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

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.”

Walter Energy 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

Encountered some adverse mining conditions

“Although we encountered some adverse mining conditions in the quarter, I am pleased with our overall performance and four and seven are running as expected.”

Produced 2.4m tons, sold 2.7m

“Second quarter met coal production totaled 2.4 million tons. Production was down compared to last year in large part due to idling Wolverine in April. Combined met coal production at mines four and seven was 1.8 million tons compared with 1.9 million tons last year and in the first quarter of this year…Met coal sales totaled 2.7 million tons in the quarter, up 11% versus last year. ”

646m in liquidity

“On a pro forma basis, the Company’s liquidity at June 30th was 646 million comprised of 612 million of cash and 34 million of unused capacity under the revolving credit facility. We believe we’ve taken the necessary steps to manage our liquidity and position ourselves to reduce financial risk prospectively.’

First debt maturity now 2018 vs 2015 formerly

“I think the date that matters with respect to runway if that’s what you are pointing to, is the first material debt maturity now versus even three to four months ago it used to be in 2015, now it’s April 2018 and again we will take the necessary actions to put ourselves in a position to refinance the debt at that time. So, we are focused on all the controllables”

No liquidity concerns in our company at this point

“As I mentioned on the last call, the timing of any asset sales is dependent on the recovery in met markets and there is no liquidity concerns in our company at this point. We think we have adequate liquidity and we’re not going fire sale assets.”

We do believe our equity is undervalued right now

“I think as we mentioned on the last call, if you remember that we do believe our equity is undervalued right now but at the same point we are not ruling anything out but it’s not really part of it, that debt equity swaps have never been — it’s not a program by any means”

Hard to say when capacity cuts will start to work through into pricing because people are still clearing inventories

“As I said, there has been about 20 million tons announced in terms of what’s been implemented, I think a large amount of that may have been implemented, but they are now they are working just as we are, the inventories both at the mine and then those inventories have to work the way clear through the customer. And that’s going to take some time to estimate how quickly that will happen is very-very difficult. I have seen estimates as early as we’ll start to really see the impact of that in the fourth quarter. I’ve seen folks say that they believe that will be early next year, but it’s really very hard to tell.”

I think these cuts are enough to balance the market

” given the projects that are coming online and the announced cuts, I think we might be pretty close to balance once it all works its way through.”

Walter Energy 1Q14 Earnings Call Notes

A digest of some of the top insights that I’ve gathered from this week’s earnings calls.  Full notes can be found here.

We’re controlling the controllables

‘The bottom line is this: Yes, the market continues to be plagued by low met coal prices, but consistent with our message over the past several quarters, Walter Energy continues to execute extremely well in the areas we control.”

Cost performance was “outstanding”

“Cost performance was also outstanding, with production cost per ton 23% lower than last year’s first quarter.”

No debt maturities until 2018 and minimal covenants

“The financing has removed all significant debt maturities until April 2018 and extended our revolver until October 2017. As well, we entered into an amendment to our credit agreement that eliminates financial covenants, with the exception of one springing covenant for those revolving credit lenders that extended their commitments. ”

“Yes, the springing covenant comes after we have, in effect, $95 million drawn on the line, excluding LCs.”

Seen some production cuts, but need more

“On the global met coal production side, we’re starting to see production cuts, with over 10 million tons in announced cuts recently. The majority of the recent cuts have been in the U.S. and Canada. We believe there is still excess supply in the market. However, we also believe that we’ll start to see cuts from some of the higher-cost Australian producers, along with more cuts in the U.S. and Canad”

Liquidity position is better than at any other point this cycle

“we’re better positioned financially than we’ve been at any point in the current cycle, with no significant debt maturities until 2018 and with liquidity close to $700 million. ”

Going to generate about 125m in cash from inventory destocking

“ooking at today’s pricing, we could expect, over the next 12 months — and really, we’re focused trying to get it done by year end, somewhere between $125 million, maybe a little higher than $125 million, from inventory. So that will be the biggest single component.”

Take a few months to get back to full production once mines shut down

“So the restart of those operations will be, as we’ve talked in the past, the — one of the concerns in Northeast B.C. is the availability of labor. And the longer these operations are idle, the — probably, the longer period it will take to ramp them back up to full speed. I would expect that we could ramp them up over a 30-day period and start to get reasonable production levels, but probably, it’s going to probably take at least 2 to 3 months to get back to full production levels during ramp-up. And during ramp-up, you’re going to have almost full cost and less tons during that period.”

Not planning on fire selling assets. “there is no liquidity concern in this company”

“Yes — no, I think on the $250 million asset sales, as I mentioned on the last call, the timing is dependent on the recovery in met markets. And there is no liquidity concern in this company, and we’re not going to fire-sale assets. So we remain committed to the target, but at this point, we have nothing further to add. It will be dependent on the met coal markets.”

Dropping capex spending even lower

“The CapEx for the year, we started off with a target of $150 million. We’re dropping that to about $130 million. And of the $130 million, the majority of that, probably $120 million or even a little more than that, is maintenance capital. And the $10 million in growth capital is really around permitting and just doing a little work, looking at reserves and exploration-type work. So the absolute majority of it is maintenance capital.”

Costs were good this quarter but they are variable

“as underground coal mines, you’re going to have — sometimes, you have an outstanding quarter. Sometimes, you have some hiccups that drive your cost up a little bit. I think what — at this point, we’re just willing to reiterate that we expect Mine 7’s costs to be similar to where it was last year by year end. They didn’t have any longwall moves in the first quarter. They’ll have 2 longwall moves later in the year, and those quarters, typically, drive cost up a little bit. And you also have vacation periods, things like that, to drive cost up a bit. So all in all, while they did have an outstanding quarter — and frankly, fourth had a little bit of a rough quarter, all in all, we think, for the year, they’re going to get to those numbers that we had disclosed previously.”

