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Contura Energy, Inc (NYSE:CTRA)
Q4 2019 Earnings Call
Mar 18, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Contura Energy Fourth Quarter 2019 Results Conference Call. [Operator Instructions]After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]

I would now like to turn the conference over to Emily, Vice President of Corporate Communications. Please go ahead.

Emily O'Quinn -- Vice President of Corporate Communications

Thanks, Alison and good afternoon, everyone. Before we begin, let me remind you that during our prepared remarks and the Q&A period, our comments relating to expected business and financial performance contains 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 2019 earnings release and the associated SEC filings. 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 Contura's Chief Executive Officer, David Stetson; and Chief Financial Officer, Andy Eidson. Also participating on the call is Jason Whitehead, our Chief Operating Officer, who is available to answer questions on operations.

With that, I'll turn the call over to David.

David J. Stetson -- Chairman and Chief Executive Officer

Thank you, Emily. Good afternoon, everyone, and thanks for joining the call today. Before I go into details of our results, I want to start off with a comment about the coronavirus. As I know it is on everyone's mind this afternoon, as we've seen across the globe, anything dealing with health and safety has potentially impacted lives, and we feel for the many people who have been affected by the coronavirus. For the perspective of our business and our people, we have been encouraging everyone at the organization to take precautions, wash hands, stay home when they're sick, all the guidelines we've heard from CDC and others.

Operationally, we continue to mine and process coal normally, and we have not seen a direct business impact at this time. From a sales perspective, we've been speaking to our customers almost daily, and we've seen a lot of speculation on the coronavirus impacts, but we haven't experienced any as of this time. In short, we remain committed to closely monitoring the situation and taking precautions to reduce the risk, the exposure to our people and to our business.

Turning now to our financial results, as you know on February the 10th, we announced preliminarily unaudited financial results for the fourth quarter, and on February the 11th, we held an exchange call to discuss results, take questions and share our vision on Contura for 2020. We will be reiterating those comments regarding the financial results from the quarter, and Andy will have some additional color in detail to share in his remarks.

There is no question that 2019 was a difficult year on multiple levels, but Contura has made tremendous progress on key corporate and operating initiatives. We've streamlined decision making, driven cost reductions and executed on our capital projects. We are fully prepared in stand ready to take advantage of market opportunities as they present themselves.

As a leadership team, we realized that operating costs experienced in late 2018 and into much of 2019 were neither sustainable nor did they accurately reflect cost of our mines under a disciplined and efficient management practices. Jason and Andy sat down [Phonetic] shortly after Jason came on board and reviewed our cost structure across the entire portfolio of mines, and they determined that a goal of getting to Central Appalachia Met cost below $80 was achievable.

We are now seeing the success of those strategies and our latest cost numbers validate our 2020 guidance cost within the range of $76 to $81 per ton for Central Appalachia Met. Much of this success is tied directly to the transformational changes that Jason has put in place since he joined the organization in mid-August as of last year.

Streamline processes improved efficiencies across the enterprise instituted mining practices that emphasize safety while also driving down cost. At the corporate level, Andy has executed well in the same mandate to extract cost from the system. Over just the past few months, Andy has identified and executed on approximately $10 million in SG&A savings as he and his team have tightened our budgets and maybe more important changes to streamline our offices.

I'm also thrilled that Roger Nicholson joined our team in December as General Counsel, leads our legal teams, as well as safety and environmental functions of our business. He is also taking quick action to remove layers of bureaucracy and lower cost across his areas of responsibility, all while tackling some of the most challenging issues that we face as a company.

Jason, Andy, and Roger have taken my vision of flatter, more nimble organization and have made it a reality. Contura is better positioned to seize opportunities when they are presented and proactively address threats to the business. We are able to react quickly when changes do arise. Along these lines, we are lowering our capex guidance for 2020 to remove $30 million at both the high and low ends of the range, putting us an expectation of $145 million to $165 million of capex for the year.

