Warrior Met Coal, Inc.

My name is Nick, and I'll be your conference operator here today. At this time, I would like to welcome everyone to Warranty Cole First Quarter 2021 Financial Results Call. All lines have been placed on mute to prevent any background noise. After the speech remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press the star and the number one on your telephone keypad. If you'd like to withdraw your question, press the phone key. 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 this discussion today 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 long-term financial matters discussed during this call in tables accompanying the company's earnings press release located on the investor section of the company's website at www.warriormetco.com. In addition to the earnings release, the company has posted a brief supplemental slide presentation to the investor section of the website at www.warriormetco.com. Here today to discuss the company results are Mr. Walt Scheller, Chief Executive Officer, and Mr. Dale Boyles, Chief Financial Officer. Mr. Scheller, you may begin with your remarks. Please go ahead.

Thanks, Operator. Hello, everyone, and thank you for taking the time to join us today to discuss our first quarter 2021 results. After my remarks, Dale will review our results in additional detail, and then you'll have the opportunity to ask questions. During the first quarter, we saw COVID-19 and the Chinese ban on Australian coals have a continued impact on both pricing and demand across the met coal industry. 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. Despite these challenging headwinds, especially on Metco pricing, we were pleased to be free cash flow positive for the fourth consecutive quarter since the pandemic began. We've remained focused on preserving cash and liquidity while managing the aspects of the business that we can control. Importantly, we achieved our second lowest quarterly cash cost per short done since going public. As the Chinese ban on Australian coals continued during the first quarter, we were able to monetize our higher than normal inventories on Chinese spot volumes, which partially offset some of the impact of the depressed pricing environment experienced in our natural markets. Strong market fundamentals persisted across all geographies during the first quarter, allowing our customers to benefit from record high steel prices and strong demand for their products. Global steel production remains on its recovery path to pre-pandemic levels. The World Steel Association has reported a 6% increase in global pig iron production for the first quarter, with China leading the charge with a year-over-year increase of 8%. Excluding China, the rest of the world grew at a more moderate pace of 2%. Unfortunately, the met coal markets remain split in a two-tier pricing system due to the ongoing Chinese ban of Australian coal imports. On one side, you have non-Australian premium hard coking coals imported into China benefiting from a stable and elevated CFR-based index price that was range bound between $214 and $223 per metric ton for most of the first quarter. On the other side, you have Australian-based premium coals that have been impacted by high volatility and low pricing. We saw the Australian index price climb from its low of $102 per metric ton at the start of the year and peak at a high of $161 per metric ton in late January. At this point, the price started its gradual decline, hitting its low of $110 per metric ton in late March. The prolonged import ban by China has also created shifts in trade patterns, as more Australian calls are making their way into Japan, South Korea, India, and Vietnam, and also into our natural markets of Europe and South America. As anticipated, Chinese buying interest was low during their New Year celebrations in February. However, it remained subdued for a longer period than expected following the holiday. However, an uptick in transactions and interest was observed prior to the end of the quarter and has remained active since. As we had expected, contracted sales into our natural markets were strong for the entire first quarter. Sales volume in the first quarter was 2 million short tons compared to 1.8 million short tons in the same quarter last year. Our sales by geography for the first quarter were 30% into Europe, 14% into South America, and 56% into Asia. Production volume in the first quarter of 2021 was 2.2 million short tons compared to a similar amount in the same quarter of last year. The mines ran well in the first quarter, and we built a little more inventory. As planned and previously communicated, inventories remained elevated at the end of the first quarter compared to pre-pandemic levels. Coal inventory levels increased to 220,000 short tons to 1.2 million short tons at the end of the first quarter. The higher the normal inventory levels will allow us to continue to supply our valued customers during the rest of the year. Our gross price realization for the first quarter of 2021 was 95% of the Platts Premium low vol FOB Australian index price and was higher than the 89% achieved in the prior year period. Our better gross price realization was primarily due to a higher percentage of our sales to Chinese customers at the CFR index price. Our spot sales volume in the first quarter was approximately 48% of total volumes compared to our normal expectation of approximately 20%. The end of our first quarter also coincided with the expiration of our collective bargaining agreement with the United Mine Workers of America on April 1st. While we continue to negotiate in good faith with the UMWA to reach a new contract, the UMWA has initiated a strike that continues today. Later in our prepared remarks, I'll provide more color on the business continuity plans we have in place to meet the needs of our valued customers. I'll now ask Dale to address our first quarter results in greater detail. Thanks, Walt.

