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Executives

Elizabeth M. Cook - Director of Investor Relations

Peter T. Socha - Chairman and Chief Executive Officer

Coy K. Lane - Senior Vice President and Chief Operating Officer

Analysts

Jim Rollyson - Raymond James

Justine Fisher - Goldman Sachs

Jeremy Sussman - Natixis

Michael S. Dudas - Jefferies & Co.

Mark Caruso - Millennium Partners

Brett Levy - Jefferies & Company

Luther Lu - FBR Capital Markets

Michael Goldenberg - Luminous Management

Steven A. Pedian - SAP Capital Management

James River Coal Co. (JRCC) Q1 2009 Earnings Call May 1, 2009 11:00 AM ET

Operator

Good day, and welcome everyone to the James River Coal Company First Quarter 2009 Earnings Conference Call. This call is being recorded.

At this time for opening remarks and introductions, I would like to turn the call over to the Director of Investor Relations, Mrs. Beth Cook. Please go ahead.

Elizabeth M. Cook

Thank you. Good morning. Welcome to James River Coal Company's first quarter earnings call. We released our earnings today, and our current release is posted on our website and was furnished to the SEC on the Form 8-K. As we noted in our press release, we're using an updated slide presentation during our prepared remarks. The slides have been posted to the company website and furnished to the SEC on an 8-K.

With me today on the call are Peter Socha, Chairman and Chief Executive Officer; C.K. Lane, Senior Vice President and Chief Operating Officer; and Sam Hopkins, Vice President and Chief Accounting Officer.

Before we begin this morning, I need to remind you that this call will contain forward-looking statements. These forward-looking statements should be considered along with the risk factors that we note at the end of our press release as well as in our annual report on Form 10-K and other SEC filings.

Now, I'll turn the call over to Peter.

Peter T. Socha

Thank you, Beth. As Beth sounded hoarse today, the Paul, who's gotten here, once we confirmed it wasn't the Swine Flu, we all felt better.

I want to start out by just passing on good wishes. Jim Ketron, our General Counsel, was in the hospital this week. He had surgery. It was very successful. And my guess is that he is probably listening in. So we want to make sure for our whole company and for our shareholders to pass along best wishes to him.

We had a strong start. This was a just a great quarter. By almost any metric that we would look at, this was a great quarter. Safety was outstanding, our production was outstanding, shipments we met with all of our major eastern customers, and had very good productive conversations, which we did talked about little bit in the press release. So, as I said, by almost any metric we had a good quarter.

From my standpoint, as the CEO I think, I'm most pleased by the fact that we're in how in a position where we can invest through the cycle. And this is a down cycle when the coal industry, there is no question about that. But it will turn up at some point this year or next year, the following year it will turn up. And for us and for our ability to invest through that cycle and I don't mean by major capital expenditures or major expansion projects or anything like that, but particularly with people and with equipment that we can take the people we have, we can train them.

So, that when we... when the strong cycle comes they will be well trained to skill positions that we have talked about for the last four or five years. As an industry, we will have a deep bench of those people. And those will be people that we have today, and in some cases it will be people that we bring in. And to the extent that we bring in people, we'll take excess skilled people and we will use them to train the younger people. So we want that bench, that's very important to us. And C.K. and the management team and I have discussed that.

But then secondly was the equipment. We talked about a little bit on the last call that we ran the equipment very hard over the last couple of years. We're now starting to bring in newer equipment rather rebuild a new equipment. And it is truly amazing some of the production numbers that are coming out of this, numbers that I've never heard of before with James River Coal. But we're seeing the benefit of that.

So again, by the end of this cycle, which I think will be another year, to year and a half we will have people in place and we will have the equipment in place. And as a CEO, that is a very important factor to me and it's something that I'm proud of for our entire organization.

Just with that, C.K. is going to lead us off. I hope he's won the point task. So C.K. got the ball first. So, he will go through operations.

Coy K. Lane

Thanks Peter. As Peter said, we had a very strong quarter as for our safety was concerned. We continued to focus on that several via operations as we did not have any lost time accidents. And we're contained with all our safety initiatives that we currently are working on.

As far as regulatory, several new items that we are focusing on, emergency response plans need to be submitted by Jim. This is for the tracking and communication that was required by the Miner's Act. In June, by June we had to have our lifelines upgraded. And this is branch lines, a new symbol added on the lifelines.

Automatic fire warning systems, the current system must be upgraded by the end of this year in December and we're working towards that. New fire resistant bells, starting in December, you're no longer allowed to purchase the current type bells and we'll be going to new fire resistant bells.

Backlog or permits still in the lower core office, we are working and submitting our work permits with the new cumulative impact study for those permits.

Moving on to central labs. As Peter said an excellent quarter, both on production and costs. Cost increases were mainly sales related to royalty and taxes. We are seeing a very strong improvement in the labor market, our turnover is being reduced, and we're seeing a lot more skilled applicants and employees.

We're continuing with our training programs as Peter said. It helps to build our strength on with our younger folks on their expanse level, and bring in some more experienced folks.

As far as our shipments and our train service and our customer relations, we were very pleased with that this quarter. We got did train service and worked with our customers through the first quarter.

In the Illinois Basin, there they tried operations, they also had very good quarter on cost productions. We did complete our Flat Creek Mine. We did stockpile some low sulfur coal there that we have for future sales. We took and moved that equipment to our new surface mine at Log Creek and started that mine and its up and running.

