Peabody 3Q15 Earnings Call Notes

Peabody Energy (BTU) Glenn L. Kellow on Q3 2015 Results

Chinese steel exports have reached record levels

“China’s economy remains a key component for coal trends. Recent domestic steel consumption has declined due to oversupply in the property sector and has paved the way for a rise in steel exports, which reached record levels through September.”

Lower electricity consumption and strong hydroelectric generation have led to reduced thermal coal

“At the same time, lower electricity consumption and strong hydroelectric generation due to heavy rainfall have led to reduced Chinese seaborne thermal coal demand, which has more than offset a 70% year-to-date import gain in India.”

80% of seaborne met coal production is not covering cash costs

“we project met coal supply to fall below 300 million tons in 2015, primarily due to declining U.S. exports. And we expect additional curtailments going forward, as an estimated 80% of seaborne met coal production is not covering cash costs at current pricing.”

Capital spending by top coal producers is down 70%

“Peabody estimates that capital spending by top coal producers has declined some 70% from the historical highs we saw in 2012. We believe this limited capital investment is insufficient to sustain current production and coal prices will need to rise well above levels we see today to incentivize new investment. And over time, we expect a gradual reduction in supply as well as increased coal demand to lead to improved fundamentals.”

Despite challenges to regulations, utilities are making investment decisions that may diminish coal consumption anyways

“In regard to the U.S. regulatory environment, I would like to briefly touch on the EPA’s carbon rules. We have seen early opposition from Congress, legislatures, and other groups, and we expect the regulations to face significant judicial challenges. That’s particularly true in light of the Supreme Court’s MATS ruling in regard to EPA overreach and most recently the judicial stay of the waters of the United States. At the same time, it is imperative that courts provide clarity in swift fashion. Some utilities are already making investment decisions based on the current rules even though ultimate deadlines are still many years away. The current plan is poor policy and poor law. Even so, I would note that under the plan the EPA still expects coal to fuel 30% of U.S. electricity generation in 2025.”

Difficult if not unprecedented times for coal

“these are undoubtedly difficult, if not unprecedented, times for the coal sector”

Arch Coal 2Q15 Earnings Call Notes

Expect thermal coal demand to fall by 80m tons

“While the summer has been a bit warmer than some may have expected, natural gas prices continue to trade in the $2.75 to $2.85 range, a level low enough to displace even PRB coal in some regions. As we noted before, the MATS regulations are expected to drive the closures of around 20-gigawatts of coal-based generating capacity this year, which will take a toll on coal consumption as well. As a result Arch continues to expect domestic thermal coal demand to fall by around 80 million tons in 2015 when compared to 2014”

Supreme court took exception to MATS rule, but generators already put their strategies into place a long time ago

“Of course as most of you know, the Supreme Court took exception to the MATS rule during the quarter, scolding the EPA for failing to consider the significant cost of the rule against its relatively modest benefits; however, the reality is that most generators forged their MATS compliance strategies long ago, so we don’t expect a significant change of the course in terms of the coal plant retirements. In a broader sense though, the ruling could have significant impact on the timing and structure of the coming Clean Power Plant rules.”

On a positive note, supply rationalization is happening more quickly than expected

“On a positive note and in a sign that low prices are bringing the market into better balance, supply rationalization is happening quicker than expected. ”

Longer term should be a buildout of generation internationally, but US coal not as competitive

“On the international side the picture is mixed. Longer-term we continue to see build-out of coal-based generation, particularly in China, India and Southeast Asia. Unfortunately currency rates and oversupply have eroded U.S. competitiveness in many markets”

Steel mill utilization reasonably strong

“Domestically, the strengthening U.S. economy has kept steel mill utilization reasonably strong, as near record levels of auto sales and a strong construction environment have helped compensate for a sharply lower demand from the drilling industry.”

There’s a lot of pressure on higher cost production in the East, Powder River Basin is a little better positioned

“as we sit here today we think there’s a lot of pressure on higher cost production, particularly in the east; and we think our position in the Powder River Basin places us very well for not only the domestic markets but we see improvements in the international markets with additional access off the West Coast, we do think that we’re well placed to take advantage of both of those markets.”

