Contura Energy, Inc. (CTRA) Q4 2019 Earnings Conference Call March 18, 2020 2:00 PM ET

Company Participants

David Stetson - Chief Executive Officer
Andy Eidson - Chief Financial Officer
Jason Whitehead - Chief Operating Officer
Emily O'Quinn - VP, Corporate Communications

Conference Call Participants

Mark Levin - Seaport Global Securities LLC
Lucas Pipes - B. Riley FBR, Inc.
Daniel Scott - Clarksons Platou Securities

Operator

Good day and welcome to the Contura Energy Fourth Quarter 2019 Results Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Emily O'Quinn, Vice President of Corporate Communications. Please go ahead.

Emily O'Quinn

Thanks Alison and good afternoon, everyone. Before we begin, let me remind you that during our prepared remarks and the Q&A period, our comments relating to expected 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 fourth quarter 2019 earnings release and the associated SEC filings. 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 Contura's Chief Executive Officer, David Stetson; and Chief Financial Officer Andy Eidson. Also participating on the call is Jason Whitehead, our Chief Operating Officer, who is available to answer questions on operation.

With that, I'll turn the call over to David.

David Stetson

Thank you Emily. Good afternoon everyone and thanks for joining the call today. Before going into the details of our results I want to start off with a comment about the Corona virus. As I know it is on everyone's mind this afternoon is we have seen across the globe anything dealing with health and safety have potential impact lives and we feel for the many people who have been affected by the Corona virus. For the perspective of our business and our people we’ve been encouraging everyone in the organization to take precautions, wash hands, stay home when you are sick, all the guidelines we have heard from the CDC and others.

Operationally, we continue to mine and process coal normally and we have not seen a direct business impact at this time. From a sales perspective we have been speaking to our customers almost daily and we have seen a lot of speculation on the Corona virus impacts but we haven't experienced any as of this time. In short, we remain committed to closely monitoring the situation and taking precautions to reduce the risk, the exposure to our people and to our business.

Turning now to our financial results, as you know on February 10, we announced preliminary unaudited financial results for the fourth quarter and on February 11, we held exchange call to discuss results, take questions and share our vision on Contura for 2020. We will be reiterating those comments regarding the financial results from the quarter and Andy will have some additional color and details to share in his remarks.

There is no question that 2019 was a difficult year on multiple levels but Contura has made tremendous progress on key corporate and operating initiatives. We streamlined decision-making, driven cost reductions and executed on our capital projects. We are fully prepared and stand ready to take advantage of market opportunities as they present themselves.

As a leadership team we realized that operating cost experienced in late 2018 and into much of 2019 were neither sustainable nor they accurately reflect cost of our mines under a disciplined and efficient management practices. Jason and Andy sat down shortly after Jason came on board and reviewed our cost structure across the entire portfolio of mines, they determined that the goal of getting to Central Appalachia Met cost below $80 was achievable.

We are now seeing the success of those strategies and our latest cost numbers validate our 2020 guidance cost within the range of $76 to $81 per ton for Central App Met. Much of the success is tied directly to the transformational changes that Jason has put in place since he joined the organization in mid-August as of last year. He has streamlined processes, improved efficiencies across the enterprise, instituted money practices and emphasized safety while also driving down cost. At the corporate level Andy has executed well on the same mandate extract cost from the system. Over just the past few months Andy has identified and executed on approximately $10 million in SG&A savings as he and his team have tightened our budgets and made more important changes to streamline our offices.

I am also thrilled that Roger Nicholson joined our team in December as General Counsel, leads our legal teams as well as safety and environmental functions of our business. He is also taking quick action to remove layers of bureaucracy and lower cost across his areas of responsibility, all while tackling some of the most challenging issues that we face as a company. Jason, Andy and Roger have taken my vision of flatter, more nimble organization and have made it a reality.

Contura is better positioned to seize opportunities when they are presented and proactively addressed threats to the business. We are able to react quickly when changes do arise.

Along these lines we are lowering our CapEx guidance for 2020 to remove $30 million at both the high and low ends the range putting us an expectation of $145 million to $165 million of CapEx for the year.

Andy will go in greater detail of this in a moment but this enhances our liquidity in case we see a drop in demand for our products amid meeting global economic challenges.

We are facing rapidly changing conditions but as of now we haven't seen pushback from customers or contracts delivery of our met production. We do have plans and contingencies in place should we see any slowdown however. On top of the $30 million in expected CapEx reductions, we've identified another $15 million in operational activities, and $8 million across SG&A and operations. They were in the process of cutting or postponing.

