Oxford Resource Partners' CEO Discusses Q1 2013 Results - Earnings Call Transcript

May.15.13 | About: Westmoreland Coal (WLB)

Oxford Resource Partners, LP (OXF) Q1 2013 Earnings Conference Call May 15, 2013 10:00 AM ET

Executives

Karen Van Horn – Investor Relations

Charles C. Ungurean – President, Chief Executive Officer and Director

Gregory J. Honish – Senior Vice President, Operations

Bradley W. Harris – Senior Vice President, Chief Financial Officer and Treasurer

Analysts

David Feaster – Raymond James

David Olkovetsky - Jefferies & Company

Sam Dubinsky - Wells Fargo Securities

Mark Levin – BB&T Capital Markets

Operator

Good day ladies and gentlemen, and welcome to the Q1 2013 Oxford Resource Partners, LP Earnings Conference Call. My name is Mo and I will be your operator today. At this time your lines will be on listen-only. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

I would now like to turn the call over to Karen Van Horn. Please proceed, ma’am.

Karen Van Horn

Thanks, Mo. Good morning, and welcome everyone to our first quarter 2013 earnings conference call. We appreciate your continued interest in Oxford Resource Partners. I’m Karen Van Horn, Investor Relations Representative with Oxford. Participating on the call today are Oxford’s President and CEO, Chuck Ungurean; Oxford’s Senior Vice President of Operations, Greg Honish; and Oxford’s Senior Vice President and CFO, Brad Harris.

Oxford released its 2013 first quarter results earlier this morning. On today’s call, we will be discussing our operations and financial results. Following our prepared remarks, we will open the call up to questions.

Please be aware that some of our remarks may include statements that are not historical in nature and that may involve expectations, plans and objectives regarding future operations. These remarks are forward-looking statements and are subject to the cautionary language regarding forward-looking statements contained in our press release. Additionally, we will be discussing Adjusted EBITDA and adjusted net loss, which are non-GAAP financial measures. The definitions of Adjusted EBITDA and adjusted net loss and reconciliations thereof to net loss, a comparable GAAP financial measure, are included in a table presented near the end of our press release. Our press release has been posted on our website, oxfordresources.com and furnished to the SEC in our Form 8-K filing.

With that, I would like to turn the call over to Chuck for some opening remarks. Chuck?

Charles Ungurean

Thanks Karen and thanks everyone for joining us today. As you saw on our earnings release this morning, 2013 is off to a good start. Our adjusted EBITDA performance shows a $1 million improvement over the fourth quarter of 2012. In addition, we generated sequential increases in our cash coal sales revenue per ton and cash margin per ton. We were able to achieve these results in spite of a continued challenging coal market. Our customer relationships remain very strong. We are 97% committed and priced for the remainder of 2013 and for 2014 our projected sales are 79% committed with 47% of that being priced while the other 32% is not yet priced.

Regarding the coal market, we are encouraged by the recent decline in utility stockpiles and higher natural gas prices in our region, both of which should drive increasing customer demand. When that happens, we have the ability to increase our production with little incremental cost. As we indicated in our press release, we are making good progress in addressing our credit facility maturity. Brad will discuss that in more detail.

Now I’ll turn the call over to Greg to provide an update on our mining operations. Greg?

Gregory Honish

I’m going to report on safety and operations, starting with safety. Due to the severe winter weather, we had more miner slip and fall injuries than usual during the first quarter. We’ve gotten off to a good start in the second quarter with the reportable incident rate well below the national average. As we’ve said before, employee safety remains our highest priority.

Moving on to our operations, we exceeded our production goals and beat our production cost targets in the first quarter. This was accomplished while developing two new mines as well as moving one of our high wall miners during the quarter. Although we have significantly scaled back production in our Illinois Basin operations, we plan to run the remaining operations there a bit longer than originally anticipated. This will allow for the completion of additional reclamation work while at the same time producing more tons than initially expected. We still expect to idle our Illinois Basin operations by the end of this year.

And with that, I’ll turn the call over to Brad. Brad?

