Walter Energy, Inc. (WLT)

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Walter Energy, Inc. (WLT)

Q3 2010 Earnings Call

October 27, 2010 10:00 a.m. ET

Executives

Mark Tubb – VP, IR and Strategic Planning

Lisa Honnold – Interim CFO, SVP and Controller

Walt Scheller – President and COO, Jim Walter Resources

Joe Leonard – Interim CEO

Analysts

Jim Rollyson – Raymond James

Brian Gamble – Simmons & Co.

Jeremy Sussman – Brean Murray, Carret & Co.

David Connie – FBR Capital Markets

Shneur Gershuni – UBS

Andre Benjamin – Goldman Sachs

Meredith Bandy – BMO Capital Market

Dan Mannes – Avondale Partners

Mark Levin – BB&T Capital Markets

Operator

Welcome to the Walter Energy’s Third Quarter 2010 Earnings Conference Call. All participants are in a listen-only mode. (Operator instructions)

Now, I would like to turn the meeting over to Mr. Mark Tubb, Vice President of Investor Relations. Sir, you may begin.

Mark Tubb

Thank you, Tonya. Good morning and thank you for joining us for Walter Energy's Third Quarter 2010 Earnings Conference Call. Today’s call is being webcast live over the Internet, and a recording will be archived on our website for up to 30 days.

Joining me today are Walter Energy’s Interim CEO, Joe Leonard; Interim CFO, Lisa Honnold and Jim Walter Resources President and Chief Operating Officer, Walt Scheller.

Today we will discuss earnings and performance for the third quarter, our views on the market, and our updated business outlook. Following our prepared remarks, we will open the call to questions.

We may refer to forward-looking statements made in yesterday's press release and may make those and other forward-looking statements on today’s call. For more information regarding risks associated with forward-looking statements, please refer to the company’s SEC filings.

Now, I will turn the call over to Lisa to discuss the financial results for the quarter.

Lisa Honnold

Thanks, Mark, and good morning everyone. Yesterday we reported earnings of $2.57 per diluted share for the third quarter, highlighted by record operating income of 202.8 million from our underground mining segment.

Consolidated revenues for the quarter totaled $464.3 million up $186 million compared to last year’s third quarter. Consolidated operating income was $207.8 million up $165 million compared to last year’s third quarter. Both revenues and operating income benefited from significantly higher coking coal prices, which include the effect of 153 tons of coking coal at carry over prices, exceeding $315 per ton.

Coking coal cost of sales in the quarter was up slightly to a weighted average cost of $81.36 per ton, primarily as a result of higher production cost at our Number 4 mine, due to difficult geologic conditions in the mine, which slowed production in July and August. Since then, we have been achieving normal production and run rates at that mine.

At our surface mining operations, we sold 368,000 tons of coal in the third quarter at an average selling price of $87.93 per ton, an improvement of more than $9 per ton versus the third quarter of 2009.

At Walter Coke, we sold 111,000 tons of furnace and foundry coke in the third quarter of 2010, compared to 38,000 tons in last year’s third quarter, generating a $6.5 million improvement through operating income versus the prior year.

Our third quarter results also include the effect of an increase in our effective tax rate, from 31.9% for the first six months of 2010, to 32.3% for the nine months ended September 30.

Due to changes in certain tax deductions for the calendar year, we expect our fourth quarter 2010 effective tax rate to be approximately 31.6%.

Cash at September 30, was $218.4 million compared to $95.7 million at June 30. Available liquidity was $458.2 million at September 30, compared to $335.5 million at the end of the second quarter. Our debt balance was $175.7 million, which is well below our cash position.

Capital expenditures for the third quarter were $35.2 million and we expect capital expenditures of the fourth quarter of approximately $45 million.

The company spent $11.9 million on share repurchasing in the third quarter, purchasing 173,360 shares, at a weighted average price of $68.58. Through the first nine months of the year, share repurchases totaled $65.4 million and we paid $8.7 million in dividends, returning more than $84 million to shareholders so far in 2010.

We will continue to evaluate opportunities to benefit our shareholders including acquisition, share repurchases, and dividends.

I’ll now turn the call over to Walt, to discuss our operation results for the quarter, and our outlook for the remainder of the year.

Walt Scheller

Thanks, Lisa, and good morning. As I mentioned to you last quarter, our two primarily goals are to achieve quarterly coke and coal production of more than 2 million tons and improve safety throughout all of our operations. I’ll talk about production in a minute but regarding safety, we’ve improved safety performance over the first nine months of the year compared to the same period last year, and have launched new initiatives to help keep our employees safe.

Turning to our third quarter results, coke and coal sales in the quarter total 1.9 million tons, in line with our expectations, and slightly ahead of sales in the second quarter. One of the keys to our results in the quarter was our logistic team’s ability to overcome some transportation issues during the period.

Early in the quarter we experienced some shipping delays due to planned maintenance on the Black Warrior River. In addition, in September the Medupi Terminal was closed due to a conveyor belt repair work, originally scheduled to take place in early October.

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