I've been very proud of our teams, we're stepping up to identify cost containment opportunities and will continue to make strong progress on these initiatives. Lastly, I'm pleased to provide an update on one of our capital projects that has now commenced production. Road Fork 52 began producing met coal in late February and when it reaches full production makes that cost to be in the $65 to $70 per ton range. This is an example of our previously discussed long term vision to bring online new production with cost curves that are low current levels.

We remain on track with our two other capital projects Black Eagle and Lynne Branch and expect all three of these met projects to be in full production next year. On the thermal side, we continue to right-size our Central App thermal production and we have redeployed equipment to met production to better match up with shrinking domestic markets and challenging international markets.

With that I'll turn over to Andy for some additional details on the financials.

Andy Eidson

Thanks David. Looking at some of our headline results. Our fourth quarter EBITDA declined from the third quarter by $8.5 million to $31.5 million, mainly due to softer met index prices in the Atlantic Basin which deteriorated by an 11% in the fourth quarter.

Consequently our average CAPP - Met segment realization declined more than $13 to roughly $95 a time. On the positive side, as David mentioned we saw strong cost improvements across all of our segments suggesting the productivity enhancement Jason and his team have implemented or continuing to yield excellent outcomes. Broken down by segment CAPP - Met generated $42 million of margin during the fourth quarter. Both of our thermal segments posted positive results in the fourth quarter with CAPP - Thermal margin of $6 million while met contributed $10 million of margin.

Note that these segments margin numbers do not include SG&A allocation of looking at fourth quarter SG&A standalone excluding a $4.7 million non-cash stock compensation expense and $8 million in one-time expenses primarily associated with management restructuring. SG&A was down $2.1 million from the third quarter to $13.1 million.

Our fourth quarter CAPP - Met shipments increased by 300,000 tons to 3.3 million tons quarter-over-quarter while met shipment volume declined slightly from 1.6 to 1.5 million tons and CAPP - Thermal shipments declined 250,000 tons to 900,000 tons, primarily as a decision of the, -- as a result of the decision to reduce our CAPP - Thermal footprint and there was also a customer force measure in the fourth quarter.

Operating costs, our CAPP - Met cost of sales was approximately $82 per ton compared with $87 per ton in the third quarter as our Deep Mine productivity which is measured by feet per shift improved in the CAPP - Met segment by 8%. I would also note that this $82 number does include approximately $3 of lower cost or market inventory adjustment. So if you're looking at a more of a stand-alone true operating cost you're in the $78, $79 zip code. So outstanding performance there.

And the story was pretty similar in the CAPP - Thermal segments where cost declined by nearly $10 a ton to $49 a ton primarily due to an increase in fee per shift of approximately 12%.

Third quarter performance at Northern App was impacted by a longwall move which drove the cost higher in third quarter -- fourth quarter we didn't have to deal with that. Also there were some incremental vacation time in Q3 versus Q4. So the absence of those factors drove the fourth quarter cost of sales in NAPP to just under $35 a ton or approximate $9 reduction.

Shifting to our 2020 guidance, we are maintaining our guidance with the exception of CapEx which will only about $30 million at both the high and low ends of our prior expectation to a new range of $145 million to $165 million. We conducted an extensive review of all of our budgeted CapEx items with a focus on lowering total spending without hindering our productivity goals or impacting safety.

A portion of the CapEx reduction is associated with Cumberland as we trim certain non-critical expenditures and we did defer some items and within the CAPP segment we transferred equipment from operations that are being well down and we're able to delay some other expenditures.

With these actions, we feel very confident that we can achieve our newly rationalized CapEx guidance in 2020.

Updating on sales progress for the year, we have approximately 52% of our CAPP - Met tonnes committed at an average price of approximately $98 per ton. In addition we have approximately 27%, committed an index for the year. And this is a little bit ahead of where we normally would be at this point in the year. We still have some times to put the [bad button] but we're pretty well on pace as we stand.

On the thermal side, we're fully committed for 2020 with a 100% of NAPP committed and priced at an average price at $43.43 and CAPP - Thermal committed and priced at an average of just under $56 per ton.

As we've announced previously at the end of the fourth quarter the company had approximately $213 million in unrestricted cash and our total restricted cash balance was $166 million including restricted cash deposits and long-term investments. So our total liquidity including all of those items as one of those availability under our ABL was $328 million as of December 31.

