Warrior Met Coal, Inc.

Good afternoon. My name is Rocco and I will be your conference operator today. At this time, I would like to welcome everyone to the Warrior Metco first quarter 2022 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 Investors 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 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, sir.

Thanks, operator. Hello, everyone, and thank you for taking the time to join us today to discuss our first quarter 2022 results. After my remarks, Dale will review our results in additional detail, and then you'll have the opportunity to ask questions. We were pleased to deliver our second consecutive quarter of record quarterly earnings in over three years on the back of strong customer demand. The global supply of met coal remained tight during the first quarter, even with China continuing to reduce its steel production. We're well positioned to continue meeting our customer commitments, even in the face of potential global economic volatility in the future. Demand for premium met coals was strong throughout the first quarter due to sustained steel production and due to restocking by customers. We also experienced a short-term surge in demand due to panic buying associated with the Russian invasion of Ukraine. The Russian buyers searching for alternative coals in an already tight market pushed prices into uncharted territory. The last event was largely responsible for making this past quarter the most volatile pricing period in recent history. However, the spike in pricing was short-lived as we saw all major indices give back a substantial portion of the gains brought on by the war. Our primary index, the PLV FOB Australia, started the quarter at $357 per metric ton, then climbed by over $313 per metric ton to its peak of $671 per metric ton on March 14th, while closing the quarter at $515 per metric ton. In addition to strong demand, supply shortages continue to be a problem due to a mix of weather-related issues in Australia and logistical constraints in North America. As previously mentioned, the Russian invasion of Ukraine only exacerbated the already tight market conditions. We were expecting Chinese buyers to initiate purchases of imported coals from the US following the Olympic Games. However, they remained mostly on the sidelines for the entire quarter. Only a few transactions between North American suppliers and Chinese customers were completed in the very early days of the quarter. With lower steel production for most of the quarter, the Chinese steel mills were able to manage with strong domestic coal production and imported land-borne coals from Mongolia, albeit lower than historical levels, as well as the residual Australian coals in the bonded warehouses. The World Steel Association recently reported that global pig iron production decreased by 8.8% in the first three months of 2022. China recorded a decrease in production of 11% for the period, while the rest of the world's pig iron production decreased by 4.3%. China's lower steel production is largely due to measures put in place for the Olympics, as well as recent shutdowns related to COVID restrictions. While lower steel production volumes in the rest of the world were due to the ongoing supply chain issues, overall steel demand remains solid despite the lower volumes compared to the previous year. As for Warrior, our sales volume in the first quarter this year was 1.1 million short tons compared to 2 million short tons in the same quarter last year. This quarter was lower than last year primarily due to the ongoing labor strike lowering total production volume, plus approximately 100,000 tons that slipped into the second quarter due to shipping delays at the port. Dredging, maintenance, and congestion in the first half of the quarter delayed some shipments into March, while a mechanical failure of the ship loader in the last few weeks of the quarter delayed our final vessel loadings, which caused the volume slippage into the second quarter. These issues resulted in 54% of our sales volume shipping in March, back-end loading to quarter sales volume and occurring higher demurrage costs of nearly $3 million. In addition, although not as significant, was the poor performance of our rail transportation provider in getting our product to the port in a timely manner. We believe these delays reduced our first quarter adjusted EBITDA by approximately $40 million, net income by $32 million, and EPS by 63 cents. Our sales by geography in the first quarter were 66% into Europe, 13% into South America, and 21% into Asia. We did not sell any volume into China during the first quarter as the CFR China index price was below the Australian FOB price the entire quarter, except for three days in early January. Our spot sales in the first quarter were approximately 15%. Production volume in the first quarter this year was 1.5 million short tons compared to 2.2 million short tons in the same quarter of last year. The tons produced in the first quarter resulted from running both longwalls and five continuous miner units at Mine 7 and two continuous miner units in the longwall at Mine 4. Our lead days on the longwalls did not materially change during the quarter and remained solid. The mines ran well and very efficiently in the first quarter as we ramped up production at mine four to about 50% of its nameplate capacity, or one million tons. We finished the quarter running the