Warrior Met Coal, Inc.

Good afternoon. My name is Chad, and I will be your conference operator today. At this time, I would like to welcome everyone to the Warrior Met Coal third quarter 2021 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 2. 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 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 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 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 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 third quarter, we were pleased to deliver our most profitable results since the onset of the COVID-19 pandemic, driven by the resiliency and efficiency of our operational base. As we have discussed over the past several quarters, our priority during the COVID-19 pandemic has been to focus on the things that we can control, our operations and cost base, to set us up for success when market conditions outside of our control improved. This work has already been fruitful, with the company maximizing its potential, despite generally tough conditions during that period. But now, with macro factors having become tailwinds instead of headwinds, we can see just how meaningful our work over the last 20 months has been for our company. in delivering strong results and creating value for our stakeholders. This quarter, we saw record high pricing, enabling us to leverage the strong global economic recovery to increase our average net sale prices. Steel and met coal demand has continued to increase, which, when combined with the Chinese ban on Australian coal imports, has created an ideal environment for our operationally strong enterprise to demonstrate our resiliency. Even with the current upswing in the macro environment, however, we continue to focus on managing expenses, enhancing liquidity, and increasing cash flows with the objective of remaining well-positioned to meet our customers' long-term commitments in the face of any potential future market volatility. Throughout the third quarter, our customers continued to experience strong demand for the steel products, which translated into strong demand for our premium quality coals. The combination of solid market fundamentals across the world and ongoing geopolitical tensions between the world's largest met coal consumer and the world's largest met coal producer have elevated pricing for our products to levels we have never seen before. China remains locked in a self-imposed supply constraint due to the continued ban on the import of Australian coals. It's rigid COVID-19 protocols at the Mongolian border crossing and due to policy measures. that have limited output of domestic met coal production. In addition, the Chinese government's mandate to keep steel production growth at zero percent compared to 2020 has led to drastic cuts in steel production. As such, Chinese producers have been able to absorb higher met coal prices as their margins have remained quite healthy due to higher steel prices and lower iron ore costs, both direct consequences of the aggressive steel production cuts mandated by the government. In the short term, we see these trends continuing. As recently reported by the World Steel Association, global pig iron production increased by 3.4 percent for the first nine months of the year, with China decreasing 1.3 percent. Excluding China, the rest of the world's production grew at an impressive rate of 13.9 percent. We were expecting our markets to remain strong as they did during the third quarter. However, we were surprised by the pricing levels achieved by our main indices. During the third quarter, the PLAS PLV FOB Australian index price experienced a meteoric rise of $191 per metric ton, rising from $198 on July 1st to a high of $389 per metric ton at the end of September. Likewise, the PLV CFR China indices increased by $295 per metric ton, from $309 to a high of $604 per metric ton. However, the majority of the rapid rise in pricing occurred in the final six weeks of the quarter, during which the PLB FOB Australian indices rose by $162 per metric ton, equivalent to 85% of the total increase for the third quarter. This also occurred with the PLB CFR China indices rising by $232 per metric ton in the final six weeks, equivalent to 79 percent of the total increase for the third quarter. Sales volume in the third quarter was 1.1 million short tons compared to 1.9 million short tons in the same quarter last year. Our sales by geography in the third quarter were 47 percent into Europe, 4 percent into South America, and 49 percent into Asia. The higher-than-normal sales to Asia were primarily driven by Chinese demand that we capitalized upon during the third quarter while capturing 100 percent of the CFR China index price on the day of the sale. Production volume in the third quarter of 2021 was 1.1 million short tons compared to 1.9 million short tons in the same quarter of last year. The tons produced in the third quarter resulted from running both long walls at mine seven plus four continuous miner units. By running the four continuous miner units, our lead days or float times have not materially changed since the strike commenced in April and are still several months out into the future. Mine four remained idle during this third quarter. Our gross price realization for the third quarter of 2021 was 81 percent of the Platts premium low vol FOB Australian index price and was lower than the 90 percent achieved in the prior year period. The lower gross price realization was primarily due to the previously mentioned rapid rise late in the quarter of both the Australian and Chinese price indices. Our spot volume in the third quarter was approximately 30 percent of the total volume and 38% year to date. Our normal expectation of spot volume is approximately 20%. The higher spot volume is primarily attributed to sales to China. I will now ask Dale to address our third quarter results in greater detail.