Andy will go in greater detail of this in a moment, but this enhances our liquidity in case we see a drop in demand for our products among many global economic challenges. We are facing rapidly changing conditions, but as of now, we haven't seen push back from customers for contract delivery of our met production. We do have plans and contingencies in place, should we see any slowdowns, however. On top of the $30 million in expected capex reductions, we've identified another $15 million in operational activities and $8 million across SG&A and operations, that we're in the process of cutting or postponing. I've been very proud of our teams. We're stepping up to identify cost containment opportunities and we'll continue to make strong progress on these initiatives.

Lastly, I'm pleased to provide an update on one of our capital projects that has now commenced production. Road Fork 52 began producing met coal in late February and when it reaches full production, we expect cost to be in the $65 to $70 per ton range. This is an example of our previously discussed long-term vision to bring online new production with cost curves that are below current levels. We remain on track with our two other capital projects, Black Eagle and Lynn Branch, and expect all three of these met projects to be in full production next year.

On the thermal side, we continue to rightsize our Central App thermal production and we redeployed equipment to met production to better match up with shrinking domestic markets and challenging international markets.

With that, I'll turn it over to Andy for some additional details on the financials.

Andy Eidson -- Executive Vice President and Chief Financial Officer

Thanks, David. Looking at some of our headline results, our fourth quarter EBITDA declined from the third quarter by $8.5 million to $31.5 million, mainly due to softer met index prices in the Atlantic Basin which deteriorated by an 11% -- by a 11% in the fourth quarter. Consequently, our average cap met segment realization declined more than $13 to roughly $95 a ton. On the positive side, as David mentioned, we saw strong cost improvements across all of our segments, suggesting the productivity enhancement Jason and his team have implemented are continuing to yield excellent outcomes.

Broken down by segment, CAPP Met generated $42 million of margin during the fourth quarter. Both of our thermal segments posted positive results in the fourth quarter with CAPP Thermal margin of $6 million while NAPP contributed $10 million of margin. Note that these segment margin numbers do not include SG&A allocation of looking at fourth quarter SG&A stand-alone excluding a $4.7 million non-cash stock compensation expense and $8 million in one-time expenses. Primarily associated with management restructuring, SG&A was down $2.1 million from the third quarter to $13.1 million.

Our fourth quarter CAPP met shipments increased by 300,000 tons to 3.3 million tons quarter-over-quarter. While NAPP shipment volume declined slightly from 1.6 million to 1.5 million tons and CAPP thermal shipments declined 250,000 tons to 900,000 tons, primarily as a decision of the -- as a result of the decision to reduce our CAPP thermal footprint and there was also a customer force majeure in the fourth quarter.

Operating costs, our CAPP Met cost of sales was approximately $82 per ton, compared with $87 per ton in the third quarter as our deep mine productivity, which is measured by feet per shift, improved in the CAPP Met segment by 8%. I would also note that this $82 number does include approximately $3 of lower cost or market inventory adjustment.

So if you're looking at a more of a stand-alone through operating cost, you're in the $78, $79 zip code, so outstanding performance there. The story was pretty similar in the CAPP Thermal segment, where costs declined by nearly $10 a ton to $49 a ton, primarily due to an increase in feet per shift of approximately 12%. Third quarter performance at Northern App was impacted by a longwall move, which drove the costs higher in third quarter, and in fourth quarter we didn't have to deal with that. Also, there were some incremental vacation time in Q3 versus Q4, so the absence of those factors drove the fourth quarter cost of sales in NAPP to just under $35 a ton of approximate $9 reduction.

Shifting to our 2020 guidance, we are maintaining our guidance with the exception of capex which were long about $30 million at both the high and low ends of our prior expectation to a new range of $145 million to $165 million. We conducted an extensive review of all of our budgeted capex items with the focus on lowering total spending without hindering our productivity goals or impacting safety. A portion of the capex reduction is associated with Cumberland as we trim certain non-critical expenditures and we did defer some items, and within the CAPP segment, we transferred equipment from operations that are being well down and we're able to delay some other expenditures. With these actions, we feel very confident that we can achieve our newly rationalized capex guidance in 2020.

