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Walter Industries, Inc. (NYSE:WLT)

Q4 2008 Earnings Call

February 17, 2009 10:00 AM ET

Executives

Mark Tubb - Vice President of Investor Relations & Strategic Planning

Victor P. Patrick - Vice Chairman, Chief Financial Officer, General Counsel and Secretary

Lisa A. Honnold - Senior Vice President and Controller

George R. Richmond - Chief Executive Officer of Jim Walter Resources, Inc. and Director of Walter Industries, Inc.

Michael Gaugler - Brean Murray, Carret & Co.

Analysts

Daniel Mannes - Avondale Partners LLC

James Rollyson - Raymond James

Jeremy Sussman - Natixis Bleichroeder

Operator

Good morning and thank you for standing by. (Operator Instructions). I would now like to introduce your conference leader for today's call; Mark Tubb, Vice President of Industrial Relations. Sir, you may begin.

Mark Tubb

Thanks Jerry. Good morning and thank you for joining us for Walter Industries Fourth Quarter and Full Year 2008 Earnings Conference Call. This call is being webcast live on the Internet and a recording of today's call will be archived on our website for up to 30 days. This morning Management will discuss earnings for the fourth quarter and full-year 2008 as well as our current perspective on the market and our business outlook.

During today's call we may refer to forward-looking statements made in yesterday's press release and may make these and other forward-looking statements. For more information regarding risks associated with forward-looking statements, please refer to the Company's SEC filings.

Participating in today's call are Walter Industries Vice Chairman, CFO and General Counsel, Vic Patrick, Walter Industries Controller Lisa Honnold and Jim Walter Resources's CEO, George Richmond. Once our management team has completed their prepared remarks, we will open the call to questions from our dial-in participants. At this time, I'll turn the call over to Vic.

Victor P. Patrick

Thank you Mark. Good morning everyone. I want to start out by recapping some of the highlights of what was a very successful 2008 for Walter Industries.

On the operations side 2008 was a record year in many respects. We generated record consolidated earnings and cash flows. Jim Walter Resources produced record metallurgical coal tonnages at mine numbers 4 and 7. All time highs in revenue and income for the natural resources segment were driven by record realized met coal prices and plus generated operating income of $60 million for the year, more than 5 times its previous high. 2008 was also a great year for us strategically. We made excellent progress on our metallurgical coal internal expansion project. Before infrastructure is complete for mine number 7 East expansion which will add capacity of 2.7 million tons per year. As we've started mining the Southwest 'A' side of Mine No. 7, a section which produced about 450,000 tons in 2008 with another 500,000 tons expected by the end of April. The east expansion will result in Mine No. 7 with its very high quality low-vol hard coking coal becoming the largest low-vol metallurgical coalmine in United States.

Our steam and industrial coal business reached almost 1.5 million tons of annual capacity in 2008, doubling its run rate production with the acquisition of Taft Coal Sales in September. And we returned cash to our shareholders in the form of $16.2 million in cash dividends, a 56% increase versus last year and more than $64 million in share repurchases.

We've also positioned the company for continued success in 2009 and beyond. We increased our high quality, low-vol and mid-vol Blue Creek metallurgical coal reserves 30%, by adding reserves contiguous to our existing Jim Walter Resources mines.

As I mentioned, we virtually completed the Mine No. 7 East expansion project, leaving us with only $23 million in expansion capital required to finish the project this year. We began the expansion of United Land's barge load-out facility. When completed in the first quarter, we will be able to ship up to 4 million tons of coal per year by barge, significantly increasing our shipping flexibility.

We closed the Kodiak mine, which will improve profitability in 2009 and has allowed us to shift resources to other coal operations. And lastly, we have announced the final steps in our strategy to transform the company into a pure play natural resources and energy company, by announcing a creative, value enhancing transaction to separate the financing business and by deciding to close the homebuilding business.