Bradley Harris

Thanks Greg. Good morning everyone. First quarter cash margin per ton increased 7.9% to $6.40 in the first quarter of 2013 from $5.93 in the first quarter of 2012. This was driven by a 3.2% increase in coal sales revenue per ton to $50.68, partially offset by 2.7% increase in cash costs to coal sales per ton to $44.25.

Total revenues were $88.7 million, including revenues of $84.8 million from our 1.7 million tons of coal sales. Comparably, first quarter 2012 revenues totaled $97.9 million, including revenues of $94.8 million from our 1.9 million tons of coal sales. Adjusted EBITDA was $9 million for the quarter, compared to $11 million in the prior year period.

All these financial results were in line with our expectations that anticipated lower production and sales from our Illinois Basin operations due to the coal supply contract termination in early 2012 that we have previously discussed.

Depreciation, depletion and amortization expense declined to $12.9 million in the first quarter from $13.7 million in the prior year period. Corporate SG&A for the first quarter was $4.2 million, relatively in line with the same period in 2012.

CapEx totaled $2.9 million during the first quarter, down from $6.1 million in the same 2012 period. The excess Illinois Basin equipment transfers to our Northern App operations have enabled us to reduce our capital expenditures.

As of March 31, 2013 we have $5.3 million in cash with no available borrowing capacity on our revolving credit facility. Our current revolving credit facility matures in July of this year. We have been engaged in active negotiations addressing the upcoming maturity. We’ve been working diligently for several months and expect to announce a comprehensive resolution within the next few weeks.

While we remain current on all of our principal and interest payments, we’re now in default of certain financial covenants. Accordingly, all the borrowings outstanding under our credit facility are presented as a current liability in our first quarter financial statements. We’ve obtained a forbearance agreement from our lenders in which they have agreed to forbear from seeking remedies for such defaults for a period of 30 days. The credit facility resolution should put us in solid financial footing to support both our near term and longer term plans and should better position us to participate in the coal market rebound. We also continue to pursue the sale of excess Illinois Basin equipment which had a net book value of $6.1 million at the end of the first quarter. These sales should also enhance our liquidity position.

And now for our 2013 outlook. The only change from previously provided guidance relates to tons produced. We now expect to produce 6 to 6.5 million tons of coal as compared to the previously provided range of 5.8 to 6.3 million tons. The increase in produced tons is attributable to our Illinois basin operations as previously discussed by Greg. We are reaffirming the balance of the guidance originally provided in our fourth quarter and yearend 2012 earnings release. We still expect to sell between 6.4 and 6.9 million tons.

Also, the average selling price per ton is still projected to be between $50.50 and $52.50, with an anticipated average per ton cost of $42.85 to $44.85. Adjusted EBITDA for the year is still expected to be in the range of $45 million to $50 million with anticipated 2013 CapEx between $22 million and $25 million. As Chuck indicated, 2013 is off to a good start with adjusted EBITDA for the first quarter improving by $1 million over the fourth quarter of 2012.

And with that, I’ll open the call up to questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question is from the line of David Feaster, Raymond James. Please proceed.

David Feaster – Raymond James

You talked about a comprehensive resolution. Could you give us some insight exactly into what you’re looking at or just some more detail what it involved, equity or is it just debt? Also would it cover the entire debt outstanding or just what you have coming due now?

Bradley Harris

The comprehensive resolution I talked to or I mentioned, we have our term loan, our credit facility I should say. It has a revolving credit component to it and a term loan component and the solution that we are looking for addresses both those. I’ve indicated the revolver matures in July of 2013 and the term loan matures in July of 2014. But the solution would address both of those pieces. As far as providing additional more details, we are still in the discussion stage, although we feel very close and we’ve moved well along in the process. The terms are not finalized at this point. So I’m going to refrain from giving any specifics other than to say it continues to move along well. As we indicated we’re looking for resolution within the next few weeks.

David Feaster – Raymond James

Would you expect any -- what sort of covenants? Would it be similar to covenants to what you had in place now? Is there anything that potentially restricts you from bringing back your distribution? Or what do you expect on that?

