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Contura Energy, Inc (NYSE:CTRA)
Q1 2020 Earnings Call
May 11, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Contura Energy First Quarter 2020 Results Conference Call. [Operator Instructions]

I would now like to turn the conference over to Emily O'Quinn, Vice President of Corporate Communications. Ms. O'Quinn, please go ahead.

Emily O'Quinn -- Vice President-Corporate Communications

Thanks, Anita, and, good morning, 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 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 first quarter 2020 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 Chairman and 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 morning, everyone, and thanks for joining the call today.

As we all know, over the last several weeks, the coronavirus pandemic has created unprecedented uncertainty in our country and across the world. This has not only disrupted global economies to a degree not seen in my lifetime, but has also created a public health challenge. These are difficult times, and as we said on our last earnings call, we are committed to taking precautions that will reduce the risk of exposure to COVID-19 for our people at Contura. We understand that these are challenging circumstances for everyone, and we are grateful to our more than 4,000 employees for their dedication and cooperation in implementing precautionary measures across the Company. The health and safety of everyone on our team is important to us, and we take these issues very seriously.

As I turn to our operational results for the first quarter, I want to start by highlighting our exceptional EBITDA of $60 million for the quarter, which was largely driven by outstanding cost performance by our operations team. Our Central App net cost reached a multiyear low of $70.68 per ton compared to fourth quarter cost of $82.36, which was already a meaningful improvement over previous quarters. This stellar cost performance is among the high points of the quarter.

When I returned to Contura last fall, I sat down with the management team to discuss our vision for Contura. We recognized that we had to drive efficiencies at both the operating and corporate levels in order to secure the long-term viability and profitability of Contura. The team put a great short and long-term strategy in place to achieve this vision, and the success of that strategy is evident in the first quarter results. I want to thank Jason Whitehead for his leadership and congratulate the entire operations group on a job well done.

Looking at our results against a broader economic backdrop, I think it's important to point out that we were able to post impressive cost numbers despite the onset of the coronavirus late in the first quarter. Although my hope for Contura was to build off a strong quarter, the markets and headwinds resulting from the virus will challenge us as well as everyone else in our industry. However, the hard work we have done over the past nine months and the building blocks we've put in place will help Contura weather the expected market disruptions over the next few quarters. The capital projects we invested in are allowing us to build a bridge to even lower cost future for Contura. The millions of dollars in savings from streamlining our operations and SG&A infrastructure are even more important now. These strategic actions, coupled with meticulous cash management instituted by Andy, will position Contura for durability in these unprecedented times.

We remain committed to an aggressive cash preservation strategy, and we finished the first quarter with $257 million in total liquidity. As a result of the CARES Act that was passed by Congress, we expect to receive an accelerated AMT tax refund of roughly $68 million early in the third quarter. We also anticipate [Indecipherable] to defer approximately $14 million of this year's payroll taxes in connection with the coronavirus relief package.

Before I turn it over to Andy to provide additional color, I want to briefly touch on some market analysis and discuss some of the external factors we are watching. Even though the first quarter met coal price continued to be challenging, it was encouraging to see the demand for our met coal held up quite well. As our reported volumes show, our met shipments of 3.3 million tons in the first quarter matched our fourth quarter 2019 shipments. Despite the announcement of many blast furnace idlings and coke plant slowdowns, our strong shipments continued well into April.

However, pricing began to weaken significantly as the COVID-19 pandemic spread and price volatility increased the last couple of weeks. While the supply has been reduced across basins in the United States, demand has fallen at even faster pace, resulting in substantial price weakness ranging from a 13% decline in high vol A market to a 26% decline in Australian premium hard coking spot prices in April alone. To put this in perspective, prices have dropped 35% to 50% over the past 12 months. There are some estimates indicating that temporary US met coal production cuts may have been as high as 50% of the total supply. We'll have to wait a little longer to get April trade and demand data, but March numbers give us hints of what to expect in the coming months.

