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Arch Resources, Inc. (NYSE:ARCH) Q1 2024 Earnings Call Transcript

Arch Resources, Inc. (NYSE:ARCH) Q1 2024 Earnings Call Transcript April 25, 2024

Arch Resources, Inc. misses on earnings expectations. Reported EPS is $2.98 EPS, expectations were $3.49. Arch Resources, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, ladies and gentlemen, and welcome to the Arch Resources Incorporated First Quarter 2024 Earnings Call Conference Call. [Operator Instructions] This call is being recorded on Thursday, April 25, 2024. I would like to turn the conference over to Deck Slone, Senior Vice President of Strategy. Please go ahead.

Deck Slone: Good morning from St. Louis, and thanks for joining us today. Before we begin, let me remind you that certain statements made during this call, including statements relating to our expected future business and financial performance, may be considered forward-looking statements according to the Private Securities Litigation Reform Act. Forward-looking statements, by their nature, address matters that are to different degrees, uncertain. These uncertainties, which are described in more detail in the annual and quarterly reports that we filed with the SEC, may cause our actual future results to be materially different than those expressed in our forward-looking statements. We do not undertake to update our forward-looking statements, whether as a result of new information, future events, or otherwise, except as may be required by law.

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I'd also like to remind you that you can find a reconciliation of the non-GAAP financial measures that we plan to discuss this morning at the end of our press release, a copy of which we've posted in the Investors section of our website at archrsc.com. Also participating on this morning's call will be Paul Lang, our CEO; John Drexler, our COO; and Matt Giljum, our CFO. After our formal remarks, we'll be happy to take questions. With that, I'll now turn the call over to Paul. Paul?

Paul Lang: Thanks, Deck, and good morning, everyone. We appreciate your interest in Arch and are glad you could join us on the call this morning. I'm pleased to report that during the first quarter, Arch continued to drive forward with our consistent and proven plan for long-term value creation and growth despite some headwinds. During the quarter just ended, the team achieved an adjusted EBITDA of $103 million and generated $83 million in discretionary cash flow, delivered a $56 per ton cash margin in our core metallurgical segment, underscoring the durability of our cash-generating capabilities across a wide range of market environments. Reduced our outstanding share count by 3%, which included 315,000 shares associated with the unwinding of the capped call instrument, and have repurchased of an additional 95,000 shares.

Prior to a quarterly cash dividend of nearly $21 million, or $1.11 per share payment in general, perhaps the most importantly extended our industry leadership and sustainability as the state of West Virginia named Leer and Leer South co-recipients of the state's top safety and honored Leer South with the state's top environmental. As we've noted many times in the past, a capital return program is the centerpiece of value propositions. We've now deployed more than $1.3 billion through this program since its relaunch in February 2022, a figure equivalent to 46% of our current market capitalization in a period of just over two years. Breaking that down further, we've paid $727 million for nearly $39 per share in dividends over that timeframe, while reducing our share count by 3.5 million shares, or roughly 16% versus the peak level in May 2022.

As indicated, this last component, the systematic reduction in our share count, has taken center stage and is receiving our intense focus. We've already made significant progress on this front over the last two years, reducing the share count from 21.9 million shares in May 2022 to 18.4 million shares in May. Along with this, we believe we position the company to drive even greater progress in the quarters ahead through our efforts to streamline the capital structure over the last two years, including the retirement of our convertible debt, the elimination of our loans, and the recent liquidation of our capped calls and our decision to build a substantial cash balance to facilitate the opportunistic buying of our shares during market pullbacks.

In short, we believe the stage is set for ongoing investment in Arch's compelling long-term prospects for a strong and sustainable share repurchase program. Turning to the coal market dynamics. After declining steadily throughout the first quarter, seaborne coking coal prices appear to have found a base in the last two weeks and are beginning to show signs of a rebound. At present, Platts is assessing High-Vol A coking at $220 per metric ton FOB the U.S. East Coast, versus an average of $285 per metric ton on the same basis just last December. It's worth noting that despite the relative market softness year to date, certain demand fundamentals appear generally supportive. For instance, global hot metal output for the world excluding China was up 2% during the first three months of the year, while China's imports of high-quality seaborne coking coal continue to trend higher.

Counterbalancing those positive indicators, the supply side has recovered modestly year to date, with Australian and U.S. coking coal exports rebounding somewhat, albeit to levels significantly below their respective peaks. It's important to point out, as a world-class competitor with a first quartile cost program, Arch is exceptionally well-positioned to manage through extended periods of market weakness while still driving value for shareholders. In fact, periods of market weakness can be healthy in our view, by differentiating the stronger operators and reinforcing the fact that this is a commodity business, the cycles that ebb and flows, and being a low-cost producer does matter. But we also continue to believe in our longstanding thesis that underinvestment and ESG-related constraints will continue to support a constructive long-term supply-demand balance in global coking coal markets.