Updating on sales progress for the year, we have approximately 52% of our CAPP Met tons committed at an average price of approximately $98 per ton. In addition, we have approximately 27% committed an index for the year. This is a little bit ahead of where we normally would be at this point in the year, we still have some tons to put the bad, but we're pretty well on pace as we stand.

On the thermal side, we're fully committed for 2020 with 100% of NAPP committed and priced at an average price of $43.43. And CAPP thermal committed and priced at an average of just under $56 per ton. As we've announced previously, at the end of the fourth quarter, the company had approximately $213 million in unrestricted cash and our total restricted cash balance was $166 million, including restricted cash deposits and long-term investments. So our total liquidity, including all of those items as well as availability under our ABL was $328 million as of 12/31.

Turning to fourth quarter cash flows for a moment, we'll look at three items that made up an increase of approximately $61 million to our overall unrestricted cash balance at the end of the year. First of all, we received the AMT credit monetization refund of $65 million. This was originally expected to be received in Q1 -- early in Q1 of this year, so it showed up just a little bit before Christmas.

And as we disclosed last time, our last call, in the -- investor presentation that we provided on our website, we've basically accelerated the assumption on all of our tax refunds in AMT category by one year. We also received a workers' comp related collateral release of $79 million of which $53 million was in transferred in a liquidity-neutral healthy transaction to the ABL. So basically, we saw a net of $26 million benefit from that LC move.

And then lastly, we received $22 million of surety releases, consisting of $9 million related to the PRB transaction of other surety related releases. As a reminder, we paid an aggregate of $95.1 million related to the PRB transaction, including the payment to ESM and some ad valorem back taxes during the quarter. We do have several other cash obligations in 2020 that we've talked about extensively in the past and so we won't cover those necessarily again right now, but you can find them in the latest investor presentation that I was referring to earlier.

Finally, I do want to comment on an issue that came up a couple of weeks ago, in late February, along with approximately 20 other companies, we received a letter from the Department of Labor regarding self-insurance of certain black lung obligations. The DOL is overhauled, the way it handles self-insurance authorization, which now imposes much more stringent reporting requirements on co-operators and require significantly more collateral than in prior years.

Under the new structure, the DOL will evaluates and sorts coal operators into risk categories of low, medium or high based on financial metrics. Company's deemed to be the highest risk will be required to provide 100% collateral, medium risk companies will provide 85% collateral, and low risk companies like Contura will need to provide 70% collateral. Across the board, this is a dramatic increase in required collateral as we've provided approximately $2.7 million in collateral in connection with these black lung obligations. And now we're being asked by the DOL to provide $65.7 million to receive authorization for self-insurance. We strongly disagree with both the security determination by the DOL and the methodology through which they've arrived at these new requirements. Therefore, we have informed the DOL of our plan to appeal this decision.

We are also evaluating other options, including the potential to ensure these black lung obligations through the third-party provider. In the event that we decide to proceed with self insurance and our appeal is unsuccessful, and reducing or eliminating additional collateral requirement, we do have sufficient capacity under our ABL to issue letters of credit to cover this requirement. Naturally, it's very early in this process, so more details to come.

One other item, I would like to cover before we open the line for questions, there have been some questions come in regarding the audit findings regarding material weaknesses in our internal controls. I didn't want to mention those quickly. There's the technical accounting view and then there is my personal view, the technical accounting view as we had three particular items that were problematic from a controls perspective.

I think all three of those from a personal view would qualify, something of a footfall but technically, they do qualify, we do have plans in many instances, as these have already been remediated. But in total, they will be remediated by the end of the first quarter, and the important thing to note is that has nothing to do with the actual financial results, these were strictly internal control issues related to first year SOX implementation. Interesting thing is none of our procedures or processes have changed since we last SOX compliant in 2014, all the team has been the same, but the world -- the outside world has changed a little bit, and therefore our processes weren't quite too far, based on these new measurement methodology.

So, with that said, I think we've covered that piece. So operator, yes, we can open the line for questions.

