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spk02: 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.
spk01: 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.
spk05: 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.
spk01: Thanks, Dale. Before we move on to Q&A, I'd like to make some final comments. We still do not have a clear view of when the trade of seaborne met coals will return to normal and efficient market conditions, although we continue to believe that a partial or full easing of the Chinese ban on Australian coal is most likely to happen at some point in time. We expect current pricing bifurcation in the markets to remain in place as long as the ban remains in place. We would expect the difference between the Australian FOB and the China CFR indices to narrow once the ban is lifted, returning to normal levels. However, the correction may take some time as there are plenty of floating vessels with Australian coals off the coast of China, as well as large volumes of coals in the ports that have been offloaded but have not cleared customs. We believe that demand for our coals will remain strong for the next few quarters, as indicated by our customers' buying patterns. Also, we believe that our markets remain vulnerable to COVID-19-related demand disruptions, mostly in Asia, Europe, and South America. We'll remain focused on serving our customers through the duration of our ongoing labor negotiations, while taking advantage of spot volumes when possible. As I mentioned earlier, our contract with the UMWA expired on April 1st, and the UMWA has initiated a strike that continues today. We believe that we are well positioned to fill our customer volume commitments for 2021 of approximately 4.9 to 5.5 million short tons through a combination of existing coal inventory of 1.2 million short tons and expected production during the rest of the year. For now, we have idled mine four. We expect production to continue at mine seven, although at lower than usual rates. While we have business continuity plans in place, the strike may still cause disruption to production and shipment activities, and the plans may vary significantly from quarter to quarter in 2021. Finally, as we navigate through these headwinds, we will continue to execute our business continuity plans to meet our customer demands. With that, we'd like to open the call for questions. Operator?
spk02: It is time. I would like to remind everyone, to ask a question, please press star and the number one on your telephone keypad. We'll pause just for a moment to panel the Q&A roster. Your first question comes from the line of David Tagliano, BMO, please go ahead.
spk03: Hi, sorry, thanks for taking my questions. I just wanted to ask a little bit about the current strike situation and the commentary regarding volumes. I guess it's the obvious question, right? So we had 2.1 million tons, I think, of sales in the first quarter. The commentary around 4.9 to 5.5 million, is that essentially if the strike remains in place for the remainder of the year? And how should we model quarterly sort of degradation in production? I'm assuming that the front end of that's going to be higher than the full year average, if there's a way you can give us some color on how we should be thinking about sales lines each quarter as a strike process.
spk01: Well, giving you a quarter-by-quarter breakdown is really pretty tough, Dave. This is Walt. And the reason for that is due to the fact that we just don't know what disruptions will be caused throughout the period of the strike. The way we've kind of walked through this in the 4.9 to 5.5 is in the first quarter, we actually had about 1.9 in sales. So that would leave us with $3 million to $3.6 million to hit. We have $1.2 million in inventory. If you take that down to the level where we say we'd like to be, which is around 400,000 tons, that brings us down to needing to produce 2.2 to 2.8 for the remainder of the year, which brings us down to call it $750,000 a quarter to $930,000 a quarter. We think that we'll be able to achieve that with the operating plans we have. We have enough lead time on our continuous miner units at mine seven for us to be able to do that. That's about as much guidance as I feel comfortable giving you because I just don't know exactly how things will play out quarter to quarter.
spk03: Understood. That makes sense in terms of the unknowns here. But just to clarify, so is it reasonable at this point to effectively just kind of spread it evenly over the remainder of the year and use that 4.9 to 5.5 range, again, if the strike were to continue for the year?
spk01: Yeah, I think that's reasonable.
spk03: Okay. And then just one other quick question. The cash costs were obviously, at least in my view, exceptionally good in the quarter. Was there anything – you know, extraordinary that suggests that we shouldn't assume a similar level of cash costs, you know, going forward. Obviously, the volumes are going to be lower, so we have to adjust for that. But, you know, if we just sort of gross that number up and then adjust for the lower volumes, is that still a reasonable kind of way to approach it?
