Warrior Met Coal, Inc.

Good afternoon. My name is Joe 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 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 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've 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 releases and SEC filings. I've also been asked to note The company has posted reconciliations of the non-GAAP financial measures discussed during this call, and the table is 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. 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 2022 results. After my remarks, Dale will review our results in additional detail, and then you'll have the opportunity to ask questions. We entered the fourth quarter with optimism that strong customer demand would facilitate a drawdown of our inventories with the expectation of continuous improvement in rail transportation and improved performance at the McDuffie Terminal. Unfortunately, several uncontrollable shipment delays continue to drive higher than normal inventories and lower shipment volumes in the fourth quarter. As we mentioned on previous calls, the rail transportation and the McDuffie Terminal performance issues impacted our shipment volumes each quarter during 2022 and caused our demurrage cost to increase by 415% last year. This underperformance by our business partners resulted in sales volumes that were below our expectations and guidance for the full year 2022. We had the customer orders ready to ship, but the mechanical failures prevented us from realizing the strong customer demand during the fourth quarter. Looking further at our outbound logistics, the fourth quarter provided a mix of encouraging and disappointing news. On the positive side, we experienced our best coal movement quarter of the year, largely due to improvements in rail service and the consistent reliability of our barging system. The performance by our rail carrier was stable throughout the quarter and has remained so into the first few weeks of 2023. We expect to see this level of service going forward as incremental improvements are made over time in order to return the service to historical performance levels. On the disappointing side, our main export terminal, McDuffie, suffered a myriad of mechanical issues that greatly impeded its loading ability. The mechanical failures have been mainly concentrated on its conveyor and transfer systems, as well as on the larger operational equipment, such as the ship loaders. In addition, vessel movement was interrupted for approximately six days during December due to heavy fog and severe weather. As a result, we experienced longer than normal vessel queues and fell short of our end-of-year shipping potential by approximately 300,000 to 350,000 short times. In January this year, we initiated a series of projects jointly with our partner at McDuffie to address the root causes of these recurring issues. In addition, We've committed both personnel and other resources towards these projects. We've already seen significant progress with these joint efforts, and we expect the performance of McDuffie to improve over the coming quarters, while recognizing that some other projects, such as the replacement of major operational equipment, will take longer to fully address. In addition to providing support to our terminal partner, we are also diverting some of our calls to alternative local terminals to maintain our sales volumes with a minimal increase in cost. From a market perspective, the fourth quarter played out in line with our forecast, with the obvious exception being China's decision to abandon its zero COVID policy. As a result of China's reopening, we saw several transactions between Chinese customers and US suppliers, with loadings in both the fourth quarter of 2022 and the early part of 2023. China has also announced several measures to stimulate its critically important property sector, which should directly benefit the local steel industry. Despite these tailwinds, improvement in China's economic activity have been slow to come. In the Atlantic Basin, steel production remains subdued due to a combination of low demand, high energy prices, and inflation. One estimate has a total capacity reduction close to 26 million metric tons per year. During the fourth quarter, we also saw capacity reductions in other Asian countries, with Vietnam announcing the idling of several of its blast furnaces. The good news is that steel pricing in most geographies seems to have found support late in the quarter, as several attempts to pass on price increases were successful. These price increases, albeit modest, are welcomed by our customers whose margins have been stressed by the current environment. From a supply standpoint, there were challenges with outbound logistics, labor, and production that remain a common theme across the world's three largest supply regions. With November 2022 year-to-date exports trailing the previous year's volume by 5%, the largest exporter, Australia, is on track to deliver a third year in a row of negative year-over-year growth. Exports from both the US and Canada should end the year with single-digit growth and export volumes versus 2021. The lack of a positive supply response during the best met coal pricing year ever is by itself remarkable. We expect some of the issues affecting supply, such as the European ban on Russian coal, weather and port disruptions, high inflation, and poor rail transportation performance to ease in 2023. We do expect the lack of sector investment over the last several years with an improving global demand outlook beyond 2023 to continue to constrain supply and drive pricing above old benchmarks for long-term pricing. The World Steel Association recently reported that global pig iron production decreased by 3.8% in 2022. China recorded a decrease in production of 0.8% for the period, while the rest of the world's pig iron production decreased by 9.4%. The decreases were primarily driven by the Russia-Ukraine war, weak economic conditions in Europe, and lower production from China. China's lower production continued to be impacted by strict COVID policies and depressed property markets. India was the only country with a year-over-year increase of 2.9%. Our European customers had an especially challenging quarter, dealing with compressed margins due to elevated energy and raw material costs and low steel pricing due to soft demand. As reported by industry publications, several integrated producers operated at reduced production rates and in some cases even idled some blast furnace capacity. From a pricing standpoint, the fourth quarter was the least volatile quarter of the year in our primary index, the PLV FOB Australian. The index started the quarter at $245 per short ton averaged $253 and closed the year at $267 per short-ton. The CFR China index was more range-bound, averaging $277 per short-ton and closing the year at $286 per short-ton. Even with the shipment delays, we performed quite well, delivering fourth quarter sales volume of 1.5 million short-tons that was flat compared to the fourth quarter of 2021. As I said on previous calls in 2022, we could have sold more volume during the quarter if not for