Turning to fourth-quarter cash flows for a moment, we'll look at three items that made up an increase of approximately $61 million for overall unrestricted cash balance at the end of the year. First of all we received the AMT credit monetization refund of $65 million. This was originally expected to be received in Q1, early Q1 of this year.

So it showed up just a little bit before Christmas and as we disclosed last time -- our last call in the earnings or the investor presentation that we provided on our website we've basically accelerated the assumption on all of our tax refunds in the AMT category by one year.

We also received a workers’ comp related collateral release of $79 million of which $53 million was then transferred and a liquidity neutral LC transaction to the ABL. So basically we saw a net of $26 million benefit from that LC move.

And then lastly, we received $22 million of surety releases consisting of $9 million related to the PRB transaction and $30 million of other surety related releases.

As a reminder we paid an aggregate of $95.1 million related to the PRB transaction including the payment to ESM and some ad valorem back taxes during the quarter. We do have several other cash obligations in 2020 that we've talked about extensively in the past and so we won't cover those necessarily again right now but you can find them in the latest investor presentation that I was referring to earlier.

Finally, I do want to comment on an issue that came up a couple of weeks ago, in late February along with approximately 20 other companies we received a letter from the Department of Labor regarding self insurance of certain black lung obligations.

The DOL has overhauled the way it handles self insurance authorization which now imposes much more stringent reporting requirements on co-operators and requires significantly more collateral than in prior years. Under the new structure the DOL evaluates and sorts co-operators into risk categories of low, medium or high based on financial metrics.

Companies deemed to be the highest risk will be required to provide 100% collateral. Medium risk companies will provide 85% collateral and lower risk companies like Contura will need to provide 70% collateral.

Across the board this is a dramatic increase in required collateral as we've previously provided approximately $2.7 million in collateral in connection with these black lung obligations. And now we're being asked by the DOL to provide $65.7 million to receive authorization for self insurance.

We strongly disagree with both the security determination by the DOL and the methodology through which they've arrived at these new requirements. Therefore we have informed the DOL of our plan to appeal this decision.

We're also evaluating other options including the potential to ensure these black lung obligations through a third-party provider. In the event that we decided to proceed with self insurance and our appeal is unsuccessful in reducing or eliminating the additional collateral requirement but we do have sufficient capacity under our ABL to issue letters of credit to cover this acquirement naturally it's very early in this process so more details to come.

One other item I would like to cover before we open the lines for questions, there have been some questions coming regarding the audit findings regarding material weaknesses and our internal controls. I do want to mention those quickly. There's the technical accounting view and then there's my personal view. The technical accounting view says that we had three particular items that were problematic from a controls perspective, I think all three of those for a personal view would qualifies something of a foot fault but technically they do qualify.

We do have plans in many instances these have already been remediated but in total they will be remediated by the end of the first quarter and the important thing to note is that has nothing to do with the actual financial results. These were strictly internal control issues related to first year stocks with implementation.

Interesting thing is none of our procedures or processes have changed since we last asked compliant in 2014. All the team has been the same but the world, the outside world has changed a little bit and therefore our processes weren't quite up to the par based on these new measurement methodology.

So with that said, I think we've covered that piece. So operator, I guess we can open the line for questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question and answer session. [Operator Instructions] Our first question today will come from Mark Levin with the Benchmark Company. Please go ahead.

Mark Levin

Okay. Great. Thank you very much, hope everyone is safe. I'm just a – a few just quick questions. One in terms of modeling price realizations going forward, any color as to whether or not it's appropriate to use the kind of the basic industry prices for high vol A, high vol B, low vol or should we be assuming some discount to those numbers and if there is a discount of how much and what are the trends of those discounts?

Andy Eidson

Hey Mark. It's Andy. Good to hear from you. I think we're still seeing by and large some degree of discount from the quoted East Coast numbers naturally. If you look at East Coast compared to Aussie low-vol I think as of yesterday if you looked at where East Coast closed as compared to the March future expectation, there's about $23 a ton disconnect there but then beyond that, I think it's safe to say there is a fair amount of discounting going on to actually move volumes and whether that number is 5%, 8%, 12% anecdotally we've heard numbers all up and down the scale but there still is a significant amount of activity in that regard.

Mark Levin

Okay, I appreciate the candor and in terms of your, to the extent you want -- will you discuss it but maybe your inventory situation on the coking coal side, is there – is there a more coal sitting on the ground today than several months ago or is it cleaning up or maybe just some color around your inventory?