Globally, the crude steel production posted one of its worst months in recent years with the overall global production declining 6% compared to March 2019. And excluding China, the production was down more than 10%. Among the markets that are most important to us, the decline was quite challenging as well, with European crude steel production showing a 20% decline in both North and South America declining nearly 10%.

I won't bore you with much more data, but it's sufficient to say that while March numbers were weak, the initial manufacturing PMI readings indicate that April numbers are even weaker. That index was 36.1 in April, down from 48.5 in March. As you know, a PMI index below 50 indicates contracting business conditions. And manufacturing slowed dramatically in a couple of key regions for our business. Eurozone manufacturing PMI declined from an already weak March level of 44.5 to 33.6 in April. Additionally, Brazil fell from 48.4 to 36 in April.

So, in summary, there are obviously some adverse circumstances that we and many other companies are having to manage around. The real question is what will happen in the coming weeks and how will those developments influence the back half of 2020 might look like. That visibility is admittedly quite limited at this time and in this environment, it's frankly impossible to accurately predict exactly what pricing demand will do.

In uncertain times like these, I believe having a solid financial foundation and strong fundamentals are essential to withstand the disruption. That's why I'm so proud of the work our team has done over the last nine months to shore up the foundational elements of the business, to cut cost and to transition to a more nimble company. Those challenges are going to serve us well, and I'm optimistic about our ability to successfully navigate the path ahead.

I'll now turn the call over to Andy for some additional details on our financials.

Andy Eidson -- Executive Vice President and Chief Financial Officer

Thanks, David.

Obviously, the uncertainty around the impacts of the coronavirus both in terms of the human toll and the new economic realities has created an extremely difficult environment to plan for. And as David mentioned, it's going to be impossible, particularly right now and likely for the very near future to know exactly what the new normal will look like. And for that reason, Contura suspended its 2020 guidance a few weeks back, and we do expect it to remain suspended for the next several weeks, until we do have some better visibility on how things are going to develop.

Given that backdrop, it's only appropriate that I'll begin by discussing the most important financial items and the items that most people will likely be very interested in: our cash position, liquidity and our cash flows. We ended the quarter with approximately $227 million in unrestricted cash and $156 million of restricted cash. Including $30 million available under our ABL, the total available liquidity was $257 million at the end of March.

As we announced on March 23, we drew $57.5 million on our revolving credit facility as a precautionary measure to bolster our cash balances and increase financial flexibility. Now, this revolver draw is reflected in our first quarter cash balance that I mentioned. Naturally, an ABL is subject to variability and volatility based on accounts receivable and inventory balances and values. And as such, the [Technical Issues] capacity of our ABL can fluctuate. So as we go forward, there could be some movement in the availability but the long-term trends typically dictates a relatively static figure.

Turning to our cash flows. Our first quarter operating cash flow was roughly breakeven while capex was just under $50 million. Inventory build was approximately $22 million during the quarter. And as we previously announced, the Company idled most of its operations in April in response to market conditions and expected customer deferrals but also in light of inventory levels. Now through that, the idling period itself wrapped up at the end of April, we ended up approximately 800,000 tons down during that month. All the operations are back online, and nearly all of our furloughed workforce has returned to the job as we continue to try to match production to sales.

There is one important cash inflow that I want to highlight, the future cash inflow that David referred to, the AMT credit monetization refund. At the beginning of the year, we had expected to receive approximately $35 million of this refund, probably in the fourth quarter of 2020, followed by $16.5 million each of the following two years. Due to the CARES Act passed by Congress and the diligent efforts of our tax team, we now anticipate receiving all $68 million of the tax fund likely in July of this year. Also, as David mentioned, in connection with the CARES Act, we expect to defer approximately $14 million in payroll taxes until 2021 and 2022.

On our last call I commented on a letter we received from the Department of Labor regarding potentially higher collateral amounts for certain black lung obligations in which we could see our self-insured collateral increased from $2.7 million to nearly $66 million. As we said then, we strongly disagree with both this demand by DOL and the methodology through which they've arrived at these new requirements. We still intend to appeal this determination and have received an extension for filing an appeal until May 22. So more details on that as it develops.