Turning to our most recent quarter. Despite the sharp downturn in the global steel industry, we were very pleased with the results from our core operating businesses which led to record fourth quarter and full earnings for the company. At the same time, there were numerous unusual items in the quarter that impacted earnings both favorably and unfavorably. I've asked our Controller, Lisa Honnold to participate in today's call and cover the major special items reported in the fourth quarter.

Lisa A. Honnold

Thank you Vic. The most significant adjustment recorded in the fourth quarter was an income tax benefit of $167 million. As a result of the deemed liquidations of the Company's homebuilding business on December 31, 2008. The Company will benefit from worthless stock deduction (ph). This deduction represents the unrecovered tax basis in the homebuilding business.

Additionally, results for the quarter include, a $32.4 million asset impairment charge at United Land's past subsidiary which related to adjusting the value of the minerals from their value as of the acquisition date, a time in which coal prices were at their peak, to their value at December 31, 2008 when coal prices had declined significantly.

The company also recorded an impairment charge of $21.3 million related to the closure of the Kodiak mine which is included in the loss from discontinued operations.

Finally, the quarter includes a 7.4 million charge for severance and asset impairment at homebuilding related to the announced closure of that business. These charges which were substantially non-cash in nature were partially offset by the benefit of a $26.9 million Black Lung Excise Tax refund claim at Jim Walter Resources.

I'll now turn the call over to George, to discuss Natural Resources and Sloss.

George R. Richmond

Thanks Lisa and good morning.

Beginning with safety, our lost time incident rate continues below the national average with 2008 being Jim Walters Resources best year ever. This is especially important given the significant number of new employees added this year. Having said that, one accident is too many and we remain committed to our goal of an accident free workplace.

In the fourth quarter 2008, we sold approximately 1.7 million tons of metallurgical coal, 300,000 tons more than the third quarter, but below the 2 to 2.1 million tons we expected. Fourth quarter sales were only marginally affected by the slowdown in the steel industry, with one boat being cancelled and another one deferred until January. The majority of the shelf for all those (ph) is expectations related to the slippage of 200,000 tons of sales into January due to dredging activities and weather conditions at the Port of Mobile.

Metallurgical coal production at Jim Walter Resources No. 4 and 7 mines totaled a record 1.8 million tons in the fourth quarter, resulting in a record for the full year as well. With the full year's quarter production in the Southwest 'A' panel, No. 7 mine broke the 1 million ton mark for the first time. Although we were pleased overall with the production in the quarter, lower yields at No. 4 mine and slower than expected advance rates in the Southwest 'A' panel left us a little short of our targeted production volumes.

Production cost in the fourth quarter, were within our expected range of 50 to $55 per ton, with No. 4's cost at $51.59 per ton, and costs at No. 7 mine of $52.74 per ton. Costs at No. 7 mine was substantially lower than the third quarter as we have the new longwall operating for the full quarter. These results brought our overall full year cost per ton to $55.89.

Metallurgical coal operating margins averaged to $77 per ton and were lower than expected primarily due to fewer high-price ton shipped in the quarter, which was a direct result of 200,000 tons in shipments, we were unable to load at the end of the quarter.

Operating income at Sloss increased almost $8 million versus last year. However coke volume declined during the quarter as Sloss began to feel the impact of the slowdown in steel production. At United Land, we produced 34,000 tons of steam and industrial coal and sold 362,000 tons, with volumes essentially inline with our internal targets and a significant increase over the prior year with the addition of Taft. With almost 1.5 million tons of annual production, we now have a meaningful position in the Alabama steam industrial coal markets. The natural gas business generated operating income of approximately $7 million in the quarter.

Turning to the current environment, both the coal and steel industries are facing difficult challenges as worldwide economic conditions have reduced the demand of steel and its raw materials. Despite these conditions, many of our customers are performing in compliance with plant deliveries. However, certain customers have deferred the scheduling of shipments with the net effect being that some of these tones will rollover into the second half of 2009.

