Warrior Met Coal, Inc.

Good afternoon. My name is Kate and I will be your conference operator today. At this time, I would like to welcome everyone to the Warrior Met Call First Quarter 2020 Financial Results Conference Call. All the lines have been placed on mute to prevent any background noise. After the speaker's remark, there'll be a question and answer session. If you would like to ask a question during this time, Simply press the star, then the number one on your telephone keypad. If you would like to withdraw your question, please press the pound key. This call is being recorded and will be available for replay on the company's website. Thank you. Before we begin, I've been asked to note that today's discussion may contain forward-looking statements and actual results may differ materially from those discussed. For more information regarding forward-looking statements, please refer to the company's press release and the SEC filing. I've also been asked to note that the company has posted reconciliation of the non-GAAP financial measures discussed during this call in the tables accompanying the company's earnings press release located on the investor section of the company's website at www.warriormetcoal.com. In addition to the earnings release, the company has posted a brief supplemental side presentation to the investor section on its website at www.warriormetcoal.com. Here to discuss the results are Mr. Walt Scheller, Chief Executive Officer, and Mr. Dale Boyles, Chief Financial Officer. Mr. Scheller, you may begin your remarks.

Thanks, operator. Hello, everyone, and thank you for taking the time to join us today to discuss our first quarter 2020 results. After my remarks, Gail will review our results in additional detail, and then you'll have the opportunity to ask questions. We were pleased to achieve higher-than-expected sales and production volumes for the first quarter than we previously communicated to you on our last earnings call. However, as we also said on that call, the COVID-19 outbreak could be a significant threat to Seabourn Metco prices until we could get more clarity on containment of the virus and businesses got back to operating as usual. And that indeed has turned out to be the case. I will come back to that thought in a few minutes. First, I'd like to discuss how the widespread outbreak of COVID-19 has affected us all in new and unprecedented ways. While we continue to operate our minds as a critical infrastructure business in the state of Alabama, these are challenging times and I would like to thank all of our employees for their hard work and resilience in the face of adversity. We've taken the necessary measures to adjust our workplace environment to comply with social distancing and personal hygiene guidelines set forth by various health organizations while maintaining our operations. While I know the future is on everyone's minds, let's take a minute to look at the first quarter results in more detail since they do provide an important baseline. Production volume in the first quarter of 2020 was 2.1 million short tons compared to 2.3 million short tons produced in the same quarter of last year, a decrease of 9%. Sales volumes in the first quarter were 1.8 million short tons compared to 2.1 million short tons in last year's first quarter. Our sales by geography in the first quarter were 54% into Europe, 26% into South America, and 20% into Asia. The geographical mix this year was fairly consistent with last year's first quarter. As expected and previously communicated, inventories were higher at the end of the first quarter than the fourth quarter of 2019. Inventories increased 229,000 short tons to 978,000 short tons during the first quarter, primarily due to higher production volumes. We expect our inventory levels to remain temporarily elevated as a precautionary measure to reduce risk should the mines be disrupted or shut down by a COVID-19 outbreak among the workforce. Also, the higher than normal inventory levels will allow us to capitalize on market opportunities that may become available as a result of our competitors being idled or shut down for lengthy periods of time. We entered the first quarter cautiously optimistic about our customers' ability to start ramping up production rates from the low levels in the fourth quarter of 2019. Global pig iron production for the first three months of the year was down by half of 1%, with positive growth from China of 2.4%, partially offset by a sharp decline of 5.4% observed across the rest of the world. As the quarter progressed, all major met coal indices increased due to the local dynamics in China, where resilient demand from the integrated steel mills was challenged by three temporary supply constraints. First, the drastic reduction in domestic met coal production as a result of lockdown measures in China due to COVID-19. Second, the closure of the Mongolian border in order to reduce the spread of COVID-19. And third, weather-related disruptions in the Australian supply chain. Metco indices peaked in mid-March as these supply constraints were eventually addressed and started retreating, giving back most of their gains. As the impact of the virus on global steel demand outside of China became apparent, our customers were quick to adjust to the threat posed by the virus, taking measured actions starting in early March to align their production rates with the declining forecast and orders. As expected, several spot customers withdrew existing and future tenders due to rapidly deteriorating conditions. The supply response from major U.S. and Canadian-based Metco producers has been significant, with a fairly large amount of production being temporarily taken offline. The Platts premium low vol FOB Australian index price closed the first quarter of 2020 $8 a metric ton higher than where it started the quarter. Metcalfe prices rose as high as $164 per metric ton during the first quarter before falling late in the quarter. Our gross price realization for the first quarter of 2020 was 89% of the Platts Premium Low Ball FOB Australian Index price and was lower than our 98% achieved in the prior year period. Our lower realization was primarily due to our rising price environment combined with a higher proportion of spot sales. The company spent $26 million on capital expenditures and mine development costs during the first quarter this year compared to $30 million last year. This amount includes the low wall panel development costs for the extension of Mine 4 into the next area of the mine plan we call 4 North. We expect to be mining in that area sometime in the next four to five years. I'll now ask Dale to address our first quarter results in greater detail.

