Release Date: July 25, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Arch Resources Inc (ARCH, Financial) achieved a record production of over 2.5 million tons in its metallurgical segment during Q2 2024.
- The company paid down an incremental $13 million of debt, achieving a net cash positive position.
- Arch Resources Inc (ARCH) deployed $19.6 million from its capital return program, including the repurchase of 94,000 shares of common stock.
- The company declared a quarterly cash dividend of $0.25 per share, with a total projected payment of $4.6 million to shareholders.
- Arch Resources Inc (ARCH) maintained its guidance for full-year coking coal sales volumes and expects a meaningful reduction in unit costs in the second half of the year.
Negative Points
- The company faced significant logistical challenges due to the collapse of the Francis Scott Key Bridge, impacting Q2 shipments and increasing costs.
- Operating margins in the metallurgical segment were compressed due to logistical disruptions, resulting in an estimated $12 million impact.
- The thermal segment faced muted power demand and depressed natural gas prices, leading to reduced shipments and higher costs in the first half of the year.
- Arch Resources Inc (ARCH) experienced a higher percentage of high-vol B shipments during Q2, which dampened average sales realizations.
- The company had to defer the shipment of nearly 150,000 tons of thermal byproducts, increasing the metallurgical segment's unit costs by an estimated $6 per ton.
Q & A Highlights
Q: My first question is on the margin outlook for the met coal business. Can you speak to Q3 expectations, considering the $6 benefit from the thermal byproduct and the absence of the severance rebate? How might higher volumes and lower rail rates impact realizations?
A: The second quarter was significantly impacted by the Port of Baltimore bridge collapse. The logistics team managed well, but we incurred about $12 million in reduced margins due to redirected rail transportation and other costs. We expect these costs to reverse in the second half. Additionally, we had a higher percentage of high-vol B shipments in Q2, which dampened realizations. We anticipate stronger volumes and lower unit costs in Q3, leading to improved margins.
Q: On West Elk, you mentioned $70 in the prepared remarks. Is that a good number to use for the entire output of West Elk going forward, or is it more specific to export tons?
A: West Elk produces a high-quality product sought after in export thermal markets and industrial markets. We are transitioning to the BC seam, which will improve coal quality and reduce costs. The $70 pertains to about 2 million tons of North American industrial business. As legacy contracts roll off, we expect significant margin expansion, especially as we reduce costs further in mid-2025.
Q: How would you use cash on the balance sheet in a downturn? Would you deploy it for buybacks or maintain a strong balance sheet?
A: Our central tenet is to return 100% of discretionary cash flow to shareholders. In a downturn, we would likely maintain a strong balance sheet while being flexible with share repurchases. We have set a minimum cash level of $200 million to ensure we can continue our capital return program even in challenging conditions.
Q: Your full-year shipment guidance for coking coal implies needing to ship roughly 2.4 million tons per quarter in the second half. Is this achievable from a production perspective, and how confident are you in the logistics chain to handle this?
A: We are confident in achieving these levels. We have built inventory and expect strong production, especially as Leer South transitions to District Two. Rail service has been solid, and we have confidence in our terminal capabilities. We have always envisioned a step-up in shipments and are well-prepared for it.
Q: Can you provide more color on the severance tax rebate from West Virginia? What is the potential dollar amount over time, and what factors influence this?
A: The largest part of the benefit has already been taken. We expect an additional rebate of roughly half of what we received in Q2 for the rest of this year. For next year, it could be in the range of $5 to $10 million, depending on market conditions and severance tax levels.
Q: What drove the CapEx reduction for the year?
A: The reduction is primarily due to deferring costs and capital expenditures to future periods. This decision was made to rightsize cash flows in light of lower-than-expected results and market conditions.
Q: On the thermal side, what kind of improvement can we expect in the second half versus the first half?
A: We expect a recovery in the Thermal segment, driven by improved shipments and reduced costs. We have built significant pit inventory, and as we ship this coal, we will see a positive impact on margins. We anticipate the Thermal segment to be modestly cash positive in the second half.
Q: With Leer South entering District Two and thicker seams, is it fair to assume 3.5 million tons plus for next year?
A: While we are not providing specific guidance, the improvement in seam thickness and quality in District Two supports higher production levels. We have high expectations for Leer South, and a step-up in production is within the range of expectation.
Q: How are operations at Baltimore and DTA post-bridge collapse? Are things back to normal?
A: Operations have returned to traditional flows since the bridge reopened on June 10th. The logistics team did an excellent job managing the disruption, and we do not see any residual impact going forward. The experience has made us stronger and more efficient.
Q: What is your perspective on the Longview fire and its impact on the market?
A: The Longview fire has taken about 3 million tons out of the market for 2024. This, along with other outages, has reduced seaborne metallurgical supply by 2% to 3%. While the market is currently subdued, we believe it is relatively balanced, and we expect demand to reassert itself, leading to a potential market rebound.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