We did complete mining in our Freelandville East surface mine and moved that equipment to our new replacement mine at Freelandville central. It's up and running well. And we're continuing to work on our facet of our new Freelandville West mine that we hope to open in the third quarter, which will be a new underground mine.

As far as production adjustments, I'm sure that everybody is aware that with the market being down almost everyone is adjusting their production for that. We have cut out our Saturday production, we've stopped purchase coal, and we've out of most of our contract mines.

With doing this, we'll continue to manage our inventories and our existing operations by adjusting our production shifts or days. Our plan is to take selected days off around holidays, giving our employees a four day weekend. We're not planning on reducing any pay or making any changes along that line. And so far this is been well received by our employees.

With our contracts gives us a really great flexibility to manage our production. And we're not feeling we are under any pressure to accept any orders at lower prices. So, we hope to ship our contracts and manage our inventories, and hope to continue the results of the first quarter.

And with that, I'll turn it back to Peter.

Peter T. Socha

Okay. Thanks C.K. Just quickly, I'll try to go through these. On the headlines, there are couple on here that are probably kind of interesting. One was China holding new licenses for two years. That was as of end of the March and that will go through the March of 2011.

But again coming on China, at the end where we have infrastructure investment, I swear we would go through one call and not mentioned fixed-asset investment in China. But this number just jumps out. Fixed-asset, infrastructure being one part of fixed-asset investment and they have four parts manufacturing real estate and other. The progression on infrastructure investment of China in the last four quarters was been 9%, 18%, 23%, 29% and now 47% and that's actually in January and February, that was not Q1.

Flipping over to slide 12. This is just based on the EIA production numbers or the weekly estimates. And we totaled them up for Q1. You can see where the trend is.

On slide 13, the South Atlantic inventories, obviously the direction is going in the wrong direction from our view point. And we think that will probably be the case over a little while, but when it does come down it will probably come down hard.

The next slide which is the run rate, I spoke to a friend of mine at the railroads couple of weeks ago. And he was telling me about how starting on April 1st, the shipments had really gone down dramatically, almost like a light switch was the term that he used. That's how it started.

Looking at the weekly shipments going to the websites and looking at the weekly shipments from CSX and NS, and just apply that to last year's annual numbers. So, this is not the most scientific analysis in the world. But on the other the guy showed what we've seen particularly recently with shipments. And the delta between what they were doing last year and what they are doing this year, you can see is a decline of about 44 million tons annualized coming out of Central App total that would include margins. But total, that's a fairly big number. To the extent the people are expecting 40 to 50 million ton out of Central App of a decline, we're probably close to there right now, if not already there.

The next slide is just a progression of how we see the market developing. And this really goes back to conversations we had last fall on these calls and also with Jeremy and with Jim and in their conferences in the fall.

So, demand definitely fell hard, industrial demand, electric demand everything so hard in the fall. We're starting to see supply fall off right now. I don't think we've seen the major change. But we're starting to see and certainly in the railroad numbers.

And then some time, whether it's later this year or the first part of '10, we believe we'll see inventories adjust. And then later than that some, in my view it's going to be the back half of '10, possibly even early '11 before the market is actually adjust. A lot that will, obviously a lot of that will depend on natural gas and what happens in that market. Although, it's interesting the same graph you could probably make a very good case, but then natural gas markets are in a similar circumstance.

On guidance, we did issue guidance with our Q4 reported back in February. I think we were the only company to issue our guidance at that time. We have updated in the past mid-year, we will continue to do that. I will tell you we will probably take production down a little bit as C.K. mentioned.

For some reason, people look at that and they think there is an immediate impact on margin, but if we take production down, there is and impact on profit. And it's just, I don't know why, but it's just not that case if the market is in the forties and costs are north of that and we take production out then it actually could have a positive impact on us based on some models but a people do that.

CapEx will probably come down a little bit marginally. SG&A had a little bit of a higher run rate in Q1, primarily due to the letter of credit facility that we talked about last call. The tax rate will definitely come down. We're learning more and more about the NOLs and doing more analysis on them. And when we can apply them and how we can apply them so the tax rate will come down.

DD&A will probably stay the same even though this quarter was a little bit on the light side. That's an accounting adjustment that should reverse itself during the course of the year.

And with that Misty, we are ready for questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions). And we'll take our first question comes with Jim Rollyson with Raymond James.

Jim Rollyson - Raymond James

Good morning, Peter.

Peter Socha

Hey, Rolly.

Jim Rollyson - Raymond James

C.K., Beth. Peter, you did some, looks like from your notes you did some re-contracting or adjustments to contracts for this year. And what it looks like is you replace some $108 coal with $70 coal and push the 108 out to 2011 and '12. Is that, am I reading that right?

Peter Socha

Yeah, yeah, that's a fair comment.

Jim Rollyson - Raymond James

Did that help lead to the 2010 coal that you booked at $70 a ton as well?

Peter Socha

That was trade-off. Yeah, that was the trade-off Rolly.

Jim Rollyson - Raymond James

Okay. So that was --

Peter Socha

Let's say I don't want to go too much into detail on it. Because I mean they are customer sensitive conversations. But from my view point, what happened was really the background here was, utility had a number of major industrial customers in their area; major, major users of electricity. And so they came to us, and I said we would love to be able to work with these customers to keep these plants, to keep these manufacturing plants going and to preserve the jobs and to help the local community if there anything that you can do for us. That was their need.