A lot of smaller mines in Central App will probably be closed for good

“From what I’ve seen in Central App, a lot of these mines that are closing, particularly the smaller ones, I think are going for good. And the cost to reopen them, I think, is going to be very difficult when you look at terms (26:09) of regional natural gas pricing.”

Joy Global 2Q15 Earnings Call Notes

Everything down a lot

“Bookings of $745 million in the current quarter were down 29% versus the year ago period. Orders for original equipment of $150 million were down 57% and service orders of $595 million were down 15%’

Operating profit down 28%

“Operating profit, excluding $24 million of restructuring and non-cash pension settlement charge, totaled $94 million in the second quarter, down 28% from the second quarter of 2014.”

We certainly have seen our end markets take another step down

“we certainly have seen our end markets take another step down. Compared to the first quarter, we’ve seen met coal prices drop 21%, iron ore fall 11%, thermal coal fall 8%, and natural gas drop 20%. The combined impact of these forces has created additional headwinds to our business and we’re seeing this in our bookings.”

Customers now projecting double digit declines in capex through 2017

“The extended downturn in commodities has put pressure on our customers under increasing pressure. Reduced cash flows and increasing debt levels are forcing our customers to shift to austerity measures, delay service work, and withdraw our original equipment expansion plant. Overall, our mining customers are now projecting double digit declines in Capex through 2017.”

China’s housing market is the driver of seaborne commodity prices

“Given the importance that China’s housing market plays for many seaborne commodities, including copper, iron ore and met coal, a healthy Chinese housing market would have an impact on demand for these commodities.”

Seeing improving copper production

“Over the last month, we’ve seen some improvements in global copper markets as the expectations of stimulus in China along with an improving housing market in the U.S. had driven expectations for increased copper demand in coming months. Additionally, we’ve seen improvements in global copper production as production rates have reached their highest level since last June, which we believe will help our service business over the coming months.”

Met coal markets have deteriorated significantly in recent weeks

“Met coal markets have also deteriorated significantly in recent weeks. Current spot prices are trending in the $85 to $90 range, although reduced spot market transactions are creating limited visibility into the market. The 25% decline since beginning the year has left met coal prices at levels not seen since 2006 and this has certainly impacted the project pipeline. ”

Global steel production has contracted

“Global steel production contracting nearly 2% year-to-date has reduced met coal demand, at the same time, the forecast for steel consumption had been reduced to just 0.5% for 2015.”

Currencies have offset supply curtailments

“While the nearly 40 million tonnes of supply curtailments announced since 2012 have begun to impact the market, the significant currency decline in major met coal producing regions has affectively muted the supply adjustment process, leaving the market oversupplied. ”

Our customers are definitely in a distressed state

“our customers are definitely into distressed state”

Bought Montabert

“Montabert offers an interesting opportunity for us in the hard rock space. If we look at the business, we’ve actually been looking at this for eight months to your point of an auction. We found about – we know a lot about Montabert, but we saw it pop out with our MTI acquisition, is a critical part of that business and this was a critical component where they had high margins and also a world-class piece or a component with their rock breaker, and we saw it in the MTI business for their drifters and the drills.”

We knew the business and we knew it was a bit of an orphan

“we know this business, but it was somewhat of an orphan child with Doosan. And with Doosan, they bought it with the bobcat, so Ingersoll Rand put it in the bobcat package, so 70% of the business was related to construction with the breakers.”

Tough markets forcing us to get better

“As far as the share, I do think these tough markets are really making us get better and going after all the business and as we highlighted, our investment right now is in service and we’ve talked about the Surface centers, but also on the product development. The previous question, investing in the consumables, investing in our Surface products, so do believe we’re gaining share in a tough market with the third party well fitters and the pirates that are going after that business, I think we are gaining.”