For the first quarter of 2021, the company recorded a net loss on a gap basis of approximately $21 million, or a loss of 42 cents per diluted share, compared to net income of $22 million, for 42 cents per diluted share in the same quarter last year. Non-GAAP adjusted net income for the first quarter, excluding the non-cash charge for a tax valuation allowance, was 8 cents per diluted share compared to 39 cents per diluted share in the same quarter of 2020. Adjusted EBITDA was $47 million in the first quarter of 2021 as compared to $62 million in the same quarter last year. The quarterly decrease was primarily driven by a 13% decrease in average net selling prices, partially offset by higher sales volume. Our adjusted EBITDA margin was 22% in the first quarter of 2021, compared to 27% in the same quarter last year. Total revenues were approximately $214 million in the first quarter of 2021, compared to $227 million in the same quarter last year. This decrease was primarily due to the 13% decrease in average net selling prices, partially offset by an 8% increase in sales volume in a weak price environment, as Walt noted earlier. The Platts Premium Low Ball FOB Australian Index price averaged $28 per metric ton lower, or down 18%, in the first quarter of 2021, compared to the same quarter last year. The index price averaged $127 per metric ton for the quarter. The merge and other charges reduced our gross price realization to an average net selling price of $106 per short time in the first quarter of 2021, compared to $122 per short time in the same quarter last year. Cost of sales was $154 million or 75% of mining revenues in the first quarter. Compared to $152 million were 68% of mining revenues in the same quarter of 2020. The slight increase in total dollars was primarily due to higher sales volume, offset by lower variable cost and a focus on controlling cost. Cash cost of sales per short-ton FOB port was approximately $79 in the first quarter, compared to $83 in the same period of 2020. This $79 per short ton was our second lowest quarterly amount in the last four years. Cash costs and price sensitive costs such as wages, transportation, and royalties that vary with net coal pricing were lower in the first quarter along with a focus on cost control. SG&A expenses were about $8 million or 3.6% of total revenues in the first quarter of 2021. and were 10% lower than the same quarter last year, primarily due to lower professional fees and employee-related expenses. Appreciation and depletion expenses for the first quarter of 2021 were $33 million compared to $29 million in last year's quarter. 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 $9 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 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 an income tax expense of $24 million during the first quarter of 2021, compared to an expense of $3 million in the same quarter last year. The first quarter's tax expense included a non-cash charge recognized upon the establishment of a valuation allowance against our state deferred income tax assets. This result was due to a change in Alabama state tax law in February that became effective as of the beginning of the year. In essence, our export sales are no longer subject to Alabama state income taxes, and therefore the value of our state net operating losses have been written down. Turning to cash flow, during the first quarter of 2021, we generated $23 million in positive free cash flow, which resulted from cash flows provided by operating activities of $45 million, less cash used for capital expenditures and mine development costs, of $22 million. Free cash flow in the first quarter of 2021 was positively impacted by a small decrease in net working capital. The decrease in net working capital was primarily due to higher collections of accounts receivable, lower prepaid expenses, and other receivables, offset partially by an increase in inventory this quarter. Operating cash flows were higher in the first quarter of 2021, compared to the same quarter last year, primarily due to higher sales volumes on lower cost. Cash used in investing activities for capital expenditures and mine development costs were $22 million during the first quarter of 2021, compared to $26 million in the same quarter last year. We continue to rationalize spending during these unprecedented times. The company spent $13 million, or 58% less, on CapEx in the first quarter of 2021 compared to the same period last year, which was largely offset by higher spending on mine development costs. Cash flows used by financing activities were $13 million in the first quarter of 2021 and consisted primarily of payments for capital leases of $8 million and the payment of the quarterly dividend of $3 million. Our balance sheet remains strong with a leverage ratio of 2.4 times adjusted EBITDA. We believe our liquidity is adequate to navigate these uncertain times. Our strong balance sheet with no near term debt maturities combined with a low and variable cost structure has allowed us to continue paying our quarterly dividend during the pandemic. Our total available liquidity at the end of the first quarter was $272 million consisting of cash and cash equivalents of $222 million and $50 million available under our ABL facility, which is net of dollar earnings of $40 million and outstanding letters of credit of approximately $9 million. Now turning to our outlook. Due to the ongoing uncertainty related to our negotiations with the union, 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 appropriately adjust our operational needs, including managing our expenses, capital expenditures, working capital, liquidity, and cash flows. We have delayed the development of the Blue Creek project and our stock repurchase program also remains temporarily suspended. I'll now turn it back to Walt for his final comments.