Warrior Met Coal, Inc.

Good afternoon. My name is Matt, and I will be your conference operator for today. At this time, I would like to welcome everyone to the Warrior Met Call Second 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 the star key followed by the number one on your telephone keypad. If you would like to withdraw your question, press stars and the number two. 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 section at 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 second quarter 2022 results. After my remarks, Dale will review our results in additional detail, and then you'll have the opportunity to ask questions. I'm excited to share the results from yet another very strong quarter. It represented our third consecutive quarter of record net income and earnings per share since the start of the COVID-19 pandemic. We again demonstrated our ability to leverage our efficient business model to meet strong customer demand for our premium met coal and taking advantage of strong met coal pricing to deliver these results. In addition to net income and earnings per share, this resulted in record high amounts of revenue, adjusted EBITDA, cash flow from operations, free cash flow, and liquidity. We were clearly the beneficiary of macroeconomic conditions driving higher pricing and strong customer demand. We're pleased with how well positioned the company is to be able to take advantage of these tailwinds. But it's the strength, efficiency, and nimbleness of our business model that are the key differentiators for us in good times and bad. We were able to see those strengths in action this past quarter in response to both industry and non-industry related issues. For example, we felt the impact of the significant inflationary environment on our cost of sales, which Dale will speak to later. Despite these increased costs, we were able to deliver strong profitability. In addition, many industries, including ours, were impacted by shipment delays related to port maintenance, the lack of available rail transportation, and port congestion. Yet we were able to overcome these issues to deliver our premium products to our customers around the world. That's why our thinking always remains ultimately defensive. It is important for us to lean into these supercharged periods while maintaining a strong buffer during periods of macroeconomic headwinds. And most important is for us to know how to be able to definitely adjust given how market conditions can change very quickly. We experienced this dynamic in part during this past quarter, which is a roller coaster of supply and demand. We entered the second quarter expecting our markets to experience price erosion as steel fundamentals were weakening. However, the first half of the quarter played out stronger than we had anticipated as pricing levels stayed quite high while we saw several pricing dips that were caused by end-user selling cargoes immediately reverse. The global supply of VET coal remained tight most of the second quarter despite lower global steel production. Eventually, a clear downward trend was established later in May, which remained unchallenged until the very end of the quarter. With lower steel prices across the globe and heavy recessionary pressures affecting most economies, it was no surprise that steel demand then deteriorated. We were expecting to see buying activity from China emerge during the quarter, but their highly restrictive COVID policies, strong domestic coal production, higher availability of Russian coals, and higher than historical imports from Mongolia limited the need to purchase U.S. met coals. To illustrate how this dynamic played out, our primary index, the PLV FOB Australia, started the quarter at $467 per short-ton, then climbed to its peak of $481 on May 18, while closing the quarter at $274 per short-ton. This correction represents a 43% decrease from its peak price achieved in the second quarter. The absolute value of the correction is by itself almost 170% higher than the 10-year average of the index. In short, we believe the first half of 2022 will go down as one of the most volatile periods in our markets, and we are pleased to emerge from it with strong results in hand. During the end of the quarter, we started to see a shift in customer demand for steel in certain industries. Overall, the World Steel Association recently reported that global pig iron production decreased by 5.5% in the first six months of 2022. China recorded a decrease in production of 4.7% for the period, while the rest of the world's pig iron production decreased by 7.1%. China's lower steel production is largely due to recent shutdowns related to stringent COVID restrictions and lower demand, especially in the property sector. Discussions with our customers continue to indicate that steel demand for the oil and gas, aerospace, and shipbuilding sectors is strong. Automotive demand is still reported to be strong, but production remains constrained by the availability of semiconductors and components. However, all other sectors have experienced weaker demand since the latter half of the second quarter. As for Warrior, our sales volume in the second quarter this year was 1.5 million short tons compared to 1.8 million short tons in the same quarter last year. Sales for this quarter were lower than last year primarily due to shipment delays due to port maintenance, lack of rail car availability, and port congestion, which have hampered our ability