Alpha Metallurgical Resources Inc
NYSE:AMR
Earnings Call Analysis
Q4-2023 Analysis
Alpha Metallurgical Resources Inc
The company has been purchasing coal opportunistically, aiming to integrate it into their shipments and ultimately boost EBITDA. However, this strategy has introduced a temporary working capital imbalance due to the timing difference between coal acquisition and the realization of sales. Executives indicated a close monitoring of cash flows and a commitment to share repurchases through the Adaptive Market Response (AMR) program, although they remain cautious about market conditions.
The executives expressed a positive outlook regarding the shipping market, particularly noting expected increases in hot metal production in Europe which should drive up demand for coke and coking coal. Although there is geopolitical and economic uncertainty, the company appears confident with its current booking status. In terms of shipments, they usually see the first quarter as lighter, but due to aggressive shipping schedules, that trend may change. Cost-wise, the company still faces inflationary pressures, especially in labor, but they've seen improvement through competitive wage and benefit packages aiming to be the preferred employer in their region.
The company's pricing strategy has been resilient, with wide spreads between U.S. and Australian Met indices. The future focus may shift more towards Asian markets, acknowledging that different coal grades often lead to variable demand. Despite current logistical challenges, like those impacting ocean freight and the Suez Canal, the company is not significantly affected as most of their business does not rely on Cost and Freight (CFR) but rather on Free on Board (FOB) shipping terms. They also reported satisfactory coal transportation via railways and some improvement in Panama Canal operations.
Concluding the call, the executives reiterated their gratitude for the interest in Alpha and indicated continued attentiveness to the dynamic market conditions.
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Greetings, and welcome to the Alpha Metallurgical Resources Fourth Quarter 2023 Results Conference Call. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Emily O'Quinn, Senior Vice President, Investor Relations and Communications. You may begin.
Thank you, Rob, and good morning, everyone. Before we get started, let me remind you that during our prepared remarks, our comments regarding anticipated business and financial performance contain forward-looking statements, and actual results may differ materially from those discussed. For more information regarding forward-looking statements and some of the factors that can affect them, please refer to the company's fourth quarter and full year 2023 earnings release and the associated SEC filing. Please also see those documents for information about our use of non-GAAP measures and their reconciliation to GAAP measures. Participating on the call today are Alpha's Chief Executive Officer, Andy Eidson, and our President and Chief Operating Officer, Jason Whitehead. Also participating on the call are Todd Munsey, our Chief Financial Officer; and Dan Horne, our Chief Commercial Officer. With that, I will turn the call over to Andy.
Thanks, Emily. Good morning, everyone. This morning, we announced our fourth quarter results with adjusted EBITDA of $266 million. For the full year, Alpha generated over $1 billion in adjusted EBITDA which marks the second year in a row, achieving that milestone. While 2023 was not without its challenges, I couldn't be prouder of the way that we responded as a company to those challenges and finish the year strong. The team did an excellent job of identifying issues, building a battle plan and executing decisively to overcome whatever obstacle we face. We ended the year within or better than nearly all of our guidance ranges, having shipped a total of 17 million tons with $15.3 million of that being Met coal. Our overall Met segment costs for the year were in line at $111.67. [indiscernible] costs in the all other category came in better than guidance. SG&A idle operations expense, DD&A and tax rate all ended the year within our guidance range. CapEx came in at $245.4 million, which is technically below the low end of the given range. However, when adding the $21 million of carryover that we have rolled into 2023, that puts us nearly exactly at the midpoint of our issued guidance for last year. Another milestone we reached in the fourth quarter was exceeding $1 billion in the share repurchase program. Since the program's inception in March of 2022, we have returned more than $1.1 billion to stockholders in the form of buybacks, repurchasing over 6.6 million shares of Alpha stock. We remain committed to our previously stated strategy of utilizing available free cash flow for the program as the preferred method of returning capital contingent upon minimum cash levels and market conditions. As we look