On our side, we were a little bit under price for 10. Last summer when we did our contracting in June, July, I really wanted another half a million to a million tons for next year, for operational reasons. I mean what this... I can't even begin to tell you how this help C.K. operate the mines and keep all the mines going. And when he and I talked about it after the fact, that was what I was really pumped about, was that it helps us enormously on their operation. So that was the trade-off. That was our need was to go ahead and price up some additional tons within (ph) that their need was to try to work with their industrial customers in '09.

But the other thing that, the other goal that I had going into it was I haven't looked at your models recently. But I think by most models, we have pretty well nailed down free cash positive in '09 and '10, in 2009 and 2010. 2011 was more on the bubble. We've got tons price, but we didn't have a lot of tons and the price was great. But as far as gross margins, as gross operating margin, it was on the bubble or whether or not it would be free cash positive. I think it will be just based on what the market does. But nevertheless, I wanted to go ahead and nail down '09, '10, '11. And in doing this, I can't say we nail it down, but we certainly made a lot of progress on it.

Jim Rollyson - Raymond James

Gives you a head start.

Peter Socha

You bet.

Jim Rollyson - Raymond James

Are you hearing any or other customers are trying to workout similar situations that you expect to?

Peter Socha

Well, we've met with all their customers and each one is different. Some have... somewhere the gas burn is clearly impacting on the coal burn. Other is where gas is a smaller percentage, it's not. But you do have a situation where thus the prices are high or the local community or the jobs or things like that. That are important to us and then important to them. So, the thing I liked about that, to be honest with you Rolly, was that they had a need and that we were able to step up and meet that need and meet it very quickly. And we were able to do in such a way that became a win-win for us and for them. That was a big deal for me.

Jim Rollyson - Raymond James

And how are you thinking now, so that helps you out for '10 for sure.

Peter Socha

Yeah, yeah.

Jim Rollyson - Raymond James

Putting the $70 number on cash with some coal, how are you thinking strategically about pricing coal for next year going-forward absentees type of situations?

Peter Socha

Yeah, I mean just see where the market goes. I mean you are not talking about it before. I think as the markets are going to soft for a while, I read something the other day about somebody thinks well the market may recover by '09, by the end of this year. Well, the economy may recover and if you look at some of the leading indicator type things, the economy is recovering. But for the coal markets to recover, I mean the gas market will have to turnaround by quite a bit. You guys do a lot of work on the gas market.

Jim Rollyson - Raymond James

Okay.

Peter Socha

I just don't see... in my crystal ball right now, I don't see the coal market recovering. So, we'll be selective and what we do for next year, we do have a couple of what I would call soft circle commitments with customers, where we've committed contract review or price review with things like that. But there is soft circled on both parties. And I think we'll work something out there, which will take our tonnage up. But as far as going out and bidding in the 40s for next year, bidding in the low 50s for next year.

Jim Rollyson - Raymond James

Right.

Peter Socha

Given where cash costs are, we don't have to do it.

Jim Rollyson - Raymond James

Right. Well, and as you said at the beginning, you're reducing volumes most likely for this year because the incremental funds tons don't make money. I guess that implies your '10 production could be at or below '09?

Peter Socha

Well, let's see, I'm not going to go there, because as I said, we do have some soft circle commitments with customers. And we have usually worked things out in a pretty good way with those customers.

Jim Rollyson - Raymond James

Okay. Last question on --

Peter Socha

So, I wouldn't necessarily draw that conclusion.

Jim Rollyson - Raymond James

Last question, on Midwest cost came down nicely even though volume was actually down a little bit.

Peter Socha

They had a good quarter. Do you want to talk about that?

Jim Rollyson - Raymond James

Any thoughts on that going forward?

Peter Socha

C.K?

Coy Lane

Lot of the cost in Midwest came down. Of course, we had diesel fuel and our (inaudible) came down at that time. We've got some items on the variable costs going up and some going down on the supply that we buy. But the mines are pretty well positioned. And we've got the new Log Creek mine running and new Freelandville Central mine running. So, look for things to continue as they are trying.

Jim Rollyson - Raymond James

Great, thanks. Excellent quarter, guys.

Peter Socha

Thank you, Jim.

Operator

And we'll take our next question from Justine Fisher with Goldman Sachs.

Peter Socha

Colombo.

Justine Fisher - Goldman Sachs

Before I even start asking questions via the nick name notes.

Peter Socha

That's right. We have a Colombo rule, there is fifteen question limit. Now, we're getting close there.

Justine Fisher - Goldman Sachs

So, question one and fifteen, what was CapEx in the first quarter?

Peter Socha

12 C.K. do you remember on top of your head?

Coy Lane

It is right, that's 14.

Justine Fisher - Goldman Sachs

Okay, it's 14. Okay. And then I was impressed to see that the utilities had actually agreed to buy coal in 2011 and '12 at a $108 a ton. I mean, what you're saying that you think the markets going to remain?

Peter Socha

So, that was pushed out Justine. That was deferred. And the way

Justine Fisher - Goldman Sachs

Okay. So, it's when the things are only --

Peter Socha

It was pulled out of '09, and put into '11 and '12.

Justine Fisher - Goldman Sachs

Okay. I mean, do you... what sort of risk, is it coal market remain soft and utilities find themselves again in the position of either just not wanting to pay really high historical prices or not being able to pay them again. And, where do you see the risks to those 11 and 12.

Peter Socha

Not high. I mean, again their customers that we've worked with for a long time. And we've continued to work with them and we have good solutions. When there is a problem that comes up, we have good solution. But Justine, seeing the markets stay soft into '11 or well into '11, given what's happened on the production side right now, I just don't see it. I mean, we can have a bear and talk about it, right.