mines with a combination of salaried and hourly employees representing approximately 50% of the normal workforce while producing approximately 75% of the normal production volume. Capital spending in mine development in the first quarter this year was $20 million and remains on target for the full year, including the work on the Four North portal, which we expect to be completed early next year. On that note, in light of the company's current free cash flow generation and our philosophy to invest in our core business, our board recently approved the purchase of two new sets of longwall shields for the existing mines. This represents another significant investment of approximately $100 million to keep our mines well capitalized and performing most efficiently. We expect to make down payments this year, which is reflected in our annual guidance, and final delivery is expected to be in the third quarter of 2023. Before I ask Gail to address our first quarter results in greater detail, I wanted to take a moment to comment on the exciting and important announcements we made earlier this week. Specifically, we announced the relaunch of the development of our Blue Creek Reserves, Our decision to accelerate stockholder returns with special cash dividends with the first dividend of 50 cents per share and an update on our approach to capital allocation. I'll start by discussing our capital allocation approach since it provides the umbrella framework for understanding how we think about our short and long-term stockholder value creation. It also explains why our board decided to unlock the value of Blue Creek and enhance stockholder returns with special cash dividends in addition to our regular quarterly dividends. First, let us look at where we are from a cash and operating perspective. We are in a much stronger cash position today than we were two years ago, having generated significant free cash flow over the last two years. Based upon the current industry outlook for higher MECO pricing in the near term, we will continue to generate significant amounts of free cash flow in the future. Second, we've demonstrated our ability to operate as a low-cost, low-leverage company with strong liquidity to maintain flexibility through market cycles and volatility in the Metco market. This approach has enabled us to continue operating successfully over the past few years despite significant headwinds. That will not change regardless of Metco pricing or our cash position. Third, at this point we've built up the necessary liquidity to allow us to put our capital to work. both through making prudent investments in our business and returning cash to stockholders. In summary, while we are following the same long-standing capital allocation principles as we always have, our cash balance and free cash flow generation give us additional flexibility and scale. Dale will have more to say about our capital allocation in a moment. For now, let me tell you that everyone within Warrior is extremely excited about the potential of Blue Creek to transform the company. We're enthusiastic about the opportunity to build on a strong track record of creating value for stockholders with this project. Importantly, the timing for relaunching this project is ideal. We believe that the demand for premium high-volume A coals will continue to increase due to their unique blending attributes, while the overall supply of premium coals will remain constrained due to declining production and a lack of new projects, which will support strong pricing fundamentals in the future. Blue Creek's Tier 1 high-volume quality and the lack of Tier 1 projects in the United States suggest considerable demand for our product. Another attractive feature of this new mine is that we expect production costs to be in the first quartile of the global seaborne cost curve. We believe the combination of these factors will generate some of the highest met coal margins in the U.S. Once fully developed, Blue Creek is expected to expand our product portfolio to our global customers. by offering three premium hard coking coals that are expected to achieve the highest premium met coal prices in the seaborne markets. The new single lone wall mine at Blue Creek is expected to produce an average of 4.8 million short tons per year of premium high vol A met coal. Once we've developed Blue Creek, we expect that this new mine could increase our annual production nameplate capacity to nearly 13 million short tons per year. resulting in an annual production growth rate of 60%. We control approximately 70 million short tons of reserves and 49 million short tons of resources at Blue Creek, which totals 119 million short tons. Based on the current schedule, we expect the first development tons from continuous mining units to occur in the third quarter of 2024, with the Lone Wall scheduled to start up in the second quarter of 2026. All this detail and much more can be found in a slide presentation on the IR section of our website. As I mentioned, Blue Creek represents a transformational opportunity for Warrior. We could not be more excited to start this project and look forward to seeing the fruits of our investment once the development is completed. I'll now be able to address our first quarter results in greater detail, provide some additional metrics around our capital allocation strategy, and provide additional information on how we are approaching the financing for Blue Creek.

