Good day, ladies and gentlemen, and welcome to Peabody Energy's Second Quarter 2021 Earnings Conference Call. . As a reminder, this conference is being recorded today, August -- today, July 29, 2021. I would now like to turn the conference over to Alice Tharenos. Please go ahead.

Thank you. Good morning and thanks for joining Peabody's Earnings Call for the Second Quarter of 2021. With me today are President and CEO, Jim Grech; and CFO, Mark Spurbeck. Within the earnings release, you'll find our statement on forward-looking information as well as a reconciliation of non-GAAP financial measures. We encourage you to consider the risk factors referenced there, along with our public filings with the SEC.

Thanks, Alice, and good morning, everyone. Peabody had an encouraging quarter as our assets are continuing to deliver solid operational performance, and we're seeing robust global coal market demand with strong economic indicators as economies continue to recover from the pandemic. We are progressing on actions to expand our margins and reduce our debt levels and are well-positioned to benefit from market recovery. Higher volumes for the second half of 2021 are projected at a time of robust markets but before I cover the highlights for the quarter, I'd like to begin by thanking our global workforce for their continued focus and working safely and efficiently. I've been impressed by the dedication and efforts of our team, and I'm confident we will continue to build on improvements we have achieved to date. As planned, in every segment, our assets are expected to deliver increased production in the second half of the year as we benefit from our efforts at a time of elevated demand. Within our seaborne thermal platform, we expect higher volumes from the advancement of development at the Wambo JV and the Wilpinjong extension projects. Within our U.S. thermal platform, we expect PRB demand to continue at the strong pace we have seen in the second quarter, and we are positioned to deliver all customer volumes. And in the Illinois Basin, we're expecting productivity improvements from our Indiana Open-Cut Mines due to new pit development and equipment enhancement projects. And finally, at our met mines, we expect higher volumes from the CMJV and from the Metropolitan Longwall reaching planned production. Now turning to the quarter. Second quarter results show EBITDA improvements in every operating segment as compared to prior year as our assets are responding favorably to increased market demand with lower costs as a result of improvement…

Thanks, Jim, and good morning, everyone. Second quarter results continue to demonstrate our focus on cost management and performance improvement. Three of the four operating segments reported lower costs compared to the prior year, and maybe more importantly, three out of four operating segments reported lower costs compared to the first quarter. Most notably, our seaborne thermal operations reduced cost per ton by 19% quarter-over-quarter. Second quarter revenue increased 15% from the prior year to $723 million on higher volumes at our U.S. thermal and seaborne met operations and higher average realized pricing for our seaborne thermal export products. Loss from continuing operations, net of income taxes, totaled $23 million, including $25 million in unrealized losses on economic hedges. We reported adjusted EBITDA of $122 million, a nearly $100 million improvement compared to prior year second quarter results of $23 million, and doubled the $61 million reported in the first quarter of this year, demonstrating the strength of our diversified assets. Importantly, we took further action to enhance our financial strength following the completion of the financing activities in the first quarter. At June 30, we had raised net cash proceeds of $65 million by issuing 8.1 million shares of common stock under the previously announced at-the-market equity program. Subsequent to June 30, we raised an additional $21.5 million and issued 2.7 million shares. We put much of that money to immediate work and retired nearly $84 million of additional debt as of June 30. We completed open market repurchases of $53 million of senior secured debt and completed multiple bilateral debt for equity exchanges, retiring $30.9 million of the 2022 senior secured notes in exchange for 4.5 million shares of common stock. These transactions resulted in a net gain from early debt extinguishment of $11.8 million in the second quarter. We reached further agreements to retire an additional $50 million of debt that we'll settle after June 30, which is expected to result in a net gain of approximately $15 million in the third quarter. For the year, including amounts that we'll settle after June 30, we will have reduced debt by a combined $176 million. Turning now to the segment results. The Seaborne Thermal segment benefited from a $12 increase in average realized price per ton compared to the prior year and held costs nearly flat despite lower volume, unfavorable exchange rates, and higher fuel and royalty costs. Seaborne thermal volumes were 500,000 tons lower than the prior year due to the transition to the United Wambo Open-Cut Joint Venture and timing of shipments from Wilpinjong.