ahead, the Board has set May 2nd as the date of our next Annual Meeting of Stockholders. And this morning, we announced a list of director candidates who will stand for election to our board at that meeting. We also announced that following significant tenures with the company, 2 of our current directors have reached the age of which they may no longer stand for election per our corporate governance guidelines, and they've retired from the Board effective today. AL Ferrara is our longest serving director, having been with us since 2016. AL has set the template for how an audit committee should be led, and we appreciate how this influence has particularly impacted the finance and accounting functions of the company. Mike Quillen and what can you say about Mike that hasn't already been said, he started this whole thing back in 2002 when he founded Alpha Natural Resources, and he's devoted much of the last 2 decades to building this company and seeing it through to its current success. It's hard to imagine the Board without these 2 long-standing directors, but we've been blessed to have them in Alpha for as long as we have. And as we announced this morning, Liz Fessenden has also retired from the Board effective today. We will miss Liz very much. She's been a Director since 2021 and served as Chair of the Board's Safety, Health and Environmental Committee. She's overseen a time of great accomplishment in environmental and safety awards, better than the national average performance across the portfolio and back-to-back company records in 2022 and '23 for NFDL and TRIR, respectively. I personally want to thank Liz for her support over the past year, in particular. She's been a great source of encouragement and a wonderful mindset coach during my first year in the [indiscernible]. We appreciate her leadership and wish her all the best. The good thing for me is that all these folks are still on my speed dial list. The bad thing for them is that all these folks are almost speed dial list. So I will be making frequent use of that list. In connection with these departures, the Board size has contracted from 9 to 7 seats, and we are excited to welcome a new and highly qualified individuals to our Board with the appointment of Shelly Lombard. Shelly comes to us with more than 35 years of experience on Wall Street and in other areas of the financial sector. This will be a variable addition to our Board and Audit Committee, and I can't wait to begin working with her. I'll now turn it over to Todd for a discussion of our fourth quarter and full year financial results.
Thanks, Andy. Fourth quarter adjusted EBITDA was $266 million, up from our third quarter level of $154 million. We sold 4.6 million tons in the quarter, almost all of which came from our Met segment. 42,000 tonnes came from the all other category. Quarter-over-quarter realizations increased for the Met segment with an average realization of $183.76 for the fourth quarter compared to $154.73 in Q3. Export Met tons priced against Atlantic indices and other pricing mechanisms in the fourth quarter realized $175.32 per ton, while export coal priced on Australian indices realized $213.41, these are compared to third quarter realizations of $136.76 per ton and $158.56, respectively. Realization for our metallurgical sales in the fourth quarter was a total weighted average of $193.54 per ton, up from $160.43 per ton in the prior quarter. Realizations in the incidental thermal portion of the Met segment decreased to $89.76 per ton in Q4 as compared to $92.22 per ton in Q3. Fourth quarter realizations in the all Other category were $70.14 as compared to $68.32 per ton in the third quarter. Cost of coal sales for our Met segment increased to $119 per ton in the fourth quarter, up from $109.95 per ton in Q3. The increase was primarily driven by higher sales-related costs and purchase coal costs, both of which were impacted by higher coal indices during the quarter. Higher labor costs were also a significant factor in the increase for the quarter. Cost of coal sales in the all Other category was $60.07 per ton as compared to $84.73 per ton in the third quarter 2023. With regard to costs, there are a couple of items creating some real-time pressure on our 2024 cost guidance. First, with the indices remaining above the levels indicated by futures trading back in November when our '24 guidance was issued, we're seeing higher sales-related costs than were budgeted. Also, we have had opportunities to purchase a higher volume of clean coal to add to the portfolio than was budgeted. And to the degree that these purchases continue at material volumes, this will also create pressure on our published cost of coal sales guidance. SG&A, excluding noncash stock compensation and nonrecurring items increased to $16.9 million in the fourth quarter as compared to $15.1 million in the third quarter. Q4 CapEx was $61.5 million, up from $54.7 million in the third quarter. Moving to the balance sheet and cash flows. As of December 31, 2023, we had $268.2 million in unrestricted cash, down from $296.1 million at the end of the third quarter. We had $94.1 million in unused availability under our ABL at the end of the quarter. Alpha had total liquidity of $287.3 million as of the end of December, which is net of a $75 million minimum liquidity ABL covenant. Cash provided by operating activities increased quarter-over-quarter to $199.4 million in Q4 as compared to $157.2 million in Q3. As of December 31, our ABL facility had no borrowings and $60.9 million of letters of credit outstanding, which is unchanged from the prior quarter. Turning now to our committed position for 2024. 