While we're sympathetic to the problems facing our customers, I'm working with them to match deliveries with the raw materials requirements, we've not renegotiated contract pricing. In the first quarter of 2009, sales volumes are estimated to be between 1.4-1.5 million tons. And operating margins are estimated to range from 55 to $60 a ton.

For this quarter, estimated volumes reflect a reduction of approximately 250,000 tons due to cautious assessment of our ability to load coal during the rest of the quarter, resulting from a recent disruption in rail transportation caused by a fire between our facility and Port of Mobile. We believe normal rail shipments will resume by the beginning of next week. We have tried to maximize deliveries to the Port by alternate means, but our inventory position at the port will remain challenged in March due to an already heavy loading schedule.

Given current customer demand for our product and their indications of requested shipments, we expect that sales volumes in the second quarter will strengthen with the completion of the Southwest 'A' panel in the second quarter, inventories at the end of June will be below 500,000 tons. This is a level of inventory appropriate to our shipping requirements and therefore we do not expect the need to reduce production during the first half of the year.

As we said in yesterday's press release, Jim Walter Resources's 7 East longwall will not start until at least September 1, 2009. If market conditions change favorably or unfavorably, as we move through the year, we can vary the start of date. No. 7 East longwall production will be approximately 2250 tons per month. Excluding all tons from the 7 East expansion would include in the completion of the Southwest 'A' panel, our 2009 base capacity is about 6.5 million tons.

Moving onto our natural gas business, we expect 2009 full year production to range between 7 and 7.2 billion cubic feet. And we are about 30% hedged at $8.84 per mcf in the first quarter only. Given the current 50% reduction in domestic steel capacity utilization, we have reduced Sloss's production by 20%. We will monitor the market, sales volumes and inventory levels and we will make further adjustments as needed.

Also with the reduced furnace coal pricing and expected lower volumes, Sloss's 2009 operating income is expected to be significantly lower than last years record level.

First quarter 2009 sales and production at United Land are expected to range between 360 and 375,000 tons. Additionally, approximately 90% of United Land's full year 2009 production is committed in price. However our plans to open United Land's Flat Top and Reid School surface mines will be delayed until market conditions improve.

In today's economic environment it is worth remembering that our metallurgical coal business, have a unique position in the industry as a result of several factors. First, we have a premium product, our Blue Creek coal is recognized among the highest quality hard coking coals globally. Even in these difficult industry conditions, our customers want to be assured of continuation of supply when the industry rebounds. We are very well positioned in the global metallurgical coal market. Our major customers, who are in South America and Europe where we have a transportation advantage over all the coal producers. We have a strong position as a low cost metallurgical coal producer which along with other transportation advantages makes us very competitive on the delivery basis.

We got in customer relationships, given our experience over past several weeks, I can say even more confident now than that long-term relationships are extremely important, and maintaining good relationships with our customers will work in our favor and in the best long-term interest of the Company and our shareholders. Finally, we believe that global demand for steel will eventually return and there will be structural deficit in the availability of high quality hard coke and coal for many years. I'll now turn the call back over to Vic.

Victor P. Patrick

Thank you, George. Before we go to Q&A, I'll provide an update on the financing separation and I also want to make some additional comments about our outlook.

Financing's merger partner Hanover Capital Mortgage Holdings has a registration statement on file with SEC. They've responded to three rounds of SEC comment and could receive SEC clearance as early as today. If that clearance is received, the Hanover shareholder's meeting is expected to occur on April 15 for the closing shortly thereafter. If the registration statement is not cleared by the SEC today, it will need to amended to include audited financial statement as of December 31, 2008. In that event the Hanover shareholder's meeting and the closing of the transaction can be affected to be delayed four to eight weeks. In either event, closing of the transaction is expected in the second quarter.

We continue to make progress on the homebuilding closure. We only have about 20 units left to finance internally and fewer than 150 homes left to build.

Turning to business outlook, George covered the key business drivers, but I want to touch on a few other items. Capital expenditures for the year are expected to be about $100 million including the completion of the mine 7 East expansion. As we've said this morning we will continue to monitor the market, we will manage capital expenditures accordingly. For the present time we are well positioned with our major expansion projects behind us.

