Warrior Met Coal, Inc.

Good afternoon, my name is Melanie and I'll be your conference operator today. At this time, I would like to welcome everyone to the Warrior Met Collins third 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 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 the 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 and 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 side presentation at the investor section of the website at www.warriormetcoal.com. Here today to discuss the company's results are Mr. Walt Scheller, Chief Executive Officer, and Mr. Dale Boyle, 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 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 happy to share our performance from another very strong quarter, delivering results above expectations despite market headwinds. We again demonstrated our ability to leverage our efficient business model to meet strong customer demand for our premium metcoals and take advantage of strong metcoal pricing to deliver those results. The most notable ongoing headwind constraining our performance relates to shipment delays, which is not a new challenge, but which became particularly problematic during the third quarter due to a variety of factors. Combination of disappointing rail performance Outages from major equipment maintenance work at the port of Mobile that was eight weeks behind schedule and substantial vessel congestion led to higher coal inventory levels, missed sales, and higher demurrage costs. While the port maintenance outages should be behind us, we expect to continue to experience port congestion challenges in the upcoming quarters. Also, we remain concerned about a potential labor stoppage from the National Railroad contract negotiations. Fortunately, we've recently started to see improvements in reducing these delays due to an increase in rail crew availability and the commissioning of the new tandem car dump at the port of Mobile. We also expect to see gradual but slow improvement as our rail carrier continues to better calibrate their cycle times and as the port continues to address ongoing performance issues and high traffic volume. As you will hear in a minute, if we could ship more, we could sell more. Given our strong customer base, low-cost business model, and liquidity position, we continued to leverage our strong production capabilities to build our inventory, which rose to 858,000 short tons at the end of the third quarter. As shipment issues are resolved, we are well positioned to take advantage of continued demand for our high-quality products. Turning to pricing and the demand for met coal, we experienced less volatility in the third quarter than previous quarters. Nonetheless, as expected, we continue to observe a general softening of steel demand across certain geographies. In particular, Europe's steel industry initiated numerous production closures of electric arc furnaces due to high electricity prices, as well as production cuts across blast furnace capacity. We continue to see lower steel demand, high inflation, and economic uncertainty in the region, all of which impacts our customer demand. The European ban on the import of Russian coals took effect on August 10th, which we expect will result in customers looking to other geographies for met coal supply. In addition, crossover coals provided some pricing support as demand for thermal coals was strong for most of the third quarter. In Asia, Chinese steel production saw modest improvements for the first two months of the quarter, but is still underperforming compared to the first nine months of 2021. As China's property sector remains depressed and its strict COVID policies continue to restrain economic activity. Our primary index, the PLV FOB Australia, which had been undergoing a correction since late May, started the quarter at $274 per short-ton before finding a floor at $171 per short-ton in early August. From this low point in the quarter, the index was able to partially claw back some of the pricing erosion, ending the third quarter at $246 per short-ton. The CFR China index experienced a greater decline as a result of lower demand. ending the third quarter at $279 per short ton, which represented a decrease of $78 per short ton from its July 1st value of $357 per short ton. The World Steel Association recently reported the global pig iron production decreased by 4.4 percent in the first nine months of 2022. China recorded a decrease in production of 2.5 percent for that period. while the rest of the world's pig iron production decreased by 8.1 percent. China's lower steel production is due to recent shutdowns related to their 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. All other sectors, including