out. I mean, 5 of the top 9 production complexes in Central Appalachia were Alpha complexes. We're extremely proud of that kind of performance. To do that while maintaining a very safe environment and doing a good job in that regard and winning all these awards, you just can't beat that. Really excited about Q1. Really excited about the rest of the year as well.

Nathan Martin (Senior Equity Research Analyst (Coal and Railroads))

Appreciate those thoughts, Andy. Maybe, as it relates to the prep plant enhancements, when are those expected to be completed? If you could remind me. With that, you know, maybe it could be helpful in increasing your sales rates as well.

Jason Whitehead (President and COO)

Hey, this is Jason. I think, you know, there's actually 2 different sets of enhancements that are kind of going on simultaneously. They're really spaced. There's different phases as they come on throughout the year. I think it's safe to say by September or October, you know, that those will all be behind us. You know, some are complete, some are ongoing, some are soon to be underway. You know, that nominal increase is baked into our guidance, we don't, you know, expect any material changes from any of that.

Nathan Martin (Senior Equity Research Analyst (Coal and Railroads))

Thanks, Jason. You know, maybe taking a step back, you guys sell, you know, so many tons into the global met coal market. Dan, I appreciate the discussion kind of in your prepared remarks. It'd be great to get some more color. You know, where do you guys see opportunities to sell, you know, the remainder of your coal for this year and even kind of going forward maybe? You know, we talked about Aussie benchmark come down, but seems to have found some stability here recently. However, the CFR China price continues to move in the opposite direction. It'd be great to get your thoughts on whether you feel like met prices largely reflect the market at this point, or if there could be a chance for further moderation from here? Thanks.

Dan Horn (Executive VP and Chief Commercial Officer)

Well, Nate, certainly demand softened a little bit here in Q1. What we saw were a lot of buyers sitting on their hands just watching the price drift down. What we expect to see here is as we get closer to July 1, our regular customers will come in for coal. I think we'll see the market pick up. We'll see the demand pick up. There's been a lot of waiting because it's the old catch-a-falling-knife thing here for the last couple weeks. As you said, recent days have seen the trough. We're coming out of that trough, it appears. With regard to, you know, the markets, we're gonna ship coal to the markets we've already outlined. A lot of coal going into the Atlantic Basin. India is gonna be strong this year.

An occasional cargo to China. As you point out, CFR China is not a particularly attractive number at this point, but, you know, we'll be opportunistic there in China if there's something there. Really where we expect to ship is where we've been shipping all along. I'll add that the North American market's been quite strong. The North American steel industry's running pretty well, and the coke plants and blast furnaces in particular are running well. I'll add that.

Nathan Martin (Senior Equity Research Analyst (Coal and Railroads))

Thanks, Dan. Appreciate that. Then maybe one more. On shareholder returns, you guys obviously continue to execute on your buyback program as you've told the market you would. You also increased your regular quarterly dividend, I think, for the third consecutive quarter in a row, I believe. You know, have you considered a more defined shareholder return program at some point, like many of your peers are doing? Again, maybe something that gives you flexibility to repurchase shares, pay a regular dividend or even a special dividend, you know, when cash flows are high enough.

Andy Eidson (CEO, Treasurer, and Director)

Yeah, thanks for the question, Nate. I guess to go back to what I said last quarter, I mean, even today, with the market going where it is, we still view the company to be, I won't say criminally undervalued, but criminally undervalued. To that degree, I think, we would like to continue to pick up these shares. I mean, when companies are trading, this whole sector is trading at the multiples that we are, it's on hard assets. It's, it's odd to me. We're very happy to continue acquiring our own shares. We will continue obviously with the regular dividend.

While we don't have a formula out there for cash flow, I think you can look at what we've done over the past 13, 14 months, and you can kinda back into what our cadence has been. It's been lumpy, but by and large, we spent a certain amount of money over that timeframe each week. You know, that's not guiding toward the cadence in the future, but that's how we think about it. We like to be nice, slow, and steady. We do have opportunities and open windows to go out and pick up more shares. If we choose to do so, we do that very judiciously. As long as the market allows, we think that the best allocation of that shareholder return program is still to repurchasing the shares.

Nathan Martin (Senior Equity Research Analyst (Coal and Railroads))

Thanks for those. Thanks for those thoughts, Andy. Thank you to all you guys for your time and information, and best of luck.

Andy Eidson (CEO, Treasurer, and Director)

Thanks, everyone. With that, appreciate everybody being on the call and, appreciate your interest in Alpha. Hope you all have a great day.

Jason Whitehead (President and COO)

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.