spk05: Hi, David. It's Dale. Yeah, I mean, you know, we really focused on keeping our costs low, and we obviously got a little more volume in the quarter. So there was nothing – Other than that, significant, look, for the rest of the year, you know, we do expect our cash costs to be a little bit lower, but then again, we're going to incur some costs with the island of mine for, you know, some other costs associated with the strike, you know, negotiation fees around legal fees and stuff like that. So we're going to have some other higher costs. So while the cost per ton may be down, you may have some other costs that offset that. So, you know, we don't see any significant change because of those offsetting issues.
spk03: Okay, sorry, just to clarify, on a cash cost per ton basis, even with the lower volumes, you think your cash cost per ton have kind of offsetting issues that will result in cash cost per ton being similar in the near quarters?
spk05: Well, if we sell what we had in inventory, right, which was produced, you know, at prior levels, right, prior levels of people working and everything, so those cash costs will not turn until after you bleed off all that inventory. Then after that, you would start to see the lower cash costs right, on lower volumes. Again, like I say, in total, you'll have some offsetting incremental costs associated with the strike that we wouldn't normally have.
spk03: Okay, thanks. I'll get back in the queue. Thank you.
spk01: Thank you.
spk02: Thank you. Again, if you have a question, please press star then one. Next question comes from Lucas Pipes of B-Wangley Securities. Please go ahead.
spk00: Hey, good afternoon, everyone. My first question is on the sales commitments for 2021, the 4.9 to 5.5 million tons. And I wondered if it's possible to give us a little bit more of a flavor for what the geographic mix is of those commitments. And would those be sold at the equivalent of the Australian benchmark, which obviously is still languishing due to the ban? Or would those also be commitments into the higher-priced Chinese market, for example, or just off of higher U.S. East Coast index pricing? We'd really appreciate your thoughts and comments on that.
spk01: Thank you. The commitments are to our primary customers in Europe, South America, and a few others into Asia. And those are based on the Australian market. low vol price. But there are also opportunities and swapping opportunities and things that allow us to also participate much as we did in the first quarter in the Chinese market CFR prices. And what we've seen is there's been kind of enough of that to offset some of the lower pricing and bring us back to kind of a normalized level. And I think that's what we'll see throughout the year is I expected to get closer to traditional targets which were 55 into Europe, 30 or so into South America, and 15 or so into Asia. I expect us to move in that direction, but I don't expect us to be the whole way back into those numbers.
spk00: That's helpful. So for now kind of modeling pricing near the benchmark, would that be very simplistically be the right way to think about it? And with that Australian benchmark? Yes. Thank you. And then I want to return to Dave's question on the cost side. So if we kind of think about, I think, 700,000 to 930,000 tons per quarter, that means your inventory, like in the second quarter, you'd be essentially selling all out of inventory. So that would still be at, Dale, the lower kind of current costs. similar to Q1, then should we be thinking about a step up in cost on a per ton basis, kind of as you exhaust the inventory and, again, assuming the strike continues, of course. So, kind of Q3 then, should that be a step up on the cost per ton basis or not?
spk05: I think, hopefully I'll be clear, but yes, in Q2 you would see a similar cost, if not just a little bit slightly higher. But after that, after you sell off the inventory, then what we're producing now would clearly be at a little bit lower cost per ton. But in your P&L, we will have some additional cost other than cost of sales. And that will be such as mine for idling cost and other costs, as I said, related to the strike, such as legal fees around the negotiations and some other expenses that we incur there. So I'm talking about total dollars. So while your cost per ton may be a little bit lower on just a pure cash cost of sales, we're going to have some other costs kind of offsetting that.
spk00: That's helpful. I appreciate that. May circle back with that later. But I want to ask one final question. Just your variable cost structure has been a true differentiator, and I would say really positioned you well during a pretty volatile medical market over the past five years. I know this is difficult, given you're negotiating, but how important is that going forward to have variable cost structure, including on the labor side. Thank you for any thoughts you can share.
spk01: Well, I think a huge part of that variability was around the rail contract and the variability for the royalty rates. In actuality, when we look at the labor variability, it has had, I would say, a very small impact over the last five years. primarily with things just like bonuses based on the benchmark pricing. I think for the past five years, that variability has had very little impact.
