Warrior Met Coal, Inc.

Good afternoon. My name is Betsy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Warrior Met Cole fourth quarter and full year 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 the 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 filing. 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.warriormetcoal.com. Also, for more labor-related information, go to WarriorMetColfax.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 fourth quarter and full year 2021 results. After my remarks, Dale will review our results in additional detail, and then you will have the opportunity to ask questions. During the fourth quarter, we were pleased to deliver our most profitable quarterly results in the last three years on the back of strong customer demand and our ability to capitalize on a favorable pricing environment. The global supply of met coal remained tight during the fourth quarter, even with China continuing to reduce its steel production. We are well positioned from a cost and supply standpoint to take advantage of the current strong market for high quality premium met coal, which has been strengthened by robust economic growth. In addition, we capitalized on favorable conditions within the capital markets to refinance our senior notes and extend the maturity of our ABL facility in the fourth quarter, which Dale will discuss in more detail later in his prepared remarks. As reported cases of COVID-19 rose during the fourth quarter and impacted most of the country, we continued 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 and regulators to protect the health and safety of our employees while maintaining our operations. I would like to thank our employees for their hard work and dedication to safety during these challenging times. While we continue to run the operations at lower operating rates due to the UMWA strike, we never changed our philosophy or dedication to providing a safe working environment for our employees. In fact, despite the disruptions during the year, our safety incident rate dropped significantly last year to a 1.25 rate from a 3.36 rate in 2020, which we believe is significantly better than the underground mining industry. Global market demand and pricing over the quarter were solid, largely driven by strong ex-China demand and overall supply tightness. However, we did experience a higher degree of volatility as we saw CFR China prices drop from their all-time high of $615 per metric ton on October 21 to a low of $337 per metric ton at year end. Most of the 45% price erosion occurred over a short period of four weeks and was caused by the combination of government-mandated steel production cuts, a governmental focus on domestic coal production, and a clearance of stranded Australian coals from bonded warehouses. Despite the release of these coals, the ban on imported coals remains fully in place. During the quarter, we saw Chinese buyers retract from the spot markets, leaving very few transactions to support the indices. The FOB Australian index corrected from a high of $403 per metric ton on November 5th to a low of $315 per metric ton. Contrary to the CFR China equivalent, the FOB Australia index managed to claw back some of the pricing erosion, closing the year at $357 per metric ton. Supply tightness in Australia due to weather disruptions and maintenance was the primary driver for the late December uptick in the index. It is interesting to point out that for the last 10 days of the year, the CFR China index was actually at a discount to the FOB Australia index, a situation that has persisted into 2022. As recently reported by the World Steel Association, global pig iron production increased by 0.6% for the full year of 2021, with China's production decreasing 4.3%. The decrease in China's production was expected given the governmental mandate to reduce production year over year. China was the only country among the major producing countries to experience a decline year over year. Excluding China, which makes up 66% of the world's pig iron market, the rest of the world's production grew at an impressive rate of 11.4%. As for Warrior, our sales volume in the fourth quarter this year was 1.5 million short tons, compared to 2.2 million short times in the same quarter last year. This quarter was lower primarily due to the ongoing strike, which lowered total production. We are now operating near normal inventory levels as well. Our sales by geography in the fourth quarter were 44% into Europe, 10% into South America, and 46% into Asia. The higher than normal sales to Asia were primarily driven by Chinese demand that we capitalized upon during the fourth quarter. while capturing 100% of the CFR China index price on the day of the sale. Our spot sales in the fourth quarter were approximately 15% and were 33% year to date. Our normal expectation of spot sales was approximately 20%. The higher spot sales for the year were primarily attributed to the higher sales to China. Our gross price realization for the fourth quarter of 2021 was 85% of the Platts premium low vol FOB Australian index price and was lower than 102% achieved in the prior year period. The lower gross price realization was primarily due to a rising market this year versus the declining market last year. Also, 47% of our sales volume in the fourth quarter of this year occurred in the month of October, which were based on lower Metco prices from the third quarter. Let me say a word about the gross price realization. The metric is a point in time calculation that can be significantly impacted by many factors, including the timing of sales, shipments, and the volatility of the indices, and does not reflect the discounting of our product. In addition, explaining the changes in our gross price realizations is a time intensive process every quarter, which we believe provides little to no value to our business or our stakeholders. We do not place any significance on the metric internally. Therefore, this will be the last quarter we report this metric. Instead, we will focus on average net selling prices, which we believe provide a more meaningful and relevant measure. Production volume in the fourth quarter this year was 1.1 million short tons compared to 1.8 million short tons in the same quarter of last year. The tons produced in the fourth quarter resulted from running both long walls and four continuous miner units at Mine 7, and one continuous miner unit at mine four. By running the continuous miner units, our lead days or flow times have not materially changed since April 2021 and are still several months out into the future. The mine four long wall remained idle during the fourth quarter. We finished the year running the mines with a combination of salary and hourly employees representing approximately 50% of the normal workforce while producing almost 75% of the normal production volume. Capital spending in the fourth quarter was $24 million. For the full year, we spent $58 million on capital expenditures, which was the lowest amount since 2016 and 34% lower than last year. This is partly due to the idling of mine floor during the year. The mines have been well capitalized by a significant number of investments since 2017, which provides flexibility in managing our spending during pandemics, industry cycles, and other disruptive impacts to the business. I will now ask Dale to address our fourth quarter results in greater detail.