Andy Eidson

Yes. We have continue to build some level of inventory. You can see the working capital movements from the beginning of last year through the end of the year that trend has continued a little bit. We are getting some production right-sizing. As you'll recall we did cut our product or our sales guidance there a few weeks ago. So we do anticipate working down that inventory level some during the year but right now we've got a pretty healthy amount of inventory about healthy. I mean a little bit more than I would like to have tied up tying up cash at the moment but expectation is certainly that we'll be bringing that down as the year moves on.

Mark Levin

Okay. And then my next questions to do with Northern App and Cumberland, maybe what the updated thought process is there, I think you guys reference to $50 million or $60 million capital requirement this year for the impoundment. Is that a definite or would you -- is there any scenario in which you would consider reclaiming the mine and if so how much would that cost maybe relative to the expense of the impoundment?

David Stetson

Yes Mark, this is David. As I stated in our call in February, we're reviewing all the options as it pertains to our capital spin at the Cumberland complex. We did receive the final permit approximately a week, 10 days ago that allows for the construction of the impoundment but until we resolve some open issues that impacts on our ability to generate some long-term free cash flow where we've limited any capital spending just a pure preparatory work associated with the impoundment. So it's still in process. We've still got some open-ended items that we want to review. We're looking at all kinds of scenarios as to that capital spend whether to do it or not to do it and if we do it over what period of time it has to be accomplished. So it's still a work in process Mark.

Mark Levin

Okay. Fair enough David. Very helpful and then final question just a modeling question for Andy. The first quarter we're almost done -- maybe some color as to how to think about at least relative to your full-year guides how Q1 will look cost volumes, etc or anything unusual in the first quarter

Andy Eidson

Yes. I mean I don't go too far but I think it's safe to say that our volumes are probably pretty well on pace. Naturally there's a little bit of seasonality. I think our Q1 typically a little bit, Q1 and Q4 seem to be a little bit heavier than the other two quarters so that that trend may hold a little bit but from a cost perspective, February I'm glad you asked the question because it gives me a chance to make Jason comfortable about dragging on him some more Q1 to date through in the February is actually doing extremely well and by and large coming in at or below the bottom end of our guidance range.

So the operations teams continues to do just an outstanding job and controlling everything that they can control and not necessarily worrying about the rest.

Mark Levin

That's great. Appreciate the color. Chat soon.

David Stetson

Thanks Mark.

Operator

[Operator Instructions] Our next question will come from Daniel Scott of Clarkson's. Please go ahead.

Daniel Scott

Great. Thank you and a nice job on cost controls. The one question I wanted to drill down in a little bit is on the contracted book particularly on the met coal site. You've raised your percent covered for the year priced and contracted and I believe the realized price went from 101 to about 98. Can you maybe give a little color on how much of that is mix? How much of it’s domestic versus international? Kind of what has changed versus the last update on the contractor book please?

Andy Eidson

Hey Dan, this is Andy. I don't have the breakdown of the qualities of the kind of the Delta there but it's probably not too far off, this is all international. The incremental pieces all international, I think if you do the math that probably hits you around mid to high 80s number but I think it just reflective of where the market has bounced around to in the past few weeks. It felt like we were getting some momentum before the impact of the Corona virus came more broadly known and then of course everything kind of went to a halt but I think that's -- I would imagine that some of this is a little bit on the lower end of the spectrum but I can't. I don't have the numbers in front of me to prove that but that's really just kind of what we're seeing in the market at this point in time.

Daniel Scott

Okay. Great. And then if you just, I got most of details of the Department of Labor stuff on self insurance because you maybe talk about the timeline for resolving that?

Andy Eidson

Yes, again it's early in the process so we had 30 days to respond to their initial requests which we did respond and notify them that we were appealing the process behind the appeal is little bit new. All this came together pretty quickly from the DOL's perspective and so I think a little bit of this will probably develop. It won't be known until it develops and I think as with all governmental agencies right now they probably have other things that they're tied up with at the moment.

So I'm not sure on a timeline. We will certainly keep everyone updated the best we can as it develops but again it appears to be hitting, it caught the entire industry that utilizes self-insurance off guard. And so it's a challenging situation and the large degree it's kind of an illogical situation, certainly understand the impact of the bankruptcies from 14 to 16 on the black lung trust fund but again to go from a collateral rate of effectively $2.7 million to $66 million or $67 million in one fell swoop seems to be a bit aggressive. So again not, unfortunately I don't have a whole lot of detail to share on that one because it is so early in the process but we'll keep everyone in the loop as best we can.

