Warrior Met Coal, Inc.

Good afternoon. My name is Vaishnavi, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Warrior Metco's fourth quarter and full year 2020 financial results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there'll 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 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 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.warriormedcoal.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.warriormedcoal.com. Here today to discuss the company's results are Mr. Walsh Scheller, Chief Executive Officer, and Mr. Dale Bores, 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 fourth quarter and four-year 2020 results. After my remarks, Dale will review our results in additional detail. Then you'll have the opportunity to ask questions. The fourth quarter continued to present a challenging market environment as a disruptive impact from the COVID-19 pandemic remained evident throughout the U.S. and global economies. Although the steel and met coal industries operated below their normal yearly levels, we saw volume stabilize with existing customers in our key markets as producers continue to increase their operating rates. Despite these challenging headwinds, especially on Metco pricing, we were pleased to be free cash flow positive for the third consecutive quarter in a row. We've remained focused on preserving cash and liquidity while managing the aspects of the business that we can control. Importantly, we achieved our lowest annual cash cost per short time since going public. At the same time, We carefully balanced our spending on long-term CapEx investments to keep us uniquely well-positioned to benefit from the eventual recovery in steel production, medical 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. We continue to operate our mines as a critical infrastructure business in the state of Alabama. And I would like to thank all of our employees for their hard work and resilience during these challenging times. We've been fortunate to keep our people employed during this unprecedented period, whereas others in the industry have had to idle their operations and furlough employees. Our fourth quarter played out largely as expected. with the exception of taking advantage of additional spot volume opportunities into China. As the Chinese ban on Australian coals played out in the fourth quarter, we were able to monetize our higher-than-normal inventories. We were able to successfully attract new Chinese customers during the fourth quarter, which partially offset some of the impact of the depressed pricing environment experienced in our natural markets. Unfortunately, some of these Chinese cargoes were sold early in the fourth quarter, just as the CFR index was beginning to rise. From a market perspective, the most consequential theme of the fourth quarter was, without a doubt, the Chinese ban on select Australian commodities, including met coal. While we were cognizant of this situation coming into the quarter, the impact of the ban became apparent in early November, as a large number of vessels were building up along the Chinese coast without being allowed to unload. As this new reality settled in, Chinese buyers scrambled to initiate discussions with alternative sourcing options, including U.S.-based supply. The Russia Trans Act, coupled with additional complications such as a slowdown in the importation of land-borne coal from Mongolia and tightness in their domestic met coal markets, created a significant distortion in the met coal indices, which persists today. Premium low vol CFR China based indices have decoupled from premium low vol FOB Australian indices, increasing from their normal spread of $8 to $12 per metric ton to over $100 per metric ton at the end of the fourth quarter. The increasing differential was primarily driven by two opposing forces. First, Chinese customers rushed to secure the limited supply of non-Australian premium coals, and second, the Australian supply that is normally reserved for China was being offered to well-supplied markets such as Europe and South America. Despite the distorted met coal pricing conditions, we were generally pleased with global steel fundamentals. Global pink iron production, as reported by the World Steel Association, continued to show an ongoing recovery in steel demand for most regions outside of China, while China achieved another record-breaking year. For the full year, global pig iron production was down less than 1%, which is quite remarkable given the severity of the impact of COVID-19 on the world's economy. The global result is largely due to China's impressive production of 887 million metric tons of pig irons. equivalent to a year-over-year increase of 4.3%, while the rest of the world was down 9.6% for the same period. We also entered the fourth quarter with reservations about pricing, which turned out to be true. The absence of clarity concerning Chinese import quotas, the Chinese ban on Australian coals, and the perception of a well-supplied market kept all major indices tightly range-bound for most of the quarter after the early rapid decrease. The PLATS premium low vol FOB Australian index price began the quarter at a high of $139 per metric ton and fell to a low of $97 per metric ton during the fourth quarter, averaging $108 per metric ton for the entire quarter. Sales volumes in the fourth quarter were 2.2 million short tons compared to 1.7 million short tons in the same quarter last year. These results were ahead of expectations set out on our last earnings call for volumes at the midpoint of our second and third quarter volumes, which was around 1.7 million short times. Our sales by geography in the fourth quarter were 49% into Europe, 20% into South America, and 31% into Asia. These higher volumes were a nice rebound from the lower volumes in previous quarters. Production volume in the fourth quarter of 2020 was 1.8 million short-turns compared to a similar amount in the same quarter of last year. This aligns with our thinking on our third quarter earnings call, where we said we expected to better match our sales and production volumes in the second half of 2020 and take advantage of opportunity if they met profitability thresholds. As planned and previously communicated, inventories remained elevated at the end of the fourth quarter compared to pre-pandemic levels. Coal inventory levels decreased 515,000 short tons to 1 million short tons at the end of the fourth quarter, primarily due to the modernization of spot volume opportunities into China. We expect our inventory levels to temporarily remain elevated, which will help us mitigate the risk that our mines may be disrupted or shut down by a widespread COVID-19 outbreak among our workforce. the higher the normal inventory levels will allow us to capitalize on spot market opportunities. Our gross price realization for the fourth quarter of 2020 was 102% of the PLATS premium low vol FOB Australian index price and was higher than the 97% achieved in the prior year period. The better gross price realization was primarily due to 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 volume in the fourth quarter were approximately 50% of the total volumes compared to a normal expectation of approximately 20%. The company spent $29 million on capital expenditures and mine development costs during the fourth quarter compared to $34 million in the same period last year. This was a 14% decrease in spending quarter over quarter. We will continue to balance our free cash flow and liquidity preservation against maintenance and discretionary capital spending as we navigate the effects of the COVID-19 pandemic. I will now ask Dale to address our fourth quarter results in greater detail.