Justine Fisher - Goldman Sachs

Okay. And then if I know you, you can't really say what you do as far as commitments until you see where the market goes. But if we start from the point of prices remaining in the mid-40s and low-50s, do you committed at that level because even if you do, the higher price contracts are likely to be cash flow positive, or it's based on production?

Peter Socha

There is just too many what ifs in there.

Justine Fisher - Goldman Sachs

I mean --

Peter Socha

And certainly, I mean we have customers who are listening to this call. I'm not going to come out and say, well, sure Justine. I think what I'll do is I'll go out and pay some call at Texas. Sorry, I can't take that right.

Justine Fisher - Goldman Sachs

Okay. That's my only question. Thank you.

Peter Socha

That's it. Thanks, Justine.

Justine Fisher - Goldman Sachs

Capital is 12.5.

Peter Socha

Well, certainly, that's what I thought.

Operator

And we'll take our next question from Jeremy Sussman with Natixis.

Jeremy Sussman - Natixis

Hi. Good morning, peter.

Peter Socha

Jeremy, good morning.

Jeremy Sussman - Natixis

Good morning. So, kind of piggyback on Jim's question on cost control. You spoke a bit about it Illinois. But obviously, your cost in Central App were good, flat excels as well. So is this also a trend that we could expect to continue given you talked about things like your equipment running better and obviously with material costs are down?

Peter Socha

C.K?

Coy Lane

We continued to work on our equipments and improve that. And hopefully with the labor force improving, that will help. As we cut back or adjust production a little bit on our overtime and on Saturdays, we'll have to see all that. But I think costs will stay pretty much where they are at in going forward.

Jeremy Sussman - Natixis

Great, thanks. And, of your hedges call list here, can you remind us, is there anything going oversees?

Peter Socha

I don't think so. C.K?

Coy Lane

No, I don't think so.

Peter Socha

If we shipped all that.

Jeremy Sussman - Natixis

Okay, that's done. And then so within your U.S. customers now --

Peter Socha

Yeah, you know what Jeremy, I'm glad you said that.

Jeremy Sussman - Natixis

Okay.

Peter Socha

Because I've got a question this morning from somebody, an e-mail from a good friend, carryover tons. He looked at our numbers and he said, Geez. I would have expected more of a negative impact from carryover ton. We shipped in the first quarter 289,000 carryover tons at $51 a ton. So, the numbers you are looking at includes those buried in there.

Jeremy Sussman - Natixis

And you're not going to have those in Q3?

Peter Socha

Yeah they are, we're done, zero.

Jeremy Sussman - Natixis

Okay. So that's a --

Peter Socha

Yeah, I mentioned that in my opening comments and I forgot. I'm glad you said that.

Jeremy Sussman - Natixis

No, perfect. And then, you obviously talked about the flexibility that you're willing to, could do to give you some sort of to get some clarity on 2010, 2011, 2012 which makes a lot of sense. Have there been kind of other customers where we've actually seen real pushback as opposed to just getting together and redoing contracts that works for both parties, or really have your customers been pretty good and saying okay a contracts a contract?

Peter Socha

They have said pretty good. They have been pretty good. I mean, as I said earlier, these are long relationships and we have good communication with our customers. They start question with some of them their coal burn is down. And in a couple of cases it's down by a pretty big amount, much bigger than they would have expected. Then in those cases we work with them to the best, as best we can and we will and we will continue to do that.

Jeremy Sussman - Natixis

Great. And then last question, in terms of M&A, it seems like people are back in the market a little bit now. We've seen some smaller deals in Central App on the net side, obviously some larger ones in the Powder River Basin. So, in general I guess more in your area what are you seeing or expecting on this front in this environment?

Peter Socha

To be honest with you Jeremy, we'd been keeping our heads down and just wanting to come in with a good quarter. And there are definitely some transactions that are out there. Certainly in the bankruptcy environment, there have been a couple of transactions that are out there. I don't know. I don't see a lot for this year.

I mean I think people who have capital or who have access to capital I think are trending to hold back close to their best, which they probably should. And people, and the other folks are trying to figure out what the market's going to do. I just think it's early.

Firstly, for us as, I said with Mike Dudas, I think on the last call, '09 is a recuperative year for us. We started off strong. We want to take care of the balance sheet, do some things for the balance sheet, get it a little bit stronger. And really take care of the people in the equipment side further so as we go into the cycle things will be much stronger. So it is... we're probably a year away from May to seriously look at M&A transactions by side M&A.

Jeremy Sussman - Natixis

Well, makes sense.

Peter Socha

But then there are people out there who are looking at them and they have strong balance sheets and they have strong cash positions and they have strong access to capital that this might be an opportune time for them for him to do it.

Jeremy Sussman - Natixis

Sure. Now, well, that makes sense. Great, quarter.

Peter Socha

Thanks Jeremy. I appreciate it.

Jeremy Sussman - Natixis

Sure.

Operator

We'll take our next question from Michael Dudas with Jefferies & Company.

Peter Socha

Hey Michael.

Michael Dudas - Jefferies & Co.

Peter. Thank you. Could you share your thoughts on the Obama administration and what's been happening recent year, well last three months going on relative to coal and environmental issues?

Peter Socha

This is inside based policy.

Michael Dudas - Jefferies & Co.

Sorry.