Thanks, Walt. In the third quarter last year, we saw the ongoing impact of COVID-19 and its downward impact on the steel and met coal industries, including our company. even as we continued to run both mines at near capacity. In contrast, this year our third quarter results were negatively impacted by the UMWA strike in which we idled mine four and significantly reduced operations at mine seven. As we execute our business continuity plans to meet our contractual commitments to our customers, we took advantage of strong market conditions to generate strong results of adjusted EBITDA and free cash flow. For the third quarter of 2021, the company recorded its largest net income in over two years on a GAAP basis of approximately $38 million, or 74 cents per diluted share, compared to a net loss of $14 million, or 28 cents per diluted share, in the same quarter last year. Non-GAAP adjusted net income for the third quarter, excluding the non-recurring business interruption expenses, idle mine expenses, and other non-recurring income was 97 cents per diluted share, compared to a loss of 28 cents per diluted share in the same quarter last year. Adjusted EBITDA was $105 million in the third quarter of 2021, the largest in over two years, as compared to $17 million in the same quarter last year. The quarterly increase was primarily driven by 108% increase in average net selling prices. partially offset by a 45 percent decrease in sales volume. Our adjusted EBITDA margin was 52 percent in the third quarter this year compared to 9 percent in the same quarter last year. Total revenues were approximately $202 million in the third quarter compared to $180 million in the same quarter last year. This increase was primarily due to the 108 percent increase in average net selling prices all set partially by 45% lower sales volume in the third quarter versus the same period last year. In addition, other revenues were negatively impacted in the third quarter this year by a non-cash mark-to-market loss on our gas hedges of approximately $6 million, which were entered into earlier this year before hurricane season and gas supply deficits. The Platts premium low vol FOB Australian index price averaged $149 per metric ton higher or up 130 percent in the third quarter compared to the same quarter last year. The index price averaged $264 per metric ton for the quarter. The merge and other charges reduced our gross price realization to an average net selling price of $189 per short ton in the third quarter this year compared to $91 per short time in the same quarter last year. Cash cost of sales was $91 million, or 46% of mining revenues in the third quarter, compared to $151 million, or 86% of mining revenues in the same quarter last year. The decrease in total dollars was primarily due to a $68 million impact of lower sales volume partially offset by $8 million of higher variable costs associated with price-sensitive transportation and royalty costs. Cash cost of sales per short-time FOB port was approximately $86 in the third quarter compared to $78 in the same quarter last year. Cash costs on price-sensitive items such as wages, transportation, and royalties that vary with net coal pricing were higher in the third quarter this year compared to the same quarter last year. Depreciation and depletion expenses for the third quarter this year were $29 million compared to $28 million in last year's third quarter. The net increase of $1 million was primarily due to two things. First, the immediate recognition of $8 million of expense related to mine forward depreciation that would have normally been capitalized as inventory as it was produced. However, since Mine 4 is currently idled, it was instead directly expensed. Second, these expenses were lower by $7 million due to the 45% decrease in sales volume. SD&A expenses were about $7 million, or 3.7% of total revenues in the third quarter of 2021, and were lower than the same quarter last year, primarily due to lower employee-related expenses and lower professional fees. During the third quarter, we incurred incremental non-recurring business interruption expenses of $7 million directly related to the ongoing UMWA strike. These non-recurring expenses were primarily for incremental safety and security, legal and labor negotiations, and other expenses. As a result of the ongoing UMWA strike that began April 1st, we idled mine forward in the second quarter. We incurred $9 million of expenses in the third quarter associated with the island of Mine 4 and reduced operations at Mine 7. These expenses were electricity, insurance, maintenance labor, taxes, and are primarily fixed in nature. Net interest expense was about $9 million in the third quarter and includes interest on our outstanding debt, interest on equipment financing leases, plus amortization of our debt issuance costs associated with our credit facilities. partially offset by interest income. The slight increase quarter over quarter was primarily related to new equipment financing leases. Other income represents proceeds received as a result of the settlement of a lawsuit. We recorded income tax expense of $5 million during the third quarter of this year compared to a benefit of $8 million in the same quarter last year. The third quarter tax expense was primarily due to pre-tax income, offset partially by benefits for depletion and additional marginal gas well credits. Turning to cash flow, during the third quarter of 2021, we generated $52 million of free cash flow, which resulted from cash flows provided by operating activities of $63 million, less cash used for capital expenditures and mine development cost of $11 million. Free cash flow in the third quarter of this year was negatively impacted by an $18 million increase in net working capital. Increase in net working capital was primarily due to an increase in coal inventory due to the lower sales volume. Cash used in investing activities for capital expenditures and mine development costs were $11 million during the third quarter of this year, compared to $28 million in the same quarter last year. However, we do expect to spend more in the fourth quarter than we did in the third quarter to keep the mines well capitalized. Cash flows used by financing activities were $51 million in the third quarter of 2021 and consisted primarily of payments on our ABL facility of $40 million, payments for capital leases of $8 million, and the payment of the quarterly dividend of $3 million. Our total available liquidity at the end of the third quarter was $356 million, representing a 24% increase over the second quarter, and consisted of cash and cash equivalents of $268 million and $87 million available under our ABL facility. This is net of outstanding layers of credit of approximately $9 million. Our balance sheet has a leverage ratio of 0.6 times adjusted EBITDA, And notably, we have no near-term debt maturities. We believe our liquidity position and strong balance sheet, combined with our low and variable cost structure, has enabled us to weather this period of uncertainty and gives us the flexibility to continue to manage through a continued volatile global marketplace. 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 a 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. In addition, 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.