Thanks, Walt. For the first quarter of 2020, net income on a GAAP basis was approximately $22 million, or 42 cents per diluted share, compared to net income of $110 million, or $2.14 per diluted share in the first quarter of 2019. Excluding non-recurring other income and losses, non-GAAP adjusted net income for the first quarter was $20 million, or 39 cents per diluted share, compared to $2.30 per validity share in the first quarter of 2019. Adjusted EBITDA was $62 million in the first quarter of 2020 as compared to adjusted EBITDA of $181 million in the same period of 2019. The quarterly decrease was primarily driven by a 31% decrease in average net selling prices and a 13% decrease in sales volumes. Our adjusted EBITDA margin was 27% in the first quarter of 2020, compared to 48% in the first quarter of 2019. Total revenues were approximately $227 million in the first quarter of 2020, compared to $378 million in the same period last year. This decrease was primarily due to the decrease in average net selling prices and sales volumes in a weaker market environment than last year. The average net selling price per short ton decreased approximately 31% in the first quarter of 2020, compared to the same period in 2019. As you may recall, last year's first quarter saw stronger met coal demand and higher pricing. The Platts Premium Low Ball FOB Australian Index averaged $51 per ton lower in the first quarter of 2020, compared to the same quarter last year. The merge and other charges reduced our gross price realization to an average net selling price of $122 per short ton in the first quarter of 2020, compared to $176 per short ton in the same period last year. Mining cash cost of sales was $151 million, or 68% of mining revenues in the first quarter, compared to $182 million, or 49% of mining revenues in the first quarter of 2019. Cash cost of sales per short-time FOB port was approximately $83 in the first quarter, compared to $87 in the same period of 2019. The decrease is primarily due to lower price-sensitive costs, such as transportation and royalties, that vary with net coal pricing, offset partially by 13% lower sales volumes. SG&A expenses were about $8 million, or 4% of total revenues in the first quarter of 2020, compared to approximately $9 million in the prior year period, primarily due to lower corporate expenses. Depreciation and depletion expenses for the first quarter of 2020 were $29 million, compared to $22 million in 2019. The increase quarter over quarter was primarily due to the high level of capital spending during 2019. Net interest expense was about $8 million in the first quarter and included interest on our outstanding debt plus amortization of our debt issuance costs associated with our credit facilities, partially offset by interest income. This amount was $1 million lower compared to the same period last year, primarily due to the early retirement of a portion of our debt in last year's first quarter. We recorded non-cash income tax expense of $3 million during the first quarter of 2020 and $28 million in the same period last year. These results primarily reflect the utilization of our net operating losses, or NOLs, with a corresponding decrease in the balance sheet account deferred income taxes. We paid no cash taxes in the first quarter of 2020 or 2019. We continue to expect the utilization of our NOLs will reduce our federal and state income tax liability to zero until the NOLs are fully utilized or expire. We expect this will continue to drive significant free cash flow conversion over the next several years. Turning to cash flow, during the first quarter of 2020, we used $5 million of free cash flow, which was the result of cash flows provided by operating activities of $21 million, less cash used for capital expenditures and mine development costs of $26 million. Free cash flow in the first quarter of 2020 was negatively impacted by an increase in net working capital. The increase in net working capital was primarily due to higher accounts receivable and inventory, partially offset by an increase in accounts payable. operating cash flows were significantly lower in the first quarter of 2020 compared to 2019, primarily due to lower average net selling prices of 31% and lower sales volumes of 13%. Cash used in investing activities primarily for capital expenditures and mine development costs was $20 million during the first quarter of 2020 compared to $30 million for the same period last year. Cash flows provided by financing activities were $63 million in the first quarter of 2020 and consisted primarily of the draw on our ABL facility of $70 million as a precautionary measure, less payments for capital leases of $4 million, and less payment of the quarterly dividends of $3 million. Of note, our balance sheet remained strong with a leverage ratio of 0.52 times adjusted EBITDA, In addition, we have ample liquidity without the fixed costs associated with legacy liabilities and a low and variable cost structure. Our total available liquidity at the end of the first quarter of 2020 was $303 million, consisting of cash and cash equivalents of $257 million and $46 million available under our ABL facility. Net of borrowings of $70 million and outstanding letters of credit of approximately $9 million. As I mentioned earlier, we drew $70 million on our ABL facility as a precautionary measure to increase liquidity and reduce risk during these unprecedented times. We intend on retaining the funds and cash to preserve liquidity amid the growing uncertainty surrounding the COVID-19 outbreak. In summary, the first quarter results for production and sales volumes turned out as expected and previously disclosed. The overall financial results were primarily driven by lower net selling prices and slightly lower sales volumes compared to last year's first quarter. Now turning to our outlook for the remainder of the year. In light of the uncertainties regarding the duration of the COVID-19 pandemic and its overall impact on the global economy and the company's operations, we are withdrawing our full year 2020 guidance issued on February 19th at this time. We're also appropriately adjusting operational needs, including managing expenses, capital expenditures, working capital, liquidity, and cash flows. For example, as precautionary measures, we have delayed the $25 million budgeted for the development of the Blue Creek project until at least July 1st, 2020, and have temporarily suspended our stock repurchase program. We will continue to evaluate the impact of the COVID-19 pandemic on our business for the remainder of the fiscal year and expect to provide further updates to our financial outlook and the development of the Blue Creek project during our second quarter earnings call to be held in late July. We'll continue to pay our quarterly dividend at this time, but we'll continue to monitor liquidity in light of the COVID-19 pandemic. I'm now turning it back to Walt for his final comments.