It’s tough to say we see things bottoming anywhere

“Boy, it’s tough for me to say seeing the bottom. We see where it’s bottoming, as I shared in the last quarter, we thought the U.S. was bottoming, and boy, it took another step down. We did highlight, we saw Australia take a bump up and we’ve been talking about that for a while and that where we seem to gain there within — in the service bookings and so that is optimistic. We’ve also seen our customers now talking about the delivery slots into 2016 in both in the U.S. and Australia, and what that means is, they start locking those in.

So, see Australia bottoming, see some positive actions, also see some China opportunities but then again, it’s taking share, so getting our service business growing in China. ”

I don’t see much optimism from our customers. They’re shutting down more mines

“I don’t see the optimism there. I think the customers who are out there are truly analyzing where they are in their costs and where they’re in their cost curves. If they have mines that are well above the cost curve, if originally those were taken out, I think that is their price goes down, takes another step, it’s going to knock more mines out.”

Looking for acquisitions

” as we look at our M&A or kind of the acquisition, we are looking at things that match our strategy. To accelerate our business into hard rock, we need critical components to make that go faster, because the new product development just takes a long time. So we’re looking at things in the hard rock space and still in that 100 to $2 million [ph] range. We are not looking at something big, we are always looking at service companies. ”

Headline EBITDA multiples obscure the value

“Obviously the multiples are going to go up when the EBITDA has gone down and so mining companies are being hit on an EBITDA basis just like we are. The good news is the acquisition. We bought a company that’s been very stable, and we do have visibility into how we are going to improve that business, integrate it into Joy. So it’s one thing to talk about the headline valuation, EBITDA multiple those are going to be in the nine to ten type of area, but with synergies, you buy that down to seven – six, seven over a pretty short period of time.’

Walter Energy 4Q14 Earnings Call Notes

Each week I read dozens of transcripts from earnings calls and presentations as part of my investment process. Below are some of the most important quotes about the economy and industry trends from the transcripts that I read this week. Full notes can be found here.

Half the necessary cuts should be cycled through supply chain by mid year

“We believe about half of those tons have cycled through the supply chain and the remainder should be out of the market by mid-year. Australian exporters have been benefiting from the decline in Australian dollar, however it is estimated that a substantial amount of Australian production will be losing money in 2015, which could lead to addition cuts.”

There were only three analysts on the call

Peabody Energy 4Q14 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. Full transcripts can be found at Seeking Alpha

Global commodity selloff has affected coal

“ The recent sell-off in the commodities sector has resulted in significant declines in copper, iron ore and oil due to concerns over global economic growth and supply. The mining and energy sector downturn has further impacted global coal fundamentals that have been weakened by strong seaborne supplies and slowing import demand.”

Met coal demand will grow faster than supply for the first time since 2011

“In 2015, we forecast that seaborne metallurgical coal demand growth will outpace supply increases for the first time since 2011. This is based on a moderate rise in global steel production along with Australian metallurgical coal export growth that will be offset by supply reductions from the U.S. and Canada. Drilling down on metallurgical coal demand, Indian imports grew nearly 20% in 2014 and are expected to continue to rise as the economy grows and infrastructure continues to be buildout. In China, metallurgical coal import demand is expected to stabilize as the year progresses. And over time Chinese seaborne demand is anticipated to expand as domestic production is rationalized and greater amounts of high quality coal imports are required”

15 m tons of met coal supply cuts will come in the first half of the year

“Regarding global metallurgical coal supply, we expect some 15 million tons of already announced cuts will be realized in the first half of the year, with additional reductions likely based on the current pricing. A sizable percentage of global metallurgical coal is uncompetitive at current prices. And U.S. production is likely to be disproportionally impacted leading to at least 10 million ton decline in the U.S. metallurgical coal exports this year.”

No one is investing in coal supply, there are going to be supply shortfalls eventually

“It’s clear that investments in metallurgical coal projects have all been dried up in the past two years and new projects can take years to bring online. Yet this is a depleting resource and we expect that the sharp pullback in investments, declining production and increased coal demand will result in supply shortfalls over time.”