We ended the year liquidity of almost $400 million, a $118 million in cash and $276 million through revolver availability. We expect our cash position to continue to grow. As a reminder our availability will be reduced by a step down in our total revolver commitment to $250 million at the end of 2009. Despite this reduction in revolver availability, we have no concerns about liquidity, given the significant cash we expect to generate.

There are two principles drivers of cash generation this year, first, despite overall market conditions, our met coal sales volumes have remained remarkably resilient and our driving cash higher. In addition, as a result of the workless staff deduction, we expect to pay no federal cash taxes through 2009.

In conclusion, we continue to believe that the investment considerations for Walter Industries remain compelling. We are very well positioned for strong financial performance in 2009. With our industry leading margins at highly desirable products, on those any foreseeable met coal price settlement scenario will lead to record or near record operating results for the year.

We remain bullish on the long term prospects for growth in the emerging economies and related demand for our high quality products. Our shareholders will receive a stock and cash dividend resulting from the separation of our financing business and future cash dividends from that real estate investment trust.

Finally, our expected robust cash generation in 2009 will enhance our already strong balance sheet. Now that we've completed our prepared remarks, we'll open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions). And our first question comes from Gary Nelson. You may ask your question.

Unidentified Analyst

Hi. We are just wondering about the mix of shipments during the quarter at the two prices of roughly 135 and 315, and hoping you could provide a breakdown or at least an approximation of how many tons were shipped at each price during the quarter? And if there was any carryover tonnage from the prior contract season mix in there?

George Richmond

Yeah, the fourth quarter, there was approximately half a million tons of the 300 plus coal, and the rest being the 135. And no, I don't think there was any of the one-on-one from the previous year.

Unidentified Analyst

Okay. So how much does that leave of the 315 plus?

George Richmond

That would leave, what, approximately -- we've shipped a couple of 100,000 so far this month, this quarter. So that will leave approximately 1.7 for the rest of the year.

Unidentified Analyst

Okay. Great thanks. And then on the real disruption, when did that fire occur and has that issue been resolved successfully?

George Richmond

Yeah it occurred a week last Sunday and the CSX estimates are that it will start -- they'll be back in full transportation mode by this Sunday. So it was a two week outage.

Unidentified Analyst

Okay. Great, thanks.

Operator

Okay. Our next question comes from Michael Gaugler. Sir you may ask your question.

Michael Gaugler

Good morning everyone.

Victor Patrick

Good morning Michael.

Michael Gaugler - Brean Murray, Carret & Co.

Vic, I'd like to start-off with you first. Your comment about no federal taxes through 2009. As we look to forecast on a go forward basis here for the year, I'm guessing you're going to pay some state taxes. Any kind of guidance as to what we ought to be plugging in there?

Victor Patrick

Well I mean the state taxes that we'll pay are the Alabama Reid and it's not any different from prior years. The -- I'm sorry, Lisa's just scribbling me a note. About 6%? Okay. Which is about 6%. And then -- I'm sorry, what's the rest of your question Michael?

Michael Gaugler - Brean Murray, Carret & Co.

That was it. And then I have a couple for George. George on the 7 East delay, you're obviously going to have a little down time there over the summer months. Are you planning on keeping everybody working or encouraging vacation during that period or are you looking to furlough?

George Richmond

Yes. Well remember that most of the man power in these deep mines is associated with continues mining development. So, we will continue doing that. No, in that we have this issue, we've actually stopped. We've got fairly large attrition rate, so we've actually stopped bringing people on and we'll let the numbers naturally drop down. Also we've actually -- we're already in that process, so we've actually dropped a couple of unit shifts, the out-shift on the 7 and 8 section, that's driving that longwall. But at the end of the day, there is only 30 people approximately involved in running a longwall, so it will run all the continues minor sections, attrition will take care of those 30 people, and we sure want to run the minor sections because that's -- when the market turns back, if we want to be ahead on the continues mines, so we can crack that longwall up to full speed.

