Q4 2023 Alpha Metallurgical Resources Inc Earnings Call

Participants

Emily O'Quinn; Investor Relations; Alpha Metallurgical Resources Inc

Andy Eidson; Chief Executive Officer & Director; Alpha Metallurgical Resources Inc

Todd Munsey; Executive Vice President & Chief Executive Officer; Alpha Metallurgical Resources

Jason Whitehead; President & Chief Operating Officer; Alpha Metallurgical Resources Inc

Dan Horn; Executive Vice President & Chief Commercial Officer; Alpha Metallurgical Resources Inc

Lucas Pipes; Analyst; B. Riley Securities, Inc.

Nathan Martin; Analyst; The Benchmark Company, LLC

Presentation

Operator

Yes, greetings, and welcome to the Alpha Metallurgical Resources' fourth quarter 2023 results conference call. (Operator Instructions) Please note, this conference is being recorded. I will now turn the conference over to your host, Emily O’Quinn, Senior Vice President, Investor Relations and Communications. You may begin.

Emily O'Quinn

Thank you, Rob, and good morning, everyone. Before we get started, let me remind you that during our prepared remarks, our comments regarding anticipated business and financial performance will contain forward-looking statements and actual results may differ materially from those discussed.
For more information regarding forward-looking statements and some of the factors that can affect them, please refer to the company's fourth quarter and full year 2023 earnings release and the associated SEC filing. Please also see those documents for information about our use of non-GAAP measures and their reconciliation to GAAP measures.
Participating on the call today are Alpha's Chief Executive Officer, Andy Eidson; and our President and Chief Operating Officer, Jason Whitehead. Also participating on the call are Todd Munsey, our Chief Financial Officer; and Dan Horn, our Chief Commercial Officer. With that, I will turn the call over to Andy.

Andy Eidson

Thanks, Emily. Good morning, everyone. This morning we announced our fourth quarter results with adjusted EBITDA of $266 million. For the full year, Alpha generated over $1 billion in adjusted EBITDA, which marks the second year in a row of achieving that milestone call 2023 was not without its challenges.
I couldn't be prouder of the way that we responded as a company to those challenges and finished the year strong. The team did an excellent job of identifying issues, building a battle plan and executing decisively to overcome whatever obstacles we face.
We ended the year within or better than nearly all of our guidance ranges. Having shipped a total of 17 million tons with 15.3 million of that being met coal. Our overall met segment costs for the year were in line at $111.67, while costs in the all other category came in better than guidance.
SG&A all operations expense, DD&A, and tax rate all ended the year within our guidance range. CapEx came in at $245.4 million, which is technically a below the low end of the given range. However, when adding the $21 million of carryover that we have rolled into 2023, that puts us nearly exactly at the midpoint of our issued guidance for last year.
Another milestone we reached in the fourth quarter was exceeding $1 billion in the share repurchase program. Since the program's inception in March of 2022, we have returned more than $1.1 billion to stockholders in the form of buybacks, repurchasing over 6.6 million shares of Alpha stock.
We remain committed to our previously stated strategy of utilizing available free cash flow for the program as the preferred method of returning capital is contingent upon minimum cash levels and market conditions. As we look ahead, the Board has set May second as the date of our next Annual Meeting of Stockholders.
And this morning we announced a list of director candidates who will stand for election to our Board at that meeting. We also announced that following significant tenures with the company two of our current directors have reached the age at which they may no longer stand for election for our corporate governance guidelines and they've retired from the Board effective today.
Al Ferrara is our longest-serving director, having been with us since 2016. Al set the template for how an audit committee could be should be led, and we appreciate how it influences particularly impacted the finance and accounting functions of the company.
Mike Quillen. And what can you say about, Mike, that hasn't already been said he started this whole thing back in '22 when he founded Alpha Natural Resources and these devoted much of the last two decades to building this company and seeing it through to its current success. It's hard to imagine the board without these two long-standing directors, but we've been blessed to have them in Alpha for as long as we have.
And as we announced this morning, Liz Fessenden has also retired from the Board effective today. We will miss Liz very much. She's been a director since 2021 and served as Chair of the Board's safety, health, and environmental committee. She's overseeing a time of great accomplishment and environmental and safety awards better than the national average performance across the portfolio and back-to-back company records in 2022 and '23 for NFDO and TRR, respectively.
I personally want to thank Liz for her support over the past year in particular. So you've been a great source of encouragement and a wonderful mindset coach during my first year in the seat. We appreciate her leadership and wish her all the best.
The good thing for me is that all these folks are still on my speed dial list. The bad thing for them is that all these folks are all on my speed dial list. So I will be making frequent use of that list. In connection with these departures, the Board size has contracted from nine to seven seats, and we're excited to welcome a new and highly qualified individual to our Board with the appointment of Shelly Lombard.
Shelly comes to us with more than 35 years of experience on Wall Street and in other areas of the financial sector, so this be a valuable addition to our Board and Audit Committee, and I can't wait to begin working with her. I'll now turn it over to Todd for a discussion of our fourth quarter and full year financial results.

