Walter Energy (WLT)

Q4 2010 Earnings Call

February 15, 2011 10:00 am ET

Executives

Joe Leonard - Interim Chief Executive Officer and Director

Walter Scheller - President of Jim Walter Resources and Chief Operating Officer of Jim Walter Resources

Lisa Honnold - Interim Chief Financial Officer, Principal Accounting Officer, Senior Vice President and Controller

Mark Tubb - Vice President of Investor Relations & Strategic Planning

Analysts

James Rollyson - Raymond James & Associates

Mark Parr - KeyBanc Capital Markets Inc.

Brian Gamble - Simmons and Company

David Lipschitz - Credit Agricole Securities (USA) Inc.

Andre Benjamin - Goldman Sachs Group Inc.

David Khani - FBR Capital Markets & Co.

Curt Woodworth - Macquarie Research

Wayne Cooperman - Cobalt Capital

Alex Rackwitz

Jeremy Sussman - Brean Murray, Carret & Co., LLC

Mark Levin - BB&T Capital Markets

Presentation

Operator

Welcome to the Walter Energy Fourth Year 2010 Earnings Call. [Operator Instructions] Now I would like to turn the meeting over to Mr. Mark Tubb, Vice President of Investor Relations. Sir, you may begin.

Mark Tubb

Thank you, Audra. Good morning, and thank you for joining us for Walter Energy's Fourth Quarter and Full Year 2010 Earnings Conference Call. Today's call is being webcast live over the Internet and a recording of today's call will be archived on our website for up to 30 days. Joining me today are Walter Energy's Interim CEO, Joe Leonard; Interim CFO, Lisa Honnold; and Jim Walter Resources President and Chief Operating Officer, Walt Scheller. Today we will discuss earnings and performance for the fourth quarter and full year 2010, our views on the market, our updated business outlook and recent developments. Following our prepared remarks, we will open the call to questions.

We may refer to forward-looking statements made in yesterday's press release and may make those and other forward-looking statements on today's call. For more information regarding risks associated with the forward-looking statements, please refer to the company's SEC filings.

At this time, I'll turn the call over to Joe.

Joe Leonard

Thank you, Mark and good morning, everybody. 2010 was a fabulous year for Walter Energy. Before I turn it over to Lisa to go through the financial results for the quarter, let me highlight some of our accomplishments.

We finished 2010 with earnings of $7.25 per diluted share on revenues of $1.6 billion, primarily from record revenues and operating income from our coking coal operation. While we made great progress in a number of strategic fronts, we kept that business focused on operating as safely and as efficiently as possible, highlighted by a 21% reduction in incident rate at our underground mines. Coking coal sales volumes increased by 18% in 2010 while production increased 10% year-over-year.

Walter Minerals increased year-over-year sales volumes by 20%. Walter Coke achieved its second highest operating income ever at $32.5 million. Late in the year, we announced the acquisition of Western Coal, a transaction that will create the leading publicly traded pure-play metallurgical coal producer in the entire world. We remain on track to complete that acquisition by April 1.

We also accomplished, acquired the assets of HighMount Exploration for $210 million, which has significantly boosted our natural gas production, but much more importantly, it will also help ensure the future coal production areas will be properly degasified, enhancing the safety and operational efficiency of existing and future underground coking coal production in that area.

We leased an additional 22 million tons of coking coal reserves in an area very near our existing underground mining operations. We acquired the Mobile river terminal of the Port of Mobile ensuring that we'll have adequate future export capability at competitive costs for our Alabama coking coal production.

Finally, we returned $90 million in cash to our shareholders in the form of share repurchases and regular dividends. In summary, we accomplished numerous key objectives during the year, all designed to continue adding value for our shareholders.

We're pleased that the market has recognized our stock as a strong investment as evidenced by our share price, which finished the year near its all-time high and up almost 70% for the year.

I'll come back in a minute and discuss some other strategic current activities, but I'll turn it over now to Lisa to discuss our financial results.

Lisa Honnold

Thank you, Joe, and good morning, everyone. Yesterday, we reported earnings of $1.75 per diluted share for the fourth quarter, highlighted by operating income of $144.6 million from our Underground Mining segment.

Consolidated revenues in the fourth quarter were $400.8 million, up $164.5 million or 70% as compared to last year's fourth quarter. Consolidated operating income of $144.7 million was up $107.9 million, almost triple the amount in the prior year.

Revenues and operating income benefited from significantly higher coking coal prices and sales volume growth. Coking coal prices averaged $196.47 per short ton in the fourth quarter, a 55% increase. And our sales tonnage increased more than 300,000 tons, a 25% increase as compared to the fourth quarter last year.

Increased sales volumes resulted from increased production capacity at our No. 7 Mine, increased recovery rates from our No. 4 Mine and opportunistic sales of purchased coal during the fourth quarter.

Results in our Surface Mining and Walter Coke segments also contributed to our revenue and earnings growth in the fourth quarter. Coking coal cost of sales in the quarter increased about $9 per ton to a weighted average cost of $85.47 per ton. This increase was primarily a result of higher royalty and freight costs.

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