Oxford Resource Partners' (OXF) CEO Charles Ungurean on Q1 2014 Results - Earnings Call Transcript

| About: Westmoreland Coal (WLB)

Oxford Resource Partners, LP (OXF) Q1 2014 Earnings Call May 6, 2014 10:00 AM ET


Karen Van Horn – IR

Charles Ungurean – President and CEO

Gregory Honish – SVP, Operations

Bradley Harris – SVP, CFO and Treasurer


Sam Dubinsky – Wells Fargo Securities


Good day ladies and gentlemen, and welcome to the 2014 First Quarter Oxford Resource Partners, LP Earnings Conference Call. My name is Crystal and I will be the operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, the conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Ms. Karen Van Horn, Investor Relations Representative. Please proceed.

Karen Van Horn

Thanks, Crystal. Good morning, and welcome everyone to our first quarter 2014 earnings conference call. We appreciate your continued interest in Oxford Resource Partners. I am Karen Van Horn, Investor Relations Representative with Oxford.

Participating on the call today are Oxford’s President and Chief Executive Officer, Chuck Ungurean; Oxford’s Senior Vice President of Operations, Greg Honish; and Oxford’s Senior Vice President and Chief Financial Officer, Brad Harris.

Oxford released its first quarter 2014results 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 to comparable GAAP financial measures, are included in a tables 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. 2014 is off to a good start with a positive first quarter. We saw a 20% increase in our cash margin per ton, compared to the same quarter last year. This was however partially offset by 14% reduction in tons sold attributable to the idling of our Illinois Basin operations.

Adjusted EBITDA increased more than 2% year-over-year in spite of the reduced tons. We were incrementally more optimistic on the outlook for coal in our market given recent dynamics. This winter’s weather has underscored the power industry’s need to keep in operation coal-fired power plants located in our markets which are scheduled to close starting in 2015.

This is exemplified by the fact that 89% of a key customer’s over coal generation target for retirement next year due to EPA rules was pressed into service during the 'polar vertex' in January. In fact, those coal-fired units ran at 46% of capacity during all of the first quarter.

While we do not supply any of these coal-fired units scheduled for retirement, this further demonstrates that coal must be part of the long-term energy solution. Coal was far less prone to price jumps or shortages and in a cold snap it is a bargain. Experts agree that, without these coal plants operating, reliability of the grid could be compromised, and electricity prices will be higher, hitting consumers hard as it did this winter.

This increased coal burn coupled with utility stock piles at the lowest levels we have seen in years is translating into sales opportunities for us. We recently received an order from a key customer for an additional 200,000 tons to be delivered ratably over the remainder of this year. We are encouraged by this recent activity and anticipate that we may see further requests for additional tons.

Our sales volume as of today is 95.6% committed and priced for 2014, with another 1.8% accounted for under month-to-month purchase orders. Should demand materialize we have the ability to increase production by up to 500,000 tons annually with little additional CapEx investment.

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

Gregory Honish

Okay, I’d like to start with a review of our safety performance. We finished the first quarter with a reportable incident rate that was 55% better than the average for Appalachian Basin mines. Our year-over-year incident rate improved by a dramatic 67% and a significant number of our mines have been operating for well over a year with no reportable incidents.

Our commitment to running safe operations remained a constant business objective. We are extremely proud of our employees’ performance in this critical aspect of our operations.

First quarter production slightly exceeded our expectations. Northern App productivity increased by 6% year-over-year primarily due to the addition of a high wall miner on a contract mining basis.

The increase in productivity contributed to an improvement in our margin per ton as Brad will discuss. Permitting continues to go well. We were issued five permits during the first quarter covering a total of 2.6 million tons. These permits increased flexibility in our current mine areas and more importantly provide access to additional reserves that could be mined to supply new sales opportunities as they develop.

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

Bradley Harris

Thanks Greg. Good morning everyone. First quarter 2014 cash margin increased 20% to $7.68 per ton from $6.40 in the first quarter of 2013. For the first quarter of 2014, coal sales revenue increased 5.4% over the prior year period to $53.36 per ton and cash cost to coal sales increased 3.2% over the prior year period to $45.68 per ton.

Tons sold in the first quarter of 2014 decreased by 234,000 tons over the prior year period to 1.4 million tons attributable to the idling of our Illinois Basin operations.

For the quarter, total revenues were $78 million, including $76.8 million from coal sales. Comparably, first quarter 2013 revenues totaled $88.7 million, including $84.8 million from coal sales.

Adjusted EBITDA was $9.2 million for the first quarter of 2014, compared to $9 million for the prior year period an increase of 2.2%.