. We'll go first to Lucas Pipes with B. Riley Securities.

Jim, great to hear your voice, and congratulations on a strong quarter.

Thank you, Lucas. It's good to hear your voice as well.

Maybe to start with a higher-level question. Your background is on the commercial side, and this is a really, really strong market globally, but also, it appears there's a resurgence in domestic demand. Can you touch on where you see the opportunities from a pricing perspective as you look across your portfolio?

Well, Lucas, whether it's domestically or internationally, global coal demand is on the increase. Now, some markets like the U.S. over the long-term are going to have a secular decline. But in total, globally, we see coal demand increasing. And I'll talk about the supply side response to that. But my view is that's going to lead to increased price volatility to the upside. And the reason I'm saying that is the supply response to these increased demands is just not there like it's been historically. The lack of capital available to the space, the trouble with permitting, the difficulty in getting workers, the elasticity of supply-demand is just not what it used to be. And so, domestically, we're seeing that right now; internationally, we're seeing that right now. And I think the volatility to the upside is just going to increase as we go forward because, overall, I see demand globally increasing with supply not keeping pace with it.

Very, very helpful. And a quick follow-up question on that. When you think about -- so when you look across the space, a number of your peers, to your point, are considering reducing their thermal coal footprint in the seaborne markets as well, what role could Peabody play in that? Is M&A feasible here and how would you think about financing opportunities? Any thoughts you can appreciate -- any thoughts you could share, I would really appreciate that.

Lucas, if there's ongoing M&A activities, we don't comment on them. But I would say that we are showing our commitment to the seaborne thermal markets with the investments we're making at Wambo Underground with extending another panel here, the 23 panel, the Wilpinjong extension that we have going on there right now. So these are assets that we have in hand, and we are putting capital into them for their expansion and their continued life because we see the seaborne thermal market as a good market to be in.

Thank you. Really appreciate that. And then last one for now to switch topics. When I look at your guidance for 2021, roughly across three different buckets, $95 million in legacy liability costs, can you share a perspective on what the tail is to those liabilities, are some of them were one-off or how should we model them going forward?

Lucas, it's Mark. I think a couple of things that you're referring to in the release and in our guidance table. $60 million for final reclamation. I think that $50 million to $60 million is a pretty good run rate for the foreseeable future here in the next few years as we continue to do the right thing and reclaim lands. There's also $30 million of retiree health care. That is there -- that's probably a pretty good run rate as well for the next few years. It is related to retiree health care, and it will reduce over time. But for the foreseeable future, I'd use that number. And then the last thing on that list, there's $15 million for the settlement of the multi-employer pension plan. That has actually had been a series of payments. That $15 million this year was the last payment that we have to make for that settlement. We actually completed that in July.

We'll take our next question from Nathan Martin with The Benchmark Company.

Welcome, Jim, and congrats on the quarter.

Thank you, Nathan.

I appreciate all the guidance you guys provided in the earnings release. I want to start with some questions, I guess, on the seaborne met side. Could you give us an idea of what the quality split is looking like for this year between the hard coking coal and PCI products within your seaborne met volume guidance? And then maybe what kind of discounts, if any, are you guys seeing relative to those indices?

Yes, Nathan, it's Mark. I'll take a stab at this. Again, looking at 2 million tons for the CMJV in the second half and up to -- about 800,000 tons from Metrop, CMJV generally produces a benchmark PCI product. That's near $145 a ton today. Metrop produces really a blend, a soft hard coke -- semi-soft coking coal and a PCI blend. We probably realized about 80% of the premium hard coking coal benchmark from a pricing perspective on that. With a little over 2 million tons on price for the remainder of the year, there's certainly some upside here in the portfolio on prices given the current conditions. There is a bit that is priced. There's probably about 400,000 tons of the CMJV currently priced at about $100 a ton.