Questions and Answers:

Operator

Thank you. And we will now begin the question-and-answer session. [Operator Instructions] Our first question today will come from Mark Levin with The Benchmark Company. Please go ahead.

Mark Levin -- The Benchmark Company -- Analyst

Okay, great. Thank you very much. Hope everyone is safe. Just a -- few just quick questions. One, in terms of modeling price realizations going forward, any color as to whether or not, it's appropriate to use the kind of the basic industry prices for high vol A, high vol B, low vol, or should we be assuming some discount to those numbers. And if there is a discount, how much and what are the trends in this discount?

Andy Eidson -- Executive Vice President and Chief Financial Officer

Hi, Mark. It's Andy. Good to hear from you. I think we're still seeing by and large some degree of discount from the quoted East Coast numbers. Naturally, we're -- if you look at East Coast compared to all the low vol. I think as of yesterday, if you looked at where East Coast closed as compared to, call it, the March future expectation. There is about a $23 a ton disconnect there, but then beyond that, I think it's safe to say there is a fair amount of discounting going on to actually move volumes, and whether that number is 5%, 8%, 12% anecdotally. We've heard numbers all up and down the scale, but there still is a significant amount of activity in that regard.

Mark Levin -- The Benchmark Company -- Analyst

Okay. And I appreciate the Contura. And in terms of your -- you know, to the extent you willing to discuss it, but maybe you're inventory situation on the coking coal side, is there -- is there more coal sitting on the ground today than several months ago? Or is it cleaning up, or maybe just some color around your inventory?

Andy Eidson -- Executive Vice President and Chief Financial Officer

Yeah. We have continued to build some level of inventory. You can see the working capital movements from the beginning of last year through the end of the year, that trend has continued a little bit. We are getting some production rightsizing. As you'll recall, we did cut our product -- our sales guidance there a few weeks ago. So we do anticipate working down that inventory level some during the year. But right now, we've got a pretty healthy amount of inventory by healthy, I mean, a little bit more than I would like to have tied up tying up cash at the moment, but expectation is certainly that will be bringing that down as the year moves on.

Mark Levin -- The Benchmark Company -- Analyst

Okay. And then my next question to do at Northern App and Cumberland, maybe what the updated thought process is there? Is there, I think you guys referenced to $50 million or $60 million capital requirement this year for the impoundment? Is that a definite or would you -- is there any scenario in which you would consider reclaiming the mine and if so, how much would that cost, maybe relative to the expenses of the impoundment?

David J. Stetson -- Chairman and Chief Executive Officer

Yeah, Mark, this is David. As I stated in our call in February, we're reviewing all the options as it pertains to our capital spin at the Cumberland complex. We did receive the final permit approximately a week, 10 days ago that allows for the construction of the impoundment. But until we resolve some open issues that impacts on our ability to generate some long-term free cash flow where we've limited any capital spending just a pure preparatory work associated with the impairment. So it's still in process. We still got some opening and items that we want to review. We're looking at all kinds of scenarios as to that capital spend whether to do it or not to do it. And if we do it over what period of time it has to be accomplished. So it's still a work in process, Mark.

Mark Levin -- The Benchmark Company -- Analyst

Okay. Fair enough, Dave. Very helpful. And then final question, just a modeling question for Andy. First quarter were almost done -- we're almost done, maybe some color as to how to think about, at least relative to your full year guidance, how Q1 will look cost volumes, etc., or anything unusual in the first quarter?

Andy Eidson -- Executive Vice President and Chief Financial Officer

Yeah. I mean, I don't want to go too far, but I think it's safe to say that our volumes are probably pretty well on pace. Naturally, there's a little bit of seasonality. I think our Q1 is typically a little bit -- Q1s and Q4s seem to be a little bit heavier than the other two quarters, so that that trend may hold a little bit. But from a cost perspective, February I'm glad you asked the question because it gives me a chance to make Jason uncomfortable by bragging on him some more Q1 to date through in the February is actually doing extremely well and by and large coming in at or below the bottom end of our guidance range. So the operations teams continues to do just an outstanding job and controlling everything that they can control and not necessarily worrying about the rest.

