Alpha Natural Resources, Inc. (ANR) Q2 2012 Results Earnings Call August 8, 2012 10:00 AM ET Executives Todd Allen – Vice President, Investor Relations Kevin Crutchfield – Chairman and CEO Frank Wood – Chief Financial Officer Paul Vining – President Analysts Brian Gamble – Simmons & Company Andre Benjamin – Goldman Sachs Jim Rollyson – Raymond James Michael Dudas – Sterne, Agee Mitesh Thakkar – FBR Capital Markets Shneur Gershuni – UBS David Gagliano – Barclay’s Capital Timna Tanners – Bank of America Curt Woodworth – Nomura Securities Lawrence Jones – Shenkman Capital Dave Lipschitz – CLSA Presentation Operator
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Please let me remind you that various remarks that we make on this call concerning future expectations for the company constitute forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.These statements are made on the basis of management’s views and assumptions regarding future events and business performance as of the time the statements are made. Actual results may differ materially from those expressed or implied. Information concerning factors that could cause actual results to differ materially from those in forward-looking statements are contained in our filings with the Securities and Exchange Commission, including on our annual report on Form 10-K and subsequently filed Form 10-Qs. This call is being recorded, will be available for replay for a period of two weeks. The call can also be heard live on the Internet and both the replay and a downloadable podcast 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 Crutchfield Thanks, Todd. Good morning, everybody, and thanks for joining this morning. Alpha’s second quarter was a busy one, idling operations, reducing production, amending our credit agreement, hammering out the definitive terms of the pending swap with Peabody and the PRB to access the Belle Ayr North LBA, negotiating with customers in very choppy markets and the list goes on. There were ample opportunities for folks to become distractive. I’m proud to say we did not. Everyone in Alpha kept their eye on the ball and far from losing focus and letting the fundamental slip, we made progress on key metrics across the Board. With regard to safety, Alpha reduced its incident rate by 13% from the previous quarter, which was itself a 17% sequential improvement over the fourth quarter. In West Virginia, the Cucumber mine, the Highland mine, the Republic Energy surface mine and our Marmet Dock all received Joseph A. Holmes safety awards during the quarter.
Now that we’ve integrated the Massey operations, we’ll soon stop calling them out as a separate piece of the business. But it’s important to note that these operations are turning the corner with nearly a 40% reduction in their incident rates since the first full quarter following the acquisition.Clearly, our cultural integration has been a success and Running Right has again proved effective. As we discussed with you on previous call, we made Running Right a priority from the offset and I think it shows, my sincere thanks to everyone at Alpha that has made this performance possible. With regard to cost control, we succeeded in reducing our Eastern cost by nearly $2 per ton compared to the prior quarter. This improvement was primarily attributable to substantial productivity gains throughout the organization, as well as the reduction in our inventory that had been marked down to recent market prices and we now expect full year cost in the east to be in the mid 70s. Therefore we’ve reduced our cost of coal sales guidance slightly to a range of $74 to $78 per ton, despite our Eastern shipment mix shifting more towards metallurgical coal, which has inherently higher costs. We’ve also taken steps to permanently reduce our overhead expenses, which are beginning to show up in cost of coal sales and we’ve adjusted our SG&A guidance for 2012 down to a range of $210 million to $225 million. While we are on the subject of cost with regard to synergies, we’re ahead of targeted mid-year run rate of $150 million and we remain on track to achieve $220 million to $260 million in annualized recurring synergies by mid-year 2013. While it may come as surprise in light of the current market conditions, sales in blending synergies are actually running ahead of expectations due to strong exports at a broad array of quality that facilitate blending, as well as less reliance on intermediaries and brokers, and logistical optionality with more prep plants, rail options and port outlets.
In the category of operational synergies, we’ve improved organic efficiency at many prep plants increasing met coal recovery, and after royalties and taxes, the revenue from additional met coal dropped right to the bottom line. Turnover rates at the Massey mines were in the mid-teens at the time of the transaction and are now consistently in the mid single digits.Sourcing synergies are also ahead of initial expectations due to our ability to systematically aggregate purchasing power of three companies. While not a synergy item per se we’ve begun to rollout a maintenance initiative that has the potential to drive substantial cost savings overtime. We are not ready to share the internal estimate of potential savings yet, but the first business unit to begin implementation seeing approximately a 5% increase in equipment uptime, which is obviously a significant productivity enhancement. Read the rest of this transcript for free on seekingalpha.com