Thank you. That will conclude our question-and-answer session. At this time, I'd like to turn the call...

Operator, I think there was a follow-on from Nathan if we can give him a second.

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Yes. I apologize for that, guys, I was on mute. Mark, I appreciate that color. If I just look at the cost as well in the seaborne met side of the business, I see a full year guidance now at $93, excluding Shoal Creek. Maybe can you guys give us an idea of the ongoing costs for Shoal Creek or maybe even North Goonyella because obviously, the reported costs in the first half were over $100 a ton. Is that still a good way to think about it on a reported basis or should that come down? Just any thought there.

A couple of thoughts. One, so North Goonyella is completely out. The holding costs there have been held stable here for the last 6 months to a year. Shoal Creek is out; holding costs there, about $10 million a quarter so far. Obviously, we're reinvesting in that asset, looking to move forward when the opportunity presents. In the current quarter, I'd say that we had some costs, Metrop ramping up, there's probably about a $4 million cost on the ramp-up. There is also a full month of holding costs there. So there's probably $7 million or $8 million of costs at Metrop that were included in the quarter that wouldn't be there on a go-forward basis.

Got it, Mark. Thank you for that. And then I guess just sticking with Shoal Creek for a second, if you guys still expect the prep plant to be finished sometime here in 3Q, labor negotiations ongoing. I guess, if we assume a contract that's worked out, are there any limitations to ramping the mine back up immediately, whether it is geology or customer related, I think, as Jim pointed out in his prepared remarks?

Well, Nathan, with the mine having sat for a while, there's going to be a gradual ramp-up back to full production. So on day 1, it would not come back at full production. And we put money into the prep plant into other parts of the facility. So there would be some commissioning period of starting the mine up before we could hit full production at some point a few months after start-up.

Can you remind us what full production might look like at this point, 2 million, 3 million tons something around there?

It can produce about 2 million, 2.5 million tons a year, in that range.

And is that, again, like a high-vol A or more of a low-vol product?

That's more of a high-vol A product.

Perfect. And then just one final question for me, guys. Thinking about CapEx, obviously, nice to see you lowered guidance here about $25 million to $200 million this year, which does include the $100 million for those, obviously thermal projects I'm assuming. If you look ahead, at what point does the major project spending wrap up? Jim, you mentioned a couple other projects. When can you guys think you can move down to more maintenance-like levels of spending and what might that look like on an absolute dollar basis?

Yes. Nathan, a couple of things. We lowered that guidance, $25 million to $200 million this year. There is some additional further out project capital of $25 million that really resulted in that number. We said it before, I'd still say, $100 million on a sustaining basis is the right number. If you look at that $25 million reduction, does that fall into '22, most likely so. Maybe we got about $25 million, but the Wilpinjong extension project and the Wambo Open-Cut Joint Venture, those projects substantially complete this year. So we should be at a -- much closer to a sustaining $100 million next year with maybe that $25 million reduction falling in '22 from this year.

Any early thoughts, Mark, on these projects as Jim mentioned, the Moorvale South or the Longwall 23 panel at Wambo?

Yes. Both are great projects for the company. The Moorvale South, we will be on that in the second half of this year, and looks obviously quite promising. And then at today's prices and current economics, the Wambo Longwall panel 22, we announced we had done that earlier this year. Looking at 23 now, certainly looks to be quite attractive and very similar to 22.

We'll take our next question from Matthew Fields with Bank of America.

Welcome, Jim.

Thank you, Matthew.

My first question is on the Australian thermal side. Obviously, with the new gas, oil price as strong as it is, you're seeing more of a lag due to the domestic contract. What can you do about that kind of domestic tonnage and maybe is there a price escalator in there, is there a way to kind of shift more into the export market while prices are so strong? What can you do to kind of help realizations on the thermal side in Australia?