Todd Munsey

Thanks, Andy. Fourth quarter adjusted EBITDA was $266 million, up from our third quarter level of $154 million. We sold 4.6 million tons in the quarter, almost all of which came from our met segment, 42,000 tons came from the all other category.
Quarter-over-quarter realizations increased for the met segment with an average realization of $183.76 for the fourth quarter compared to $154.73 in Q3. Export met tons priced against Atlantic indices and other pricing mechanisms in the fourth quarter realized $175.32 per ton while export coal prices on Australian indices realized $213.41. These are compared to third quarter's realizations of $136.76 per ton and $158.56, respectively.
Realization for our metallurgical sales in the fourth quarter was a total weighted average of $193.54 per ton, up from $160.43 per ton in the prior quarter. Realizations in the incidental thermal portion of the Met segment decreased $89.76 per ton in Q4 as compared to $92.22 per ton in Q3.
Fourth quarter realizations in the all other category were $70.14 as compared to $68.32 per ton in the third quarter. Cost of coal sales for our met segment increased to $119 per ton in the fourth quarter, up from $109.95 per ton in Q3.
The increase was primarily driven by higher sales related costs and purchased coal costs, both of which were impacted by higher coal indices during the quarter. Higher labor costs were also a significant factor in the increase for the quarter. Cost of coal sales in the all other category was $60.07 per ton as compared to $84.73 per ton in the third quarter 2023.
With regard to costs, there are a couple of items creating some real-time pressure on our 2024 cost guidance. First, with the indices remaining above the levels indicated about futures trading back in November. When our '24 guidance was issued, we're seeing higher sales-related costs than were budgeted.
Also, we have had opportunities to purchase a higher volume of clean coal to add to the portfolio than was budgeted. And to the degree that these purchases continue at material volumes, this will also create pressure on our published cost of coal sales guidance.
SG&A, excluding non-cash stock compensation and non-recurring items, increased to $16.9 million in the fourth quarter as compared to $15.1 million in the third quarter. Q4 CapEx was $61.5 million, up from $54.7 million in the third quarter.
Moving to the balance sheet and cash flows. As of December 31, 2023, we had $268.2 million in unrestricted cash, down from $296.1 million at the end of the third quarter. We had $94.1 million in unused availability under our ABL at the end of the quarter.
Alpha had total liquidity of $287.3 million as of the end of December, which is net of the $75 million minimum liquidity ABL covenant. Cash provided by operating activities increased quarter over quarter to $199.4 million in Q4 as compared to $157.2 million in Q3. As of December 31, our ABL facility had no borrowings and $60.9 million of letters of credit outstanding, which is unchanged from the prior quarter.
Turning now to our committed position for 2024, 35% of our metallurgical tonnage in our met segment is committed and priced at the midpoint of guidance at an average price of $171.33. Another 55% of our met tonnage is committed, but not yet priced. Thermal byproduct portion of the met segment is fully committed and priced at the midpoint of guidance at an average price of $77.14.
Pursuant to our share repurchase program, we repurchased approximately 500,000 shares at a cost of $137 million in the fourth quarter of 2023. Since the beginning of the program, we have spent approximately $1.09 billion to acquire roughly 6.6 million shares of Alpha's common stock at a weighted average price of $164.87 per share.
The outstanding share count has been reduced by more than 30% from the time the program began. As of February 19, 2024, the number of common stock shares outstanding was approximately 13 million, which includes the impact of 220,067 net shares issued in December 2023 and January 2024. The shares issued in these periods resulted from vesting of previously granted equity awards under the company's long-term incentive plan.
The remaining authorization permits approximately $410 million in additional repurchases, contingent as always, on cash flow levels and market conditions. We are planning a reduction of the cadence of share buybacks over the next few months, up to potentially causing the program for a bit to build our cash balances back to our targeted levels. I will now turn the call over to Jason for details on operations.