Michael Gaugler - Brean Murray, Carret & Co.

Okay, and then just one more. You had mentioned in your comments, some sales slipped in 4Q into '09 and I'm wondering if may be you could give us a little bit of color on your end markets and what you're seeing if perhaps, are you seeing weakness in Europe or South America or just any color?

George Richmond

Yeah. I mean the weakness is across the Board I mean the U.S. steel utilization is in the 40s right now, but it varies with, I know some customers producing at 80% and some other customers are as low as 50% utilization. However, this seems to be, I've already said it's across the Board but there seems to be some improvements as the shipping schedules certainly from some customers are now getting a little stronger. It's very hard to generalize obviously, because such a variation will like.

Victor Patrick

Hey Michael, I just -- it didn't occur to me as I was giving you the tax rate that that's the nominal rate, and there is a deduction for federal tax purposes. We keep the book as if we're paying federal taxes, even though there is no cash tax paid. So the 6% tax rate equates to a 4% after the federal deduction.

Michael Gaugler - Brean Murray, Carret & Co.

Well that's --

Victor Patrick

On a realized basis.

Michael Gaugler - Brean Murray, Carret & Co.

That's certainly going to make an impact on the --

Victor Patrick

(inaudible) Michael you don't want to cheat myself for the $0.02 (ph).

Michael Gaugler - Brean Murray, Carret & Co.

Absolutely not. I mean it looks you might -- we'll go in to that after the call. Thanks guys, I appreciate it.

Victor Patrick

Okay, thanks Michael.

Operator

And our next question comes from Dan, is it Mannes?

Daniel Mannes - Avondale Partners LLC

It is. Good morning everybody.

Victor Patrick

Good morning Dan.

Daniel Mannes - Avondale Partners LLC

Couple of quick questions. You mentioned how much was unfulfilled under the high price contract. Can you give me the same answer on the low price contracts, what's still remaining to be delivered?

Victor Patrick

We're just looking into.

Daniel Mannes - Avondale Partners LLC

No problem.

Victor Patrick

Do you have another question and then we'll get back with you on that one?

Daniel Mannes - Avondale Partners LLC

Yeah, a couple of more. Can you also go through quickly what's the schedule is on longwall moves for 2009 for 4 and 7?

Victor Patrick

Yes, it's a longwall move in March for No. 4 mine. It will be a relatively short one, probably about 6 days. And there will be one in September at No. 4 mine, No. 7 will have one in April and then in November.

Daniel Mannes - Avondale Partners LLC

Got it. Okay. And then just briefly on the tax issue. Just so I understand from an accounting perspective, are you going to actually book taxes on your income statement it's just going run through deferred tax on the cash flow or are you actually going to show a zero tax rate?

Victor Patrick

No. We will book tax as if we're paying tax for book purposes, but we have a deferred tax asset that will be in contract.

Daniel Mannes - Avondale Partners LLC

Got it. Do I have more time for questions or George --?

Victor Patrick

We have the -- because the difference between what we told you before is --

George Richmond

About 1.6.

Victor Patrick

About 1.6 million.

Operator

Okay. (Operator Instructions). And our next question comes from Jim Rollyson. Sir, you may ask your question.

James Rollyson - Raymond James

Good morning guys.

George Richmond

Good morning Jim.

Victor Patrick

Good morning Jim.

James Rollyson - Raymond James

George, you talked about obviously, the first quarter we've got guidance on production and shipments and cost and given the fact that the Southwest 'A' panel runs out in the second quarter and you're not coming back with the 7 East until maybe September 1. Can you give us your thoughts on production cost for No. 7 as you go through the year?

