Warrior Met Coal, Inc.

Good afternoon. My name is Rocco, and I will be your conference operator today. At this time, I would like to welcome everyone to the Warrior Met Cool third 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. This call is being recorded and will be available for replay on the company's website. 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 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 investor 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 investor section of its website at www.warriormetcool.com. Here to discuss the company's 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 third quarter 2020 results. After my remarks, Dale will review our results in additional detail and then you will have the opportunity to ask questions. The third quarter presented a challenging market environment as the COVID-19 pandemic continued its disruptive impact on the U.S. and global economies. Although the steel and met coal industries operated well below their normal yearly levels, we started to see higher sales volumes in the third quarter compared to the second quarter as customers in our key markets began to increase their operating rates and restock their inventories. However, we cannot say the same on pricing as we experienced our lowest average realized met coal price since becoming a publicly traded company. Despite these challenging headwinds, in particular on met coal pricing, we were pleased once again to be free cash flow positive for the quarter. We've remained focused on preserving cash, liquidity, and managing the aspects of the business that we can control, achieving our lowest cash cost per short-ton since going public. At the same time, we carefully balanced our spending on longer-term capex investments to keep us uniquely well-positioned to benefit from the eventual recovery in steel production, met coal demand, and pricing. We continue to take the necessary measures to adjust our workplace environment to comply with social distancing and personal hygiene guidelines set forth by various health organizations to protect the health and safety of our employees while maintaining our operations. While we continue to operate our mines 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 been fortunate to keep our people employed during these unprecedented times, whereas others in the industry have had to idle their operations and furlough employees. We said on our last earnings call that we expected the worst to be behind us in terms of demand and expected the third quarter to bring higher sales volume, as well as better visibility from our customers. We're pleased to see that most geographies and steel-related sectors are performing in line with these expectations. As reported by World Steel Association, pig iron production for the third quarter rose by 4.5% compared to the second quarter. China's pig iron production has maintained a strong performance throughout the year, having produced 3.8% above last year's for the first nine months. Although the majority of the regions outside of China have displayed continuous month-over-month growth from the earlier lows in the second quarter, their output remains lower year-over-year by 12.9%. India has made a noticeable increase in pig iron production in the last three months and appears to be near their pre-COVID-19 production rates. Warrior's stronger sales volumes for the third quarter were mostly due to the improvement in demand as previously mentioned. However, we believe that our third quarter sales volumes benefited from some level of restocking by our customers that had overshot production curtailments earlier in the year and who were also taking advantage of the low market prices. We did not expect this restocking to be repeated in the fourth quarter, as most customers appear to be well-stocked heading into year end. Our fourth quarter sales volumes are expected to be in between the low point of the second quarter and the third quarter. We also entered the third quarter with reservations about pricing, which turned out to be true. The absence of clarity concerning Chinese import quotas, as well as the perception of a well-supplied market, kept all major indices tightly range bound for most of the quarter. The Platts premium low vol FOB Australian index price oscillated between $105 per metric ton and $116 per metric ton for the first 11 weeks of the third quarter. However, following an increase in buying activity in China and India, as well as further indication of demand recovering outside of China, the indices broke through their resistance level around mid-September. closing the quarter at a high of $139 per metric ton. As a steep climb in pricing occurred in the back end of the quarter, this limited our ability to capture the benefit of the rise in our realized pricing. Similar to the challenges we experienced in the second quarter, we chose to decline several spot opportunities that failed to meet our profitability thresholds. Sales volumes in the third quarter were 1.9 million short tons compared to 2 million short tons in last year's third quarter. Our sales by geography in the third quarter were 51% into Europe, 27% into South America, and 22% into Asia. These higher volumes were a nice rebound from the low volumes in the second quarter. If you remember from our second quarter earnings call, we said that the second quarter should be the worst in terms of reduced steel production and met cold demand. However, we also remained concerned about pricing for the remainder of the year. Production volume in the third quarter of 2020 was 1.9 million short tons compared to 2.2 million short tons in the same quarter of last year. This aligns with our thinking on our last earnings call, where we said we expected to better match our sales and production volumes in the second half of 2020. As planned and previously communicated, inventories remained elevated at the end of the third quarter compared to the second quarter. Inventory slightly decreased 58,000 short tons to 1.5 million short tons during the third quarter. We expect our inventory levels to temporarily remain elevated as a precautionary measure to reduce risk should the mines be disrupted or shut down by a widespread 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 idled or shut for lengthy periods of time. Our gross price realization for the third quarter of 2020 was 90% of the PLATS premium low vol FOB Australian index price and was lower than 102% achieved in the prior year period, which included a rapidly decreasing price environment. Our lower gross price realization was primarily due to the rapidly rising price environment of 28 percent in the month of September and a higher percentage of our sales being exposed to spot sales with lower relativities due to a fundamental oversupply in the marketplace. Our spot sales in the third quarter was approximately 50 percent compared to a normal expectation of approximately 20 percent. The company spent $28 million on capital expenditures and mine development costs during the third quarter compared to $33 million in the same period last year. This amount includes the Longwall Panel development costs for the 4North 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 will now ask Dale to address our third quarter results in greater detail.