Bradley Harris

The first part of the question, I would anticipate that the credit facility will have covenants similar to what we have right now. And again I’m going to defer on the second piece of that specifically related to the distributions as we are still going through the terms of that and they’re not set yet. But again within a few -- well, we’re hoping to be within a few weeks we’ll be able to share with you the complete resolution.

David Feaster – Raymond James

On the CapEx front, CapEx was remarkably low in the first quarter and guidance implies a step up over the next few quarters. Is there any ability to bring that down or are you running at basically bare minimum right now?

Bradley Harris

The first quarters we’ve been very diligent in controlling our CapEx spend. So knowing, everyone is aware liquidity is certainly a concern for us. We’re going through this refinancing. So we’ve been watching our cash and available liquidity very, very closely. So we have deferred to the extent that wouldn’t impact production or maintenance and efficiency of the equipment, whatever CapEx we could. At this point we are still expecting the total CapEx for the year to be in that same range, although we do remain hopeful that to the extent we can we will continue to try to reduce our CapEx through the balance of the year. it’s just a little early in the year if you would to be backing up what our full year expectation is knowing that there’s certainly a lot of preventive maintenance and competitive components and things like that that will still need to be done.

David Feaster – Raymond James

Now in terms of bringing production back online, how quickly and how much can you do and basically what’s your total capacity based on the equipment and everything that you have right now? What’s your total capacity if we were in a good market running full steam ahead?

Charles Ungurean

Right now we think given our current equipment fleet we could probably increase that production between 5% and 10%. So, somewhere between 300,000 and 500,000 tons without any additional new equipment. So I’d say 5% to 10%.

David Feaster – Raymond James

And just one quick housekeeping question. Where did the accrued distributions fall on your balance sheet?

Bradley Harris

They do not. Accrued distributions do not appear on the balance sheet and we’ll be filing our 10-Q and there’s a disclosure in there of what those accrued distributions are. But distributions are not a liability until they are declared. So again they will not be on the financial statements.

Operator

Your next question is from the line of David Olkovetsky, Jefferies & Company. Please proceed.

David Olkovetsky - Jefferies & Company

First question relates to the assets that you’re holding for sale. What’s the replacement value and or market value of those? You said it’s $6.1 million book. What do you think you could reasonably get if you were to sell those assets?

Bradley Harris

We’re hopeful. From the accounting standpoint we had to if you will adjust those assets to fair value. So we believe that’s probably about the best estimate of those assets again, about $6.1 million.

David Olkovetsky - Jefferies & Company

Has anybody taken a look at purchasing of assets yet and if so, how far down the line are you with those guys?

Charles Ungurean

Yes. We have had interest in that equipment and we continue to talk to a couple of potential customers.

David Olkovetsky - Jefferies & Company

Can you give me a sense as to what stage of talks you might be in?

Charles Ungurean

Not really. We’ve got some people that we’ve talked to and they have yet to come inspect the equipment. So that’s the next move.

David Olkovetsky - Jefferies & Company

And then in terms of your 2014 contracting position still appears to be about 21% open. Can you give us a sense for what you’re seeing in terms of pricing and also when you think you may conclude pricing on that?

Charles Ungurean

I would expect by the fourth quarter to have the rest of that coal sold. As far as pricing right now the market is I believe getting slightly better. And then part of our pricing, a big part of it is some prices, it really cannot price until the end of the year because it’s based on published indexes. But given those, they look to increase some of where they are right now, at least --

David Olkovetsky - Jefferies & Company

Let me just maybe try to paraphrase. You’re saying that you expect to be fully contracted by November, December and fully priced by the time that these indices are published. Is that a fair way to say that?

Charles Ungurean

Yes.

David Olkovetsky - Jefferies & Company

And then in terms of your customers, are you in conversation with them in terms of what would occur in the event of a default of the -- if you don’t come to a comprehensive resolution?

Charles Ungurean

Frankly our customers have been very supportive and we have not had this conversation because we fully expect to get this put behind us and they do too.

Operator

Your next question is from the line of Sam Dubinsky, Wells Fargo. Please proceed.