Jason Whitehead

Thanks, Todd, and good morning, everyone. I want to start by recognizing outstanding safety and environmental compliance performance from our teams in 2023. We've maintained our 99% water quality compliance rate for many years now and continued expanding our beyond compliance initiatives.
For safety, we followed a 2022 company record in NFDL performance with another company record this time for TR hour in 2023. I can't say enough about our team members making this top priority day in and day out. And that focus has resulted in performance that has consistently better than the national average. We work hard every day to continue this positive trend into the future.
While we're highlighting outstanding performance, I also want to publicly congratulate the winners of those 2023 best in class awards. competition was fairly tight and we had record-setting teams and the winning the overall award. That's how difficult it is to claim the top spot for 2023, the Mid West Virginia surface region, one in categories of deep mine surface mine and preparation plant that has winners or Kingston, number two, Kingston, South surface and Kingston processing, respectively.
Kingston, South surface mine, also known as Bishop has won two years in a row. Guinea would in his Mid West Virginia surface team deserve all the accolades they have received for sweeping those categories, which is very difficult to do. And the loadout facility category, Marmot river dock one best in class, Walmart for claimed top honors in underground belt transfer system. Both of those are back-to-back winters two years in a row as well. And I want to thank all the teams for their determination and commitment to exceeding expectations.
Turning to some operational updates as I mentioned last quarter, we celebrated the first development cuts that our newest have on Checkmate town in Q4. Also during the quarter, we completed renovations to the formerly retired test processing plant, which is now online and serving this mine together, Checkmate thousand and test processing solidify Alkeran as a new complex for alpha.
Also want to mention a couple of non injury incidents we experienced in January at our McClure processing plant and road for 52 deep mines on January 17. An ignition occurred near record clean coal belt discharge on top of a clean coal silo. We believe the admission was fueled by the US and ignited by a shortage of electrical installation. Again, nerve injuries and our team members acted quickly and appropriately to make necessary notifications to agencies and ensure there was no fire investigations are currently no contributing. Citations have been issued.
While the exact cause of the admissions still being analyzed, the silo has been examined and structurally sound and designs are underway to make repairs due to the swift responses were able to reroute belt conveyors within the first few days to exclude the clean coal storage.
So as to enable continued processing and shipments at normalized run rates did not experience any material impact from the non injury ignition on January 30, 2024 Road Fork, 50 two's number three section started retreat mining the fourth and last panel of their active district, Dan, on January 31, 2024, a non-injury ignition occurred and about a third on the golf area of the number three entry.
And golf area is a term that we use to describe fully depleted in mind areas similar to those areas that are left behind the longwall investigations revealed a roof collapse in the Gulf, the number for entry exposing an overlying coal seam, and we believe it's likely that coal-bed methane entered into the job from that exposed, same other than reports of monitors here in the roof bolt break immediately before the event and ignition source has not been identified investigations resulted in zero related or contributory citations.
And personally, I want to thank the team that Road Fork 52 for their actions on the night of January 31, but more importantly, and in my opinion, their high standards regarding housekeeping and rock dusting that prevented any more serious issues despite the tedious nature of investigating this incident like this underground, our team and regulatory investigators concluded in about four business days. Of the five CM sections operating at Road Fork 52. Number 3 section was the only section idle during that time. I will now turn the call over to Dan for some information on the coal markets.