spk05: The bigger amount of cost are the transportation royalties. As we've said in the past, that's about a third of the total cash cost. of that $79, a third of that is just pure variability. And then the other piece of that is the mining cost, whatever it takes to get it out of the mine. And while there's some variability to that, it's a smaller piece of the total.
spk00: That's helpful. And in an environment like Q1, like we just had, on a kind of dollar per ton basis, what would be the labor variability tailwinds on the cost side for you guys, roughly.
spk05: The variability in the future quarters?
spk00: No, no. So when I look at Q1 was a terrific cost number that you just reported. So very, very good job there. And what I'm trying to get at is in a quarter like Q1 where pricing is very low and obviously your costs were fantastic, how much of the lower cost was due to the variable cost structure on the labor side that had been part of the prior or current labor agreement?
spk05: Again, it's a small percentage of the total cost.
spk00: So even in an environment like we just had, it would still be a small percentage.
spk05: Right.
spk00: Very helpful. I appreciate that. Thank you very much and best of luck.
spk02: Thank you. Again, if you have a question, please press star then one. Our next question is from David Gagliano, a follow-up question from BMO. Please go ahead.
spk03: All right, great. Thanks for taking my follow-ups. I just have a couple of quick ones. I was wondering if you could talk a little bit more about the demurrage charges in the first quarter, you know, and what those were related to and how they may transpire in the coming quarters. And then the second question, just regarding the strike, if you can just possibly give us a little color on what are the key issues here and are there negotiations still happening and kind of the status of the talks between the two sides at this point? Thanks.
spk05: All right, David. This is Dale. I'll take the first one on Demerge. Divergent was just a little bit higher in the first quarter. A couple things. One, higher moisture content than normal because of the weather-related heavy rains in Alabama over the past few months in the normal rainy season here. And then with a higher proportion of sales going into China, there was some ash penalties because they have a very low ash requirement. So the penalties and demurrage were related to those primary two factors.
spk01: And on the contract negotiations, we are currently negotiating on a weekly basis with the UMWA. We had reached a tentative agreement with the international, and it was voted down by the locals about a month ago. The issues are just about what's always the typical issues in a labor contract. It's days off, it's pay, it's benefits, just all the normal things.
spk03: Okay. Are there any sort of next steps, your votes or anything coming up that we should be thinking about?
spk01: No, nothing's scheduled at this point.
spk03: Okay, thanks very much.
spk02: Thank you. The next question comes from Matt Farwell, Roth Capital. Please go ahead.
spk04: Thanks for taking my question. Just wondering if you could provide an estimate for what the idling costs for Mine 4 might be, just so we can understand what the cash flow impacts are in 2021.
spk05: Yeah, for mine four, those are going to vary. Obviously, we've got some of your fixed costs like electricity, your property taxes, but we do have a very small crew that has to continue to fireball some mine and those kind of things. So we're in a range of $2 million to $3 million a month to maintain the idling.
spk04: Okay. So it seems like the liquidity is well sufficient to handle the to strike at least for the next 12 months. Is that a fair statement?
spk05: Yeah, I think so. I think we've developed, you know, our continuity plans for the rest of this year with our customers, you know, and those have several different alternatives as we go forward, and we'll adjust those as we go as we need to. But we do feel like our liquidity is sufficient. $272 million, $220 of that is cash. and we don't have any near-term commitments for our debt maturities. We don't have any significant funding of pension liabilities or anything like that. So it's really just your normal expenses in the business. So given what we've outlined here with our commitments and how we're planning to meet those commitments, we feel very good that our liquidity is adequate to navigate through these times right now.
spk04: Okay, great, thanks for taking my question.
spk01: Thank you.
spk02: This time we have no further questions. Now I'd like to turn the call back over to Mr. Scheller for closing remarks.
spk01: That concludes our call this afternoon. Thank you again for joining us today. We appreciate your interest and we're your Metco.
spk02: Thank you, and that concludes today's presentation. You may now disconnect. Thank you for this.
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