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CONSOL Energy Inc. (NYSE:CEIX) Q1 2024 Earnings Call Transcript

CONSOL Energy Inc. (NYSE:CEIX) Q1 2024 Earnings Call Transcript May 7, 2024

CONSOL Energy Inc. beats earnings expectations. Reported EPS is $3.39, expectations were $2.37. CONSOL Energy 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 CIEX First Quarter 2024 Earnings Conference Call. At this time, all lines are in the listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Tuesday, May 7, 2024. I would now like to turn the conference over to Nathan Tucker, Director of Finance and Investor Relations. Please go ahead.

Nathan Tucker: Good morning, everyone, and thank you for joining us. Welcome to CONSOL Energy’s first quarter 2024 earnings conference call. Any forward-looking statements or comments we make about future events are subject to risk, certain of which we have outlined in our press release and in our SEC filing, and are considered forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. We do not undertake any obligations of updating any forward-looking statements for future events or otherwise. We will also be discussing certain non-GAAP financial measures, which are defined and reconciled to comparable GAAP financial measures, in our 2024 First Quarter press release, furnished to the SEC on Form 8-K, which is also posted on our website.

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Additionally, we filed our 10-Q for the quarter ended March 31, 2024, with the SEC this morning. You can find additional information regarding the company on our website, www.consolenergy.com, which also includes a supplemental slide deck that was posted this morning. On the call with me today are Jimmy Brock, our Chief Executive Officer; Mitesh Thakkar, our President and Chief Financial Officer; and Bob Braithwaite, our Senior Vice President of Marketing and Sales. In his prepared remarks, Jimmy will provide a recap of our first quarter achievements and a detailed discussion of our operations. Mitesh will then provide an update on our marketing and financial progress and our updated 2024 guidance. In his closing comments, Jimmy will recap our capital allocation progress and lay out our key priorities for the remainder of the year.

There will be a Q&A session followed by the prepared remarks in which Bob will also participate. With that, let me turn it over to Jimmy.

Jimmy Brock: Thank you, Nate. Good morning, everyone. CONSOL Energy finished the first quarter with a strong operational performance and produced 6.5 million tons from the Pennsylvania Mining Complex, which was no small feat considering each of the three mines had a longwall move in the quarter. We are very proud of the PAMC team for their efforts during these moves and for completing them safely and efficiently. We continued our export shift and 65% of our Q1 2024 total reoccurring revenues and other income was derived from sales into the export market. We also continued to execute our strategy of returning value to our shareholders through share buybacks and deployed 89% of our Q1 2024 free cash flow toward retiring 440,000 shares of our common stock.

Before I move to the operational update, let me address the situation at our CONSOL Marine Terminal where vessel access to our terminal became blocked due to the collapse of the Francis Scott Key Bridge in Baltimore in late March. We’d like to again extend our condolences to all of those affected by this tragedy. This event has limited our ability to ship coal into the export market and per multiple agency officials, this restriction is expected to continue through the end of May. However, we have successfully developed alternative strategies to partially offset the impact. First, we’ve identified and worked with domestic customers to improve their shipment volumes. Second, our rail and logistic partners have stepped up and helped us quickly divert some of our export shipments to an alternative port in Virginia where we secured some incremental capacity which has allowed us to move approximately 50% of our planned export volumes.

Until the permanent 50-foot draft shipping channel is reopened in the Port of Baltimore, we expect to be operationally constrained. The good news is that we are still shipping tons into the export market, thanks to the cooperation of our rail and logistic partners, which has helped us partially mitigate the financial impact of the bridge collapse on our business. Now, let’s discuss our operational performance in detail. On the safety front, our Itmann Preparation Plant had zero employee recordable incidents during the first quarter of 2024. Our coal operations finished the quarter with a total recordable incident rate well below the national average for underground coal mines. Coal production at the Pennsylvania Mining Complex came in at 6.5 million tons in Q1 2024, compared to 7 million tons in the prior year period.

Production was lower due to the previously mentioned longwall moves in Q1 2024 compared to zero moves in Q1 2023. As a result of these longwall moves, as well as ongoing inflationary pressures, our PAMC average cash cost of coal sold per ton for Q1 2024 was $40.29, compared to $33.61 in Q1 2023. Looking ahead, we expect to have only one longwall move for the remainder of the year. Moving on to Itmann. During the first quarter of 2024, sales from the complex improved to 193,000 tons of coal, including third-party tons, compared to 159,000 tons in Q4 2023. During the first quarter, all three operating sections continued to mine additional height for mains development, which requires cutting additional rock and slows mining rates. Furthermore, we continued to be impacted by equipment delivery issues with a major supplier and high employee turnover, which led to the idling of several production shifts throughout the quarter.