Moving to our financial results. We posted a very strong first quarter EBITDA of $60 million, nearly doubling from the fourth quarter, mainly due to the excellent performance by Jason's team on cost specifically CAPP-Met, which came in at $70.68 per ton. As David mentioned, that's a multiyear low for that particular metric. If you drill down a little bit further and adjust the cost of Contura-produced coal that was sold during the quarter, so this would exclude a small amount of coal that we purchased from third parties, our cost was right at $69.

Overall, CAPP-Met generated $69 million of EBITDA during the quarter while our two thermal segments in Central App and Northern App combined to add another $2 million of EBITDA. And SG&A allocation is not factored into these segment EBITDA results.

And just to add a little bit more context on our CAPP-Met cost, because, again, it was just a phenomenal quarter, roughly $70.68 per ton, down from roughly $82 a ton in the prior quarter; that's 17% reduction quarter-over-quarter, but it's a staggering 34% reduction from Q1 2019's cost of $94 a ton. Our CAPP-Met underground productivity as measured by feet per shift increased an impressive 9% over the fourth quarter, continuing a strong trend over the past couple of quarters.

CAPP-Thermal costs increased from a relatively low level in the fourth quarter, and it was primarily attributable to the 31% reduction in volume as we continue curtailing production of certain thermal operations.

In our Northern App segment, a $5 increase in the cost of sales was due to a planned longwall move which was completed in March. We expect the next longwall move to take place in September.

On the revenue front, our CAPP-Met volume remained quite robust in the first quarter, with total shipments roughly even with the fourth quarter at 3.3 million tons and revenue per short ton slightly declining by $2.18 to $92.80. Northern App revenues and realizations increased slightly with volumes remaining at 1.5 million tons and CAPP-Thermal sales tonnage declined by 31% in connection with our continued de-emphasization of thermal production, which results in a $15 million decline in CAPP-Thermal revenues. As David commented earlier, our met volumes continued to be very strong in April.

SG&A, after excluding non-cash stock comp and onetime items, remained roughly flat at $13.4 million in the first quarter compared with $13.1 million in the fourth quarter. As Jason has done with reducing our operating costs, we've reduced our corporate overhead by approximately $10 million since the first quarter of last year, and we continue to highly manage all of our controllable expenses going forward.

And with those details, operator, I believe we're ready to open the line for questions.

Questions and Answers:

Operator

[Operator Instructions] The first question today comes from Lucas Pipes of B. Riley FBR. Please go ahead.

Dan Day -- B. Riley FBR -- Analyst

Hey, guys, good morning. This is actually Dan Day on for Lucas. I just want to congratulate you on the cost performance on the CAPP-Met side. It was a really nice job there. My first question here. We've seen a lot of blast furnace closures, especially, in the US and in Europe. You touched on it in the prepared comments. Just are you guys seeing coke plants deferring volumes or outside of Q2, Q3? Just any other color on impacts from kind of idled blast furnaces and coke plants? Thanks.

David J. Stetson -- Chairman and Chief Executive Officer

I'll start that off. Dan Horn's also with us. He can provide additional color. But the answer simply is, yes. I mean, you're seeing deferrals. We're monitoring this. Dan's in constant communication with both our domestic and international customers. We're reading the same thing. We're hearing the same thing that's being put out in publications. So we are certainly seeing the deferrals both in the second and third quarter.

Dan Day -- B. Riley FBR -- Analyst

Got it. Thank you.

Daniel Horn -- Senior Vice President and Head of. Metallurgical Coal Sales

Yeah. I'll start off...

Dan Day -- B. Riley FBR -- Analyst

Go ahead.

Daniel Horn -- Senior Vice President and Head of. Metallurgical Coal Sales

Yeah. I'll start off by saying, we've seen this before. We saw this in '09 and to a lesser degree in '15. When blast furnaces start to come offline, of course, coke plants have to slow down to match. We follow that, and we have seen some deferrals and we're matching our production to those deferrals. Not a surprise at all.

