Chand B. Vyas to New York Stock Securities Analysts
New Strategies For Growth
Feb. 15, 1996
Good morning. I intend to share with you today my visions and plans for
Zeigler Coal Holding Company. But before I do, let me make several statements.
They may seem contradictory on their surface. I assure you, they are not.
A generation ago, President John F. Kennedy stood in front of the Berlin
Wall, and although he was an American, proclaimed: "I am a Berliner."
Today, I stand here as part of the First Coal Industry Conference and say to
you, "I am not a coal miner."
I am not a coal miner, though I have 22 years of experience in the coal
business. In addition, Zeigler is not just a coal company, though today we are
considered the largest pure play in coal. And finally, Zeigler's future success
will not be measured solely on coal, although coal will continue as a core
asset.
Let me address the first point, for it's important for you to
understand me to understand my strategies. I wasn't a coal miner in 1985 when I
mortgaged my house and helped to lead the buyout of Zeigler from Enron. Nor was
I a coal miner when I orchestrated huge acquisitions from British Petroleum in
1990 and Shell Mining in 1992. I wasn't a coal miner as Zeigler grew
exponentially, from a company barely in the top 50 in 1985 to one of the five
largest coal companies today.
And I am not a coal miner today, in the strict sense of the word. Oh, I
know coal mining. I know well the massive construction and engineering that go
into today's huge mines... the mining practices that make for best surface and
underground operations... the land holdings and other deposits that accompany
coal mining... the vagaries of coal transportation... and, perhaps most
importantly, the complex issues surrounding coal markets... and coal customers.
My expertise, Zeigler's expertise, though, lies not in extracting coal
but in extracting value. Each of our three acquisitions, and each of the
thousands of decisions along the way, have been made with the single-minded
focus of creating value. And coal has been a critical ingredient in that value.
We target our value creation through a focus on sustainable, long-term
growth in revenue, earnings and cash flow. And, although that growth has not
always been linear, you can see for yourself what that focus has brought us.
Given that context, let's discuss the more recent past. When I took
over as CEO a year ago, the challenge was daunting.
Fundamental changes were taking place with utilities, our primary
customers. These changes were dramatically changing the way they did business.
And that had enormous implications for the way we did business.
In fact, the same day I became CEO, Phase I of the Clean Air Act
Amendments of 1990 took effect. This dramatically increased our customers'
appetites for low-sulfur coal.
In addition, utility deregulation was forcing our customers to really
compete for the first time.
At the same time, we were locked in disputes with three of our
customers.
I knew these challenges existed. I also knew that our strategies for
tackling these challenges were necessary. But I have since become convinced
that additional value-adding strategies can take us to a much higher level.
Our coal strategies had been threefold: to grow through productivity
improvements, internal investment and acquisitions. Let's take a look at each
one.
Productivity improvements have been crucial to success in an industry
where the average spot price has declined nearly 50% over the past decade.
While we have dramatically improved productivity, however, we as an industry
have failed to use these gains to increase margins. Instead, we have produced
additional coal at prices that simply cover the lower, incremental costs.
Internal investment is a constant necessity, of course. But such
investments within the form of greenfield development are rare, and for good
reason. By my own estimate, our industry has an overcapacity of about 150
million tons. The midwest is an excellent example of this.
We made the tough decision in 1995 to close some of the lowest-cost
mines in the Illinois basin. These mines produce coal in the $16 a ton range.
Yet in 1995 we sold coal here for as little as $11 a ton. These prices can only
be met by producers interested in volume, with no regard for margins. It
reminds me a bit of the grocer who said he lost a little on every sale, but
planned to make it up on the volume........... We have no intention of becoming
grocers.
That leaves us with acquisitions. In an industry with oversupply,
acquisitions and consolidation must continue for a variety of reasons.
Regulations and capital requirements are leaving the mom-and-pops behind. We've
gone from 6,000 coal mines 20 years ago to fewer than 2,000 today. And further
consolidation will come as aging mines close. It will come as long-term
contracts expire. And it will come as non-strategic producers are forced to
fight for capital. But the timing and scope of acquisitions are not something
that can be easily predicted.
Don't get me wrong. Despite these clear industry pathologies, let me
assure you that my optimism for coal has not wavered. I just think it is
important for you to clearly understand why our strategies must change
and why Zeigler's strategies have changed.