Depreciation, depletion and amortization expense was $11.2 million for the first quarter of 2014 compared to $12.9 million for the prior year period. First quarter of 2014 SG&A was $3.7 million, down from $4.2 million in the prior period. The prior period include expenses related to our debt restructuring.

Additionally, we incurred $75,000 of restructuring charges in the first quarter associated with the idling of our Illinois Basin operations. We do not anticipate any further such charges.

We incurred a $204,000 loss in the first quarter of 2014 related to the routine disposal of assets. Interest expense was $3.9 million higher for the first quarter of 2014 primarily due to higher interest rates and amortization of costs associated with our new credit facilities.

And lastly, we recorded a non-cash loss of $415,000 in the first quarter of 2014 related to the change in the fair value of warrants associated with our second lien credit facility.

Total CapEx totaled $2.6 million during the first quarter of 2014, down from $4 million in the prior year period. Maintenance CapEx benefited from the use of our Illinois Basin equipment relocated to our Northern App operations.

As of March 31, 2014, we have $4.6 million of cash and $3 million of available borrowing capacity on our revolving credit line. We also have an option under the second lien credit facility for additional $10 million term loan if requested by us and approved by the issuing second lien lender.

As announced a few weeks ago, we sold our Illinois Basin river terminal and related equipment. In doing so, we’ve retained assignable rights to coal loading throughput of the terminal facility for a period of seven years. Cash proceeds from the sale of these assets totaled $2 million thereby further enhancing our liquidity.

This action is consistent with our strategy to focus on our core Northern Appalachian operations.

We continue to pursue the sale of our remaining Illinois Basin equipment consisting of a large capacity shovel and several smaller pieces of equipment and we consider offers for the remaining coal reserves.

And now an update for our 2014 guidance. We expect to produce between 5.7 million tons and 6 million tons and we expect to sell between 5.8 million tons and 6.1 million tons. Our average selling price is expected to be in the range of $52.25 to $53.75 per ton, and our average cost is expected to be in the range of $43.80 to $45.30 per ton.

Adjusted EBITDA for the year is expected to be in the range of $40 million to $45 million. The decrease from our previous guidance reflects the impact of higher diesel fuel costs.

And finally, we anticipate CapEx to be between $17 million and $20 million.

With that, I’ll open the call up for questions.

Question-and-Answer Session


(Operator Instructions) Our first question will come from the line of Sam Dubinsky from Wells Fargo. Please proceed.

Sam Dubinsky – Wells Fargo Securities

Great, what percent of your costs are diesel-related for mining? And is that the bulk of the reason why the cost increased or is there something else?

Gregory Honish

Yes, this is Greg. Our diesel costs were about $10 a ton, so you are looking at – the range is 20% to 25% of our production costs of diesel. And that is the major factor behind our cost increase.

Sam Dubinsky – Wells Fargo Securities

Okay, and then pricing was a little better than expected for 2014, is that a function of mix or was a conservatism entering the year or is it better spot pricing? What’s driving the increase there?

Charles Ungurean

This is Chuck. It’s primarily the sales mix.

Sam Dubinsky – Wells Fargo Securities

Okay, and then what percent of you contracted for 2015 and 2016 volumes and what price and how was pricing compared to today?

Charles Ungurean

Do you ask for 2016?

Sam Dubinsky – Wells Fargo Securities

2015 and 2016.

Charles Ungurean

2015 and 2016, okay, for 2015 we are 65.6% committed and for 2016 we are at 30.5% committed and pricing, it will hold off on, it’s difficult on the pricing. We have this contract with ADP that’s priced off at indices and since the indices do not set till the end of the year. Those tons do not go into our committed or priced numbers or whatever. But I think it’s fair to say that our sales expectations have been comparable little better than what they’ve been in 2014.

Sam Dubinsky – Wells Fargo Securities

Okay and what goes behind the indices, like what indices should we track?

Charles Ungurean

It’s three indices go into the calculation, it’s Argus Platts and SNL.

Sam Dubinsky – Wells Fargo Securities

And then last question on the liquidity front, do you feel you have enough liquidity today to execute on your plans or do you think you may have to tap the revolver some more?

Charles Ungurean

At this point, we think we are okay, I mean, obviously, yes, liquidity is a little tighter than they might like at the moment, but it’s a level what we continue to operate and have for some period of time and it is – our liquidity is consistent with what our business plan was. So, we are executing as expected. And at this point we do not anticipate needing to tap the additional term loan availability.

Sam Dubinsky – Wells Fargo Securities

Great, thank you very much.

Charles Ungurean

Welcome, Sam.


And with no further questions, 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 our next earnings call.


Ladies and gentlemen that concludes today’s presentation. You may now disconnect. Have a great day.

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