automobiles, have weakened and are expected to remain weak due to the overall challenging economic environment. Even with this backdrop, we performed quite well, increasing our third quarter sales volume compared to the third quarter last year. And as I said, we could have sold even more volume during the quarter if not for the shipment delays. The largest impact to our third quarter results by a wide margin was the poor performance of our rail transportation provider that delayed getting our product to the port in a timely manner. In addition, with the high demand for seaborne thermal coal, we saw higher volumes of thermal coal move through the port, creating some additional congestion and impacting loading dates and times. Our sales volume in the third quarter was 1.5 million short tons compared to 1.1 million short tons in the same quarter last year. Our sales by geography in the third quarter were 62% into Europe, 17% into South America, and 21% into Asia. European sales continue to be strong despite the economic headwinds facing the region, including the softening of steel production. Our European customers continue to operate their Coke batteries to produce gas and heat for local communities, as well as lower their overall energy costs. despite lower steel production. Production volume in the third quarter this year was 1.6 million short tons compared to 1.1 million short tons in the same quarter of last year. The tons produced in the third quarter resulted from running both long walls and five continuous minor units at mine seven and three continuous minor units in the long wall at mine four. Our lead days on the long walls continue to remain long and solid. The mines ran well and were very efficient in the third quarter, despite some downtime for skip maintenance that we previously discussed on our last earnings call. We finished the quarter running the mines with a combination of salaried and hourly employees, representing approximately 50% of the normal workforce, while producing more than 80% of the normal production volume. These statistics represent another strong quarter for employee productivity compared to historical periods. Over the past year, the mines have trended higher in clean tons produced per man-hour work due to well-capitalized mining operations, revised work schedules, and a more productive hourly workforce. 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 third quarter, we spent $56 million on CapEx and mine development. CapEx spending was $41 million, which included $12 million on the Blue Creek project. Mine development spending was $15 million during the quarter. Year to date, we have spent $120 million on CapEx, of which $21 million was for the Blue Creek project. We expect to spend between $75 and $80 million on sustaining capital for the existing mines for the full year. In addition, we expect to spend between $110 and $120 million on special projects for Blue Creek, new longwall shields, and the Four North Portal. Based on these full-year targeted spending amounts and year-to-date spending, we expect the fourth quarter will be the highest capex spending quarter this year. We continue to see rising inflation and long lead times impacting our business for an indefinite period of time. In addition to the higher cost, the lead times on supplies, equipment purchases, both new and rebuilt, continue to be 18 to 24 months in duration. Despite partial mitigation of these issues with our improved productivity at the mines, we're experiencing a 25 to 35 percent increase 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 third quarter results. As U.S. inflation in September remained near a four-decade high of 8.2 percent, the Federal Reserve continued its faster pace of interest rate increases in its efforts to bring that number down. As we look ahead, we made strong progress this quarter on the development of Blue Creek. which represents a transformational opportunity for Warrior. More specifically, we continue developing the site and constructing the slope and service shaft. As we continue to move through the preliminary stages of development on schedule, both activity at Blue Creek and the spending required for that activity will increase over the remainder of this year. We remain extremely excited about the potential to create significant stockholder value through this project. We continue to balance investment in Blue Creek with returning cash to stockholders, allowing them to benefit from our strong free cash flow generation in the near term and long term. During the third quarter, we were pleased to be able to pay another special dividend of 80 cents per share, the second special dividend this year. I'll now ask Dale to address our third quarter results in greater detail.