Thanks, Walt. As Walt discussed, the overall financial results for the third quarter were primarily driven by a significant reduction and U.S. and global economic activity as a result of the spread of COVID-19 this year compared to a fairly robust market environment last year. Our third quarter was about balancing competing priorities. We ran the mines without idling or laying off employees while keeping our costs low in an extremely depressed and challenging price environment. We balanced those results with continuing to make significant CapEx and mine development investments. Our ability to remain free cash flow positive for the third quarter was an important outcome of the success of our balancing act. Overall, our total liquidity increased by $12 million from the second quarter to $280 million at the end of the third quarter. For the third quarter of 2020, the company recorded a net loss on a gap basis of approximately $14 million, or a loss of 28 cents per diluted share. compared to net income of $45 million, or 87 cents per diluted share, in the same quarter last year. Non-GAAP adjusted net loss for the third quarter was $14 million, or a loss of 28 cents per diluted share, compared to 79 cents of income per diluted share in the third quarter of 2019. Adjusted EBITDA was $16 million in the third quarter of 2020, as compared to $83 million in the same quarter last year. the quarterly decrease was primarily driven by a 36% decrease in average net selling prices. Our adjusted EBITDA margin was 9% in the third quarter of 2020 compared to 29% in the same quarter last year. Total revenues were approximately $180 million in the third quarter of 2020 compared to $288 million in the same quarter last year. This decrease was primarily due to the 3% decrease in sales volumes and the 36% decrease in average net selling prices in a weaker market environment due to the impact of COVID-19. As you may recall, last year's third quarter saw stronger net coal demand and higher pricing. The Platts Premium Low Ball FOB Australian Index price averaged $47 per metric ton lower, or 29% lower, in the third quarter of 2020 compared to the same quarter last year. The index price remained range-bound most of the third quarter until the final month of September. The merge and other charges reduced our gross price realization to an average net selling price of $91 per short ton in the third quarter of 2020, compared to $141 per short ton in the same quarter last year. Mining cash cost of sales was $151 million, or 86% of mining revenues, in the third quarter. compared to $189 million or 67% of mining revenues in the third quarter of 2019. The decrease of $39 million or 21% in cash cost of sales was primarily attributable to three factors. One, a 3% decrease in sales volume. Two, a 36% decrease in average net selling prices. And three, tighter cost management in 2020. Cash cost of sales per short ton, FOB port, was approximately $78 in the third quarter compared to $95 in the same period of 2019. Our third quarter cash cost of sales per short ton was the lowest quarterly amount since going public in 2017. The decrease from last year's same quarter was primarily due to lower price-sensitive costs such as wages, transportation, and royalties that vary with met coal pricing and tightly managing our costs in a challenging price environment. The tons sold in the third quarter were mostly mined in the second quarter at low met coal prices under highly efficient mining rates and with a continued focus on cost reduction. In addition, we sold a higher percentage of lower cost mine seven low ball coal in the third quarter than the second quarter. This lag effect is primarily due to the high levels of inventory on hand this year. We do not expect a similar cash cost per short-term in the fourth quarter, primarily due to the lower expected volumes, as Walt mentioned earlier. We expect total cash cost of sales dollars to be similar to the third quarter on lower sales volumes, which will result in a higher cash cost of sales on a per short-term basis. SU&A expenses were about $8 million, or 4.5 percent of total revenues in the third quarter of 2020. and were 12.5% lower than the same quarter last year, primarily due to lower professional fees and employee-related expenses. Appreciation and depletion expenses for the third quarter of 2020 were $28 million and were 8.6% higher than the same quarter last year. The increase quarter over quarter was primarily due to a higher amount of assets placed in service. Net interest expense was about $8 million in the third quarter and included interest on our outstanding debt plus amortization of our debt issuance cost associated with our credit facilities, partially offset by interest income. This amount was approximately $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 non-cash income tax benefit of $8 million during the third quarter of 2020 compared to income tax expense of $8 million in the same quarter last year. This quarter's tax benefit is attributed to the pre-tax loss and additional marginal gas well credits from our gas businesses. Turning to cash flow, during the third quarter of 2020, free cash flow was positive and over $1 million. which was the result of cash flows provided by operating activities of $29 million, was cash used for capital expenditures and mine development costs of $28 million. Free cash flow in the third quarter of 2020 was positively impacted by a $20 million decrease in net working capital. The decrease in net working capital was primarily due to the income tax refund for AMT credits received during the quarter. Operating cash flows were significantly lower in the third quarter of 2020 compared to the same quarter last year, primarily due to lower sales volumes and lower average net selling prices. Cash used in investing activities for capital expenditures and mine development costs was $28 million during the third quarter of 2020 compared to $33 million for the same quarter last year. While spending was lower by 15% this year, we continued to rationalize spending in this challenging market environment. Cash flows used by financing activities were $6 million in the third quarter of 2020 and consisted primarily of payments for capital leases of $3 million and the payment of the quarterly dividend of $3 million. We continued to focus on cash preservation and total liquidity during the quarter, and our balance sheet remained strong with a leverage ratio of 1.5 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 with no near-term debt maturities. Our total available liquidity at the end of the third quarter was $280 million, consisting of cash and cash equivalents of $216 million and $64 million available under our ABL facility, net of borrowings of $40 million, and outstanding letters of credit of approximately $9 million. 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 was not based on changes in the perceived value of the project, but rather on our short-term focus 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 managing expenses, capital expenditures, working capital, cash flows, and liquidity. I'll now turn it back to Walt for his final comments.