We'll watch the blast furnaces frankly as a leading indicator. And as those do come back online later in the year, we'll adjust our production, and we know our customers will adjust their coal production accordingly too. It's nothing we haven't seen before.

Dan Day -- B. Riley FBR -- Analyst

Great. Thanks. One other on sort of the capital projects you guys have lined out, Black Eagle and Branch, Road Fork 52. Any impacts from this to those? I think you had said, Lynn Branch first coal in third quarter. Is there any impact to that timeline? Or anything else we should be thinking about?

David J. Stetson -- Chairman and Chief Executive Officer

No, no impact. Those projects are continuing as we've previously indicated.

Dan Day -- B. Riley FBR -- Analyst

Great. Thank you. I guess, I'll sneak one more in. With the AMT tax refund, the CARES Act deferrals, respecting that you guys have suspended guidance, is there a path to positive free cash flow in 2020?

Andy Eidson -- Executive Vice President and Chief Financial Officer

This is Andy. I'll take that one. When you look at all of our below-the-line cash items, things that go back to the bankruptcy, funding of reclamation accounts and things like that, 2020 was setting up to be a relatively difficult year from a cash burn perspective as it was. I think it's hard when you look at, all inclusive of all those items, to really bridge that gap.

I think, we're still going to be in a position of cash burn during the year. And naturally, any pressures we see in the second and third quarter will further increase the burn there. But from a liquidity perspective, we still feel pretty solid that we've got things as tightened up as humanly possible at this point, and we continue to look for other areas to improve just to shore up for whatever is to come.

Dan Day -- B. Riley FBR -- Analyst

Awesome. I appreciate all that color. Thanks for taking my questions. And best of luck.

Andy Eidson -- Executive Vice President and Chief Financial Officer

Thank you.

Operator

[Operator Instructions] The next question comes from Mark Levin with The Benchmark Company. Please go ahead.

Mark Levin -- The Benchmark Company -- Analyst

Okay. Great. Thank you very much. So, first, congratulations on the met coal cash cost. Kind of a huge, huge decrease. I guess, my question is the sustainability of those costs in the second, third and fourth quarter. It sounds like you'll be dealing with less volume in the second and third quarter to be able to spread out those costs. But maybe how sustainable is keeping costs down around that $70 level?

David J. Stetson -- Chairman and Chief Executive Officer

Well, we're all looking at each other who wants to grab that answer. Obviously, as I have explained in the past and you know very well, Mark, it all depends on your production levels, when you get start looking at cost. And we suspended guidance because we didn't really have any view or visibility into what the second, third and fourth quarter will look like for the rest of this year.

The takeaway from my perspective is that even as difficult as the markets were in the first quarter, we kept production where we needed to keep it, and those costs easily came in line there. So, I didn't mean easily, but it came in line. Jason, you want to chat about this at all with Mark?

Jason E. Whitehead -- Executive Vice President and Chief Operating Officer

Sure. I mean, I think you both hit the nail on the head. As long as we're able to run our mines near capacity, I would say the costs are sustainable. It's interesting how -- I think Andy mentioned 17% reduction quarter-over-quarter and 9% increase on feet per shift. And if you looked at Q1 of last year, a 34% decrease on cash cost and a 17% increase on productivity, looking at the deep mine productivity. So, if you look at those four numbers, it's really clear, the relationship between productivity or volume and cost. So, I think as long as the mines are able to run at a rate that's near capacity, then those are the types of numbers we should expect.

Andy Eidson -- Executive Vice President and Chief Financial Officer

Yeah. And, Mark, this is Andy to add one last piece to that. If you kind of imagine a world where the market and our costs were both flat, then Jason's costs would likely have come in even a little bit better than they did because we continue to have to reflect the impact of lower cost or market adjustments. It's a bad thing when we've got inventory at higher costs as Jason keeps taking the costs down. As we adjust those monthly, some of the cost of inventory that's still sitting on the books have to flush through current period cost of sales. And so if you flatten that out and you flatten the market, then it's even better.

So, I think by and large, these cost reductions are not just sustainable, but they're -- I don't want to put any more pressure on Jason, but there always could be a little bit more squealing there to squeeze it out.

