Peabody Energy's CEO Discusses Q3 2011 Results - Earnings Call Transcript

Peabody Energy (BTU)

Q3 2011 Earnings Call

October 25, 2011 11:00 am ET

Executives

Vic Svec - Senior Vice President of Investor Relations & Corporate Communications

Richard A. Navarre - President and Chief Commercial Officer

Michael C. Crews - Chief Financial Officer and Executive Vice President

Gregory H. Boyce - Chairman, Chief Executive Officer and Chairman of Executive Committee

Analysts

Peter D. Ward - Jefferies & Company, Inc., Research Division

Brian Yu - Citigroup Inc, Research Division

James M. Rollyson - Raymond James & Associates, Inc., Research Division

Mark A. Levin - BB&T Capital Markets, Research Division

Lance Ettus - Mortar Rock Capital Management

Meredith H. Bandy - BMO Capital Markets Canada

Lucas Pipes - Brean Murray, Carret & Co., LLC, Research Division

Andre Benjamin - Goldman Sachs Group Inc., Research Division

Paul Forward - Stifel, Nicolaus & Co., Inc., Research Division

Richard Garchitorena - Crédit Suisse AG, Research Division

Brandon Blossman - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Michael S. Dudas - Sterne Agee & Leach Inc., Research Division

Mitesh Thakkar - FBR Capital Markets & Co., Research Division

David S. Martin - Deutsche Bank AG, Research Division

Brian D. Gamble - Simmons & Company International, Research Division

Shneur Z. Gershuni - UBS Investment Bank, Research Division

Presentation

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Peabody Energy Third Quarter Earnings Release. [Operator Instructions] As a reminder, today's call is being recorded. Now with that being said, I'll turn the conference over to the Senior Vice President, Investor Relations and Corporate Communications, Mr. Vic Svec. Please go ahead.

Vic Svec

Well, thank you, John, and good morning, everyone. Thanks very much for taking part in the conference call for BTU. With us today are Chairman and CEO, Greg Boyce; Executive Vice President and CFO, Mike Crews; and President and Chief Commercial Officer, Rick Navarre. Today's format includes our traditional earnings call discussions, as well as a brief presentation on Macarthur Coal, given the significant milestone we've just achieved. You can find that presentation on peabodyenergy.com.

We do have some forward-looking statements. They should be considered along with the risk factors that we note at the end of our release, as well as the MD&A section of our filed documents.

And I'll now turn the call over to Mike.

Michael C. Crews

Thanks, Vic, and good morning, everyone. This quarter, Peabody posted record revenues for the second quarter in a row, increased contributions from U.S. and Trading and Brokerage operations and generated substantial cash flow. Even with a significant event in Australia, Peabody turned in a solid quarter and we're looking to finish 2011 with our best quarter of the year. We continue to benefit from a diverse portfolio that can mitigate downside and access the best markets. I'll discuss our third quarter results beginning with the income statement.

We delivered revenues of $2.04 billion, rising 9% over the prior year. This was driven by higher volumes in the U.S., improved realizations across the platform and increased Trading and Brokerage results. EBITDA rose 10% at U.S. Mining operations and would have increased year-over-year in Australia, but for the roof fall of our North Goonyella Mine that we previously announced. The EBITDA impact of the fall and longwall startup was approximately $120 million for the quarter in line with our prior estimates.

EBITDA also benefited from a 30% improvement in Trading and Brokerage contributions on both higher pricing and increased exports. All in, consolidated EBITDA for the quarter totaled $504 million and included $9 million of transaction costs related to the Macarthur track acquisition.

We also incurred approximately $13 million in interest expense to secure bridge financing. In total, these items reduced earnings by $0.07 per share. Diluted earnings per share from continuing operations totaled $1.01 compared with $0.83 last year. Excluding the noncash measurement of income taxes, our adjusted diluted EPS was $0.87. Our effective tax rate was 24% for the quarter, excluding the effects of income tax remeasurement, and we continue to target a mid-20% range for the full year.

Turning now to the additional detail within our supplemental income statement. In the U.S., our volumes increased 8% in the Midwest and 4% in the West over the prior year. While flooding remained an issue, both regions recovered well from the second quarter and boosted output, and the West benefited from resumed shipments of Twentymile. Revenues also rose in both U.S. regions. Cost increases were driven primarily by the timing of repairs and higher fuel expenses, along with increased compliance cost in the Midwest and sales-related expenses in the West. Average revenues were up 7% and gross margins per ton increased 5% in the U.S.

In Australia, volumes of 6.6 million tons were below the prior year, primarily due to 550,000 tons of lost shipments related to North Goonyella and related blending. Revenue per ton rose 15% to $115 per short ton on higher realizations. During the quarter, we shipped 1.6 million tons of met coal at an average price of $251 per short ton. We also sold 3.4 million tons of seaborne thermal coal at a realized average price of $99 per short ton.

Regarding Australia cost increases, more than $8 per ton was driven by higher currency rates. The roof fall at North Goonyella and 2 longwall moves also contributed $8 per ton. And higher royalties due to increased pricing added another $2 per ton. We are now targeting full year Australia cost in the low $70 per ton range.

Turning to the balance sheet. We have $1.4 billion in cash, driven by a 34% increase in cash flow from operations, which totaled $575 million. Our debt-to-capitalization ratio has declined to 32%. And we continue to target full year capital spending for 2011 at $900 million and $950 million, excluding acquisitions.

I'd like to close with a review of our outlook. In the fourth quarter, we expect to see improving production from Australia, which will be partly offset by impacts from North Goonyella, which is still ramping up following the roof fall. We still expect to be within our original guidance of up to $175 million in EBITDA impact for the year from the roof fall.

Read the rest of this transcript for free on seekingalpha.com

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