Peter Socha

Listen, Mike asked the question on the last call about my thoughts on the Obama's administration. And certainly and I will reiterate. From the Department of Energy and from Dr. Chu, I think that they are really searching for ways that they could change the energy mix of the country.

But there were a number of people who either listening, who read the transcripts later or whatever, who called me up and chastised me later saying, you don't know what is coming from EPA, you don't know what is coming from these other thing. So, I saw Mike, what was it Mike about two weeks later or a week later. And I said we have a Dudas rule. We have the Justine rule, the Colombo rule, which is 15 question limit. Now we have the Dudas rule, no more Obama questions.

Michael Dudas - Jefferies & Co.

I'm sorry. But I don't know seriously, you've done a really good job at least with the chambers decision and walking through that and your insights from that. I just want to share what you've seen, let's just keep it to the EPA front and how much more difficult it's going to be for the industry to manage itself to this downturn because of potential opportunities there.

Peter Socha

Yeah. I think on the EPA front, I think everyone has been of course... actually C.K. why don't you talk about the EPA front?

Coy Lane

As far as the remaining issues, we're still seeing permits backlog and almost every level. And you still see the challenges that are coming out the EPA on the surface mining permit. So it's going to take longer to get permits and more details required in those permits. We're submitting most of our permits now with a new cumulative impact analysis that's required by the court. So, it's just an issue of time. It takes longer and a lot more work to get that. So, it delays production in that sense.

Peter Socha

You're there Mike?

Michael Dudas - Jefferies & Co.

Yes. No, that's fine.

Peter Socha

I just think, I think the letters that the EPA is been sending out reviewing whether its at all the permits or a lot of permits or other permits, I think that is a new paragon. Would you agree C.K.?

Coy Lane

Yes. I mean, we've not had that focus like that before.

Michael Dudas - Jefferies & Co.

And one follow-up there Peter. What's your sense of the vendor community out there, is there a lot of difficulties and struggles there as well working through the system and could that be something that could impact maybe the eventual possibility of a recovery in the next year or two?

Coy Lane

I think it could. I think that's a great question. We haven't noticed it on the vendor community yet. There is definitely pricing pressure. As far be it for us to go in and criticize somebody on their financials or anything like that, on the credit availability. That's one thing we don't do. But it could be a problem later on. But I don't see it right now. Let me ask C.K to respond to that. What do you think C.K ?

Coy Lane

I haven't seen it so far. I mean, our vendors are working really well as such and we continued to have good relationships with them.

Michael Dudas - Jefferies & Co.

Terrific. Thanks for your thoughts, gentlemen.

Peter Socha

Thanks Mike.

Operator

And we'll take our next question from Jeff Cramer (ph) with UBS.

Peter Socha

Cramer.

Unidentified Analyst

Hey, good morning everyone. You touched on gas or station area. Obviously, there is some that's going. Could you comment to the extent that that's really going on in the South Atlantic?

Peter Socha

It varies. It's great, Jeff. It varies customer-by-customer as I said. Some of them have the ability to have switching and others don't have quite as much on the combined cycle. Combined cycles did make more of the inroads in the Southeast than they did in the Midwest. And so that is clearly part of the equation.

But, I think the story on gas, I was going to touch on a little bit with Jim, and that is, I think the real story on gas is not, everyone seems to be focused on drill rigs. Drill rigs, drill rigs, drill rigs. And that's a big number. But, you follow the sector. I think it's on the industrial demand side. When industrial demand picks up for natural gas, I think you will see natural gas prices firm materially. And as Jim is still out there, he can buzz back in.

But I'm at the higher end on the switching and I've been at the higher end really since last fall of sort of to the 20 to 30 million ton numbers. We were out visiting customers in January. And some of them had, at one point, they had four units, two of them were down because of switching in January. Another one smaller customer might burn, I think it was 3,200 tons a day. They were down to burning 2,300 tons a day. So I think that was finishers.

Now, as we head into summer, you'll see everything burning. I think you should see everything burning, the cold burns et cetera. But I have been at the higher end on switching and maybe some others.

Unidentified Analyst

Okay. That's helpful. Thanks.

Peter Socha

Okay, thank you.

Unidentified Analyst

Just couple of more.

Peter Socha

Go ahead. Go ahead.

Unidentified Analyst

And it looks like inventories were up a bit in the quarter, where the shipments went out just after quarter-end or. Can you comment on that?

Peter Socha

There were some, yeah. But it was really, if you go back and look, we really flushed inventories at year-end. I know some people, particularly on the med side, had some larger inventories at 12/31. We did not. I mean, we were down to an asphalt to a parking lot and several of our prices.

And so, to a certain extent, you're looking at just a big increase off of a low number. And then we are carrying probably a little bit more than we do normally. But we were, I mean C.K. believe, if we were half of desired level at the end of the year?

Coy Lane

Well, probably that and we've ran out last year with not quite as much inventories we like to have. So, it's not to have little inventory build up to match up with your shipment schedule a little better.

Unidentified Analyst

Okay. Then I guess from a working capital perspective then, do you step it down to the year, how many pre-limited maybe actually some sorts of cash?

Peter Socha

Maybe. But we certainly aren't receivables. Receivables, once they've got into that higher level, they'll stay there, they'll maybe come down a little bit. We shipped a lot of coal in March. And so the year-end, I mean the quarter-end receivables probably had some of that in there where there was a little bit of a bulge. But inventories. I think you should look for inventories to probably stay flat, maybe up a little, maybe down a little.