Thanks, Walt. As Walt noted in his remarks, the market for met coal was strong during the fourth quarter, driving prices to levels never seen before. The strength of the met coal and steel markets, a strong economic recovery from COVID, and robust capital markets led us to capitalize upon favorable timing to refinance our senior notes and ABL facilities. We believe the timing of the refinancing was excellent as the markets have been experiencing a significant amount of inflation and we believe that the Federal Reserve would start raising interest rates sooner rather than later to manage it. We believe that it would have been more costly and more difficult to complete a refinancing if we waited to do it closer to the maturity of the senior notes. Our decision to refinance our senior notes and ABL facility during the quarter accomplishes several important goals. It enhances our already strong balance sheet and financial position, takes advantage of current low borrowing rates, which are expected to start rising in the near future, modestly lowers our cash interest expense, and furthers our financial flexibility with a maturity extension as we pursue the creation of long-term shareholder value. It will also position us to resume our growth strategy and increase our return of cash to shareholders in the future. For the fourth quarter of 2021, the company recorded its largest quarterly net income in three years on a GAAP basis of approximately $139 million, or $2.68 per diluted share, compared to a net loss of $34 million, or $0.66 per diluted share, in the same quarter last year. Non-GAAP adjusted net income for the fourth quarter, excluding the non-recurring business interruption expenses, idle mine expenses, and a loss on early extinguishing of debt, was $3.17 per diluted share compared to an adjusted net loss of 63 cents per diluted share in the same quarter last year. Adjusted EBITDA was $240 million in the fourth quarter of this year, the largest in three years, as compared to $9 million in the same quarter last year. The quarterly increase was primarily driven by a 193% increase in average net selling prices, partially offset by a 34% decrease in sales volume. Our adjusted EBITDA margin was 58% in the fourth quarter of this year, compared to 4% in the same quarter last year. Total revenues were approximately $416 million in the fourth quarter, compared to $212 million in the same quarter last year. This increase was primarily due to the 193% increase in average net selling prices, offset partially by 34% lower sales volume in the fourth quarter versus the same period last year. In addition, other revenues were positively impacted in the fourth quarter this year by a 121% increase in natural gas prices plus a non-cash mark-to-market gain on our gas hedges of approximately $7 million. The Platts Premium Low Ball FOB Australian index price averaged $260 per metric ton higher or up 241% in the fourth quarter this year compared to the same quarter last year. The index price averaged $369 per metric ton for the fourth quarter. The merge and other charges reduced our gross price realization to an average net selling price of $274 per short ton in the fourth quarter this year, compared to $94 per short ton in the same quarter last year. Cash cost of sales was $153 million, or 39% of mining revenues in the fourth quarter. compared to $190 million, or 92% of mining revenues, in the same quarter last year. The decrease in total dollars was primarily due to a $65 million impact, a 34% lower sales volume, partially offset by $28 million of higher variable costs associated with price-sensitive wages, transportation, and royalty costs. This resulted in a cash margin of $168 per short-ton in the fourth quarter, compared to only $7 per short time in the same period last year. Cash cost of sales per short time, FOB port, was approximately $106 in the fourth quarter, compared to $86 in the same quarter last year. Transportation and royalty costs accounted for $22 of the increase, offset slightly by lower other production costs, which tend to be rather stable most of the time. cash costs on price-sensitive items such as wages, transportation, and royalties that vary with net coal pricing were significantly higher in the fourth quarter this year compared to the same quarter last year. As you may remember, transportation costs lag on a one-quarter basis and prices averaged $105 higher in the fourth quarter versus the third quarter this year. As a result of the significantly higher prices period over period, variable transportation royalty costs are significantly larger components of the cost per ton than the normal approximately one-third percentage. Variable transportation royalty costs were 43% of the cost per ton of $106 in the fourth quarter this year, compared to only 27% in the same quarter last year, driven primarily by higher met coal pricing. As we look forward into the first quarter, We expect our cash cost per ton to increase over the fourth quarter as transportation rates reset in the first quarter based on the average of higher met coal prices in the fourth quarter. Keep in mind that index prices averaged $105 per metric ton higher in the fourth quarter than the third quarter of 2021. Also, we expect a variable cost of royalties to increase in the first quarter based on the higher met coal prices. Combined, transportation and royalties per short-ton will be a higher percentage of our cash costs per short-ton in the first quarter than the fourth quarter of 2021 because our production or mining costs remain fairly stable, except for the smaller variable labor costs. Also, we expect to see increases in labor costs next quarter as we increase our hourly headcount at the mines, plus the impact of expected inflation on material and supply costs. Depreciation and depletion expenses for the fourth