Mark Levin -- The Benchmark Company -- Analyst

That's great. Appreciate the color. Chat soon.

Andy Eidson -- Executive Vice President and Chief Financial Officer

Thanks, Mark.

Operator

[Operator Instructions] Our next question will come from Daniel Scott of Clarksons. Please go ahead.

Daniel Scott -- Clarksons -- Analyst

Great. Thank you, and a nice job on cost controls. The one question I wanted to drill down in a little bit is on the contracted book particularly on the met coal site. You've raised your percent covered for the year priced and contracted, and I believe the realized price went from $101 to about $98. Could you maybe give a little color on how much of that is mix? How much of it's domestic versus international? Kind of what has changed versus the last update on the contractor book, please?

Andy Eidson -- Executive Vice President and Chief Financial Officer

Hey Dan. This is Andy. I don't have the breakdown of the qualities of the kind of the Delta there, but it's probably not too far off. This is all international. The incremental piece is all international. I think if you do the math that probably hits you around mid to high 80s number, but I think it's just reflective of where the market has bounced around to in the past few weeks. It felt like we were getting some moment before the impact of the coronavirus came more broadly known, and then of course everything kind of slant to a halt. But I think that's -- I would imagine that some of this is a little bit on the lower end of the spectrum, but I can't. I don't have the numbers in front of me to prove that, but that's really just kind of what we're seeing in the market at this point in time.

Daniel Scott -- Clarksons -- Analyst

Okay. Great. And then if you could just -- I got most of details of the Department of Labor stuff on self insurance because you maybe talk about the timeline for resolving that?

Andy Eidson -- Executive Vice President and Chief Financial Officer

Yes. Again, it's early in the process. So we had 30 days to respond to their initial requests which we did respond and notify them that we were appealing the process behind the appeal is a little bit new. All this came together pretty quickly from the DOL's perspective, and so I think a little bit of this will probably develop. It won't be known until it develops and I think as with all governmental agencies right now they probably have other things that they're tied up with at the moment.

So I'm not sure on a timeline. We will certainly keep everyone updated the best we can as it develops, but again it appears to be hitting, it caught the entire industry that utilizes self insurance off guard. And so it's a challenging situation, and the large degree it's kind of an illogical situation, certainly understand the impact of the bankruptcies from 14 to 16 on the black lung trust fund, but again to go from a collateral rate of effectively $2.7 million to $66 million or $67 million in one fell swoop seems to be a bit aggressive. So again not -- unfortunately I don't have a whole lot of detail to share on that one because it is so early in the process but we'll keep everyone in the loop as best we can.

Daniel Scott -- Clarksons -- Analyst

Hey, Andy. Thanks very much for the detail.

Andy Eidson -- Executive Vice President and Chief Financial Officer

Sure. Thanks.

Operator

Our next question will come from Lucas Pipes with B. Riley FBR. Please go ahead.

Lucas Pipes -- B. Riley, FBR -- Analyst

Hey. Good afternoon, everybody.

Andy Eidson -- Executive Vice President and Chief Financial Officer

Hey, Lucas.

David J. Stetson -- Chairman and Chief Executive Officer

Good afternoon, Lucas.

Lucas Pipes -- B. Riley, FBR -- Analyst

Hey, I first wanted to just get a little bit more market color. Are you getting push back from customers either on the domestic side as thermal coal, we had a mild winter low natural gas prices and now I assume everyday looks like a weakened. And then also on the international side, are European steel mills pushing back on met coal deliveries for example? Would appreciate your perspective on that. Thank you.

David J. Stetson -- Chairman and Chief Executive Officer

I'll take it, and Andy can fill in the gaps. On the thermal side, yes, we are not unique to many of our colleagues in the industry on the thermal side. There's been a weakened demand there. We have had good relationships with our utility customers and have entered in agreements that have to some extent curtailed postponed some shipments and that goes to our strategy that we had earlier. We kind of saw it coming. So we started reducing our thermal footprints in Central App region.

