Warrior Met Coal, Inc.

good afternoon my name is Andrew and I will be your conference operator today at this time I would like to welcome everyone to the warrior met coal second quarter 2020 financial results conference call all lines have been placed on mute to prevent any background noise after the speaker's remarks there will be a question and answer session if you would like to ask a question during this time simply press star then the number one on your telephone keypad. If you would like to withdraw your question, please press star then two. If you require operator assistance, please press star then zero. This call is being recorded and will be available for replay on the company's website. Before we begin, I have 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 SEC filings. I have also been asked to note that the company has posted reconciliations of the non-GAAP financial measures discussed during this call in the tables accompanying the company's earnings press release located on the Investors section, of the company's website at www.warriormetcoal.com. In addition to the earnings release, the company has posted a brief supplemental slide presentation to the investors section of its website at www.warriormetcoal.com. Here today to discuss the company's results are Mr. Walt Scheller, Chief Executive Officer, and Mr. Dale Boylas, 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 second quarter 2020 results. After my remarks, Dale will review our results in additional detail, then you will have the opportunity to ask questions. The second quarter was a very challenging environment as the COVID-19 pandemic continued its spread and disruptive impact on the U.S. and global economies. We saw material cuts in steel production across our key geographies that led to lower demand for met coal. In addition, met coal pricing hit a four-year low point in early June. These key factors had a significant impact on our financial results for the second quarter, as we will explain in further detail. 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. 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. I would also like to thank our supply chain partners who have adapted their operations during this pandemic to ensure that all of Warrior's customers receive their orders on time. As the quarter progressed, the full impact of COVID-19 on the global steel markets became apparent, with customers taking decisive actions to align their production levels with reduced demand. These actions have varied from simple operating rate adjustments to the idling of blast furnaces and, in some cases, the intent to permanently close down older and less efficient production lines. The results of these actions can now be measured through the global pig iron production data from the World Steel Association, where most of the steel-producing regions, excluding China, were down significantly, an average of 20 to 35 percent for the second quarter. For the first six months of the year, global pig iron production was down 3.6%, while China continued to surprise to the upside, growing its production by 2.2% for the same period. It's worthwhile pointing out that India's pig iron production, which is of growing importance to the global met coal seaborne trade, was down over 32% for the second quarter compared to last year. The rapid onset of production cuts across most of the world quickly translated into a softening met coal market. resulting in a price correction for met coal. Despite several announced production cuts from met coal suppliers, the rate of decline in demand was simply too steep, far outpacing the supply response. On April 1st, the Australian PLV was valued at $145 per metric ton before being impacted by a major correction, losing almost 27% of its value prior to reaching its low point for the quarter of $106 per metric ton on June 2, a valuation not seen since 2016. By the end of the quarter, the index regained a small portion of its losses, closing at $116 per metric ton. In addition to being challenged with lower index prices, Metco producers were also impacted by lower relativities due to increased competition on fewer spot opportunities. And in some cases, cold blend adjustments made by customers as a result of increased coking times and other cost-cutting measures. There's little doubt that these pricing levels have cut deep into the global cost curve with several met coal producing regions trading at or below their cash costs. While I know many people are thinking about what this means for future quarters, let's take a minute to look at the second quarter results in more detail since they do provide an important data point. Sales volumes in the second quarter were 1.5 million short tons compared to 2.2 million short tons in last year's second quarter, which was a record quarter for Warrior. Our sales by geography in the second quarter were 75% into Europe and 25% into South America. There were no sales into Asia in the second quarter this year compared to 18% in the same period last year as a result of customers significantly cutting back on steel production in countries such as Japan and South Korea. Production volume in the second quarter of 2020 was 2.1 million short tons compared to 2.2 million short tons produced in the same quarter last year. As expected and previously communicated, inventories were higher at the end of the second quarter than the first quarter of 2020. Inventories increased 593,000 short tons to 1.6 million short tons during the second quarter. primarily due to lower sales volumes. We expect our inventory levels to temporarily remain elevated as a precautionary measure to reduce the risk should the mines be disrupted or shut down by a COVID-19 outbreak among our workforce. Also, the higher the normal inventory levels will allow us to capitalize on market opportunities that may become available as a result of our competitors being idle or shut down for lengthy periods of time. Our gross price realization for the second quarter of 2020 was 100% of the PLATS premium low vol FOB Australian index price and was higher than the 97% achieved in the prior year period. Our higher gross price realization was primarily due to the falling price environment during the month of June. The company spent $31 million on capital expenditures and mine development costs during the second quarter of this year compared to $34 million in the same period last year. This amount includes a long wall panel development cost for the Four North Portal. We will continue to balance our free cash flow and liquidity preservation against maintenance and discretionary capital spending and the long-term value of capital projects for the remainder of this year. I'll now ask Gail to address our second quarter results in greater detail. Thanks, Walt.