Thanks, Walt. For the third quarter of 2022, the company recorded net income on a GAAP basis of $98 million, or $1.90 per diluted share, compared to net income of $38 million, or 74 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 and idle mine expenses, was $2.10 per diluted share, compared to an adjusted net income of $0.97 per diluted share in the same quarter last year. We achieved adjusted EBITDA of $172 million in the third quarter this year, compared to $105 million in the same quarter last year. The quarterly increase was primarily driven by a 32 percent increase in average net selling prices and a 42 percent increase in sales volumes, partially offset by higher variable transportation and royalty costs and the impact of inflation on labor, materials, supplies, and major equipment rebuilds. Our adjusted EBITDA margin was 44 percent in the third quarter this year compared to 52 percent in the same quarter last year. Total revenues were $390 million in the third quarter compared to $202 million in the same quarter last year. This 93 percent increase was primarily due to the 32% increase in average net selling prices and 42% higher sales volume. In addition, other revenues were positively impacted in the third quarter this year by a $6 or 145% increase in natural gas prices compared to the prior year third quarter. The prior year third quarter other revenues were also lower due to a $6 million loss on natural gas hedges that were in place at that time. The Platts Premium Logall FOB Australian Index price on average was $13 per short-time lower in the third quarter of this year compared to the same quarter last year. The index price averaged $227 per short-time to the third quarter. The MERGE and other charges reduced our gross price realization to an average net selling price of $248 per short-time in the third quarter this year. compared to $189 per short time in the same quarter last year. The merge and other charges were approximately $13 million higher in the third quarter this year versus last year, primarily due to higher pricing and the shipment delays that Walt discussed a few minutes ago. Cash cost of sales was $202 million, or 54% of mining revenues in the third quarter, compared to $91 million or 46 percent of mining revenues in the same quarter last year. The increase of $111 million was primarily due to $73 million of higher variable costs associated with price-sensitive wages, transportation, and royalty costs, including the impact of inflation, higher maintenance costs, and other spending, and a $38 million impact of 42 percent higher sales volume. Inflation accounted for $7 million of the higher cost and $4 per short-ton, resulting from higher costs for belt structure, new bolts, cable, magnetite, log dust, and other materials, plus labor and parcel repairs and major equipment rebuilds. Despite the higher variable costs and inflation, cash margins were $113 per short-ton in the third quarter, compared to $103 per short-ton in the same period last year. demonstrating the leverage to higher met coal prices, driving both profitability and free cash flow. Past cost of sales per short-ton FOB port was approximately $135 in the third quarter, compared to $86 in the same quarter last year. Transportation and royalty costs accounted for $31 of the $49 per ton increase. The remaining increase of $18 was due to an increase in production costs attributed to rising inflation of $4 per short-ton, Mine 7 skip repairs of $4 per ton, Mine 4 production cost, previously treated as idle cost of $4 per ton, and higher other spending of $4 per short-ton. As we continued to ramp up Mine 4 production during the quarter, more costs were treated as production costs versus being treated as idle costs in the prior year comparable quarter. Variable transportation royalty costs were 47% of the cash cost of sales per short time of $135 in the third quarter this year, compared to only 39% in the same quarter last year, driven primarily by higher met coal pricing and sales volume. As a reminder, our transportation rates are reset at the beginning of each quarter based upon the average met coal prices of the preceding quarter. Therefore, we expect our fourth quarter transportation costs to be lower than the third quarter. SD&A expenses were about $11 million, or 2.7% of total revenues in the third quarter this year, and were higher than the same quarter last year due to higher employee-related expenses, primarily higher stock compensation expense, and higher professional fees. During the third 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 $5 million in the third quarter and represent expenses incurred with the operations at both mines running at reduced capacities, such as electricity, insurance, maintenance, labor, and taxes. These expenses decreased quarter over quarter, primarily due to the partial restart of mine floor operations this year. versus the prior year comprehensive order when it was fully idle. Turning to cash flow, during the third quarter of this year, we generated $191 million of free cash flow, which resulted from cash flows provided by operating activities of $247 million, less cash used for capital expenditures and mine development costs of $56 million. This resulted in free cash flow conversion of 112 percent this quarter, versus last year's third quarter of 50 percent. Free cash flow in the third quarter of this year was positively impacted by a $95 million decrease in net working capital from the second quarter of this year. The decrease in net working capital was primarily due to a decrease in accounts receivable due to lower net coal pricing and the timing of sales, slightly offset by higher inventories due to strong production and the shipment delays previously discussed. Our total available liquidity at the end of the third quarter was a record $869 million, representing an increase of $101 million, or 13% over the second quarter of 2022, and consisted of cash and cash equivalents of $746 million and $123 million available under our ABL facility. At this point, we are well positioned to continue the development and fund our Blue Creek project in the face of any challenging macroeconomic headwinds in the near future. Now turning to our outlook and guidance for 2022. We have updated our guidance as we near the completion of this year and have a clear picture of overall volumes. While we have seen gradual improvements in the shipping delays, we believe those issues will continue to impact us the remainder of this year. However, 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.