Sam Dubinsky - Wells Fargo Securities

Just a couple of quick ones. Obviously you would like to finalize the new credit agreement earlier. At this moment, can you discuss what the major holding points are in the new credit facility, where are the sticking points? Also if you can give an idea where interest rates would be for this deal. And I have a couple of follow ups.

Bradley Harris

Again at this point in time we’re still in the negotiation. Again we’re close on terms. We hope to be able to announce something in the next couple of weeks, but I’m reluctant so I’m not going to share if you will any specifics on interest rates or individual issues that we’re working to resolve. The one thing I will tell you is why this has taken a little longer than all of us had hoped. Our credit facility has 10 individual lenders in that. So it’s a big group to get together in consensus. We wanted to make sure we were addressing the revolving credit facility as well as the term loan and we certainly wanted to make sure that the company had liquidity to execute its business plans. So a combination of all of those things have factored into taking a little bit longer and again we’re going to share with you the details everyone is asking about as soon as they’re available.

Sam Dubinsky - Wells Fargo Securities

And just to follow up on pricing, just a clarification, the 47% that is already priced for 2014, how is that compared to 2013? And then the remaining that’s un-priced, how does that compare to what’s priced?

Charles Ungurean

Well, the 47% that is priced is at or higher prices than we currently have.

Sam Dubinsky - Wells Fargo Securities

And then the un-priced portion should be higher than what’s already committed in terms of price based on where Nat gas is today? Is that correct?

Charles Ungurean

Yes. I would say so. Again whether that’s going to be -- how these indexes are because that’s a big chunk of it. Right now the indexes are higher as we speak today. It’s based on a 12 month average.

Sam Dubinsky - Wells Fargo Securities

And then just on the CapEx figure, I know you said it’s a bit early, but just that $22 million, $25 million CapEx figure, do you think that is somewhat of a normalized rate when we return to a normal market? Or are you guys under investing what you should be at this moment?

Bradley Harris

No. we’re expecting. That’s a really normalized rate, the $22 million to $25 million. Any given year depending upon where we are in the maintenance cycle of equipment, it could be a little bit higher or a little bit less than that. But that represents a normalized run rate. We are not postponing or deferring maintenance that would impact reduction or efficiency. Our fleet is being very well maintained, that type of thing but just to the extent that we can we’ll defer some of the elective spend or some of those type of things. We’re doing that.

Charles Ungurean

That’s sufficient to maintain the 6 million to 6.5 million tons production.

Operator

Your next question is from the line of Mark Levin, BB&T Capital Markets. Please proceed.

Mark Levin – BB&T Capital Markets

Most of my questions have been asked and answered. Just a quick modeling question. When you think about 2014 operating costs relative to 2013, what type of inflationary rate would you begin or do you anticipate being able to hold costs flat next year? Thanks.

Charles Ungurean

We feel that probably that 3% inflation. We would hope we do better than that, but that’s what if I had to say today I think that’s what it would be. The large part of that obviously is fuel and we are looking at doing some hedges on fuel right now. But I think 3% would be a good number, 3% or less.

Operator

Your next question is from the line of David Olkovetsky, Jefferies & Company. Please proceed.

David Olkovetsky - Jefferies & Company

So I want to maybe try to get a little bit more information on these plans to refi. I understand that there’s certain information that you don’t want to go into, but can you give us a sense, are you talking with the same group of lenders who you currently have your RCF and term loan outstanding with or is there other conversations ongoing with other groups as well to ensure you get the best value?

Bradley Harris

As I mentioned before and I’m just going to repeat, so we are actively negotiation process. We are moving along very well. we remain optimistic that we’re going to have something done in a couple of weeks, but I’m not again at this point go into any specifics as to term, et cetera at this point .again we will announce it as soon as we can and we’re hopeful to be able to do that in a few weeks.

Operator

There are no further questions. So I would now like to turn the call back over to Chuck for closing remarks.

Charles Ungurean

Thanks again everyone for your ongoing support of Oxford. We look forward to sharing our progress with you on the next earnings call.

Operator

That concludes today’s conference. You may now disconnect. Have a good day.

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