In fact, those dynamics could spur a quick recovery in such markets if global economic conditions start to strengthen, our major economies begin to increase their steel-intensive stimulus spending. It's also worth noting that recent price declines may already be taken in toll on high-cost U.S. operations. In recent weeks, several small coking coal mines have closed sections or ceased production entirely, according to market intelligence. Turning now to the thermal markets, U.S. fundamentals remain challenged at present, with natural gas trading below $2 per million Btu at Henry Hub and utility stockpiles at historically high levels after the mild winter. These natural factors in turn drove an estimated 10% decline in domestic thermal coal production on a quarter-over-quarter basis.

On a more positive note, the seaborne thermal market has rebounded somewhat, with the prompt Newcastle price standing at $130 per metric ton and API-2 at $119 per metric ton. Due in part to this improvement in the price environment, U.S. thermal coal exports were up roughly 26% for the first two months of 2024 when compared to 2023. Looking ahead, we are sharply focused on driving continuous improvement across our operating platform in support of ongoing and value-generating capital returns for our shareholders. At the same time, we are continuing to capitalize on the strategic optionality afforded to us by our ownership interest in the DTA terminal as we navigate through the tragedy of the Francis Scott Key Bridge collapse at the Port of Baltimore.

While the closure of the port should not have any impact on production in our mine, it's likely constrained second quarter coal shipments somewhat and in turn dampened Q2 capital returns. However, we expect the impacts to be timing-related, if the Port of Baltimore reopens as anticipated, but the effective cash flow is merely delay rather than loss. In closing, let me say in many respects, Arch is built for periods such as this, where our low-cost position and high-quality products afford us the ability to generate substantial cash flow despite softer market environments. At the same time, we believe we are equally well-positioned to capitalize on the situation and bring even more robust amounts of cash to our shareholders when the markets recover.

With that, I'll turn the call over to John Drexler for further discussion on operational performance in Q1. John?

A coal miner working in a surface mine, wearing a hard hat and carrying a pick.
A coal miner working in a surface mine, wearing a hard hat and carrying a pick.

John Drexler: Thanks, Paul, and good morning, everyone. As Paul just discussed, the Arch team successfully navigated through significant disruptions to logistics chain in a weakening market environment during Q1, while still delivering substantial amounts of discretionary cash flow. While production levels for our core metallurgical segment were less than ratable from an annual guidance perspective, the portfolio is currently transitioning into increasingly favorable geologic conditions, and we expect good momentum as we progress through the year. In the first quarter, our four metallurgical segments once again delivered a first quartile cost performance and generated nearly $130 million in adjusted EBITDA despite less than ratable output stemming from longwall moves at both Leer and Leer South, typical geologic variability and issues I would characterize as just minor.

We've included in this latter category, we lost seven days of longwall production at the Leer mine during Q1 at an estimated impact of around 70,000 tons due to our efforts to coordinate the longwall startup with the local utilities relocation of power lines that were to be under while the steps we took on that front resulted in our receipt of a $9.1 million payment, which was recorded as other income. We estimate that the lost tonnage inflated our Q1 metallurgical segment costs by close to $2 per ton. Even with that impact, the segment's average cash cost came in at $94 per ton, which was modestly above the high end of our full year guidance range, but still top tier when compared to other U.S. coking coal producers. As indicated, our coking coal mines are transitioning into increasingly favorable geology, and as a result we remain comfortable with our full year guidance and the cash cost midpoint of $89.50 per ton.

In the thermal segment, the West Elk mine continued to operate efficiently and generated solid adjusted EBITDA even as it continued to ship under several legacy contracts that dampened netbacks there. The Powder River Basin assets also operated efficiently, but lost cash in spite of that fact due to the rapidly cooling domestic thermal demand environment. In short, we ended the year stripping at a pace consistent with a 55 million ton per year sales volume level, but currently anticipating 2024 shipments that could be as much as 10 million tons lower than that. As a result, the PRB operated in the Red in Q1, counterbalancing the solid performance at West Elk. On a more positive note, we expect to capitalize on the excess stripping completed in the PRB in the year's back half and, as in the past to preserve value by negotiating additional out-year commitments in exchange for any customer-requested deferrals.

Looking ahead, we continue to be encouraged by the general progression of our coking coal operations. Leer South is currently operating at a good productive pace and is well on track in our view, to achieve the 3 million ton annual production figure we have targeted for the mine for 2024. Moreover, the development work we are currently doing in district two is serving to reinforce our confidence in the much advanced geologic conditions we expect to encounter there. As previously discussed, our drilling data, as well as our experience via the early development work in that district suggests a materially thicker coal seam and more favorable credibility overall in district two, which would prove beneficial when we begin longwall mining there in the fourth quarter.

I will say again, at a time when many other operations are wrestling with the migration to less advantageous and higher cost reserves, we are fortunate to be moving in the opposite direction of Jerusalem. Now, let's spend a few minutes discussing the closing of the shipping channel at Baltimore following the tragic bridge collapse there. As we have discussed, we typically ship the majority of our Leer and Leer South export volumes, and roughly half of our coking coal volumes overall via the Curtis Bay Terminal in Baltimore. With the channel closed, we are having to direct volumes elsewhere, and I'm pleased to report that the team is doing a terrific job on that front and remains focused on maximizing our shipments using alternative routes. Of course, our strategic investment in Dominion Terminal Associates in Newport News has been pivotal to our success on that front.