Dont think they need to access capital markets, liquidity from working capital significant

“No, we don’t see the need for that. I think our liquidity at $676 million plus the benefit we’re going to get from working capital is pretty material. We never say never about anything, but at this point, we don’t see any need.”

Not going to sell the core assets

“the real strategic assets we have in the company are the Canadian operations and the 2 big Alabama operations. Those are the real core operations, and while we — and we’ve talked about potential partnering in Canada. So anything that’s really not in the core, by nature, is available and is considered non — or is non-core. Now we do have a couple of others that are non-core but strategic things, such as — the coke plant and the gas companies are both we view as strategic but non-core. So that means we have got the assets in the U.K. We have assets in West Virginia. We have some surface assets in Alabama. So really — it’s really only — the only limitation is the core asset.”

The debt to equity swap is not a big program

“We have no plans at this point to do anymore. We have no plans not to look at things, but we don’t want to understate that we do value the equity, but we also look at our interest expense and we wanted to offset the March refinancing, which did raise our interest expense. And as we mentioned on the call, it’s now — it’s come down to — that went up, and now it’s come down slightly to the $255 million per year. So we’re not ruling anything out, but we’re not in the middle of a huge program, by any means.”

We understand that our shares are undervalued

” we do understand that our shares are undervalued. I know that there’s some dialogue about what dilution — we read some things. I think people need to run their numbers, and from our point of view, we wanted to — the first step of it was to offset the financing in March, reduce our interest expense and — as well as reduce our SG&A to manage fixed cost.”

It takes time to move the PCI inventory

“we’ve been moving the PCI product as fast as we could across the transportation system we have up there, and we’ll just continue to do that. So it’s not going to be, in any way, accelerated because there’s any urgency. It’s just — that’s what is going to take us to get that go-to-market, and we’ll move it to those customers. And I think you’ll see, over the course of the year or through the next 3 or 4 quarters, PCI sales will, probably, maybe, not be flat but won’t be down much.”

Alabama coal tends to go to South America and Europe, not Asia

“So on a yearly basis, we have typically shipped a cargo or 2 out of Alabama in Asia. That’s about it. And frankly, given where pricing has been and where freight rates have been, there just hasn’t been a whole lot of coal moving from Alabama in that direction. Our coal tends to sell out with South America and Europe out of Alabama.”

Walter Energy 2Q13 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. The quotes are generally pieces of information that I find interesting or helpful to understanding the company, industry or economy and are not meant to provide summaries of the full content of the call. Other posts in this series can be found by clicking here. Full transcripts can be found at Seeking Alpha.

“As we look at the market, we continue to see the short-term outlook for hard coking coal pricing under pressure. We are being confronted with low operating levels at most steel mills, oversupply of hard coking coal in the market and an exchange rate, which is favoring Australian supply.”

“In South America, Brazil continues to show reduced production levels compared to 2012. However, most still anticipate an improvement in advance of the World Cup and Olympics. Europe continues to be soft with exception — with the exception of the U.K. which continued to show a steady production improvement, a trend we’ve seen since March”

“I did see where someone said they believed it was the low-vols and mid-vols that we’re in an oversupply situation. I tend to disagree with that. I think the steel mills still require the higher quality coals in order to maintain their coke strength and protect their blast and their coke ovens from the expansion of some of the lower quality coals. So what we’ve seen is we still have a very strong demand of our low- and mid-vol products. So I would tend to disagree with that.”

“Q3, we’ll strive to maintain our cost levels where they are. But it would be possible that they could go up slightly.”

“I think we saw spot pricing got as low as about $125 for the premium coals, and we’ve seen that creep back up in recent days to a little over $130. So while it’s still below the benchmark, we’re seeing it start to move north again.”

“I think the key messages were action-oriented and we’re going to make progress and we’re going to — and move very decisively and quickly.”

“We can only process a certain amount of coal on a monthly basis. So if we try to increase that amount, we would have to add additional shifts at the preparation plant and additional shifts at the mine in order to be able to dispose the additional refuse. And both of those would come with additional costs as well. The lowest cost alternative for us is to just bring that inventory through the process a little more slowly than we had originally anticipated, when prices were a little stronger than what they are.”

“I do think everyone is — as you read through all the reports, everyone is doing everything they can to reduce their costs. So that does move the marginal cost down a bit. But still, you’re going to end up with some of those third and fourth quartile mines just aren’t going to make it. So it’s just — it’s still just a matter of time to where those tons come out of the market.”

“We still have about 2 accounts left open, otherwise we’re probably 96% done [locked up for 3Q].”

“The Q2 price is well above the Q3 price. So I think we’re going to see prices come down in Q3 versus Q2.”

“we view with — liquidity comes from 3 areas or financial flexibility comes from 3 areas: operations, capital markets and asset sales. And we’re focused on all 3. I just pointed that out in the amendment, it doesn’t necessarily mean we’re focused on that one in particular. We’re looking at all alternatives. And we’d like to be aggressive and move decisively, but we’re not going to rule anything out and we’re not pointing to any one in particular at this point.”

“I don’t think you should read too much into the $250 million or as being the number, if I could. If an asset sale is underway and someone bids higher than $250 million, we will take the money. You can be sure of that.”