George Richmond

Yeah, as well. Let me say this, based on a September start of the production cost for both mines are going be in that 50 to 55 range. The No. 4 mine will be below 50 and No. 7 mine will be a little higher than the 55. Now just a variations on volume, that's based on a September start-up. For every 100,000 tons, if we slip a 100,000 tons of production at No. 7, it will add approximately a dollar a ton to that cost for the year and vice versa. If we crank you to purely (ph) volume, it will take a dollar a ton.

James Rollyson - Raymond James

Got you. That's very helpful. On the Sloss side, you talked about obviously, volumes being down but and pricing being substantially lower, can you maybe just put some numbers around substantially what were you thinking kind of going back to the '07 levels or nearing the kind of low to mid $200 a ton range or not quite that that, or what are you guys thinking?

George Richmond

Yeah, we don't want to put too much color on it just yet but let me at least to explain the background to it. We have settled the -- the foundry business we're actually doing is a little better than our contracted numbers for last year. The furnace business we're doing is quite a bit less, however we do not have contract for this year, it's just quarter by quarter on purchase orders. So, we really don't want to get into that, but it is significantly less than last year. And we'd expect the -- what we see today and what's the turnaround in the steel industry, lot of part here which obviously, since we haven't fixed the price, we'll be able to benefit from, but without that we'd expect the operating income to return to previous levels prior to last year.

James Rollyson - Raymond James

Got you. And (inaudible) pretty steady in before hand, so?

George Richmond

Yes.

James Rollyson - Raymond James

Okay, last question from me, maybe Vic. You look at your homebuilding business, which you've obviously shutdown, going on a go forward basis. I presume you still have to complete a hand full of contracts you have left, maybe thoughts on timing of how long does it take you to get through those last, I think you had 421 homes left at the end of the year. How long does it take you to get through those and then when we see cost and revenues drop off, kind of thoughts on how much G&A goes out of the equation with that going out?

Victor Patrick

Well between deliveries and cancellations, the number we have left to build at this point is down at the 150 level. And we would really expect to be through that really in the first half, at least through virtually all of it in the first half. In terms of SG&A going out, I mean that's at least it's --

Lisa Honnold

million and half, 2 million in the quarter.

Victor Patrick

That sounds -- that million and half to $2 million per quarter roughly.

James Rollyson - Raymond James

Perfect. Thanks guys.

Operator

(Operator Instructions). And our next question comes from Robert Spivey (ph). You may ask your question.

Unidentified Analyst

Hey guys. Just one quick question for you. In the current environment with a lot of miners is probably out there in relatively distressed conditions and at least in the equity markets, we're seeing a lot of guys looking pretty cheap. Knowing that you guys have historically kind of liked to acquire some firms in your area, I was just wondering how you guys are thinking right now about acquisitions or going shopping considering that you have some liquidity there?

Victor Patrick

Yeah. I think maybe George and I can both speak to that. In terms of once again I'll take this forward to the availability of liquidity approach, George and you can take the more strategic approach. I mean in terms of having the resources to do that obviously, we're going to -- we're in a strong cash position, the Flading (ph) kinds of acquisitions that we've done in the past, would be easily manageable, obviously that's going to depend on availability. It also depends on managing liquidity, I mean we've been active for example, as we've mentioned in the share repurchase area and this is just another idea for the strategic deployment of cash. And so while are -- we'll do that if it makes sense, we're also obviously in an environment where conservation of cash is a little more -- is a lot more important than it is in another environment. So, we'll mange that opportunity with liquidity, but the balance sheet really ought to be strong enough, so if a good opportunity comes along, we should be able to have it. Do you want to comment on it?

George Richmond

The only thing I would add to that, clearly valuations are down, certainly with companies that as you mentioned, there is some distress out there. But I came to believe that, there will be more opportunities in the second half than the first half. I mean we'll see a roll through the business towards the end of the year.

Unidentified Analyst

And has your outlook changed at all enough for either steam coal or met coal to change the mix that you are looking the target for acquiring?