35% of our metallurgical tonnage in our Met segment is committed and priced at the midpoint of guidance at an average price of $171.33. Another 55% of our Met tonnage is committed but not yet priced. Thermal byproduct portion of the Met segment is fully committed and priced at the midpoint of guidance at an average price of $77.14. Pursuant to our share repurchase program, we repurchased approximately 500,000 shares at a cost of $137 million in the fourth quarter of 2023. Since the beginning of the program, we have spent approximately $1.09 billion to acquire roughly 6.6 million shares of Alpha's common stock at a weighted average price of $164.87 per share. The outstanding share count has been reduced by more than 30% from the time the program began. As of February 19, 2024, the number of common stock shares outstanding was approximately $13 million, which includes the impact of 220,067 net shares issued in December 2023 and January 2024. The shares issued in these periods resulted from vesting of previously granted equity awards under the company's long-term incentive plan. The remaining authorization permits approximately $410 million in additional repurchases. Contingent, as always, on cash flow levels and market conditions. We are planning a reduction of the cadence of share buybacks over the next few months up to potentially pausing the program for a bit to build our cash balances back to our targeted levels. I will now turn the call over to Jason for some details on operations.
Thanks, Todd, and good morning, everyone. I want to start by recognizing the outstanding safety and environmental compliance performance from our teams in 2023. We've maintained our 99% water quality compliance rate for many years now, and we'll continue expanding our beyond compliance initiatives. For safety, we followed a 2022 company record in NFDL performance with another company record this time for TR in 2023. I can't say enough about our team members making this top priority day in and day out, and that focus has resulted in performance that is consistently better than the national average. We work hard every day to continue this positive trend into the future. While we're highlighting outstanding performance, I also want to publicly congratulate the winners of Alpha's 2023 best-in-class awards. The competition was tight, and we had record-setting teams that didn't end up winning the overall award. That's how difficult it is to claim the top spot. For 2023, the Midwest Virginia surface region, 1 in categories of deep mine, surface mine and preparation plant. Those winners are Kingston #2, Kingston South surface and Kingston processing, respectively. Kingston South surface mine, also known as Bishop, has won 2 years in a row. Jimmy Wood and his Midwest Virginia surface team deserve all the accolades they have received for sweeping those categories, which is very difficult to do. In the [indiscernible] facility category, Marmite River Dock 1 best-in-class while [indiscernible] claimed top honors and underground belt transfer system. Both of those are back-to-back winters 2 years in a row as well, and I want to thank all the teams for their determination and commitment to exceeding expectations. Turning to some operational updates. As I mentioned in last quarter, we celebrated the first development cuts at our newest high ball line, Check May Poulton in Q4. Also during the quarter, we completed renovations to the formerly retired chest processing plant which is now online and serving this mine. Together, CheckMate Fountain and chest Processing solidify Olkon as a new complex for Alpha. Also want to mention a couple of noninjury incidents we experienced in January at our McClure processing plant and Road fork 52 Deep mine. On January 17, an ignition occurred near the Core's clean coal belt discharge on top of a clean coal silo. We believe the ignition was fueled by dust and ignited by a shorted electrical installation. Again, no injuries, and our team members acted quickly and appropriately to make necessary notifications to agencies and ensure there was no fire. Investigations occurred and no contributing citations have been issued. While the exact cause of the ignition is still being analyzed, the silo has been examined and is structurally sound, and designs are under [indiscernible] repairs. Due to the swift responses, we were able to reroute [indiscernible] within the first few days to exclude the clean coal storage solo as to enable continued processing and shipments at normalized run rates and did not experience any material impact from the noninjury ignition. On January 30, 2024, [indiscernible] 52's #3 section started retrieve mining, the fourth and last panel of their active district. Then on January 31, 2024, a noninjury ignition occurred in by the [indiscernible] and [indiscernible] area of the #3 entry and [indiscernible] area is a term that we use to describe fully depleted and mined areas similar to those areas that are left behind the longwall. Investigations revealed a roof collapse in the [indiscernible] of the #4 entry exposing an overlying coal seam, and we believe it's likely that coal-bed methane entered into the [indiscernible] from that exposed scene. Other than reports of minors here in the roof bolt break immediately before the event and ignition source has not been identified. Investigations resulted in 0 related or contributory citations. And personally, I want to thank the team at Road Fork 52 for their actions on the night of January 31, but more importantly, and in my opinion, their high standards regarding housekeeping and rock dusting that prevented any more serious issues. Despite the tedious nature of investigating in this incident like this underground, our team and regulatory investigators concluded in about 4 business days. Of the 5 CM sections operating at Road Fork 52, #3 section was the only section idle during that time. I will now turn the call over to Dan for some information on the coal markets.
Thanks, Jason, and good morning. Throughout 2023, metallurgical coal markets generally showed strength with periods of volatility in the face of economic pressures, geopolitical uncertainty and global recessionary fears. Macroeconomic conditions around the world remaining consistent with some economies like the United States exhibiting continued resilience to these external pressures, while others like the European Union have experienced significant do. While central bankers in the United States and Europe are expected to lower interest rates within the 2024 calendar year in response to easing inflation, uncertainty remains regarding when those actions may be taken and how quickly they may impact overall economic conditions. Organizations such as the International Monetary Fund and the World Bank have issued muted expectations about global growth prospects for 2024 and 2025, citing a slower than historical average pace of expansion and downside risks related to geopolitical shocks, supply disruptions or prolonged tight monetary conditions. Geopolitical strife, namely the Russian war in Ukraine and the violence in the Middle East has impacted coal markets by upending natural trade flows and at times causing shipping delays due to violence stemming from these conflicts. While we have not been directly impacted by the well-publicized attacks in the Red Sea, we believe the continued volatility in metallurgical markets is possible as these macroeconomic and geopolitical circumstances evolve. Metallurgical coal indices ended the fourth quarter within a few percentage points of where they started in October. But since then, all 4 indices have softened. The Australian premium well wall index decreased from $333 per metric ton at the start of the quarter to $323.75 per tonne on December 31. U.S. East Coast low-vol index increased from $258 per metric ton at the beginning of October to $268 per metric ton at the end of the quarter. U.S. East Coast High-Vol A index live from $288 per metric ton at the start of the fourth quarter to $281 per metric ton at the end of the year. And lastly, the U.S. East Coast high-vol B index increased from $238 per metric ton at the beginning of October to $252 on December 31, 2023. As of February 23, the U.S. East Coast indices of low-vol, high-vol A and high-vol B in disease measured $265, $255 and $215 per ton, respectively. The Australian premium low vol index has decreased from its quarter level close to $314 per metric ton on the same day. In the thermal coal market, the API2 index moved from $124.85 per metric ton at the start of October down to $103.85 per metric ton at the end of the year and down even further to $90.30 as of February 23. Despite some of the challenges we faced, Alpha finished the year strong as you've heard. I want to specifically commend my team for their outstanding efforts to close out the year on a high note. We worked hard to meet our internal goals, which we were successful in doing while even setting some new logistic records within the company. The accomplishments of last year are impossible without a dedicated team, and I am proud of what the Alpha sales team achieved. Of course, we're hoping to continue good work in this year. And with that, operator, we are now ready to open the call for questions.
