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Good day and welcome to the Contura Energy Fourth Quarter 2019 Results Conference Call. [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.
Thanks, Allison, 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 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 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 operations. With that, I'll turn the call over to David.
Thank you, Emily. Good afternoon, everyone, and thanks for joining the call today. Before I go into details of our results, I want to start off with a comment about the coronavirus. As I know it is on everyone's mind this afternoon, as we've seen across the globe, anything dealing with health and safety has potential to impact lives. And we feel for the many people who have been affected by the coronavirus. For the perspective of our business and our people, we have been encouraging everyone in the organization to take precautions, wash hands, stay home when they're sick, all the guidelines we've heard from 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've been speaking to our customers almost daily, and we've seen a lot of speculation on the coronavirus 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 and exposure to our people and to our business. Turning now to our financial results. As you know, on February 10, we announced preliminarily unaudited financial results for the fourth quarter. And on February 11, we held the exchange call to discuss results, take questions and share our vision on Contura for 2020. We'll be reiterating those comments regarding the financial results from the quarter, and Andy will have some additional color and detail to share in his remarks. There's no question that 2019 was a difficult year on multiple levels, but Contura has made tremendous progress on key corporate and operating initiatives. We've 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 did they accurately reflect cost of our mines under a disciplined and efficient management practices. Jason and Andy sat down shortly after Jason came onboard and reviewed our cost structure across the entire portfolio of mines. And they determined that a goal of getting to Central App 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 this 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 mining practices that emphasize safety, while also driving down cost.
At the corporate level, Andy has executed well on the same mandate to 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 a flatter, more nimble organization, and have made it a reality. Contura is better positioned to seize opportunities when they are presented and proactively address 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 of the range, putting us at 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 the many global economic challenges. We are facing rapidly changing conditions. But as of now, we haven't seen pushback from customers for contract delivery of our met production. We do have plans and contingencies in place, should we see any slowdowns, 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, that we're in the process of cutting or postponing. I've been very proud of our teams for stepping up to identify cost containment opportunities, and we'll 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, we expect 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 below current levels. We remain on track with our 2 other capital projects, Black Eagle and Lynn Branch, and expect all 3 of these met projects to be in full production next year. On the thermal side, we continue to rightsize our Central App thermal production, and we have redeployed equipment to meet 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.
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 11% in the fourth quarter. Consequently, our average CAPP - Met segment realization declined more than $13 to roughly $95 a ton. On the positive side, as David mentioned, we saw a strong cost improvements across all of our segments, suggesting the productivity enhancement Jason and his team have implemented are 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 NAPP contributed $10 million of margin.
Note that these segment margin numbers do not include SG&A allocation. We're looking at fourth quarter SG&A stand-alone. Excluding a $4.7 million noncash stock compensation expense and $8 million in onetime 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 NAPP shipment volume declined slightly from 1.6 million 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 majeure 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 more of a stand-alone true operating cost, you're in the $78, $79 zip code. So outstanding performance there.
The story was pretty similar in the CAPP - Thermal segment, where costs declined by nearly $10 a ton to $49 a ton, primarily due to an increase of feet per shift of approximately 12%.
Third quarter performance at Northern App was impacted by a longwall move, which drove the costs higher in third quarter, and fourth quarter, we didn't have to deal with that. Also, there was 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 we're on about $30 million at both the high and low ends of our prior expectations to a new range of $145 million to $165 million. We conducted an extensive review of all of our budgeted CapEx items with the 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 noncritical expenditures, and we did defer some items. And within the CAPP segment, we transferred equipment from operations that are being wound 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 tons committed at an average price of approximately $98 per ton. In addition, we have approximately 27% committed in index for the year. This is a little bit ahead of where we normally would be at this point in the year. We still have some tons to put to bed, but we're pretty well on pace as we stand. On the thermal side, we're fully committed for 2020 with 100% of NAPP committed and priced at an average price of $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 well as availability under our ABL was $328 million as of 12/31. Turning to fourth quarter cash flows for a moment. We'll look at 3 items that made up an increase of approximately $61 million to our 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 in 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 earning -- 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 1 year.
We also received a workers' comp related collateral release of $79 million, of which $53 million was then transferred in a liquidity neutral healthy 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 $13 million of other surety-related releases. As a reminder, we paid an aggregate of $95.1 million related to the PRB transaction, including a 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 coal operators and require significantly more collateral than in prior years. Under the new structure, the DOL evaluates and sorts coal operators into risk categories at low, medium or high based on financial metrics. The companies deemed to be the highest risk will be required to provide 100% collateral, medium-risk companies will provide 85% collateral and low-risk companies like Contura will need to prevent -- 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 are also evaluating other options, including the potential to ensure these black lung obligations through the third-party provider. In the event that we decide to proceed with self-insurance and our appeal is unsuccessful in reducing or eliminating additional collateral requirement, we do have sufficient capacity under our ABL to issue letters of credit to cover this requirement. 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 line for questions. There have been some questions coming in regarding the audit findings regarding material weaknesses in our internal controls. I did want to mention those quickly. There's the technical accounting view and then there's my personal view. The technical accounting views says that -- what -- we had 3 particular items that were problematic from a controls perspective. I think all 3 of those from a personal view would qualify something of a footfall, 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 it has nothing to do with the actual financial results. These were strictly internal control issues related to first year SOX implementation. Interesting thing is none of our procedures or processes have changed since we were last SOX compliant in 2014.