Given the recent pullback in met coal markets, we expect that employee turnover and supply chain bottlenecks could ease if we begin to see some supply rationalization. Despite these setbacks, we expect to complete our long-term mains development during the second quarter, which will allow us to operate the mining sections at more efficient mining heights and improve production rates. Moving to the CONSOL Marine Terminal. Despite losing five days of potential vessel loadings, we achieved a throughput volume of 4.5 million tons during Q1 2024, compared to 4.6 million tons in the prior year quarter. Terminal revenues for the quarter came in at $24.5 million and CMT operating cash costs were $7.2 million. Accordingly, CMT adjusted EBITDA finished at $16.8 million, compared to $20.6 million in the prior year period.

With that, let me turn the call over to Mitesh to provide the marketing and financial updates.

Mitesh Thakkar: Thank you, Jimmy, and good morning, everyone. Despite some demand softness, the power generation markets, due to mild winter weather during the first quarter, demand for our product remains strong in the export markets, specifically the industrial and crossover metallurgical markets. As such, we continue to take advantage of our high quality product and sold nearly 60% of our total volumes into the export markets during the quarter. From a revenue perspective, sales into the export market accounted for 65% of our total recurring revenue and other income. Conversely, domestic power generation sales accounted for 30%. During 1Q 2024, we sold 6.1 million tons of PAMC coal at an average coal revenue per ton sold of $68.33, compared to 6.7 million tons at $84.32 in the year ago period.

We continue to see a lot of interest for our product in the export markets. This is evident in the fact that with the disruption caused by the temporary closure of the Baltimore Port, most of our customers are focused on moving and deferring current shipments instead of canceling their shipments. So, we believe the demand has been deferred, not lost. In the second half of 2024, we expect to increase the percentage of tons going into the export market compared to our projections when we began the year. Our ability to sell our PAMC product into many different end-use markets gives us significant flexibility to pivot tons between markets depending on demand strength. We began 2024 initially forecasting to sell approximately 50% of our PAMC volume into the export markets.

However, due to reduced domestic demand and our ability to pivot, we now expect to move 60% or more into the stronger international markets in 2024, despite the temporary port closure in Baltimore. In fact, the port closure has limited high CV thermal exports and improved CFR India prices, along with API2 prices over the past several weeks. Specifically, we have seen Indian retail inventories tighten due to these reduced high CV exports from the U.S., and with the monsoon season about to begin, we expect these inventories to remain low when the restocking season kicks off. This could result in strong demand and pricing once the monsoon season ends. On the crossover metallurgical front, we sold 508,000 tons of our PAMC product into this market during 1Q 2024 and continue to focus on penetrating new markets.

A large coal mining complex on a sunny day, with heavy machinery moving vast amounts of earth.
A large coal mining complex on a sunny day, with heavy machinery moving vast amounts of earth.

Currently, we are seeing renewed interest for our crossover product, particularly in Southeast Asia, where demand is picking up. On the domestic front, despite the near-term coal demand weakness due to mild weather, there are long-term indicators for potential growth in domestic coal-fired generation demand. The biggest driver for this demand in the U.S. is the expected growth in artificial intelligence on top of the already growing power demand for electric vehicles, heat pumps and the manufacturing of microchips, EVs and batteries. The Wall Street Journal reports that AI servers could consume 6% of total U.S. electricity generation by 2026, up from 4% in 2022. The Journal also points out that a recent scientific study estimates that AI servers worldwide could consume as much power as a mid-sized economy like Sweden or the Philippines as early as 2027.

Domestically, it has been reported that Samsung will double its semiconductor investments in Texas to $44 billion. Furthermore, a Southeastern domestic utility has recently made the decision to build new power plants in order to serve the increased demand from new data center load. This new data center load will be serviced exclusively by natural gas, coal and a small amount of batteries. The same utility has also delayed the retirement of some of its coal-fired power plants in order to service this increased demand. Consistent with these domestic demand trends, we recently completed a fixed-price three-year term deal in the domestic market for 950,000 tons running from 2026 through 2028. We are also currently in negotiations with another domestic utility for a long-term fixed-price deal.

Now let me provide a quick update on our financial results before moving on to our 2024 guidance and outlook. This morning, we reported a strong first quarter 2024 financial performance. We generated net income of $102 million or $3.39 per dilutive share and adjusted a bid of $182 million. During the quarter, we spent $42 million in CapEx, which resulted in approximately $41 million of free cash flow. We also deployed $58 million to our share buybacks and reduced outstanding debt by $4 million. Our free cash flow was impacted negatively by approximately $81 million of working capital changes. Let me highlight a few items that resulted in this negative working capital impact. First, the timing of longwall moves in February and early March impaired our receivables collection during the quarter.

Second, the closure of the Baltimore Port resulted in our inability to ship approximately 450,000 tons of coal at the end of the quarter, which is now sitting in inventory. Despite these issues, we ended the quarter with a net cash position of $65 million and total liquidity of $478 million. We continued to maintain strong liquidity of $502 million at the end of April as well. A prudent capital allocation over the last few years, which prioritized debt repayment and bolstering liquidity, has significantly improved our ability to manage through a multi-month restriction on moving our export volumes. Since our spinoff, we have increased our unrestricted cash and short-term investments by more than $100 million and reduced our annual debt servicing cost by more than $60 million.