Daniel Scott

Hey Andy thanks very much for the detail.

Andy Eidson

Sure. Thanks.

Operator

Our next question will come from Lucas Pipes with B. Riley FBR. Please go ahead.

Lucas Pipes

Hey good afternoon everybody.

Andy Eidson

Hey Lucas.

David Stetson

Good afternoon Lucas.

Lucas Pipes

Hey, I first wanted to just get a little bit more market color. Are you getting pushback from customers either on the domestic side thermal coal, we had a mild winter low natural gas prices and now I assume everyday looks like a weakened and then also on the international side, are European steel mills pushing back on met coal deliveries for example? I would appreciate your perspective on that. Thank you.

David Stetson

I'll take it and Andy can fill in the gaps. On the thermal side, yes, we are not unique to many of our colleagues in the industry on the thermal side. There's been a weakened demand there. We have had good relationships with our utility customers and have entered in agreements that have to some extent curtailed/postponed some shipments and that goes to our strategy that we had earlier. We kind of saw it coming. So we started reducing our thermal footprints in Central App region.

On the met side, Lucas we see a steady metallurgical coal ship -- its demand in recent weeks. We realize what's going on today. We stay in close contact with our customers both in North America and abroad and we and I'll say it just picked the time right, Lucas it's 2:31 today I can tell you that we haven't seen any or heard of any shipment delays referrals from our customer base. I think they're kind of looking at a wait-and-see as well but we also aware of the disruptions on automobile side in Spain, Germany, France and Italy.

And so, our Q1 metallurgical shipments are ahead of schedule and ahead of budget. However, the way we're seeing the market today, we've got all kinds of contingencies in place internally. We figure it will probably be a more of a, it could be the end of the second quarter, third quarter impact but right now we haven't seen any Lucas but [they probably] found.

Lucas Pipes

Well, it's very good to hear that as of today, it has not been the case and hopefully this will pass sooner than we all fear at this time. My second question is around the liquidity. You have a couple of facilities. Have there been considerations on kind of proactively employing those to just – just in the event that things do last a little longer and a lot of folks are concerned about a cash crunch getting even worse from where it is today kind of -- Andy how are you thinking about that? Thank you.

Andy Eidson

No, that's a great question Lucas. I think we've all watched over the past couple of weeks, activity ramping up in that regard, a lot of companies particularly in the hospitality or airline industry, it's the ones most heavily damaged by Corona virus issues moving towards drawing down -- revolvers -- we are testing as much cash as they can while it is available.

I think at this point, we have really good relationships with the syndicate of banks and our revolver. And at this point we don't – we don’t really have concern around being able to utilize our facility even in a more protracted situation but that is definitely something that has been a consideration something on our mind at least as we watch so many other companies doing that but at this point, I think any action on our part would probably be premature but again we are pretty comfortable with our banks and the amount of reserves they have to cover the commitments from the – for LC just general ABL usage.

Lucas Pipes

Very helpful and sort of question that there isn't anything that would limit your ability from a covenant perspective to take advantage of that liquidity?

Andy Eidson

No, not really. It really ties back to just the inventory and AR value that supports the total facility size naturally as markets come down -- the value of inventory will deplete a little bit and the value of the AR will -- [DOL] as reflecting over self process. But we have – you can probably call it undersized facility as it is we have quite a bit of cushion when it comes to our inventory and our AR balances compared to the availability or the size of the facility. So we are even at this current trough level where we have got plenty of rooms as far as meeting the requirements to maintain our access to the full facility. There are naturally if you are drawing down there are some limitations as far as if you have springing levels which typically are 90% to 95% of the total capacity which will be limiting factor but no other real covenantal restrictions that would keep us out of access to it.

Lucas Pipes

Got it. Got it. Very helpful, Andy and team everybody really be safe and best of luck during this turbulent times.

Andy Eidson

Thank you Lucas. Same to you.

Operator

Ladies and gentlemen this will conclude our question-and-answer session. At this time I would like to turn the conference back over David Stetson, CEO for closing remarks.

David Stetson

Again, thanks everyone for getting on the line and joining us today and thanks for your interest on Contura. I hope everyone has a safe and great rest of their day. Thank you so much.

Operator

The conference is now concluded. And we thank you for attending today's presentation. You may now disconnect your lines.