Chand B. Vyas Remarks
1996 Annual MeetingMay 7, 1996
Good morning.
In our short time here this morning, I intend to briefly review our
1995 results within the context of our strategies. I intend to update you on
your company's performance since year end. And I intend to offer some insight
into the strategies we began implementing in 1995, and the fruits they have
borne since that time.
First, Zeigler by the numbers. In 1995, we generated 784 million
dollars in revenue, an 8% decline from 1994. Before special items, our earnings
totaled 43 million dollars, a 12 percent increase over the prior year. And our
cash flow hit a record 171 million dollars, up 8 percent from 1994. These
results translated into a 20% increase in overall return to you, our
shareholders, based on share price appreciation plus dividends.
This
performance came about within a transitional climate. At the beginning of 1995,
Zeigler faced a number of market-based challenges, that I'll review in a moment.
We have made significant strides since that time. We greatly
strengthened our business and our prospects as the year developed. And, while I
believe our 1995 performance was impressive given these challenges, I believe
greater successes lay ahead as we more fully implement these strategies.
Zeigler's reorganization in 1995 has resulted in a corporate services
group and three independent growth units. Let's take a brief look at the 1995
performance of these three units.
COAL SEGMENT
Our coal growth unit in 1995 faced the most challenges, but has made
tremendous strides to overcome these challenges and position our coal operations
for improved growth.
The challenges fall into several primary categories. First of all, as
a result of the Clean Air Act, utilities have been dramatically altering their
choice of coal in favor of low-sulfur supplies. Second, the coal industry
continues to experience a general oversupply position as a number of producers
seem committed neither to strategically participate in the industry nor to exit.
As a result, they produce incremental tonnage at below full-cost, thereby
skewing real supply/demand economics and continuing a general downward national
pricing trend. And third, our customers face extensive competition that require
new solutions and new partners.
Let me explain how we have addressed
these issues and planted the seeds for future growth.
First of all, we made the difficult but necessary decisions to
dramatically alter our production profile in favor of low-sulfur coal. As a
result, where Zeigler's production in 1990 consisted almost exclusively of
high-sulfur coal, by year's end more than three-fourths of our sales will be in
low-sulfur coal. This has resulted in the idling or closing of four Illinois
basin mines between 1995 and 1996, the earnings impact of which was reported in
our 1995 numbers. Moving forward, we continue to increase our sales of
low-sulfur coal both in Appalachia and the Powder River Basin. In fact, new
business signed in 1995 could total as much as 75 million tons of new business,
for terms that extend up to 15 years.
Second, we positioned the company to improve coal margins by
continuing our trend toward lower production costs. Despite temporary
inefficiencies caused by operating certain Illinois basin operations at reduced
volumes, we continued an 11-year trend of productivity improvements. Average
costs per ton for the year decreased 42 cents to $17.52 in 1995.
The company successfully resolved all customer litigation.
And we proactively pursued ways to preserve or increase shareholder value while
assisting customers as they move toward a deregulated environment.
NON-MINING SEGMENT
In 1995, we made the decision to unite our surplus land assets and
other non-mining businesses under the Americoal Development Company umbrella.
The result of this strategic spotlight was impressive, as our non-mining unit
more than quadrupled its earnings contribution in 1995.
Americoal has embarked upon a bold plan to triple non-mining earnings
over the next five years by maximizing revenues and earnings from our land,
transportation and environmental businesses, developing new businesses and
divesting unprofitable and non-strategic assets.
In 1995, our two
East Coast terminal businesses increased throughput by 82 percent, taking
advantage of an improved global market for U.S. coal. Our Phoenix Land Company
succeeded in improving utilization of land assets through greater coal
leaseouts, new business developments in timber, farming and limestone, and
surplus asset sales. And our Encoal Corporation and Tek-kol partnership
successfully advanced our proprietary clean coal technology and signed letters
of intent with three foreign entities to develop plants based on the technology.
MARKETING / NEW BUSINESS DEVELOPMENT
While our first two growth units have strong operating responsibilities,
our third growth unit is very much different.
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
seeks new ways to improve margins for existing businesses. And it seeks to
define, locate and land businesses within coal and other strategic links along
our value chain.
The reason for this is that coal does not exist in a
vacuum. It is part of a chain of economic value that includes a variety of
links: engineering, mining, land, transportation, environmental businesses,
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.
Even so, 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.
Becoming strategic players along this value chain is at the heart of
our new strategy within Marketing and New Business Development and indeed
throughout the entire Zeigler family of companies.
1996 INDICATORS
I told you at the beginning of my talk that our actions in 1995 were
important to pave the way for our future success. The first quarter provided a
good example of this.
At the end of 1995, we reported that we were
looking to several specific areas for improvement. We targeted improved
productivity, particularly in Appalachia. We targeted improved profits from
idling a high-cost operation and outsourcing the contract from that mine. We
targeted increased profits in the Midwest due to reduced exposure to uncommitted
high-sulfur coal. We targeted increased earnings by our non-mining segment.
And we targeted reduced interest expense. Looking at our first quarter results,
I am pleased to report that we are on target in each of these areas.
The first quarter is historically not our best, nor was it in the past
two years. Still, we earned 36 cents per share in the first quarter, which was
a 64 percent increase over the first quarter of 1995. We did so with a 33
percent increase in operating income by our coal segment, and a 35 percent
improvement in operating income by our non-mining segment. Our production cost
per ton decreased in every region, and the spread between the price per ton sold
and production cost widened 62 percent.
We also planted seeds for future progress within all three growth
units in the first quarter. I'll quickly recount some of our successes to date.
Within our coal growth unit, we began development of one major new
low-sulfur coal mine, and reached agreement to begin another one.
We purchased additional coal reserves that allow for increased
production at another low-sulfur mine, and developed plans to extend until at
least 1998 the life of a coal mine that was originally slated to close in 1995.
Within our non-mining growth unit, we announced that Tek-kol, the
clean coal technology partnership, had signed an agreement with Mitsubishi Heavy
Industries for advanced 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 within our Marketing and New Business Development growth unit, we
announced that a joint Zeigler/NRG proposal to purchase the non-nuclear assets
of Cajun Electric Cooperative had been incorporated into a plan filed by the
federal bankruptcy trustee.
Overall, through the steps we made in
1995 and the progress to date so far in 1996, I feel good about our direction
and the future results we can attain for you, our fellow shareholders.
On behalf of the board of directors, executives and other employees
of Zeigler Coal Holding Company, we appreciate your support in the past, and
look forward to serving you in the future.
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