Dan Horn

Thanks, Jason, and good morning. Throughout 2023, metallurgical coal markets generally showed strength with periods of volatility in the face of economic pressures, geopolitical uncertainty and global recessionary fears.
Macroeconomic conditions around the world remaining consistent with some economies like the United States exhibiting continued resilience to these external pressures, while others like the European Union have experienced significant downtime, while central bankers in the United States and Europe are expected to lower interest rates within the 2024 calendar year in response to easing inflation.
Uncertainty remains regarding when those actions may be taken and how quickly they may impact overall economic conditions. Organizations such as the International Monetary Fund and the World Bank have issued muted expectations about global growth prospects for 2024 and 2025, citing a slower than historical average pace of expansion and downside risks related to geopolitical shocks, supply disruptions or prolonged tight monetary conditions.
Geopolitical strife, namely the Russian war in Ukraine and the violence in the Middle East has impacted coal markets by upending natural trade flows and at times and shipping delays due wireless stemming from these conflicts. And while we have not been directly impacted by the well-publicized attacks in the Red Sea, we believe the continued volatility in metallurgical markets is possible as these macroeconomic and geopolitical circumstances evolve.
Metallurgical Coal indices ended the fourth quarter within a few percentage points of where they started in October, but since then, all four indices have softened. The Australian premium low-vol index decreased from $333 per metric ton at the start of the quarter to $323.75 per ton on December 31. US East Coast low-vol index increased from $258 per metric ton at the beginning of October to $268 per metric ton at the end of the quarter.
US East Coast High-Vol A index went from $288 per metric ton at the start of the fourth quarter to $281 per metric ton at the end of the year. And lastly, the US East Coast high-vol B index increased from $238 per metric ton at the beginning of October to $252 on December 31, 2023.
As of February 23, the US East Coast indices of low-vol, high-vol A, and high-vol B indices measured $265, $255, and $215 per ton, respectively. The Australian premium low-vol index has decreased from its quarter level close to $314 per metric ton on the same date. In the thermal coal markets, the API 2 index moved from $124.85 per metric ton at start of October, down to $103.85 per metric ton at the end of the year and down even further to $90.30 as of February 23.
Despite some of the challenges we faced, Alpha finished the year strong. As you've heard, I want to specifically commend my team for their outstanding efforts to close out the year on a high note, we worked hard to meet our internal goals, which we were successful in doing while even selling some new logistic records within the company.
The accomplishments of last year are impossible without a dedicated team and I am proud of what our the office sales team achieved. Of course, we're hoping to continue good work in this year. And with that, operator, we are now ready to open the call for questions.

Question and Answer Session

Operator

(Operator Instructions) Lucas Pipes, B. Riley Securities.

Lucas Pipes

Thank you very much operator. Good morning, everyone, but you make it look really easy, but I know this is a lot of hard work and I want to congratulate you on that, great job. Andy, Todd, Dan, I have a question kind of for all three of you and it starts with how you think about the current market environment, what your longer expectations are and then how that feeds into your capital allocation priorities again, kind of shorter term and longer term as well? Todd, I think you mentioned a little bit of a pullback on the on the buyback in the near term? And if you could elaborate on that as well, I would appreciate. Thank you.