quarter this year were $39 million and flat compared to last year's fourth quarter. However, the fourth quarter this year included the immediate recognition of $8 million of expense related to Mine 4 depreciation that would have normally been capitalized as inventory as it was produced. However, since Mine 4 was idled in the fourth quarter, it was instead directly expensed. This increase in expenses was offset by $8 million due to the 34% decrease in sales volume. SG&A expenses were about $9 million, or 2.3% of total revenues in the fourth quarter this year, and were higher than the same quarter last year, primarily due to higher employee-related expenses, partially offset by lower audit and legal expenses. During the fourth 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 Mine 4 remained idle during the fourth quarter, except for the one continuous mining unit that was running, and as Mine 7 ran at a reduced rate of production, We incurred $14 million of EIDL expenses. These expenses were for electricity, insurance, maintenance labor, taxes, and are primarily fixed in nature. The amounts were higher than the second and third quarters as we incurred more labor from higher headcount at Mine 4, costs associated with restarting one continuous minor unit at Mine 4, and preparation work in anticipating restarting the Longwell at Mine 4 in the first quarter of 2022. Net interest expense was about $9 million in the fourth quarter and included 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. The loss on early extinguishment of debt represents the write-off of debt issuance costs and premiums paid in connection with the refinancing of our senior notes during the fourth quarter. We recorded income tax expense of $27 million during the fourth quarter this year on pre-tax income of $165 million compared to a benefit of $11 million in the same quarter last year on a pre-tax loss of $45 million. The fourth quarter tax expense was primarily due to pre-tax income partially offset by benefits for depletion and additional marginal gas well credits. The fourth quarter expense primarily represents the utilization of our NLLs, and therefore we paid no cash income taxes. Turning to cash flow. During the fourth quarter this year, we generated $151 million of free cash flow, which resulted from cash flows provided by operating activities of $175 million. less cash used for capital expenditures and mine development costs of $24 million. This resulted in free cash flow conversion of 63% this year versus last year's fourth quarter of 13%. Free cash flow in the fourth quarter of this year was negatively impacted by a $34 million increase in net working capital. Increase in net working capital was primarily due to an increase in accounts receivable on higher met coal pricing. all set partially by lower inventories due to higher sales volume. Cash used in investing activities for capital expenditures and mine development costs were $24 million during the fourth quarter of this year compared to $29 million in the same quarter last year. Cash flows used by financing activities were $24 million in the fourth quarter of this year and consisted primarily of payments related to the refinancing of our senior notes of $14 million capital lease payments of $7 million, and payment of the quarterly dividend of $3 million. Our total available liquidity at the end of the fourth quarter was $479 million, representing an increase of $123 million, or 35% over the third quarter, and consisted of cash and cash equivalents of $396 million and $83 million available under our ABL facility. This is net of outstanding letters of credit of approximately $9 million. With the refinancing in the fourth quarter, we have no near-term funding debt maturities. We believe our total liquidity position, strong balance sheet, and low and variable cost structure are strengths of the company that will allow the company to navigate volatile markets and challenging business conditions. As a result of the uncertainties facing the business these past two years, the company has been stockpiling cash, resulting in net debt of less than zero, further strengthening the balance sheet and providing the company a significant amount of flexibility to navigate challenging markets. 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 while we accumulate and preserve cash and liquidity. Combination of strong met coal markets with high prices and the refinancing of our indebtedness pushing out the maturities has resulted in a stronger balance sheet and positions us to resume our growth strategy and increase returns of cash to stockholders in the future. However, at this time, We are taking a patient, wait-and-see approach to capital allocation and have not made any other significant changes to our capital allocation policy except for the recent announcement to increase the fixed quarterly dividend by 20%. We continue to evaluate market conditions for 2022 while expecting a met coal pricing reset to lower levels and continue to negotiate with the union on a new contract to resolve the ongoing strike. And we continue to monitor changing Chinese policies that may significantly impact the net coal and global steel markets. And finally, we expect to reevaluate the prospect of developing our Blue Creek reserves in the coming months. Now, turning to our outlook and guidance for 2022. We believe we are well positioned to fulfill anticipated customer commitments for 2022. In the current operating environment and without a new union contract, we believe that our production and sales volumes will be as outlined in the outlook section of our earnings release. The volumes outlined include the restart of Mine 4, although at lower production rates, and running Mine 7 at lower operating rates than normalized production. I will now turn it back to Walt for his final comments.