Coal does not exist in a vacuum. It is part of a chain of economic
value that includes a variety of links: engineering, construction, mining,
energy, transportation, clean air technologies, electricity generation, power
distribution and, finally, the end user. In short, far from being a discrete
industry, coal helps to propel an industry value chain that represents one-sixth
of the U.S. economy.
Now, because coal fuels more electricity in the United States than all
other sources combined, you might think that our industry has carved out a
dominant market and margin linkage along this value chain.
And you would be wrong.
As we've discussed, historically, we in the coal industry have allowed
ourselves to be isolated from the value in the rest of this chain. When there
have been problems along the chain, we have borne the brunt of the pressures.
And when there have been opportunities, we have too often been excluded.
The coal industry needs to strategically align itself with its
customers. At Zeigler, we intend to make that happen.
Becoming strategic players in other links in this value chain
both domestic and overseas is at the heart of our new corporate strategy.
We intend to access those links that allow us to boost margins
and to make best use of the reinvestment opportunities afforded us through our
very good cash flows.
That's why we are currently completing a major corporate reorganization.
We are now structured around a core corporate service staff along with three
primary growth units: coal, non-mining, and marketing/new business development.
The three strategies we discussed earlier productivity
improvements, internal investments, and strategic investments remain
crucial prongs in our coal growth unit. Our non-mining unit is focusing on
dramatically increasing contributions of previously underperforming assets and
businesses in the non-mining sector.
And, most importantly, our marketing and new business development group
has been charged with creating major new entries at strategic points along the
value chain.
Let's take a look at each growth unit, given our accomplishments in 1995
and where we see each one taking us in 1996 and beyond. I think you'll find
that we've given new meaning to the "three Rs" you heard of in school.
For us, this has translated into redefined markets, restructured operations,
and a revitalized corporation.
For our coal growth unit in 1995, we made tremendous strides:
- We took aggressive steps to idle or close our poorest performing
operations, thereby sharply improving our portfolio of coal mines.
- We dramatically transformed our company from a predominately high-sulfur
producer four years ago to one with an overwhelming low sulfur profile today.
The coalfields are littered with producers who were unable to do this as quickly
or as ably.
- We resolved all three customer contracts under dispute, each time
positioning the company for improved earnings and growth.
- And we achieved a record year in cash flow from operating activities that
allowed us to pay down more than $100 million in debt and fuel our future growth
engine.
I am extremely pleased with this progress in 1995. But these moves
were preliminary steps. And, as in the case of our announced closing of poor
performing Midwest mines, which had been severely impacted by poor market
conditions, these moves can even appear negative on the surface, as revenues
show a temporary decline.
In the Midwest, our focus is on aggressive liability management. This
is evidenced through our customary experience in controlling costs related to
reclamation, medical and black lung. It also is demonstrated by our more
creative efforts. Consider our donation of Old Ben Mine No. 25 to the National
Museum of Coal Mining. As a result, our reclamation liabilities have been
minimized, and the closed mine can live on to help educate future generations
on the importance of coal.
Our liability management is also reflected in our recently signed sales
transaction of our Indiana operations, which are expected to cap our liabilities
and provide moderate future cash flow and earnings growth over the next several
years.
Closing these Midwest operations has not been easy. But I believe this
sort of pruning is important for long-term growth.
So let me share with you some of the most promising projects from our
coal growth units.
- First, and largest, is North Rochelle. After several years of planning
and selling I am pleased to announce today that Zeigler is proceeding
with what will be the largest new coal mine developed in the nation in the past
decade. We anticipate selling 8 million tons of this supercompliance coal in
1998, with average yearly production in the 10 to 12 million ton range.
I said earlier that greenfield development rarely makes sense. I
believe this development is one such exception. North Rochelle brings the
perfect coal to a hungry market at the perfect time... as the utility industry
approaches the stricter limitations of Phase II of the Clean Air Act in the year
2000. In addition to having some of the lowest sulfur of any U.S. coal, North
Rochelle contains higher heating value than most other Wyoming mines. And North
Rochelle offers important transportation diversity, expanding our customer
universe.
Today, North Rochelle contains more than 175 million-tons in reserves,
providing a 15-year mine life. And we are taking steps to obtain an additional
block of nearly 200 million tons nearby.