Unidentified Analyst

Okay. Thank you.

Peter Socha

Thanks, Jeff.

Operator

(Operator Instructions). We will now go to our next question, Mark Caruso with Millennium Partners.

Peter Socha

Hey, Mark.

Mark Caruso - Millennium Partners

Good morning, Peter. Sorry. Again, I'm late. So, I may have missed some of this. But as far as I heard the comments earlier that you sort of had an agreement and you fill confident and the 10 and 11 tons you just do with the customer. Can you give us an update I guess first on the stocker side? I know typically that is one of the higher price products. But I'd want to get a sense of how that market is there and how we should think about that call this year and next year?

Peter Socha

We've done some stocker, but I don't remember how long ago, it wasn't too long ago. But that's an industrial product. And so I would pretty much repeat the comments I made about industrial gas demand. Those industrial accounts are hurting, prices have come down. They are still above OTC, they are still above the FX prices and utility prices. But they have clearly come down. And I think we're going to have to wait and see what happens on industrial, electric demand, gas demand and stocker demand, will probably track each other.

Mark Caruso - Millennium Partners

And so I guess for that standpoint, would you keep the tons in the ground, would you still, since it is still above OTC, if there is business to be have or do that or kind of --

Peter Socha

Great question, Mark. Right now, we are very much focused in terms of pricing. And I don't want to get too specific, but in terms of pricing, given our book we're very much looking at our costs. And we're saying that we don't have to do anything. Certainly, a $48 or $46 like somebody, I saw $42 number a couple of weeks ago.

We don't have to do anything. We've got a good book with good customers that we've had relationships with long time. And so if somebody comes out and says, well, for an industrial stocker product, we'll offer you X, I'm much more focused on how does that do... how does that relates to my cost. And if I leave it in the ground, what is the impact on our cost, less fixed-cost absorption, obviously. But that's probably the primary factor right now, more so than what I consider to be kind of a false market.

Mark Caruso - Millennium Partners

Okay. And then just one last question, as far as you had mentioned the balance sheet, obviously things are getting better. And I read in the release the minimum amount that has to be maintained is not much an issue.

Peter Socha

Yeah.

Mark Caruso - Millennium Partners

I know, I think it was, at some point last year you'd talked about if things materialize with the contracts and free cash flow is getting better, you'd contemplate doing something on the debt side as far as buying backs on the debt. How should we think about your update thoughts on that going forward here?

Peter Socha

Yeah, the current bank facility doesn't permit it. So it's kind of... it's very much a hypothetical. Taking a look at the current bank facility, Brad asked the question I guess last call, what are we going to do about it. It's on my agenda Mark. But I wouldn't describe it as being at the top of my agenda.

Right now I'm very focused on making sure we ship our contracts, making sure the customers are, the relationship there is strong, making sure that C.K. has what he needs and making sure that I'm understanding what's going on in the markets, not just here but around the world. Those are all our higher priority and should be higher priority right now. At some point this year what we do on the balance sheet, I'm not planning to buyback any bonds right now. Yeah, I know Brad's out there in the queue somewhere and he'll ask the question. But in this environment, I think cash is probably better than paying down debt or then buying in bonds.

Yeah, the comment was well, the bonds are trading at 78. Well, I know a lot of companies that would kill to have bonds trading at 78. 80 is the new part.

Mark Caruso - Millennium Partners

Right. I just have one question you mentioned about the utilities. I'd imagine given what you were able to do with whatever utility it was is an indication that you guys do have the relationship with the utilities and are working with them to sort of run an extent and you are not one of the culprits of shorting utilities last year and therefore aren't going to be able to get the benefit of doubt. Is that, moving back with your relationship?

Peter Socha

Well, that's a hang in curball, Mark. Yeah, I mean, I go to them, it was three basic premises and that is we went through a bankruptcy in '03 and '04. I've never missed the train. We stayed as a reliable supplier, I never missed the train. When the constituent cost went up as a result of all regulatory things and the accidents and all of those things, and costs went up well in excess of contract prices where it was not uncommon for us to have a contract at $45 and have a cost of $52. So every time we shipped, we lost money on. We never miss the train.

So when I sit down with the CEO of the Utility, that's what I say. And then point number three, when the market ran up last year and it went up into the 130s and 140s, and there was every incentive in the world you've given where we were with covenants and with lenders and getting whipped every six months or every three months, there was every incentive in the world for us to divert trains and to call up our utility customers. And you know what, we're short this month. And I'm short three trains or I'm short four trains. And meanwhile divert back to 120 or 130, 140 dollar business.

We had every incentive in the world to do it. We never missed the train. So, sitting down with the utility, I start with that as my premise, that this is how we have treated our relationship with you. Despite that the market today is half of what it was last fall, I think you need to consider how we have acted and how we have been a reliable supplier to you in the past before we have this conversation on what we're doing in contract. So, sorry Mark.

Mark Caruso - Millennium Partners

No, no I appreciate. Thanks and great quarter.

Peter Socha

Okay. Thanks Mark.

Operator

And we'll take our next question from Brett Levy with Jefferies & Company.

Peter Socha

Brett, I knew you were out there.

Brett Levy - Jefferies & Company

Yeah. Your bonds are 79.5 bid at this point.

Peter Socha

Thank you, Brett.

Brett Levy - Jefferies & Company

So we'll skip to the next question. You had said on the last call that some of the first quarter pricing reflected little lower from the fourth quarter or lower pricing.