On the met side, Lucas we see a steady metallurgical coal shipments demand in recent weeks. We realize what's going on today. We stay in close contact with our customers both in North America and abroad, and we and I'll say it just picked the time right, Lucas it's 2:31 today, I can tell you that we haven't seen any or heard of any shipment delays referrals from our customer base. I think they're kind of looking at a wait-and-see as well, but we also aware of the disruptions on automobile side in Spain, Germany, France and Italy.

And so, our Q1 metallurgical shipments are ahead of schedule and ahead of budget. However, the way we're seeing the market today, where we've got all kinds of contingencies in place entirely. We figure it will probably be a more of a -- it could be the end of the second quarter, third quarter impact but right now we haven't seen any Lucas but they'll probably come.

Lucas Pipes -- B. Riley, FBR -- Analyst

Well, it's very good to hear that as of today, it has not been the case and hopefully this will pass sooner than we all fear at this time. My second question is around the liquidity. You have a couple of facilities. Have there been considerations on kind of proactively employing those to just -- just in the event that things do last a little longer and a lot of folks are concerned about a cash crunch getting even worse from where it is today kind of -- Andy how are you thinking about that? Thank you.

Andy Eidson -- Executive Vice President and Chief Financial Officer

No, that's a great question Lucas. I think we've all watched over the past couple of weeks, activity ramping up in that regard, a lot of companies particularly in the hospitality or airline industry, it's the ones most heavily damaged by Corona virus issues moving toward drawing down -- revolvers -- we are testing as much cash as they can while it is available. I think at this point, we have really good relationships with the syndicate of banks and our revolver. And at this point we don't -- we don't really have concern around being able to utilize our facility even in a more protracting situation but that is definitely something that has been a consideration something on our mind at least as we watch so many other companies doing that but at this point, I think the only action on our part would probably be premature but again we are pretty comfortable with our banks and the amount of reserves they have to cover the commitments from the -- for LC just general ABL usage.

Lucas Pipes -- B. Riley, FBR -- Analyst

Very helpful and sort of question that there isn't anything that would limit your ability from a covenant perspective to take advantage of that liquidity?

Andy Eidson -- Executive Vice President and Chief Financial Officer

No, not really. It really ties back to just the inventory and AR value that supports the total facility size naturally as markets come down -- the value of inventory will deplete all of it and the value of the AR will -- DOL as reflecting over self process. But we have -- you can probably call it undersized facility as it is we have quite a bit of cushion when it comes to our inventory and our AR balances compared to the availability or the [Indecipherable] of those facility. So we are even at this current trough level where we have got plenty of rooms as far as meeting the requirements to maintain our access to the full facility. There are naturally if you are drawing down there are some limitations as far as if you have springing levels which typically are 90% to 95% of the total capacity which will be limiting factor but no other real covenantal restrictions that would keep us out of access to it.

Lucas Pipes -- B. Riley, FBR -- Analyst

Got it. Very helpful, Andy and team everybody really be safe and best of luck during this turbulence times.

Andy Eidson -- Executive Vice President and Chief Financial Officer

Thank you, Lucas. Same to you.

Operator

Ladies and gentlemen this will conclude our question-and-answer session. At this time, I would like to turn the conference back over David Stetson, CEO for closing remarks.

David J. Stetson -- Chairman and Chief Executive Officer

Again, thanks everyone for getting on the line and joining us today and thanks for your interest in Contura. I hope everyone has a safe and great rest of the day. Thank you so much.

Operator

[Operator Closing Remarks]

Duration: 33 minutes

Call participants:

Emily O'Quinn -- Vice President of Corporate Communications

David J. Stetson -- Chairman and Chief Executive Officer

Andy Eidson -- Executive Vice President and Chief Financial Officer

Mark Levin -- The Benchmark Company -- Analyst

Daniel Scott -- Clarksons -- Analyst

Lucas Pipes -- B. Riley, FBR -- Analyst

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