to ship more volume this year. With the high demand for seaborne thermal coal, we're seeing higher volumes in thermal coal move through the port, creating some congestion and impacting loading dates and times. By far, the largest impact to our second quarter results was the poor performance of our rail transportation provider that delayed getting our product to the port in a timely manner. We were not immune to the challenges posed by a very chaotic national rail system. Rail performance for the past quarter was one of the lowest we've ever experienced. causing higher than expected coal inventory levels at our mine sites, higher vessel to merge costs, and missed quarterly sales targets. We understand that our rail partners have plans in place to address the shortage, but we expect the return to normal operations to be lengthy and lumpy. Therefore, we expect outbound logistics to remain challenged for the foreseeable future. Our coal inventory rose to 735,000 short tons at the end of the second quarter. We expect to bring down the level of inventory in the second half of the year as some of the shipment delay issues improve. Our sales by geography in the second quarter were 62% into Europe, 18% into South America, and 20% into Asia. We sold a small amount of volume into China during the second quarter as the CFR China index price was below the Australian FOB price for most of the quarter. Production volume in the second quarter with 1.7 million short tons compared to 1.2 million short tons in the same quarter of last year. The production tons produced in the second quarter resulted from running both long walls and five continual miner units in mine seven and three continuous miner units in the long wall of mine four. Our lead days on the long walls continue to remain solid. The mines ran well and were very efficient in the second quarter as we continued to ramp up production in mine four. We finished the quarter running the mines with a combination of salaried and hourly employees, representing approximately 60% of the normal workforce, while producing nearly 83% of the normal production volume. Employee productivity was strong again during the second quarter compared to historical periods. Over the past year, the mines have trended higher in clean tons produced per million-hour work. This increase in productivity has helped offset some of the inflation we've been experiencing. We appreciate the significant efforts by our employees to drive higher production levels while continuing to maintain a safe working environment. During the second quarter, we spent a record high amount on CAPEX and mine development of $79 million. This amount included normal sustaining capital plus discretionary capital, including the development of our Blue Creek Reserves, work on the Four North Portal, and the deposits on the new Longwall Shield. As previously disclosed, Our Board approved the purchase of two new sets of longwall shields for the existing mines, which should be delivered in the third quarter of 2023. We made down payments on these shields in the second quarter of approximately $48 million. These shields represent another significant investment of approximately $100 million over two years to keep our mines well capitalized and performing most efficiently. We continue to see rising inflation and long lead times impacting our business the remainder of this year. Despite partial mitigation of these issues with our improved productivity at the mines, we are experiencing 25 to 35% increases in cost of operating supplies and materials, repairs, and major equipment rebuilds. Those price increases led to a $4 per short time negative impact on our second quarter results. As U.S. inflation in June hit another four-decade high of 9.1%, the Federal Reserve shifted to a faster pace of interest rate increases in its efforts to bring down inflation. There are growing fears of slowing economic growth worldwide, which has led to a decline in commodity prices in recent weeks, including met coal. Before I ask Gail to address our second quarter results in greater detail, I wanted to take a moment to comment on the exciting and important announcements that we made during the second quarter. Specifically, we announced on May 3rd, first, the relaunch of the development of our Blue Creek reserves, second, our decision to accelerate stockholder returns of special cash dividends, and the first special dividend of 50 cents per share, and third, an update on our approach to capital allocation. The development of Blue Creek represents a transformational opportunity for Warrior. During the second quarter, we began developing the site and constructing the service shaft and slope. We are in the preliminary stages of development and expect activities and spending to continue to ramp up over the remainder of this year. We are extremely excited about this project and look forward to seeing the results of our investment once the development is finally completed. As a result of our strong free cash flow generation, we paid a special dividend of 50 cents per share during the second quarter. In addition, we just announced additional returns to stockholders of a second special dividend of 80 cents per share to be paid in the third quarter. These returns are on top of the significant investments we are making into the business, as I mentioned earlier, as part of our capital allocation strategy. I'll now ask Dale to address our circled quarter results in greater detail.