PRB coal will be competitive with Nat Gas. Projecting increase in utility coal consumption by 2017

“Looking forward, we see 2015 U.S. coal demand declining 50 million to 60 million tons in total due to lower natural gas prices, but at the same time, we believe PRB coal will remain competitive with natural gas leading to PRB consumption rising up to 20 million tons this year. By 2017, we’re projecting a total increase in utility coal consumption of 10 million to 30 million ton as coal rebounds to approximately 40% of U.S. electricity. More importantly for Peabody, we expect PRB and Illinois Basin demand to grow 50 million to 70 million tons during this time.”

Still demand from low cost basins

“Demand for these low cost basins is anticipated to represent a greater share of the U.S. coal generation profile as gas prices increase, demand from other regions has displaced and coal plant retirement are offset by higher plant utilization rates at the remaining coal fleet.”

Australia has some competitive advantages

“We believe that Australia holds a number of inherent competitive advantages by other supply sources. It has high-quality products that are location advantaged with shorter rail hauls and shipping distances to the high growth base in marketplace. Clearly, the currencies of wind at our back right now. Australia is also in the process of completing a free-trade agreement with China that will provide a further advantage compete with other production regions.”

Joy Global 4Q14 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. Full transcripts can be found at Seeking Alpha

Most challenging market in more than a decade

“2014 was another challenging year characterized by weak commodity market conditions and slowing global economic growth. Our customers are facing depressed cash flows and oversupplied end markets. We knew that these conditions would persist in 2014 and planned for that, but it goes without saying this is the most challenging market we’ve seen in more than a decade.”

Oil sands partners have $50 costs

“While lower oil prices have cut into margins, most oilsands customers we work with have production cost around the $50 level, in some cases lower. In the current environment, they can still produce at positive margins and have more cost takeout opportunities in front of them.”

Still a good outlook for copper

“Strength in our Latin American market has primarily been driven by global copper market fundamentals. While recent global economic fears have driven a decline in copper prices dipping below $3 per pound, the medium-term outlook along with supply side dynamics continue to make copper an attractive investment. Over the medium-term, continued power grid expansion in China, which now consumes nearly 10 million tons of refined copper per year or 45% of the world’s total, will continue to drive demand dynamics.”

Supply side of copper is challenged too

“From the supply-side, a number of issues continue to contribute to the annual supply constraints that help support the copper market. These include falling ore grades, lower-than-expected ramp up from new mines and labor issues. Over the last 10 years, an average of 750,000 tons of supply has been affected by these issues and has resulted in years of deficit.”

40% of power generation was coal this year

“While coal has accounted for nearly 40% of electricity generation through the first three quarters of the year, falling gas prices have driven some switching to gas. During the calendar third quarter, natural gas accounted for 31% of electricity generation, up from 25% during the first half of the year. ”

There needs to be consolidation in the industry

“The consolidation, it feels like it has to happen. Obviously we don’t want to talk about any of our customers because of the oversupply situation. I think this winter is going to be very interesting. They are predicting a colder winter. The supplies at utilities are more than the 10-year low average. Maybe that’s the new normal. It’s interesting. We’re talking to our customers about what’s going on with oil now.

It might be an interesting effect because last year the coal burn would have gone up higher if the utilities could have gotten coal during that winter polar vortex, but they couldn’t get the coal because they couldn’t get rails. Now with that shifting a little bit, that dynamic may be different this year, so that could help. Now that’s banking on the weather forecast to help, but right now just the simple answer is, there’s too much supply and that’s got to be consolidated.”

Walter Energy 3Q14 Earnings Call notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. Full transcripts can be found at Seeking Alpha

Bringing down cash cost of sales

“our mines in Alabama to continue to perform well. We’re on track to produce around 9.5 million tons of meth coal or the full year. We’ve also lowered our estimate for combined full year production cost per ton at mines 4 and 7 to around $96 a ton. We expect full year met coal sales to total around 10 million tons as we are making good progress selling down the Canadian inventory.’

Selling inventory generating cash

“We ended the third quarter with roughly 1.7 million tons in meth coal inventory, which included about 600,000 tons at mines 4 and 7 and about 1.1 million tons in Canada. Remaining PCI inventory in Canada totaled just under 800,000 tons. We expect to sell the remaining inventory in Canada over the next six months, which should translate to net cash generation of about 75 million.”