Mark Levin -- The Benchmark Company -- Analyst

And you'll be bringing on some lower cost mines, I assume too, so your mix would improve I would imagine over time as well. Is that right?

Andy Eidson -- Executive Vice President and Chief Financial Officer

Yeah. The three projects which when they come online, they should constitute roughly between 25% and 30% of our productive capacity. And with those all lower 60s if not $60 million on the button projected cost, it's not unreasonable to expect some contribution there.

Mark Levin -- The Benchmark Company -- Analyst

Okay. Great. And then just in terms of the here and now -- I realize you guys suspended guidance, but in terms of the stuff that's controllable, capex, SG&A, stuff that you guys do have some visibility or should have some visibility around, any comments or thoughts about how capex will trend in the current environment for the remainder of this year and then also SG&A-type savings things that you can do to control cost? And maybe relative to where you were in previous guidance, is there upside to the lower end of those guidance ranges that you had previously provided?

Andy Eidson -- Executive Vice President and Chief Financial Officer

Again, trying to avoid issuing guidance when we've not issued guidance, just same way as it is with operational costs, there's always a little bit more squeal to be taken out. We have been taking very close looks at SG&A. But we feel like we're getting pretty close to the critical mass required to be a public company. So, I don't know that there's a significant amount left. There's always going to be a little bit. But from a capex perspective, Jason and we're constantly communicating about the different projects and where we may be able to defer some capital. So, again, I think there are possibilities. I don't want to speak to the quantum, but those are things that we're evaluating daily.

Mark Levin -- The Benchmark Company -- Analyst

And then this question is for Dan, just about the market in general, when you look at some of the US met prices and maybe the indices that we read on Platts and other places like that. Dan, do you think that those prices that we see printed are representative of the prices that you guys get? Or are things just so tough out there that you have to take discounts, either mid-single, high single digit, whatever the case may be, discounts to those indices?

Daniel Horn -- Senior Vice President and Head of. Metallurgical Coal Sales

Hi Mark, look, I think we've said before, when the prices are going up we tend to sell at premiums to the index. And when prices are going down, the industry tends to sell at discounts. Beyond that, we sell so many different products, low-vol, medium-vol, high-vol, semisoft. There's a lot of different answers to that question, and I'm really not going to give you any of them. But I could tell you, look, we're matching the market. We're following the market. It's difficult. I can't predict it either. I wish I could. But we're staying with it, and we'll just have to see. Like I said, we've seen it before. I'm confident we'll pull through this.

Mark Levin -- The Benchmark Company -- Analyst

Got it. And then last and final question. Any update on Cumberland and your thoughts regarding that from either a strategic perspective or from a capex perspective, however you want to address it?

David J. Stetson -- Chairman and Chief Executive Officer

Mark, this is David. I don't have anything beyond what we have said previously. Obviously, in these markets, preservation of capital is key. We spoke the last time about some preparatory work we did as part of the impoundment. But at this point in time, I don't have any real update on Cumberland beyond that we're still evaluating the future direction there.

Mark Levin -- The Benchmark Company -- Analyst

Okay. Great. Thanks. Congrats, again, on the cost side.

David J. Stetson -- Chairman and Chief Executive Officer

Thank you, Mark. Appreciate it.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to David Stetson for any closing remarks.

David J. Stetson -- Chairman and Chief Executive Officer

Again, thanks, everyone, for joining us today and your interest in Contura Energy. Have a great rest of your day. Thank you so much.

Operator

[Operator Closing Remarks]

Duration: 27 minutes

Call participants:

Emily O'Quinn -- Vice President-Corporate Communications

David J. Stetson -- Chairman and Chief Executive Officer

Andy Eidson -- Executive Vice President and Chief Financial Officer

Daniel Horn -- Senior Vice President and Head of. Metallurgical Coal Sales

Jason E. Whitehead -- Executive Vice President and Chief Operating Officer

Dan Day -- B. Riley FBR -- Analyst

Mark Levin -- The Benchmark Company -- Analyst

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