We are very bullish on North Rochelle, and are pleased to already have
several contract customers signed up. These commitments add well over 50
million tons and more than 300 million dollars to our already extensive contract
backlog. We also retain sufficient uncommitted coal to take advantage of
anticipated price improvements as we move nearer to Phase II.
North Rochelle is an important element in our coal growth strategies,
but it's by no means our only one.
- We are in the latter stages of discussions to acquire reserves for the
development of a 1-million-ton-per-year mine in Eastern Kentucky. And we're in
negotiation for the sale of three-fourths of its first several years'
production. This mine should produce quality coal for at least seven years
beginning in 1997.
- And there's Mine No. 20, a metallurgical grade mine originally scheduled to
close in early 1995. Thanks to a motivated workforce, new thin-seam mine
equipment and additional reserves, the mine is still very much alive. In
addition, if our current efforts are successful, the operation will still be
profitably selling coal far beyond the turn of the century.
These are only examples. Each of our mines is developing plans to
improve productivity and expand markets and margins, and we are optimistic that
these mines will produce a steady stream of successes.
Now let's turn to our non-mining growth units. I am particularly proud
of their accomplishments in 1995, after we made the strategic decision that they
were to be managed not as surplus assets but as core businesses. The result?
Their contribution of EBIT more than quadrupled in 1995, and are expected to
increase by another 50% in 1996.
Continuing improvement from our non-mining growth units should come from
several sources:
It should come as revenues and margins improve for both import/export
terminals, as we take advantage of the strong global coal market and better
product mix.
Improvement should also come as we exit the demonstration phase and move
to greater commercial development of ENCOAL, our clean coal technology plant.
In fact, we're a step nearer to that thanks to the involvement of Mitsubishi
Heavy Industries, who has signed an agreement for feasibility studies related to
joint engineering and construction projects, and Mitsui, who intends to serve as
our agent for the sale of our clean coal product in Southeast Asia.
And improvement should come from better use of our hundred thousand
acres of land assets, leading to 20%-plus return projects in farming, timber,
oil and gas, ash disposal and other businesses.
Now let's look at some of the opportunities offered by our third growth
unit, which by nature is quite different from the other two.
Contrary to the first two operating units, Marketing and New Business
Development has no operating or even sales duties on a day-to-day basis. It has
one overriding purpose: to define, locate and land high-return projects and
businesses at strategic points along our value chain.
How does access to links on a value chain differ from traditional
vertical integration? Well, first of all, it involves accessing those links of
the chain that offer the highest returns, rather than simply attempting to
digest the entire chain. But, more importantly, it can come through strategic
alliances in integrated projects the sharing of equity positions with
equally skilled partners at various points along the chain.
Discussing specific opportunities is dangerous, given that several of my
competitors are sitting right here in this room. Still, I can give you a flavor
of several of the projects being explored.
Each of the links on the value chain exists domestically and overseas.
And, while the partnering concept is particularly appealing, each of these links
offer entry points through organic development, strategic alliances or full
equity positions.
- That means we could take our surplus talent in efficient mining and put it
to good use developing a low-risk, high-return international mining consulting
venture.
- That means we could combine our resources with other players and approach
entire integrated projects for fuel, transportation, generation and distribution
of electricity.
- And that means that we could make a major acquisition of a player anywhere
along the value chain, from pure producer to pure distributor.
Already, in the past several months we have signed a letter of intent
with a partner to determine the feasibility of a major power plant/coalfield
project overseas. We have been in advanced negotiations with power marketers
negotiations that could provide an entree into the electricity markets in a
variety of ways. And, yes, we have explored strategic purchases of low-sulfur
reserves and operations within coal domestically and these discussions
have already paid dividends.
Redefining, restructuring, revitalizing. Opportunities domestically and
globally in coal mining, non-mining and new business development.
Zeigler's success has come from anticipating markets, moving to meet
them, improving productivity, making good investments, and managing businesses
as core assets. Our success has come from adding value.
Today, I tell you that Zeigler has turned a corner. Not because we are
pursuing high-return businesses that add shareholder value we have always
done that. But because we are committed to participating along strategic links
links in an integrated value chain that dramatically increase our upside.
As one of Zeigler's largest shareholders, I can tell you today that I
have never felt better about our future prospects, as we continue to manage the
business for strong growth in revenues, earnings and cash flow.
And I appreciate the opportunity to share this enthusiasm with you
today.
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