Thanks, Walt. Our fourth quarter continued to be about balancing competing priorities as it had been throughout most of 2020. We ran the mines without idling or laying off employees. while keeping our costs low in an extremely depressed and challenging price environment. At the same time, we continue to make significant CapEx and mine development investments. Our ability to generate positive free cash flow in the fourth quarter was an important testament to the success of this balancing act. For the fourth quarter of 2020, the company recorded a net loss on a GAAP basis of approximately $34 million or a loss of 66 cents per diluted share compared to net income of $21 million or 41 cents per diluted share in the same quarter last year. Non-GAAP adjusted net loss for the fourth quarter was 63 cents per diluted share compared to 32 cents of income per diluted share in the same quarter of 2019. Adjusted EBITDA was $9 million in the fourth quarter of 2020 as compared to $45 million in the same quarter last year. The quarterly decrease was primarily driven by a 22% decrease in average net selling prices, partially offset by higher sale volumes. Our adjusted EBITDA margin was 4% in the fourth quarter of 2020, compared to 22% in the same quarter last year. Total revenues were approximately $212 million in the fourth quarter of 2020, compared to $205 million in the same quarter last year. This increase was primarily due to the 33% increase in sales volumes, partially offset by a 22% decrease in average net selling prices in a weaker market environment due to the impact of COVID-19. The Platts Premium Low Ball FOB Australian Index price averaged $32 per metric ton lower, or down 23%, in the fourth quarter of 2020 compared to the same quarter last year. After the early decrease at the beginning of the quarter, the index price remained range bound for most of the fourth quarter, averaging $108 per metric ton and hitting a low point of $97 per metric ton. The merge and other charges reduced our gross price realization to an average net selling price of $94 per short term in the fourth quarter of 2020, compared to $120 per short time in the same quarter last year. Mining cash cost of sales were $190 million, or 92% of mining revenues in the fourth quarter, compared to $142 million, or 72% of mining revenues in the same quarter of 2019. The increase of $48 million, or 34%, in cash cost of sales was primarily attributable to two factors. One, a 33% increase in sales volumes, and two, tighter cost management in 2020, partially offset by a 22% decrease in average net selling prices. Cash cost of sales per short time, FOB port, was approximately $86 in the fourth quarter, and approximately the same amount in the same period of 2019. While the cost per ton in both quarters was the same, met coal prices were 22% lower in the fourth quarter of 2020. Cash costs and price sensitive costs such as wages, transportation, and royalties that vary with met coal pricing were lower in the fourth quarter. However, they were offset by higher production costs per ton. Production costs per ton were higher due to our decision to slow production in order to preserve cash in the fourth quarter. SG&A expenses were about $8 million, or 3.7% of total revenues in the fourth quarter of 2020, and were 2% lower than the same quarter last year, primarily due to lower professional fees and employee-related expenses. Appreciation and depletion expenses for the fourth quarter of 2020 were $39 million. The increase quarter over quarter was primarily due to a higher amount of assets placed in service and higher spending levels. Net interest expense was about $8 million in the fourth 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 was approximately $2 million higher compared to the same period last year, primarily due to incremental borrowings on our ADL facility this year and lower returns on cash balances. We record a non-cash income tax benefit of $11 million during the fourth quarter of 2020 compared to a benefit of $3 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 fourth quarter of 2020, we generated over $1 million in positive free cash flow which resulted from cash flows provided by operating activities of $30 million, less cash used for capital expenditures and mine development cost of $29 million. Free cash flow in the fourth 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 a decrease in inventory on higher sales volume and our decision to slow production this quarter. Operating cash flows were higher in the fourth quarter of 2020 compared to the same quarter last year, primarily due to higher sales life. Finishing and investing activities for capital expenditures and mine development costs was $29 million during the fourth quarter of 2020 compared to $34 million in the same quarter last year. We continue to rationalize spending versus investing in long-term projects that will benefit the company in the future. Specifically, the company spent $13 million, or 47% less, on CapEx in the fourth quarter of 2020 compared to the same period last year, which was partially offset by higher spending on mine development costs. For the fourth year of 2020, our sustaining CapEx spending was approximately $60 million, which was $29 million less than the prior year. Because our minds are well-capitalized and generate significant cash flows, we can continue to invest in our business even in challenging price environments. We spent $27 million on discretionary CapEx in 2020, or approximately 31% of total CapEx. Free cash flow for the full year could have been that much higher had we chosen to suspend those discretionary investments during the pandemic. Cash flows used by financing activities were $6 million in the fourth 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 continue to focus on cash preservation and total liquidity during the quarter and our balance sheet remains strong with a leverage ratio of 1.9 times adjusted EBITDA. In addition, we have adequate liquidity as we have shed our fixed-cost legacy liabilities and today have a low and variable cost structure with no near-term debt maturities. The total available equity at the end of the fourth quarter was $244 million, consisting of cash and cash equivalents of $212 million and $32 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. This is the ongoing uncertainty related to the COVID-19 pandemic, the Chinese ban on Australian coal and other potentially disruptive factors. We will not be providing full year 2021 guidance at this time. We expect to return to providing guidance once there is further clarity on these issues. We continue to evaluate the impact of COVID-19 and these other potentially disruptive factors on our business. although we believe that it is premature to speculate on when the economies of the countries in which our customers are located will reopen on a sustained basis and lead to a return on normalized demand for met coal. We continue to appropriately adjust our operational needs, including managing expenses, capital expenditures, working capital, cash flows, and liquidity. We have delayed the development of the Blue Creek project until at least the summer of 2021. This decision was not based on changes in the perceived value of the project, but rather on our short-term focus of preserving cash and liquidity. Our stock repurchase program also remains temporarily suspended. I'll now turn it back to Walt for his final comments.