Alpha Natural Resources, Inc. (ANR) Q1 2014 Earnings Call Corrected Transcript: 01-May-2014
Alex Rotonen - Vice President-Investor Relations, Alpha Natural Resources, Inc.
Kevin S. Crutchfield - Chairman & Chief Executive Officer, Alpha Natural Resources, Inc.Frank J. Wood - Chief Financial Officer & Executive Vice President, Alpha Natural Resources, Inc. Paul H. Vining - President, Alpha Natural Resources, Inc. Brian D. Sullivan - Chief Commercial Officer & Executive VP, Alpha Natural Resources, Inc. Other Participants Caleb M. J. Dorfman - Analyst, Simmons & Co. International Michael S. Dudas - Analyst, Sterne, Agee & Leach, Inc. Curt Woodworth - Analyst, Nomura Securities International, Inc. Brandon Blossman - Analyst, Tudor Pickering Holt & Co. Securities, Inc. Kuni M. Chen - Analyst, UBS Securities LLC Evan L. Kurtz - Analyst, Morgan Stanley & Co. LLC Jeremy R. Sussman - Analyst, Clarkson Capital Markets LLC Brett M. Levy - Analyst, Jefferies LLC Mitesh B. Thakkar - Analyst, FBR Capital Markets & Co. David Gagliano - Analyst, Barclays Capital, Inc. Lance Ettus - Analyst, Tuohy Brothers Investment Research, Inc. MANAGEMENT DISCUSSION SECTION Operator: Greetings and welcome to the Alpha Natural Resources First Quarter 2014 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Alex Rotonen, Vice President of Investor Relations. Thank you, sir. You may begin. Alex Rotonen, Vice President-Investor Relations Thanks, Christine. Thank you for participating in today's Alpha Natural Resources First Quarter 2014 Earnings Call. Joining me today are Kevin Crutchfield, Alpha Natural Resources' Chairman and CEO, who will provide a brief market outlook and summarize our first quarter results; Frank Wood, our CFO, who will comment on Alpha's financial results and updated guidance and Paul Vining, Alpha's President and Brian Sullivan, Alpha's Chief Commercial Officer, who will be available to address operational and marketing questions following our prepared remarks. Note that various remarks we make on this call concerning future expectations for the company constitute forward-looking statements. These statements are made on the basis of management views and assumptions regarding future events and business performance as of the time the statements are made. Various factors, including those identified in this morning's press release and in our filings with the SEC, may cause actual results to differ materially from those expressed or implied. Also, see our press release for reconciliation of certain non-GAAP measures to GAAP measures. This call is being recorded and will be available for replay for a period of two weeks, and a replay of the event will be archived on our website at alphanr.com for a period of three months. With that, I'll turn it over to Kevin. Kevin S. Crutchfield, Chairman & Chief Executive Officer Thanks, Alex, and good morning, everyone. The first quarter remained challenging for the coal industry, particularly in the metallurgical market. We continued to stay true to our core philosophy that we've mentioned on several occasions to control the things that we can control. We think this quarter demonstrates that the actions we've taken to rationalize our cost base, manage production volumes, and maintain the quality of our balance sheet are having a positive impact on the aspects of our business that we can control. And more importantly, we're beginning to see small but important developments that give us some optimism regarding overall market conditions, both in the met and thermal markets. I'll address those more in a moment, but first, a headline summary of the quarter. In terms of the top-line numbers, we generated total revenue of $1.1 billion and adjusted EBITDA of $289 million, including a $250 million gain from the Alpha Shale transaction during the first quarter, compared with revenue of $1.3 billion and adjusted EBITDA of $117 million in the first quarter of 2013. Coal revenues in the quarter are $1 billion, down from $1.1 billion in the year-ago period. As we noted in our press release, decreases in total revenues and coal revenues in the quarter were primarily attributable to lower average realizations and lower shipments of metallurgical and steam coal. Clearly, one of the things that we can attack and control, to a large degree, is our cost structure and our team did a very good job of that this quarter. Adjusted cost of coal sales per ton in the East continues to decrease, averaging $65.73 for the quarter. We're pleased to see tangible results from the measures we've taken. We expect to continue to perform in this area and consequently, we're reducing our Eastern cost of coal sales guidance to a midpoint of $66.50. Importantly, we're very pleased also that we've been able to take the substantial costs out of our system while maintaining our unwavering commitment to Running Right. Our Mine Safety and Health Administration violations per inspected day remained unchanged from the first quarter of 2013, and our S&S citations were down 10%. Beyond safety, we remain on the forefront of reclamation innovation at our mine sites. Recently, our Whitman Surface Mine won an Excellence in Reforestation award, and White Flame Surface Mine Number 9 won the West Virginia Coal Associations Surface Reclamation Award. Our decreased costs, excellent safety track record, and our commitment to reclamation are a testament to the hard work of our team and their continued focus on running efficient but also Running Right. I'd like to thank everyone for their tireless efforts on these fronts during the quarter. On the financial side, I, and the rest of the management team, remain keenly focused on prudent balance sheet management during this down cycle. As a result of our cost management initiatives and proceeds from the exchange of our joint venture interest in Alpha Shale, and cash and common shares in Rice Energy, we increased Alpha's total liquidity to more than $2.1 billion, with cash, cash equivalents and marketable securities of nearly $1.2 billion. We also reduced our outstanding 2015 convertible debt to $159 million, down from $194 million as we continue to manage our maturities effectively. We believe the strength of our balance sheet allows us to maintain our financial flexibility and continue our cyclical resilience while positioning the company to take advantage of improvements in the marketplace when they do occur. In the broader coal markets, as you're well aware, oversupply remains the most significant challenge, particularly in the seaborne segment. In terms of met, the global seaborne market remains challenged, with pricing softening further in early 2014 due to the seasonal slowdown in Chinese iron production, relatively weak foreign currencies of major producing countries, and increased production of coking coal primarily out of Australia.