Arch Coal's CEO Discusses Q4 2011 Results - Earnings Call Transcript

Arch Coal, Inc. (ACI)

Q4 2011 Earnings Call

February 10, 2012 11:00 a.m. ET

Executives

Deck Slone - Vice President, Government, Investor and Public Affairs

Steven Leer - Chairman and Chief Executive Officer

John Eaves - President and Chief Operating Officer

John Drexler - Senior Vice President and Chief Financial Officer

Analysts

Paul Forward - Stifel Nicolaus

Shneur Gershuni - UBS

Michael Dudas - Sterne, Agee & Leach

Brandon Blossman - Tudor, Pickering, Holt

Jim Rollyson - Raymond James

Brian Gamble - Simmons & Company

Mark Levin - BB&T Capital Markets

Mitesh Thakkar - Friedman, Billings, Ramsey

Andre Benjamin - Goldman Sachs

David Gagliano - Barclays Capital

David Beard - Iberia Capital

Lucas Pipes - Brean Murray, Carret & Company

Brian Yu - Citigroup

Kuni Chen - CRT Capital

David Lipschitz - CLSA

Wes Sconce - Morgan Stanley

Meredith Bandy - BMO Capital Markets

Chris Haberlin - Davenport & Company

Lance Ettus - Tuohy Brothers

Presentation

Operator

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Good day, everyone, and welcome to this Arch Coal Incorporated Fourth Quarter 2011 Earnings Release Conference Call. Today’s call is being recorded. And at this time, I would like to turn the call over to Mr. Deck Slone, Vice President of Government, Investor and Public Affairs. Please go ahead, sir.

Deck Slone

Good morning from St. Louis, thanks for joining us today. Before we begin, let me remind you that certain statements made during this call, including statements relating to our expected future business and financial performance, may be considered forward-looking statements pursuant to the Private Securities Litigation Reform Act. Forward-looking statements by their nature address matters that are, to different degrees, uncertain. These uncertainties which are described in more detail in the annual and quarterly reports that we file with the Securities and Exchange Commission, may cause our actual future results to be materially different than those expressed in our forward-looking statements.

We do not undertake to update our forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by law. I’d also like to remind you that you can find a reconciliation of the non-GAAP financial measures that we plan to discuss this morning at the end of our press release, a copy of which we have posted in the Investors section of our website at archcoal.com.

On the call this morning, we have Steve Leer, Arch’s Chairman and Chief Executive Officer; John Eaves, Arch’s President and Chief Operating Officer; and John Drexler, our Senior Vice President and CFO. Steve, John and John will begin the call with some brief formal remarks, and thereafter we’ll be happy to take your questions. Steve?

Steven Leer

Thank you, Deck. Good morning, everyone. 2011 was a transformative year for Arch Coal as we executed on our long-term growth plans that boosted our reserves by 1.3 billion tons, added low cost productive capacity in our core operating basins, and expanded our reach into the global coal arena. To that end, we deepened and broadened our met coal profile with the acquisition of ICG. Facilitated continuing penetration into the overseas market with new offices in Asia and Europe, and bolstered our port access along the East, West and Gulf Coast. All supporting our objective of delivering even stronger financial returns in the years ahead.

Our fourth quarter results reflect these efforts. Arch generated $1.2 billion in revenues, $270 million in EBITDA last quarter, representing our best performance yet. These results also cap of a record year from our core value perspective. In terms of safety and environmental performance, Arch again ranked first among its majority of its industry peers for its low incident and environmental violations rates. Also, four of our facilities ended the year without a single safety incident our environmental violation. We are proud of these accomplishments, even more so considering that we welcome 13 new mining complexes and 28,00 new employees into the fold halfway throughout the year.

In terms of financial performance, we topped $4.3 billion in revenues and $921 million in EBITDA in 2011, despite lower company sales volumes. We also set these records while acquiring and integrating ICG over a very short timeframe, while overcoming operational challenges at our Mountain Laurel complex and flood related disruptions in the Powder River Basin. And while managing through a weakening market environment as the year ended.

As you know, the coal industry will face some headwinds in domestic thermal markets in 2012. Power demand is down approximately 8% through the first week in February, a function of the exceptionally mild winter to-date and a tough comparison versus 2011. Heating degree days are also off 20% from normal which has contributed to the glut of natural gas and depressed prices for that fuel as well. As a result, we are taking a conservative view of 2012 and expect U.S. coal consumption to decline by approximately 50 million tons or so from 2011 levels.

This drop off is due to unseasonably warm weather in this winter season and to decade low prices for natural gas, which are causing some displacement of coal burn. Given these headwinds, we are seeing a significant coal supply rationalization. Of course a swift and deep correction can set the stage for a stronger and longer rebound, in fact we believe that Arch is one of the few producers in the Appalachia region that has cash costs below the current market price levels. Thus, it wouldn’t be surprising to see Central Appalachian thermal production fall well below 100 million tons by year-end.

In summary, we expect to see more supply cuts in Appalachia and elsewhere in the near-term, supported by industry announcements to date and by our own reduced volume expectations this year. All of these production cuts, along with the 20% drop in natural gas rig count, should help reduce the oversupply of gas and also aid in rebalancing the U.S. thermal coal markets overtime.

Despite the current challenging state of the U.S. thermal markets, we do see some positive signs in the economy in the sector overall. For one, coal exports out of the U.S. have been and should continue to be a bright spot. In 2011, the industry hit a record 108 million tons of export. In 2012, we expect the total to grow by another 5 to 10 million tons as U.S. thermal coal continues to push into Europe, even with lower ARA prices, and as port capacity increases along our domestic coastlines facilitating the movement of additional tons to the Atlantic and the Asian Pacific seaborne coal trade.

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