George Richmond

Now, we've I mean we've always liked metallurgical, first of all we liked the area we're working, Minneapolis (ph) or Alabama and we like the international metallurgical market, but we also like steam coal in Alabama. We're getting close to be in the largest producer of steam and industrial coal in Alabama.

Victor Patrick

What people miss about our business and our being so focused on met coal and met coal now being in this favor because of the steel industry conditions. I mean, our met coal could be if we wanted it to be the best steam coal in the world and we could sell it that way and we'd actually have higher volumes if we did. Now, it doesn't make sense for us to do that because met coal even in a distressed environment commands a premium. So, there is kind of a little bit of disconnect there, acquiring met coal assets and having our emphasis on med coal asset is always going to be a higher margin opportunity than going into the steam business and you see that in our results. I mean as our -- even at reduced margins, our margins are industry leading margins, nobody touches them. So, we think that that unique position of having this leverage to met coal is a unique aspect of our franchise, and one that we want not dilute too much. Obviously, these steam coal flooding acquisitions just have synergies galore as George's team puts those under management's and produces locally and sells locally and some of it, if it has metallurgical characteristics can go integrate directly into Sloss, so those acquisitions make all kind of sense to us. But really the emphasis for this company is on met and we expect we'll keep it that way.

Unidentified Analyst

All right, good. Just for clarification, we were kind of hoping that with met coal prices being down as much, you wouldn't want to concentrate more on the met coal as on the steams, but obviously, where we live we think it's a more viable long term situation than steam coal which is much more commodity?

Victor Patrick

That's where we live too.

Unidentified Analyst

But that being said, I'm just really quick, one last question. How -- can you walk me through with how much you bought back in the quarter and what your average price was?

Victor Patrick

Are you talking about the shares purchased?

Unidentified Analyst

That's correct.

Victor Patrick

Are you talking about this quarter or last quarter?

Unidentified Analyst

This quarter so far.

Victor Patrick

This quarter so far we've been active with we've and I'll just out this is a net income cut, but I'll go and give it to you. So far in Q1 we've spent $90 million and repurchased about 870,000 shares. And we'll continue to be active on an opportunistic basis in the program, but we're going to manage to a very strong liquidity number. I mean we like that $400 million of availability in this environment, it gives us all kind of flexibility, and we are going to manage to keep the liquidity very strong.

Unidentified Analyst

Alright. Thanks, so much guys.

Operator

(Operator Instructions). And our next question comes from Jeremy Sussman. You may ask your question.

Jeremy Sussman - Natixis Bleichroeder

Hi, good morning.

Victor Patrick

Good morning, Jeremy. How are you?

Jeremy Sussman - Natixis Bleichroeder

Good, thanks. I was just wondering if you could talk a little bit about kind of where you see things right now in terms of the supply demand on the met side, where are we in with all the recent production cuts? And then I guess, secondly, in terms of the reports that we saw BHP renegotiating some prices this morning. I guess what are your thoughts there, and what if anything that means for pricing on the upcoming contracting season? Thank you.

George Richmond

First of all we haven't seen BHP article this morning, so you are little ahead of us on that one. We still analyze in the in the volume of course. I mean, want us to be very careful because I certainly look to turn, some of them of course relative to plan tonnage versus actual tonnage or projected tonnage. So, we're still trying to get study it out. But I mean we tend to look not at the tonnage that's being cut in general, but the tonnage that competes with those. So, certainly from the U.S. point of view, I think the two major ones are out, one -- well three, one, the Cleveland-Cliffs announcement of low-vol cuts, the Beu-Cnnon cuts (ph) and also I think it was ICG announced a cut. Remember that the U.S. production is a little over 20 million tons of low-vol coal, it's not a big market. So I think in that particular product it's a fairly substantial number.

Jeremy Sussman - Natixis Bleichroeder

Okay, thanks very much. I appreciate it.

Operator: (Operator Instructions).

Mark Tubb

Okay, well operator seeing no more questions, I'd like to thank everyone for participating on our call this morning. And that concludes the call. Thank you.

Operator: Thank you and have a good day.

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