Andy Eidson

Hey, Lucas, it's Andy. Thanks for the comments and while as you said, it's not easy looking at the comments that Jason made on a couple of operational things that we ran into the teams that have managed those situations and these things happen relatively frequently when you're when you're underground, you're on a big surface mine, things go sideways sometimes.
And it's really a testament to the team that they've been able to manage these things and come through safely in and without the broader broader impacts. So it's not easy. And I like to pass that along to the operations team, but they do make it look easy from our perspective, but I know as well as you do, it's very, very difficult as far as how the market feeds into the buyback. So the buyback is, as it's always been, it's going to be driven by our cash flow on every available dollar that we have above a certain liquidity target is going to go into the buyback.
And so as we look at the market, and Daniel, I'll let Dan comment on that piece of it. But as we see it, if it starts feeling a little bit shaky, then we're going to tend toward probably building a little bit higher, get to the higher end of the liquidity level versus we're a little bit toward the lower end of that range right now and building cash could come in handy if we do get into some doldrums as we typically do in the the spring part of the year and then also, as Todd mentioned, seeing some of the cost pressures from particularly at this point in the year, some purchased coal.
We've opportunities opportunistically been buying some coal where we've had a chance to put it into some of our shipments. And while that ultimately ends up with the incremental EBITDA, it does create a kind of a working capital and balance with the timing of buying the coal versus realizing the ultimate receipt. So that's an additional a little bit of pressure on cash that we're watching out for. But it's, as I said, as long as the cash is there, we'll just keep marching along and buying the shares, but we have to be cognizant of where the market is. So, Dan, anything you want to add there?

Dan Horn

Hey, Lucas. I think we're pleased with our book the way we have it right now. I think the looking forward there, we're going to be shipping in the same markets that we've been talking about in previous calls, I think I'm a little bit encouraged talking to some of our European customers. It probably they probably can't have as tough a year as and last year in Europe and talking to most of the customers, they expect Continental Europe to increase it.
That's a positive for us until they'll need more coking or coking coal. So I don't have the work that. Mike spoke in great detail about a lot of the economic and geopolitical uncertainty. We're watching that every day. It seems like every day, there's something new to add to the list. But I think for now, we're confident with what we see in front of us.

Lucas Pipes

That's very helpful. Thank you. Look forward to the transcript, Andy, on that new work you used. For my second question, I wanted to ask about the cadence of shipments and kind of Q1, Q2, if you could provide a little bit of an outlook. And then to circle up on the cost side, can you speak a little bit to where you still see inflationary pressures today, how we're seeing some easement on what the situation is on the labor front? Thank you very much.

Andy Eidson

Yes, Lucas, on the shipment side. So we typically if you look at the current configuration of Alpha going back to Q4 of 2020, basically Q1 of every year has been basically the lightest year. And I'm specifically talking about the mass shipments. If you isolate those we're up behind has been Q4. I mean, historically, we've not had very strong Q4, and that's something else I do want to compliment the team about again that we talked about trying to finish strong this year. They deliver beyond anything I could have imagined.
4.6 million total tons, 4.5 million of met is an all-time record for our Q4. And so part of that was being aggressive on our shipping schedules and logistics. And we probably pulled one or two cargoes that should have in Q1 24 shipments were almost into the fourth quarter and which is a good thing anytime you can accelerate that. That's a good thing.
So it will probably create even more pressure on Q1, which again, typically was a little bit lighter, but we would normally see Q1 and Q4 being on the lighter end two and three be on the stronger end, but we've the way Q4 Q1 to blended into each other. We'll have to see how that plays out. But I think we're still feeling relatively okay about where we'll end up on the quarter, just based on shipments thus far. But Dan, anything you'd like to add to that?

Dan Horn

I think you covered.