Thanks, Walt. Before I go into detail about the quarter, I want to address how we're thinking about capital allocation while we move ahead with the Blue Creek project. Given our strong liquidity position, now is the appropriate time to provide additional context to our thinking. In the press release we issued on May 3rd, we laid out our current policy in regard to capital allocation, which focuses on our ability to fund the operations, regardless of volatility in the met coal market, investing in highly accretive growth opportunities, such as Blue Creek, and leveraging our free cash flow to return cash to stockholders through special cash dividends or stock repurchases. More specifically, there are certain key metrics that we're focusing on achieving as we make those capital allocation decisions, including through the development of Blue Creek. They include, first, maintaining a higher amount of minimum total liquidity of $250 million, including a minimum cash balance of $150 million. Second, staying one and a half to two times levered. And third, balancing the value of our NOLs with stock repurchases, which could jeopardize those NOLs. We believe strongly that our capital allocation policy and our key metric guidelines provide the right approach. They balance capital investments for medium to long-term growth with near-term returns to our stockholders. Turning now to Blue Creek. In determining to move forward with the project, we compared the Blue Creek potential to our investment criteria. With Blue Creek as one of the rare large-scale Tier 1 assets in the country, we expect the project to deliver an attractive internal rate of return on our investment of approximately 30%. As we think about how best to account for the $650 to $700 million investment, we will be opportunistic in evaluating funding alternatives beyond our free cash flow. If there are financially prudent opportunities to tap external financial resources, we will look to do so. We are pleased that our strong base of operations has enabled us to take this flexible approach. However, we expect to generate enough free cash flow during the five-year construction period to pay for the project entirely in cash, pay special dividends, or repurchase stock and retire a debt early by as much as two years. At that point, we expect the company would be debt-free while producing approximately 13 million short-tons per year. In considering the timing of the development of Blue Creek and the required investment, there are several internal and external factors that influence our decision to move forward with the project now, despite the inflation we are currently experiencing. First, We refinanced our debt in the fourth quarter last year and pushed out the maturity until late 2028, well beyond the start of the Blue Creek Longwall in 2026. Second, our cash and liquidity has significantly increased since we originally announced our intention with Blue Creek in early 2020, including an additional $241 million of cash and an additional $247 million of total liquidity on our balance sheet. Third, the strength of both current market conditions and high prices should allow the company to generate strong free cash flows this year, further reducing the funding risk of the project. Fourth, accelerating the project timeline by 15 months also brings production online sooner, thereby increasing profitability and free cash flows in the next five years, two years before the maturity of our senior notes. Financing options still remain available if needed to maintain an efficient and low-cost capital structure. And finally, in addition to these factors, we expect to generate strong free cash flows over the five-year construction period that will provide further liquidity to balance both the development of Blue Creek and make additional cash returns to stockholders. These factors combined with the value that Blue Creek can deliver to our stockholders give us confidence in the success of the project. With that, I will turn to the first quarter results. For the first quarter of 2022, the company recorded its second consecutive quarter of record quarterly results of net income on the GAAP basis of $146 million or $2.83 per diluted share compared to a net loss of $21 million or $0.42 per diluted share in the same quarter last year. Non-GAAP adjusted net income for the first quarter excluding the non-recurring business interruption expenses, idle mine expenses, and other income, was $2.97 per diluted share compared to an adjusted net income of $0.08 per diluted share in the same quarter last year. Adjusted EBITDA was $244 million in the first quarter this year, another all-time record high for a quarter, as compared to $47 million in the same quarter last year. The quarterly increase was primarily driven by a 220% increase in average net selling prices, partially offset by a 42% decrease in sales volume. Our adjusted EBITDA margin was 64% in the first quarter this year, compared to 22% in the same quarter last year. We believe the financial impact of the shipping delays that Walt previously noted reduced the first quarter sales volume by 100,000 short times. adjusted EBITDA by approximately $40 million, net income by $32 million, and EPS by 63 cents per share. The impact of the delays was magnified by the current high pricing environment. Total revenues were $379 million in the first quarter compared to $214 million in the same quarter last year. This 77% increase was primarily due to the 220% increase in average net selling prices, partially