But that has been the great support we have received from our mail firm. While we continue to work around capacity constraints at DTA, we believe we will be able to achieve sales volumes in the range of 1.9 million to 2.2 million tons in Q2, depending on the exact timing of the channel reopening that is currently projected for the end of May according to the U.S. Army Corps of Engineers. That volume level would put us at around 4 million tons through the first two quarters, suggesting a little over a 2.4 million ton quarterly run rate in the year's back end. Given our available alternative logistics and stockpile capacity, we do not expect any impact to our production levels at the mines due to the port outage and continue to view our prior volume guidance of 8.6 million to 9 million tons as achievable.

Before passing the baton to Matt, let's spend a few minutes discussing the team's exemplary achievements in the sustainability arena. As you know, we firmly believe that a culture of safety and environmental stewardship is essential for long-term success in our business. During Q1, Arch's subsidiary operations achieved an aggregate total lost time incident rate of 0.62 incidents per 200,000 employee hours worked, which was more than three times better than the industry average. On the environmental front, the company again recorded zero environmental violations under SMCRA, as well as zero water quality exceedances across all of our subsidiary operations. Highlighting the team's excellent work, the state of West Virginia recently named the Leer and Leer South Mines co-recipients of the Governor's Milestone of Safety award, the state's highest safety honor.

In addition, the Mountain Laurel mine and the Leer, Leer South, and Mountain Laurel preparation plants were each honored with a Mountaineer Guardian Award for safety excellence. In the environmental arena, Leer South claimed the Greenlands Award, the state's highest honor for environmental achievement, and Leer and Leer South were honored with additional environmental excellence. On behalf of the Board and the Senior Management team, I want to commend the entire workforce for their deep commitment to excellence in these essential areas of performance. With that, I will now turn the call over to Matt for some additional color on our financial results. Matt?

Matthew Giljum: Thanks, John. Good morning, everyone. Let's begin with a discussion of first quarter cash flows and liquidity. Operating cash flow totaled $128 million in Q1, which included a working capital benefit of $19.7 million. While we had anticipated working capital to build in the period, the decline in metallurgical prices over the course of the quarter, combined with lower thermal shipping volumes, resulted in a meaningful drawdown of accounts receivable. Capital spending totaled $45 million and discretionary cash flow was $83 million. Turning to the balance sheet, we ended March with cash and short-term investments of $340 million, essentially flat with 12/31 levels. As we discussed in last quarter's call, we closed on our new $20 million term loan in Q1 and largely used those proceeds to retire the old loan and make other debt amortization payments, resulting in the end-of-quarter debt $146 million, which was only modestly higher than year-end levels.

Our net cash position was $174 million on March 31st and our liquidity was $442 million, both of which remain above target levels. Turning now to the capital return program. We continue to execute on our two-pronged approach, systematically reducing the share count while also paying a meaningful dividend. Starting with the share count. Through a combination of the capped call unwind and share repurchases, we retired 410,000 shares during the quarter. The capped call unwind, which made up over 75% of that total, was equivalent to a share repurchase of nearly $53 million, but without any cash outlay in the quarter. We also repurchased 95,000 shares in the open market in Q1 and in total have now retired over 2.5 million shares at an average price of $139 since we relaunched the program.

That combined with the retirement of the convertible debt has reduced our fully diluted share count by 3.5 million shares since its recent high point in 2022. While share count reduction is our clear priority, the dividend remains a significant component of Arch's value proposition. The Board has approved a quarterly dividend of $1.11 per share today, bringing the total dividends to nearly $39 per share since the beginning of 2022. The upcoming dividend will be paid on June 14 to stockholders of record as of May 31st. Next, I wanted to provide some additional detail around Paul's comment on Q2 capital returns. John just provided an excellent overview of our approach to managing our export metallurgical shipments, while the Baltimore harbor remains closed.

From a timing standpoint, as you would expect, much of April to date has been focused on redirecting activity away from Curtis Bay into DTA and other alternatives, with the net result being export shipments heavily weighted toward the latter half of the quarter. Additionally, we expect a further seasonal step down in thermal volumes in Q2 before seeing modest improvement as we get into the summer. As a result, we currently expect a significant working capital increase in Q2 and that operating cash flows and discretionary cash flows will be at levels that won't allow for significant share repurchases in the quarter. We view this strictly as a timing issue, and we anticipate cash flows and capital returns to normalize as we get to Q3. As a final point, while we expect second quarter volumes in both segments to be lower than ratable as compared to guidance levels, we expect stronger performance in the second half of the year and are maintaining our full year operating and financial guidance.

With that, we are ready to take questions. Operator, I will turn the call back over to you.

See also

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