Audit 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.
[Operator Instructions] Our first question today will come from Mark Levin with The Benchmark Company.
Okay, great. Hope everyone is safe. Just 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, how much? And what are the trends in this discounts?
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, we -- if you look at East Coast compared to Aussie low-vol, I think as of yesterday, if you look at where East Coast closed as compared to, call it, 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.
Appreciate the candor. And in terms of your -- to the extent you're willing to discuss it, but maybe your inventory situation on the coking coal side, is there more coal sitting on the ground today than several months ago? Or is it cleaning up? Or maybe just some color around your inventory?
Yes. We have continued 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 rightsizing. As you'll recall, we did cut our product -- 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, by 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.
Okay. And then my next question is to do with Northern App and Cumberland. Maybe what the updated thought process is there? Is there -- I think you guys referenced 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?
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 spend at the Cumberland Complex. We did receive the final permit approximately a week to 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 still got some opening of 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.
Okay. Fair enough, Dave. Very helpful. And then final question, just a modeling question for Andy. First quarter we're almost -- we're almost done. Maybe some color as to how to think about, at least, relative to your full-year guidance, how Q1 will look, cost volumes, et cetera? Or anything unusual in the first quarter?
Yes. I mean, I don't want to 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 is typically a little bit -- Q1 to Q4 seemed to be a little bit heavier than the other 2 quarters. So 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 uncomfortable by bragging on him some more. Q1 to date through the end of 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 team continues to do just an outstanding job in controlling everything that they can control and not necessarily worrying about the rest.
[Operator Instructions] Our next question will come from Daniel Scott of Clarksons.
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 side. You've raised your percent covered for the year, priced and contracted. And I believe the realized price went from $101 to about $98. Could 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 contracted book, please?
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 piece is all international. I think if you do the math that probably gets you around a mid-to-high 80s number. But I think it's 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 coronavirus became more broadly known, and then, of course, everything kind of went to a halt. But I think that -- 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.
Okay, great. And then if you could just -- you got most of the details of the Department of Labor stuff on self-insurance, but could you maybe talk about the time line for resolving that?
Yes. Again, it's early in the process. So we have 30 days to respond to their initial request, which we did respond and notify them that we were appealing. The process behind the appeal is a 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 the time line. 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 to a 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.
Our next question will come from Lucas Pipes with B. Riley FBR.
I first wanted to just get a little bit more market color. Are you getting pushback from customers, either on the domestic side, the thermal coal? We had a mild winter, low natural gas prices, and now I assume every day looks like a weekend. And then also on the international side, are European steel mills pushing back on met coal deliveries, for example. Would appreciate your perspective on that?
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 footprint in the Central App region. On the met side, Lucas, we have seen a steady metallurgical coal shipments 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 I 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, deferrals from our customer base. I think they're kind of looking at a wait and see as well. But we also are aware of the disruptions on the 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're -- we've got all kinds of contingencies in place internally. It will -- we figure it will probably be more of a -- it could be the end of the second quarter or third quarter impact. But right now, we haven't seen any, Lucas, but they'll probably come.
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 liquidity. You have a couple of facilities. Have there been considerations on kind of proactively employing those to just in the event that things do last a little longer and a lot of folks are concerned about cash crunch getting even worse from where it is today. Kind of -- Andy how are you thinking about that?
No, that's a great question, Lucas. We -- 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 industries, the ones most heavily damaged by coronavirus issues moving toward drawing down revolvers, war chesting 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 really have a 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're pretty comfortable with our banks and the amount of reserves they have to cover the commitments from the -- for LC or just general ABL usage.
Very helpful. And a follow-up question on that. There isn't anything that would limit your ability from a covenant perspective to take advantage of that liquidity?
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 the inventory will deplete a little bit. And the value of the AR will dip as it's reflecting lower sales prices. But we have -- you could probably call it an 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're -- even at this current trough level, we're -- we've got plenty of room as far as meeting the requirements to maintain our access to the full facility. There are -- naturally, if you're drawing down, there are some limitations as far as if you hit springing levels, which typically are 90% to 95% of the total capacity, which would be a little bit of a limiting factor, but no other real covenantal restrictions that would keep us out of access to it.
Got it. Very helpful. Andy, team, everybody really be safe and best of luck during these turbulent times.
Thank you, Lucas. Same to you.
Ladies and gentlemen, this will conclude our question-and-answer session. At this time, I'd like to turn the conference back to -- over to David Stetson, CEO, for closing remarks.
Again, thanks, everyone, for getting on the line and joining us today, and thanks for your interest in Contura. I hope everyone has a safe and great rest of their day. Thank you so much.
The conference has now concluded, and we thank you for attending today's presentation. You may now disconnect your lines.