In other words, we have significantly reduced the fixed cost in the business while simultaneously improving our liquidity and financial flexibility, which gives us comfort in managing through the terminal disruption. Before moving on to guidance, let me provide some perspective around the impact of the Baltimore Port closure and how it will drive our outlook for 2024. As Jimmy mentioned, we are restricted in our ability to export coal. In working with our customers and logistics partners, we are currently able to move approximately 600,000 export tons per month to 800,000 export tons per month from an alternate port compared to a typical 1.2 tons per month to 1.5 million tons per month of our PMC product to Baltimore. We expect this situation to continue through the end of May.

Assuming there are no restrictions at the Baltimore Port beginning in June, we will work to not only resume our historical average throughput rate, but to potentially make up for the lost throughput tonnage from April and May. Accordingly, we are adjusting our production guidance to reflect that assumption. Starting with the PMC, due to the bridge collapse, we are reducing our 2024 sales volume to a range of 24 million tons to 26 million tons from the previous range of 25 million tons to 27 million tons. Our PMC mines were running very well until the bridge collapse and continue to run well on their current reduced schedules. Our marketing team has also done a good job to quickly secure spare port capacity. In preparation for the port reopening, the CMT team has focused these past few weeks on completing their planned shutdown projects while we ship PMC tons to stockpile at the terminal.

Our plan is for the CMT to then reduce the duration of its typical shutdown period and ship coal from the stockpile while the mines and railroads go through their summer maintenance shutdowns. On the pricing front, we are maintaining our average coal revenue per ton sold range of $62.50 to $66.50. Holding this range, despite the increased shipping costs of the export tons that pivoted to a Virginia port, reflects the improved API2 benchmark pricing compared to earlier this year when the guidance range was initially set. Given the reduced tonnage range and lower fixed cost distribution benefit in April and May, we are increasing our PMC average cash cost of coal sold guidance to $37.50 per ton to $39.50 per ton, an increase of $1 per ton on each end of the range.

For our Itmann Mining Complex, we are increasing our sales volume guidance to a range of 700 tons to 900,000 tons and from the previous range of 600 tons to 800,000 tons. On the cash cost front, we are suspending our average cash cost of coal sold per ton guidance at the Itmann Mining Complex due to the continued significant equipment delivery delays, reduced manpower and the evolving mix of mined, purchased and processed coal at the complex. Lastly, on the capital expenditures front, in an effort to partially mitigate the effects of the bridge collapse, we are reducing our CapEx guidance range by approximately $20 million to a range of $155 million to $180 million, from the previous range of $175 million to $200 million. With that, let me turn it back to Jimmy.

Jimmy Brock: Thank you, Mitesh. Let me now provide an update on our shareholder return to progress. We deployed approximately 89% of the free cash flow generated during the first quarter towards repurchasing shares of our outstanding common stock. In total, through April 2024, we deployed $37 million of our Q1 2024 free cash flow towards repurchasing 440,000 shares of CEIX common stock at a weighted average price of approximately $84 per share. Since restarting our share repurchase program in late 2022, we’ve retired 6.1 million shares or approximately 18% of our public flow. As we have mentioned, we remain dedicated to returning value to our shareholders through our capital allocation framework. We continue to believe that demand for our high quality coal in the export industrial markets will be stronger for much longer than we’re given credit for.

We also believe that our long-term contracts provide us with strong revenue visibility. As such, we continue to believe that share buybacks are the best use of our capital. As always, we will continue to analyze this and prioritize the highest rate return. Moving forward through the remainder of 2024, our major focus will be on mitigating as much of the reduced export tonnage due to the bridge collapse as possible. Customer demand in the export markets has remained strong and we have had constant communication with our customers to work through the delays and move shipments around. We continue to work closely with the Coast Guard and local authorities to open the shipping lane as soon as possible. As Mitesh mentioned, we have a plan to accelerate our summer maintenance work at the CMT in conjunction with pre-shipping coal to the terminal to allow it to hit the ground running when the shipping lane opens.

This will also allow the CMT to continue shipping throughout the shutdown period when the railroads and mines will close for maintenance work. Before turning over the call, I want to thank our employees for their timely reaction to the accident in Baltimore. The CMT team jumped into action working with local authorities and developing plans to accelerate maintenance. Our mining operations quickly pivoted to maximize efficiency and optimize their operating schedules. Our marketing team leveraged the strong relationships we built with our transportation partners to secure some incremental capacity at an alternative export facility, as well as reroute trains to this port. Finally, the entire team across the Board has been focused on managing as much spend as possible to help partially mitigate the financial impact until the Port of Baltimore is reopened.

It is our team’s dedication and hard work that allow us to so quickly manage through these unforeseen challenges that inevitably happen in this business. With that, I will hand the call back over to Nate for further instructions.

Nathan Tucker: Thank you, Jimmy. We will now move to the Q&A session of our call. At this time, I’d like to ask our Operator to please provide the instructions to our callers. Operator, could you please provide the instructions?

Operator: Thank you. [Operator Instructions] Your first question comes from the line of Lucas Pipes of B. Riley Securities. Your line is now open. Please ask your question.

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