Yes, Matt, the domestic tonnage out of Wilpinjong there is really based on customer needs and really gives the first coal from the mine, I'll say. That's pretty ratable over the year. Looking at exporting about 3.7 million tons in the second half, 2.5 million of those tons are unpriced with the remainder priced at about $63 a ton. So certainly looking at some higher prices in the second half and higher volumes on the export side, in particular. As a reminder, Wilpinjong sold at a discount -- a high ash product, a discount to the API 5 index, which is currently above $90, but don't confuse that with a Newcastle's benchmark product.

Sure. Thank you. And then on the balance sheet side, your release said that you had another $50 million of debt retirements to be settled after the quarter end. Can you just give us some detail on what tranches that $50 million entails?

Yes. Most of that $50 million is in the term loan. It's just a delayed settlement of those. We've reached agreements to repurchase those at a substantial discount, as you saw from the expected gain in the quarter. Just a matter of timing, getting those settled. Most of that was the term loans I mentioned. There's about $5 million of additional 2022 notes that we've done debt for equity exchanges for us well. Some are the ones that we closed in the quarter.

Okay. Thank you. And then, you're poised to generate a decent amount of cash flow in the back half here. Where in your capital structure, do you intend to kind of target that cash generation, is it in Australia, is it in the BTU corporate notes or the term loan? Can you just give us an idea of what your priorities are?

Yes. Matt, as we said before, priority #1 is to maintain operating liquidity, and that hasn't changed. Certainly, in the current price environment, much higher cash flow generation opportunity these prices prevail, I'll remind everyone, the Wilpinjong free cash flow, which we just got done talking about the volumes and the pricing there, there is an excess cash flow sweep that's embedded with those notes. So anything generated at Wilpinjong, 100% of the excess cash flow will be swept to reduce the debt there at Wilpinjong, both the notes and the term loan at Wilpinjong. And then we'll continue to opportunistically look at opportunities to find ways to continue to deleverage and reduce debt if remaining cash flows provide that opportunity.

We'll go next to Lucas Pipes with B. Riley Securities.

Thank you very much for taking my follow-up question. And I want to return to the market for just a moment here. Jim, when we talked about the market earlier, right, you mentioned the strength and your positive outlook. And I think what's so remarkable here is that the strength is occurring despite the Chinese ban of Australian coal. And you're in a unique position with your Australian portfolio to maybe comment on what is driving the strength, right? If you're not selling directly to China from Australia, what is driving prices higher in your opinion? Would really appreciate your thoughts on that? And then anything as it relates to CFR prices in China and how you might be able to take advantage of that in the future? Would also appreciate your thoughts on that.

Lucas, first off, historically, like in 2020, for example, only about 2% of our coal was sold into China. So the -- we didn't have to rebalance our portfolio very much with the event of the Australian coal going into China. And the market in general or in total, though, has rebounced, right? There's so much demand out there with the coal, the Australian coal that isn't going to China is finding its way to other markets. And then American coal is an example of finding its way to China. So I think the strong demand that's out there is certainly having an impact and the -- with the Chinese ban on Australian coal, now you're starting to see the Atlantic prices, metallurgical prices rising as well. So the market has found a way to balance itself. But again, for us, we historically have not been a seller of a lot of our coal into China.

As you look to restart Shoal Creek, could -- how accessible would the Chinese market be for that product?

Well, Shoal Creek, historically, it's had customers that are not in the market in China. But when we restarted that mine, that would certainly -- some of the customer inquiries, we are getting for coal are from that market. So we have commitments to our existing customers and we have a loyalty to our existing customers as well. So we'll make sure that we're meeting their needs. They are not in the China market. But we'll also, if we have the opportunity, certainly place some coal in that market.

That will conclude our question-and-answer session today. At this time, I'd like to turn the call back over to Jim Grech for any additional or closing remarks.

Well, thank you all for joining us today. I'd especially like to thank our employees for remaining focused on safety, and for continuing to execute on our various productivity and cost improvement initiatives. I'd also like to thank our customers, investors, insurance providers, and our vendors for your continued support. Operator, that concludes our call.

Thank you. That will conclude today's call. We appreciate your participation.