As Walt discussed, the overall financial results for the second quarter were primarily driven by a significant reduction in U.S. and global economic activity as a result of the spread of COVID-19 this year, compared to a fairly robust market environment in the second quarter last year. In addition, last year's second quarter was a record quarter for Warrior in terms of both sales and production volumes. These combined factors led to 34% lower sales volumes and 38% lower average net selling prices, slightly offset by lower costs on tighter spending compared to last year's second quarter. As a result of the company's highly variable cost structure, these factors explain the majority of the financial variances in the second quarter compared to the same period last year. For the second quarter of 2020, the company recorded a net loss on a gap basis of approximately $9 million, or a loss of 18 cents per diluted share, compared to net income of $125 million or $2.43 per diluted share in the second quarter of 2019. Non-GAAP adjusted net loss for the second quarter was $9 million or a loss of 18 cents per diluted share compared to $2.16 of income per diluted share in the second quarter of 2019. Adjusted EBITDA was $20 million in the second quarter of 2020 as compared to $176 million in the same period of 2019. The quarterly decrease was primarily driven by a 34% decrease in sales volume and a 38% decrease in average net selling prices. Our adjusted EBITDA margin was 12% in the second quarter of 2020 compared to 44% in the second quarter of 2019. Total revenues were approximately $164 million in the second quarter of 2020 compared to $398 million in the same period last year. This decrease was primarily due to the decrease in sales volumes and average net selling prices in a weaker market environment due to the impact of COVID-19. The average net selling price per short time decreased approximately 38% in the second quarter of 2020 compared to the same period in 2019. As you may recall, last year's second quarter saw stronger met coal demand and higher pricing. The Platts Premium Low Vol FOB Australian index price averaged $85 per metric ton lower in the second quarter of 2020 compared to the same quarter last year. The index price hit a four-year low of $106 per metric ton or $96 per short ton in early June. The mortgage and other charges reduced our gross price realization to an average net selling price of $108 per short ton in the second quarter of 2020 compared to $173 per short term in the same period last year. Mining cash cost of sales was $130 million or 82% of mining revenues in the second quarter compared to $205 million or 53% of mining revenues in the second quarter of 2019. The decrease of $75 million or 37% and cash cost of sales was primarily attributable to three factors. One, a 34% decrease in sales volume. Two, a 38% decrease in average net selling prices. And three, tighter cost management in 2020. It is noteworthy to highlight the company's variable cost structure in the second quarter, where cash cost of sales decreased $21 million, or 14%, from the first quarter of 2020 as sales volumes were lower by 19%, and average net selling prices were 11% lower. Cash cost of sales per short-ton FOB port was $88 in the second quarter, compared to $91 in the same period of 2019. The decrease is primarily due to lower price-sensitive costs such as wages, transportation, and royalties that vary with met coal pricing. While our cost per ton FOB port was higher in the second quarter compared to the first quarter of 2020, the change in volumes somewhat distorts the picture of total spending. As I pointed out earlier, a total spending on cash cost of sales declined 14% from the first quarter, and volumes were 19% lower. SG&A expenses were about $8 million, or 5% of total revenues in the second quarter of 2020, and were 22% lower than the prior year period. primarily due to lower professional fees and employee-related expenses. Appreciation and depletion expenses for the second quarter of 2020 were $22 million and were 14% lower than the same period last year. The decrease quarter over quarter was primarily due to lower sales volumes. Net interest expense was about $8 million in the second 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 higher compared to the same period last year, primarily due to incremental borrowings on our ABL facility and lower returns on cash balances. We recorded a non-cash income tax benefit of $4 million during the second quarter of 2020, compared to income tax expense of $33 million in the same period last year. Turning to cash flow, during the second quarter of 2020, free cash flow was positive, which was the result of cash flows provided by operating activities of $32 million, plus cash used for capital expenditures and mine development costs of $31 million. Free cash flow in the second quarter of 2020 was positively impacted by a decrease in net working capital. The decrease in net working capital was primarily due to lower accounts receivable, offset partially by higher inventory. Operating cash flows were significantly lower in the second quarter of 2020 compared to 2019, primarily due to lower sales volumes and lower average net selling prices. Cash use and investing activities for capital expenditures and mine development costs were $31 million during the second quarter of 2020, compared to $34 million for the same period last year. While spending was lower by 9% this year, we continue to rationalize spending in this challenging market environment. Cash flows used by financing activities were $37 million in the second quarter of 2020 and consisted primarily of the repayment on our ABL facility of $30 million, payments for capital leases of $4 million, and the payment of the quarterly dividend of $3 million. Of note, our balance sheet remains strong with a leverage ratio of 0.9 times adjusted EBITDA. In addition, we have adequate liquidity in light of the fact we have shed our fixed cost legacy liabilities and today have a low and variable cost structure and no near-term debt maturities. Our total available liquidity at the end of the second quarter of 2020 was $268 million consisting of cash and cash equivalents of $221 million and $47 million available under our ABL facility, net of borrowings of $40 million, and outstanding layers of credit of approximately $9 million. Our strong balance sheet and total liquidity position allowed us to pay back $30 million on the ABL facility to keep our interest costs low. Now, turning to our outlook for the remainder of the year. On April 29th, in light of the uncertainties regarding the duration of the COVID-19 pandemic, its overall impact on the global economy and the company's operations, we withdrew our full-year 2020 guidance. We initially delayed the development of the Blue Creek project until at least July 1st, and have now further delayed that project until at least the early part of 2021. This decision is not based on changes in the perceived value of the project, but rather on our short-term focus of preserving cash and liquidity. We also 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 next quarterly earnings call. We also are continuing to appropriately adjust our operational needs, including management expenses, capital expenditures, working capital, cash flows, and liquidity. I'll now turn it back to Walt for his final comments.