offset by 42% lower sales volumes in the first quarter versus the same period last year. In addition, other revenues were positively impacted in the first quarter this year by an 87% increase in our natural gas prices, offset by non-cash mark-to-market loss on our gas hedges of approximately $13 million. This mark-to-market hedge loss is attributed to hedges put into place prior to the war in Ukraine, which has triggered a run-up in natural gas prices recently. Our gas operations are generating strong results, just not as much as they could be due to the hedges. The Platts Premium Low Vol FOB Australian Index price averaged $361 per metric ton higher and was up 284%. in the first quarter this year, compared to the same quarter last year. The index price averaged $488 per metric ton for the first quarter. The merge and other charges reduced our gross price realization to an average net selling price of $339 per short ton in the first quarter this year, compared to $106 per short ton in the same quarter last year. The merge charges were approximately $3 million higher in the first quarter this year, versus last year, primarily due to the port delay issues that Walt discussed earlier in his comments. Cash cost of sales was $134 million, or 35% of mining revenues, in the first quarter, compared to $154 million, or 74% of mining revenues, in the same quarter last year. The decrease in total dollars was primarily due to a $65 million impact, a 42% lower sales volume, partially offset by $45 million of higher variable costs associated with price sensitive wages, transportation, and royalty costs. In addition, our costs were higher due to inflation increases on belt structure, roof bolts, cable, magnetite, rock dust, and other materials and equipment. Despite the higher variable costs and inflation, cash margins were $220 per short ton in the first quarter, compared to only $27 per short ton in the same period last year, demonstrating the leverage to higher met coal prices, driving both profitability and free cash flow. Cash cost of sales per short ton, FOB port, was approximately $119 in the first quarter, compared to $79 in the same quarter last year. Transportation royalty costs accounted for $32 of the increase, plus an increase in production costs due to rising inflation of approximately $3 per short time. Cash costs on price-sensitive items such as wages, transportation, and royalties that vary with met coal pricing were significantly higher in the first quarter of this year compared to the same quarter last year. As you may remember, transportation costs lag on a one-quarter basis, and index prices averaged $361 higher in the first quarter versus the same quarter last 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 46% of the cost per ton of $119 in the first quarter this year, compared to only 29% in the same quarter last year, driven primarily by higher met coal pricing. As coal prices stay at or near these all-time highs, we expect our transportation and royalty costs to be a higher percentage of our total cash costs in the coming quarters. SG&A expenses were about $14 million, or 3.7% of total revenues in the first quarter this year, and were higher than the same quarter last year, primarily due to higher stock compensation expense, due to retirement eligible employee equity grants, and a 60% higher stock price. During the first quarter, we incurred incremental non-recurring business interruption expenses of $7 million that were directly related to the ongoing labor strike. These non-recurring expenses were primarily for incremental safety and security, legal and labor negotiations, and other expenses. Idle mine expenses were $3 million in the first quarter and represent expenses incurred with the operations at both mines. running at reduced capacities, such as electricity, insurance, maintenance, labor, taxes, and are primarily fixed in nature. Turning to cash flow, during the first quarter of this year, we generate $50 million of free cash flow, which resulted from cash flows provided by operating activities of $70 million, less cash used for capital expenditures and mine development costs of $20 million. This resulted in free cash flow conversion of 20% this quarter versus last year's first quarter of 50%. Free cash flow in the first quarter of this year was negatively impacted by a $159 million increase in net working capital from the fourth quarter of 2021. The increase in net working capital was primarily due to an increase in accounts receivable on higher met coal pricing combined with lower sales volumes which increased our inventories due to the shipping delays previously noted. Our total available liquidity at the end of the first quarter was $557 million, representing an increase of $78 million, or 16%, over the fourth quarter of 2021, and consisted of cash and cash equivalents of $434 million and $123 million available under our ABL facility. This is net of outstanding layers of credit of approximately $9 million. Now turning to our outlook and guidance for 2022. We believe we're well positioned to fulfill anticipated customer commitments for 2022. In the current operating environment and without a new labor contract, we believe that we'll be able to meet our production and sales volumes, including the outlook section of our earnings release. The volumes outlined include the restart of Mine 4 at about 50% of capacity and running Mine 7 at lower operating rates than normal production. I'll now turn it back to Walt for his final comments.