[Operator Instructions] Our first question comes from Lucas Pipes with B. Riley Securities.
Look, you make it look really easy. But I know there's just a lot of hard work, and I want to congratulate you on that. Great, great job. Andy, Todd, Dan, I have a question kind of for all 3 of you. And it starts with how you think about the current market environment, what your longer expectations are and then how that feeds into your capital allocation priorities again, kind of shorter term and longer term as well. Todd, I think you mentioned a little bit of a pullback on the buyback in the near term, if you could elaborate on that as well, I would appreciate it.
Lucas, it's Andy. Thanks for the comments. And Will, as you said, it's not easy looking at the comments that Jason made on a couple of operational things that we ran into the teams that have managed those situations. And these things happen relatively frequently when you're underground, you're on a big surface mine, things go sideways sometimes, and it's really a testament to the team that they've been able to manage these things and come through safely and without broader broader impact. So it's not easy. And I'd like to pass that along to the operations team that they do make it look easy from our perspective. But I know as well as you do, it's very, very difficult. As far as how the market feeds into the buyback. So the buyback is as it's always been. It's going to be driven by our cash flow every available dollar that we have above a certain liquidity target is going to go into the buyback. And so as we look at the market, and Dan I'll let Dan comment on that piece of it. But as we see it, if it starts feeling a little bit shaken, we're going to tend toward probably building a little bit higher -- get to the higher end of the liquidity level versus we're a little bit toward the lower end of that range right now and building cash could come in handy if we do get into some doldrums as we typically do in the the spring part of the year. And then also, as Todd mentioned, seeing some of the cost pressures from -- particularly at this point in the year, some purchase coal, we've opportunistically been buying some coal where we've had a chance to put it into some of our shipments. And while that ultimately ends up with the incremental EBITDA, it does create kind of a working capital imbalance with the timing of buying the coal versus realizing the ultimate receipt. So that's an additional little bit of pressure on cash that we're watching out for. But it's -- as I said, it's as long as the cash is there, we'll just keep AMR along and buying those shares, but we have to be cognizant of where the market is. So Dan, anything you want to add there?
Yes. Lucas, I think we're pleased with our book the way we have it right now. I think the looking forward here, we're going to be shipping in the same markets that we've been talking about in previous calls. I think I'm a little bit encouraged talking to some of our European customers. It probably they probably can't have as tough a year as they had last year in Europe and talking to most of the customers. They expect hot metal production in Europe to increase. That's a positive for us. I mean, they'll need more coke and more coking coal. So I don't have -- look, I spoke in great detail about the economic and geopolitical uncertainty. We're watching that every day. It seems like every day, there's something new to add to the list. But I think for now, we're kind of confident with what we see in front of us.
That's very helpful. I look forward to the transcript, Andy, on that new word you used. For my second question, I wanted to ask about the cadence of shipments and kind of Q1, Q2, if you could provide a little bit of an outlook. And then to circle up on the cost side, can you speak a little bit to where you still see inflationary pressures today? Were you seeing some easement what the situation is on the labor front?
Yes, Lucas. On the shipment side, so we typically -- if you look at the current configuration of Alpha, going back to fourth quarter of 2020. Basically, Q1 of every year has been basically the largest year. And I'm specifically talking about the Met shipments if you osolate those. Right behind us being Q4. I mean historically, we've not had very strong Q4, and that's something else I do want to complement the team about again. We talked about trying to finish strong this year and they deliver beyond anything I could have imagined 4.6 million total tons, $4.5 million of Met is an all-time record for our Q4. And so part of that was being aggressive on our shipping schedules and logistics. And we probably pulled 1 or 2 cargoes that should have been Q1 24 shipments, which goes into the fourth quarter, which is a good thing. Anytime you can accelerate that, that's a good thing. So it will probably create even more pressure on Q1, which, again, typically was a little bit lighter, but we would normally see Q1 and Q4 be on the lighter end, 2 and 3 be on the stronger end, but the way Q4 or Q1 have blended into each other, we'll have to see how that plays out. But I think we're still feeling relatively okay about where we'll end up on the quarter just based on shipments thus far. But Dan, anything you like to add to that?