Peter Socha

Yeah.

Brett Levy - Jefferies & Company

Is part of the reason that your guidance to margins being at least as good in the second quarter have to do with the fact that, if you look at the average price quarter-to-quarter-to-quarter, second quarter is going to be better than first quarter? And can you talk a little bit in terms of some of the prices and deferrals you've done? If we look at 2Q, 3Q and 4Q, is there any sort of disproportionate period in the next three quarters where a good portion of the favorable pricing is being pushed out and level --

Peter Socha

Yeah. Well, all of the unfavorable pricing is already done, all right, all of the carryover tons shipped in Q1. As I said is 280, 290,000 tons roughly, is roughly $51 of carryover. So those are taken care of.

As far as quarter-to-quarter you always asked me for quarterly guidance. And last time we were the only company to give any guidance. And so I'm not going to start giving quarterly guidance, I mean we have past every quarter and we'll see where it take now.

Brett Levy - Jefferies & Company

Okay. And then you mentioned that Jerry and you are in good shape with respect to your covenants. But it looks like you only got about 9 or so million left barred on this line. My sense is very soon you're going to have nothing barred on that line and then will you start rethinking this?

Peter Socha

As I said, I mean, what I do on the balance sheet, just from my standpoint Brett, I've basically been working with the banks and keeping everything alive. So that Glencore used to be our largest shareholder and onetime I think it was they always made to me was once extend the option. The market will come to you, but you got to make sure you're there when it happens. And so that's what we did.

And so to a certain extent, I was wearing a big CFO hat for the last two and a half years or two years. Doing that and functioning in that role and making sure that we were there when the market turned. And I got to tell you this quarter, I put my CEO hat on and I took my CFO hat off and it feels pretty good. Because I'm out there and I'm looking at what's going on in the market. I'm spending much more time thinking like a CEO and less like a CFO. And so later this year, will I put the hat back on and will I start thinking on the bank debt and on the letters of credit facility and on the revolver and on the bonds, yeah I will. But it's not going to be this quarter, it's not going to be this month.

Peter Socha

And last question is obviously do you think production is going to come down a little bit because of the demand. In terms of where you might look for it more in Central App or more in the Midwest?

Peter Socha

Yeah, Midwest is all sold out. So Midwest is not an issue. Central App, it's a question that do you want to sell the coal at a negative margin, at a below cash cost number or would you rather just keep it in the ground and think, we're pretty much unanimous than we're just going to keep it in the ground. But Midwest is all full down.

Brett Levy - Jefferies & Company

Fantastic. Thank you very much.

Peter Socha

Thanks Brett.

Operator

And we'll take our next question from Luther Lu with FBR Capital Markets.

Luther Lu - FBR Capital Markets

Hi Peter. How are you?

Peter Socha

Good morning, Luther.

Luther Lu - FBR Capital Markets

Since Justine didn't use 15 questions --

Peter Socha

You don't get carryover from Colombo.

Luther Lu - FBR Capital Markets

Okay. I'm just wondering, when you sell the stocker quota to industrial customers, just on a sequential basis, are those customers telling you anything that they are seeing pickup in demand, pickup in activities?

Peter Socha

I don't know because I haven't had. I mean they are just small account and I haven't talked any recently. I will tell you that by once looking at some numbers the other day, if you go to the PMI, the most recent PMIs and you drill down into new orders two things, which are a kind of green shoots of green shoot.

Luther Lu - FBR Capital Markets

Okay.

Peter Socha

And that is on PMIs look at new orders, the new order's index, its still below 50 but it is clearly put in a bottom and it is clearly turning back up. I don't have the number in front of me for some reason. I think it was like 44.2 or something. But there is no question has this turned up.

I mean if you look at the inventories, the customer inventories, they are clearly down. So those are two very, very strong early signs. And I didn't see this, although I heard it in the car driving somewhere the other day that the box makers have come out this week and made some relatively positive comments on what they are seeing for a new orders. And, as you know, I mean, those are the earliest of early cycles.

Luther Lu - FBR Capital Markets

Yeah, the packaging, right?

Peter Socha

The packaging, yeah.

Luther Lu - FBR Capital Markets

Good. Then on Central App, you mentioned that cost is under control, you've got new equipments, the labor turnover is down, productivity is up. So, I'm just wondering after the falloff this year, when the productions were up to may be 190 million tonish range, what would you think the margin of calls would be in 2010 in the Central App region?

Peter Socha

That's a C.K. question. C.K?

Coy Lane

I'm just worried about next quarter, and not 2010, not now. I just couldn't... I'm not sure what is that's going to be. There are so many things with geology and what raw materials to do that just too hard to predict.

Luther Lu - FBR Capital Markets

Well, let's say, if crude oil stays where it is, what would be the cost? Would you mind take a shot?

Coy Lane

No, I don't want to take a shot at 2010 cost.

Luther Lu - FBR Capital Markets

Okay. All right. And, Peter, Illinois Basin, we haven't really seen a huge amount of a supply cuts there. Can you talk about a little bit about the supply situation?

Peter Socha

Yeah, I mean, and you won't see one from us. As I said, as I think I mentioned earlier, the gas turbines are not as prevalent in the Illinois basin in the Midwest. So, the coal burn itself, I don't think it's off by quite as much. There are a couple of new big mines coming online later this year or early next year C.K?

Coy Lane

Well, I think one later this year and one early next year.