Andy Eidson

Okay. On the cost side, it's still a story of inflation and still story of labor. I think we've seen supplies and maintenance type costs start to slow down in absolute dollars, but there's still a little bit of inflation on the labor side of things at home. We have seen our turnover rates drop over the past quarter, which is I think that's been a result of our attempts to trying to be the the lead employer and civil Central Appalachian our wage and benefit packages.
So the goal is to get people in every seat and I think to a large degree, we've accomplished that, but it will continue. Obviously, there's only a certain pool of candidates to choose from and every bill and everyone wants those people.
So right now, I think we feel pretty good about our situation. But on cost trends, just across the board continue to be it's somewhat of a challenge, but we're we're focused on it. So we're going to figure out creative ways to either get our productivity up or our costs down in a direct fashion and hopefully start improving that metric.

Lucas Pipes

Andy and team, I really appreciate all those comments. Continue with best of luck, keep up the good work.

Andy Eidson

Thanks, Lucas.

Operator

(Operator Instructions) Nathan Martin, The Benchmark Company.

Nathan Martin

Thanks, operator. Good morning, guys, congrats on the strong end of the year and thanks for taking the questions. Dan, maybe one for you to start on the spreads between the US met indices and the Australian indices remain historically wide and be great to get your thoughts on how long you think that persists, maybe what can drive improvement there.
And then how are you thinking about Alpha's mix and maybe opportunity to sell more tons into Asian markets based on those Aussie indices? And then maybe some comments maybe on the mix that you have committed thus far, which I think is what 35% committed and priced and then 55% committed and unpriced, that'll be very helpful. Thank you.

Dan Horn

Yeah, Nat. Well, I'm not going to pretend to understand exactly how those indices move and when they're in sync with each other. But obviously, we'll will all of the best realizations for us and for our products. So when we look at that versus a lot of the the Aussie linked business will be in Asia, as we've said in past quarters.
So our eyes will be on that primarily. I think that there's a fair amount of talk about the high vol and high vol this eyeball that and we don't hear a lot is the strength of the medium vol and low vol sectors where we see real strength here in the US and the demand for that. That's not always reflected directly in the indices right away. I think there's a lot of term business.
It's already been put to bed there that it's a little bit of a soft period here now with the Chinese New Year ending and some in some of the Indian steelmakers are out of the market right now. But I have the sense is things will get back to normal here. Some of our mix is, as I said, going to be focused more on Asia, but I do think there's opportunities in Europe as well as the steelmakers come back from a rotten year in Europe.

Nathan Martin

That's very helpful, Dan. And then a question as well. Some of the tons that you sell into the Asian markets, are you having to sell those at CFR prices.

Dan Horn

I don't want to say we have to. We do some business is on the CFR business. Most of it is not most of it is FOB vessel. But if there are opportunities where we need to sell it on a CFR basis, and we'll do that.

Nathan Martin

Got it. Perfect. On maybe kind of sticking with that, there had been some numerous logistical hurdles as of late for the entire industry port delays you guys mentioned in the Red Sea and maybe in your prepared remarks, low water levels in the Panama Canal, et cetera, it would be great to get an update on what Alpha's seeing on the transportation and logistics front.

Dan Horn

Sure. I'll take a shot at that. And as you said, the ocean freight situation is up erratic right now because of the situation in vessels that normally would transit through the Suez Canal on the way to Asia from the US now going around the Horn of Africa that's added some days and some some costs to those ocean voyages out as we do most of our business on a per vessel basis, we don't see that direct impact right now, the freight markets move for other reasons, do they move through that seasonal grain season, et cetera.
Overall economic weakness probably has a bigger effect on ocean freight than some of these other events are certainly aware of and it hasn't changed our store targets at all. With regard to the railroads, they're moving the coal well, we're pleased to see both railroads have been doing a good job for us here in recent months. So I will note no other comments there. The Panama Canal situation seems to be getting a little better as well.

Nathan Martin

Okay, great. I think I'll leave it there. I appreciate the color, Dan, and best of luck to you guys in '24.

Operator

We have reached the end of the question-and-answer session. I will now turn the call back over to Andy Edson for closing remarks.

Andy Eidson

Thanks again to everyone for joining us today and for your interest in Alpha. We hope you have a great rest of the day.

Operator

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.