Bringing down SG&A and Capex

“We expect to hit our run rate of 70 million per SG&A expenses by year end, which will be down roughly 30 million from last year. In addition, as Bill stated, we’ve reduced our targeted capital expenditures for the year by another 10 million to approximately 110 million.”

Steel production in China up 2.5% this year, but imports down 20% from last year

“Steel production growth in China is up almost 2.5% through September but the growth is at a slower rate than last year. Along with this, met coal imports are down about 20% from last year. However, even with this decline, China is on track to import more than 60 million tons of met coal this year.”

There has been more interest in buying assets recently

” I think over the last few months there has been more activity in both incoming calls, et cetera. We’d like to take a cautious approach. We’re still committed to the target but we don’t want to talk specifically about timing at this point but there has been more activity and more interest.”

We can keep capex here for a long time

“We’re still making sure we take care of mines 4 and 7 and that we’re feeding them the capital necessary to keep those mines exactly where they need to be. So, from the standpoint of keeping our operations with good equipment and properly maintained and ventilated, we could do that for the long term. We are not starving those mines of capital.”

There are 20 years of reserves at these mines even though that doesn’t make it into the SEC filings

“When we look at the SEC documents and the requirements for tons being netted [ph] in the reserves, there are a lot of tons surrounding these operations that will likely be added into the reserve basis for both operations.

And I believe that what we’ve said previously is that it’s an excess of 20 years of reserves for both of those operations. And we still believe that even though from those tons are not currently in the – comply with SEC standard.”

Focused on smaller asset sales to reduce interest expense where possible

“None of them are I would call as homeruns, but again, our strategy is to continue to lower interest expense and frankly lower the cost with singles and doubles.”

At some point tons demanded and tons taken off have to cross, and I don’t think that’s too much longer away

“And if you also, even looking at this year, if you look at project next year another 2% growth in steel production, 2% is 32 million tons of additional steel production and call it, just to make it easy, that’s 20 million more tons of coal demanded. At some point, the impact of the tons coming out and the demand for more tons have to cross. And I don’t think that’s going to take a long time to get there at this point”

Volumes are holding up with currency higher, but the pricing is the issue

“Yes, volumes are holding up. It’s just we’re contented with – the price is the issue, to be honest with you.’

It’s starting to get a little harder to get our quality coal

“we’re starting to – maybe a little bit starting to show up our main brand type products where customers thought they could pick up a phone and just automatically get the – there’s a little bit of – I don’t want to call it tightness but it’s starting to show up out there.”

Arch Coal 3Q14 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. Full transcripts can be found at Seeking Alpha

Even despite a cool summer, utilities are still interested in coal

“Turning now thermal markets, we still expect domestic coal consumption to be up 10 million tons or so in 2014 and that’s taking into account the cooler summer we’ve had in coal concerning regions in the past 30 years. Even with the disappointing summer burn, we continue to see real interest from our customers and layering in significant tonnage for multiple years.”

Some customers are taking coal plants offline in order to ensure that they have enough coal for the winter

“We’re seeing customers who are concerned about rail delivery, take coal plants offline during the season in order to ensure that they have enough coal in hand to meet demand this winter.”

60 GW of coal will likely retire by 2018, 20GW to close next year

“We estimate that 60 gigawatts of coal generating capacity will likely retire by 2018, nearly a third of those plants are already closed. In 2015, we anticipate approximately 20 gigawatts will close, affecting up to 25 million tons of demand on a gross basis”

Met coal markets are bottoming out

“we believe met markets are in the process bottoming out. Benchmark prices are fallen below the cost for one-third or more of global producers and supply cuts are underway. Those cuts will help to offset new supply that is coming to the market over the last several years.”