Yes, I think you covered it.
Ok. On the cost side, it's still a story of Inflation is still a story of labor. I think we've seen supplies and maintenance top costs start to slow down in absolute dollars, but there's still a little bit of inflation. On the labor side, I think we have seen our turnover rates drop over the past quarter, which is -- I think that's been a result of our attempts to try to be the lead employer in Central Appalachian or wage and benefit packages. So the goal is to get people in every seat. And I think to a large degree, we've accomplished that. But it will continue. Obviously, there are only a certain pool of candidates to choose from and everyone wants those people. So right now, I think we feel pretty good about our situation. But cost trends just across the board continue to be somewhat of a challenge. But we're focused on it, going to figure out creative ways to either get our productivity up or our cost down in a direct fashion and hopefully start improving that metric.
[Operator Instructions]
Our next question comes from Nathan Martin with the Benchmark Company.
Congrats on the strong end of the year. Dan, maybe 1 for you to start, spreads between the U.S. Met indices and the Australian indices remain historically wide. It'd be great to get your thoughts on how long you think that persists, maybe what could drive improvement there? And then how are you thinking about Alpha's mix and maybe the opportunity to sell more tons into Asian markets based on those Aussie indices? And then maybe some comments maybe on the mix that you have committed thus far, which I think is, what, 35% committed priced and then 55% committed on price. That would be very helpful.
Yes,. Well, I'm not going to pretend to understand exactly how those indices move and when they're in sync with each other. But obviously, we'll follow the best realizations for us and for our products. So when we look at that, of course, a lot of the Aussie Link business will be in Asia, as we've said in past quarters. So our eyes will be on that primarily. I think there's a fair amount of talk about the high vol, high vol this, high vol that. And what we don't hear a lot is the strength of the medium ball and low-vol sectors. We see real strength here in those -- in the demand for that. But it's not always reflected directly in the indices right away. I think there's a lot of term business that's already been put to bed, and it's little bit of a soft period here now with the Chinese New Year ending and some of the Indian steelmakers out of the market right now. But I have the sense is things will get back to normal here soon. Our mix is, as I said, going to be focus more on Asia, but I do think there's opportunities in Europe as well as the steelmakers come back from a rotten year in Europe.
That's very helpful, Dan. I mean question as well, some of the tons that you sell into the Asian markets or you haven't been selling those at CFR prices?
I don't want to say we have to. We do -- some business is on a CFR business. Most of it is not -- most of it is FOB vessel. But if there are opportunities where we need to sell it on a CFR basis, we can and will do that.
Got it. Perfect. Maybe kind of sticking with that. There have been some numerous logistical hurdles as of late for the entire industry, for delays you guys mentioned the Red Sea, maybe in your prepared remarks, low water levels in the Panama Canal, et cetera, it would be great to get an update on what Alpha is seeing on the transportation and logistics front.
Sure. I'll take a shot at that. As you said, the ocean freight situation is a little erratic right now because of the situation vessels that normally would transit through the Suez Canal on their way to Asia from the U.S. now are going around the more of Africa. That's adding some days and some cost to those ocean voyages but as we do most of our business on an FOB vessel basis. We don't see that direct impact right now. The freight markets move for other reasons, too. They moved the seasonal grain season, et cetera. overall economic weakness probably has a bigger effect on ocean freight than some of these other events. We're certainly aware of it. It hasn't changed our targets at all. With regard to the railroads, they're moving the coal well. We're pleased to see both railroads have been doing a good job for us here in recent months. So I have really no other comments there. the Panama Canal situation seems to be getting a little better as well.
We have reached the end of the question-and-answer session. I will now turn the call back over to Andy Eidson for closing remarks.
Thanks again to everyone for joining us today and for your interest in Alpha. We hope you have a great rest of the day.
This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.