Thanks, Walt. 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 Crete, and leveraging our free cash flow to return cash to stockholders through special cash dividends or stock repurchases. Using the strong cash flow generated during the second quarter, we deployed the highest quarterly amount of capital spending in mine development ever in the business of $79 million, as Walt noted earlier. We expect full-year capital spending of approximately $200 million to be a record high for the company. While deploying that capital into the business during the second quarter, we also paid a special dividend to stockholders of 50 cents per share. In addition, earlier this week, we announced our second special dividend of the year that will be paid to stockholders in late August on top of the regular quarterly dividend. As previously disclosed, there are certain key metrics that we're continuing to focus on achieving as we make those capital allocation decisions during the five-year 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 at all times during the development of Blue Creek. Second, staying no more than one and a half to two times levered over that same period, and third, balancing the value of our NOLs with stock repurchases, which could jeopardize those NOLs until they're fully utilized. While the current cash balance and total liquidity well exceeds those minimums, we continue to stockpile cash for the anticipated capital spending for the new Longwall Shields and the development of Blue Green, while returning excess cash to stockholders, as we have demonstrated this year. Now that we have nearly enough cash to pre-fund the entire Blue Creek project, we're pleased to be able to continue to balance capital investments for medium to long-term growth with near-term returns to our stockholders without incurring any debt. We believe strongly that our capital allocation policy and our key metric guidelines provide the right approach. With that, I'll now turn to the second quarter results. For the second quarter of 2022, the company recorded its third consecutive quarter of record quarterly results with net income on a GAAP basis of $297 million, or $5.74 per diluted share, compared to a net loss of $5 million, or $0.09 per diluted share in the same quarter last year. Non-GAAP adjusted net income for the second quarter was an all-time record, excluding the non-recurring business interruption expenses and idle mine expenses and was $5.87 per diluted share, compared to an adjusted net income of 25 cents per diluted share in the same quarter last year. We achieved an all-time record high of $431 million of adjusted EBITDA in the second quarter this year, compared to $65 million in the same quarter last year. The quarterly increase was primarily driven by a 227% increase in average net selling prices partially offset by a 15% decrease in sales volume, plus the impact of inflation on materials and supplies, labor and parts on repairs and major equipment rebuilds. Our adjusted EBITDA margin was 69% in the second quarter this year, compared to 29% in the same quarter last year. Total revenues, another record high, were $625 million in the second quarter, compared to $227 million in the same quarter last year. This 175% increase was primarily due to the 227% increase in average net selling prices, partially offset by a 15% lower sales volume. In addition, other revenues were positively impacted in the second quarter this year by a 130% increase in natural gas prices offset by a non-cash mark-to-market loss on our gas hedges of approximately $14 million. This mark-to-mark hedge loss was attributed to the hedges put into place prior to the run-up in natural gas prices. During the second quarter, we terminated all outstanding gas hedges, and our gas operations should report revenue more consistently with current market prices in future quarters. The Platts Premium Low Vault FOB Australian Index price averaged $280 per short-ton higher and was up 225% in the second quarter this year compared to the same quarter last year. The index price averaged $404 per short-ton for the second quarter. The merge and other charges reduced our gross price realization to an average net selling price of $404 per short-ton in the second quarter this year. compared to $123 per short ton in the same quarter last year. The merge and other charges were approximately $14 million higher in the second quarter this year versus last year, primarily due to higher pricing and the shipment delays that Walt discussed earlier. Cash cost of sales was $190 million for 30% of mining revenues in the second quarter, compared to $152 million, or 68% of mining revenues, in the same quarter last year. Increase in total dollars was primarily due to $61 million of higher variable costs associated with price-sensitive wages, transportation, and royalty costs, partially offset by a $23 million impact, a 15% lower sales volume. In addition, our costs were higher due to inflation, resulting in increased costs for belt structure, root bolts, cable, magnetite, rock dust, and other materials. plus labor and parts on repairs and major equipment rebuilds. Despite the higher variable costs and inflation, cash margins were $281 per short time in the second quarter, compared to only $40 per short time 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 time, FOB port, was approximately $123 in the second quarter, compared to $83 in the same quarter last year. Transportation royalty costs accounted for $39 of the increase, plus an increase in production costs due to the rising inflation of approximately $4 per short time. Cash costs on price-sensitive items such as wages, transportation royalties that vary with met coal pricing were significantly higher in the second 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 $280 higher in the second 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 54% of the cost per ton of $123 in the second quarter this year, compared to only 33% in the same quarter last year, driven primarily by higher met coal pricing. We expect our transportation costs to be higher in the third quarter due to the lag effect. SE&A expenses were about $13 million, or 2% of total revenues, in the second quarter this year, and were higher than the same quarter last year, primarily due to higher employee-related expenses. During the second quarter, we incurred incremental non-recurring business interruption expenses of $6 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. There is no update on the ongoing labor strike as we continue to negotiate in good faith to resolve the matter. Idle mine expenses were $2 million in the second 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 second quarter this year, we generated an all-time record high $250 million of free cash flow, which resulted from record high cash flows provided by operating activities of $329 million, less cash used for capital expenditures and mine development costs of $79 million. This resulted in free cash flow conversion of 58% this quarter versus last year's second quarter of 82%. Free cash flow in the second quarter of this year was negatively impacted by a $67 million increase in net working capital from the first quarter of this year. Increase in net working capital was primarily due to an increase in accounts receivable on higher met coal pricing, combined with higher inventories due to the shipment delays previously discussed. A total available liquidity at the end of the second quarter was a record $768 million, representing an increase of $211 million, or 38% over the first quarter of 2022. and consisted of cash and cash equivalents of $645 million and $123 million under our ABL facility. Now turning to our outlook and guidance for 2022, we believe we're well positioned to fulfill anticipated customer commitments for the year. In the current operating environment and without a new union contract, we believe that we will be able to meet our production and sales volumes, including the outlook section of our earnings release. I'll now turn it back to Walt for his final comments.