The railroads are trying to right their ship slowly but surely

“We’re reading everything that everybody else is about the delayed improvements in the railroad, but with our conversations with all the railroads, particularly the western rail roads, we’re confident with the progress they’re making and in terms of capital spend. They’re bringing crews on. That obviously takes time to bring in power on. They’re trying to improve their velocity, but it just takes time. ‘

Demand for met coal in US and Europe does continue to be there

“the capacity factors have hung in there in mid 70s range and we would expect that to continue and with our second biggest market in Europe we’ve also been relatively pleased with the demand that we’ve seen there. Now, we’re not happy with the pricing, but certainly the demand in the U.S. and the Europe continues to be there.”

We feel like we’ve responded appropriately to the market

“I think what you’ve seen over the last two or three years is that we’ve responded appropriately to the market. Sitting here today, we’ve got our portfolio down to pretty strong set of operations and are cash flow positive and as markets move up and markets move down, we’ll address it.”

Peabody Energy 3Q14 Earnings Call notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. Full transcripts can be found at Seeking Alpha

Chinese imports of met coal were tepid, but India had strong growth

“Seaborne metallurgical coal market saw tepid Chinese imports and steel production growth, while India remained a bright spot. India’s metallurgical coal imports increased over 20% through September, further indication of the country’s strong reliance on the seaborne market to meet the vast majority of its metallurgical coal needs.’

China will continue to rely on coal

“Peabody recently completed a more thorough review of China, and when we looked through the short-term fluctuations, we’re confident that coal will be the dominant energy source for decades to come. China will continue to depend on coal for economic development and affordable energy to support major urban population growth, and China has taken dramatic steps to improve emissions by installing more control technologies. This year alone China is adding approximately 150 gigawatts of NOx controls. That’s equivalent to half of the entire U.S. coal fleet, with more to come.”

Coal is taking back some share in the US

” in the U.S., coal volume is on pace to increase 15 million tons in 2014, reflecting the competitiveness of coal even with a mild summer and continued rail constraints. U.S. coal generation increased 3% through September despite summer cooling degree days over 8% below normal levels in the coal heavy legions. PRB inventories ended this summer at the lowest level in nine years and the restocking period is expected to continue through 2015 and beyond as some utilities look to increase stockpiles in response to rail constraints”

Joy Global 2Q14 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. Full transcripts can be found at Seeking Alpha

Conditions remain difficult

“It goes without saying that conditions in mining remain difficult and while we see some signs of stabilization in terms of our order rates and service activity, there are still challenges on the horizon”

Coal facing more headwinds in the second half

” challenges remain as U.S. coal production now faces some headwinds in the second half of 2014 from continued depressed coal prices, decreasing export opportunities and a cooler than normal summer.”

Met coal prices seem to have found a floor, but producers are still liquidating inventory

“Met coal prices remain under pressure, but seem to have found the floor to pricing as stock prices have trended in the $110 to $120 range since March. Pricing at these levels continues to pressure over half of global producers. Despite the announcement of over 20 million tons of curtailment, these cuts have not yet materially impacted the market as many producers had stockpiles built up that are still being depleted.”

Pricing environment is likely to last through 2015

“Steel production is expected to grow 3% to 4% this year and that will help support the demand side, but the current oversupply is likely to persist through 2015 capping any marginal upside pricing improvements around $130 per ton’

Iron Ore price ceiling at $100

“The 3.8% growth in global steel production has not been enough to absorb global supply increases and will likely result in a price ceiling on iron ore at $100 per ton in the absence of any major supply disruption.”

service business should stabilize in 2015, but probably still not a lot of new build

“I’ll give you just our initial thoughts on 2015, because it’s tied. We don’t see much changing. We see the service business settling. So we feel good about that. We would like to see this increase going. On the OE piece, we don’t see any major – unless there is a push on the pricing, we don’t see major projects coming through. But what we do see is some of these rebuilds have been extended for long enough period of time, some of that could show up as OE into 2015, so we’re looking at that”

We have to find our own growth in this difficult environment

“– with our acquisition, we think we have an opportunity to bring mechanized mining to hard rock. So we think that’s a growth for us. So all these are growth elements on top of the business that we think we’re going to have to have created. We’re not going to get the uplift of the past 10 years with commodity prices booming. So that’s what we mean by that.”