Peter Socha

And my understanding is they have that pretty well sold out or sold. So, that won't add to the unsold position out there. Prices out there have come in a little bit, but I wouldn't say dramatically, not to the extent we've seen in Central App where they are down by 60% or 70%.

Luther Lu - FBR Capital Markets

Okay. And then finally as you lookout your window, how is the export train going?

Peter Socha

Well, one just went by a few minutes ago and there is another one around the bank.

Luther Lu - FBR Capital Markets

Okay.

Peter Socha

Well, I don't know, I haven't with that the port, I was going to get out last week and I got tied up to another thing.

Luther Lu - FBR Capital Markets

Okay. Thanks.

Peter Socha

Thanks Luther.

Operator

And we'll take our next question from Michael Goldenberg with Luminous Management.

Michael Goldenberg - Luminous Management

Good morning.

Peter Socha

Good morning Mike.

Michael Goldenberg - Luminous Management

Excellent quarter.

Peter Socha

Thank you.

Michael Goldenberg - Luminous Management

Question on the utility that you've restructured the coal with. I imagined you can't disclose name of it, but other than that do you have walkover that utility, is that one of the major customers or is that all the coal that we're getting from you?

Peter Socha

I don't want to go there. I'd rather not do anything there.

Michael Goldenberg - Luminous Management

Fair enough.

Peter Socha

My sales guy sitting two offices away and he'll come down here and hit me on my head.

Michael Goldenberg - Luminous Management

No problem. Then, if you allow me to ask you to put your CFO cap on.

Peter Socha

Okay.

Michael Goldenberg - Luminous Management

So, things are going well, you're getting all this cash, what would be the priority if use of that cash because clearly your bank facilities do cost more than the cash being spending on banks, so what's the priority of use of that?

Peter Socha

In light of that, I think I've said before. That's a Board discussion issue and we haven't had discussion. So, I'd rather, I'll defer on that. And maybe I'll go into a little more detail. Depending on the result of the Board discussion, I'll go into a little more detail in August.

Michael Goldenberg - Luminous Management

Fair enough. But you are planning to present that proposals to the Board, right?

Peter Socha

We're going to have a discussion. We have a small Board. I mean we'll have a pretty fulsome discussion about it.

Michael Goldenberg - Luminous Management

Fair enough. Now, when you said that you can't buy bonds because you have a bank debt facility, if that facility, if there is nothing drawn ahead can you at that point buy or you would have to restructure back --

Peter Socha

I would probably have to do another amendment. And this is just a guess, okay. There is no way I'm going back for another amendment, having gotten kicked around for the last two years. So there is no way, I'm going to get an amendment, just like to go out and buy some wine.

Michael Goldenberg - Luminous Management

Understood. Thank you very much.

Peter Socha

Okay. Thank you, Mike.

Operator

And we'll take our next question from Steven Pedian with SAP Capital Management.

Peter Socha

Hi Steven.

Steven Pedian - SAP Capital Management

Hey. Great quarter guys.

Peter Socha

Thank you.

Steven Pedian - SAP Capital Management

Quick questions, most of my questions have been answered. Did you give a free cash flow number for the quarter?

Peter Socha

No. No, actually the Q was supposed to be filed this morning and the auditors just came up with something last night that they wanted double-check on. So it will be filed in the next couple of days.

Steven Pedian - SAP Capital Management

Okay. And then one quick question. I know you had mentioned in previous call, that the struggles with the... I think you said the one million ton producers in your area.

Peter Socha

Yeah, yeah.

Steven Pedian - SAP Capital Management

Are you still seeing that as a major factor in production coming down? And as a follow-up, I know you mentioned showing up the balance sheet going forward. But down the road, you see opportunities there in purchasing some assets?

Peter Socha

Maybe. As I've said, we start... again it's not high on my agenda right now. They are clearly falling off. And they are clearly... they usually do not sell directly through the utilities or self, so Telford (ph) capacity or ICG or somebody like that. So they don't have the benefit necessarily of a longer terms utility contract as the other companies might have.

Whether we start looking at them to pick them up on a strategic basis if it makes sense for us and it's a bolt-on where it relatively close proximity, we'll look at it that it's not where I'm standing a lot of time right now.

Steven Pedian - SAP Capital Management

Okay, fair enough. And then one last question; I know you were more hesitant to talk about this, but any input on the cap and trade issues being turnaround?

Peter Socha

Good, you can talk and beat it. I think in the senate, it's an issue in the senate, if you look at the number of democratic senators in states that have low cost electricity primarily due to coal. If you notice in the budget, they specifically carved it out and said that there were 67 senators who voted for something rather same number what it was. They said that well, this could not be done through a reconciliation process which only requires 51 votes. So they're very in-tuned with here in the senate. That's been a mark year or trying pretty hard. They're doing everything that have to get us through, but we'll see. And then now I'm going to defer on any comment there.

Steven Pedian - SAP Capital Management

Okay, great. Well, keep up the good work. Thank you.

Peter Socha

Thank you, Steve.

Steven Pedian - SAP Capital Management

Thanks.

Operator

In the interest of time, that does conclude today's question-and-answer session. I'd now like to turn it back over to Mr. Socha for any additional comments and closing remarks.

Peter Socha

Well, thank you Misty. And thank everyone for joining us today. We appreciate it. And we will be joining you on probably the first week of August, which is our usual time. All right. Thank you and we look forward to talking to you then.

Operator

This concludes today's presentation. Thank you for joining us. And have a wonderful day.

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Source: James River Coal Q1 2009 Earnings Call Transcript
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