the shipment delays. These shipment delays pushed our coal inventory level to 855,000 short tons by the end of the fourth quarter. As performance on the McDuffie terminal improves, we believe that we are well positioned to take advantage of customer demand and spot market opportunities to reduce the working capital tied up in our inventories. Our sales by geography in the fourth quarter were 46% into Europe, 32% into South America, and 22% into Asia. European sales continued to be strong despite the economic headwinds facing the region, including the softening of the steel production. Production volume in the fourth quarter of 2022 was 1.5 million short tons compared to 1.1 million short tons in the same quarter of 2021. The higher tons produced in the fourth quarter for the full year resulted primarily from restarting mine four and running a full year in 2022. We added approximately 140 people at the mines during the year compared to the prior year, with the bulk of those additions at mine four. The mines ran well and were very efficient in the fourth quarter, despite the normal extended downtime for the holidays. Our safety incident rate continues to be approximately 63% lower than the industry average and reflects the training programs in place and the dedication of our employees to maintain a safe working environment. I want to say a special thank you to all of our employees for your hard work and dedication. 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 have been experiencing. These statistics represent another strong quarter for employee productivity and safety compared to historical periods. We appreciate the significant efforts by our employees to drive higher production levels while continuing to maintain a safe working environment. During the fourth quarter, we spent a record high $98 million on CapEx and mine development. CAPEX spending was $85 million, which included $27 million on the Blue Creek project. Mine development spending was $13 million during the fourth quarter. We expect development of Mine 4 will be completed by the second half of this year. We made good progress in 2022 on the development of Blue Creek, which represents a transformational growth opportunity for Warrior. More specifically, we continued developing the site, constructing the slope, service shaft, and ventilation shafts. We invested approximately $47 million in Blue Creek in 2022. 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 substantially over the next two years. As I will discuss in a few minutes, we remain extremely excited about the potential to create significant stockholder value through this project. We expect to continue to balance our growth investment in Blue Creek with returning excess cash to stockholders, allowing them to benefit from our strong free cash flow generation in the near term and over the long term. Gail will speak more to capital allocation in a moment. For most of 2022, we met or exceeded our targets as outlined in our previous guidance, except for sales volume that were lower than our expectations due to previously discussed shipment delays. Despite the lower sales volume, we delivered strong financial results in the fourth quarter that marked the conclusion of an exceedingly strong financial year for Warrior, which posted record operating cash flow, free cash flow, and adjusted EBITDA, which was more than double our 2021 adjusted EBITDA of nearly $1 billion. I will now ask Dale to address our fourth quarter results in greater detail.

Thanks, Walt. For the fourth quarter of 2022, the company recorded net income on a GAAP basis of $100 million, or $1.93 per diluted share, compared to net income of $138 million, or $2.68 per diluted share, in the same quarter of 2021. Non-GAAP adjusted net income for the fourth quarter, excluding the non-recurring business interruption expenses, idle mine expenses, and other non-cash adjustments, was $1.90 per diluted share compared to an adjusted net income of $3.17 per diluted share in the same quarter of 2021. These decreases quarter over quarter were primarily driven by lower average net selling prices and higher operating costs. We reported adjusted EBITDA of $148 million in the fourth quarter of 2022 compared to $240 million in the same quarter of 2021. The quarterly decrease was primarily driven by a 17% decrease in average net selling prices on flat sales volume, plus higher variable transportation and royalty cost, and the impact of inflation on labor, materials, and major equipment rebuilds. Our adjusted EBITDA margin was 43% in the fourth quarter of 2022, compared to 58% in the same quarter of 2021. Total revenues were $345 million in the fourth quarter compared to $416 million in the fourth quarter of 2021. This 17% decrease was primarily due to the 17% decrease in average net selling prices. Other revenues were slightly lower in the fourth quarter of 2022, primarily due to the prior year, including a mark-to-market gain of $7 million on our gas hedges. offset partially by an increase in revenues due to higher natural gas prices. The Platts premium lowball FOB Australian index price on average was $82 per short-time lower in the fourth quarter of 2022 compared to the same quarter of 2021. The index price averaged $253 per short-time for the fourth quarter. The merge and other charges reduced our gross price realization to an average net selling price of $227 per short-ton in the fourth quarter of 2022, compared to $274 per short-ton in the same quarter of 2021. The merge and other charges were $4 million higher this fourth quarter versus the fourth quarter of 2021 as a result of the shipment delays. We continue to see 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 and equipment purchases continue to be in the range of 18 to 24 months. Despite partial mitigation of these issues with our improved productivity at the mines, we are experiencing significant increases in costs of operating supplies and materials, repairs, and major equipment repairs. Those price increases led to a $5 per short time negative impact on our fourth quarter results. Cash cost of sales were $179 million, or 54% of mining revenues in the fourth quarter, compared to $153 million, or 39% of mining revenues, in the fourth quarter of 2021. The increase of $26 million was primarily due to higher variable costs associated with price-sensitive wages, transportation, and royalty costs, plus the impact of inflation. Variable transportation and royalty costs were higher primarily due to the delayed impact of tons being produced in earlier quarters when net coal prices were higher, and recognizing cost of sales on a FIFO inventory basis in the fourth quarter. This delayed recognition will revert back to normal as we bring down our coal inventory levels. Inflation accounted for $7 million of the higher cost, or $5 per short time, resulting from higher costs for labor, materials, and major equipment rebuilds, as previously noted. Cash cost of sales per short-time, FOB port, was approximately $123 in the fourth quarter, compared to $106 in the fourth quarter of 2021. Higher variable wages, transportation, and royalty costs were the primary drivers, as previously noted, plus the $5 per short-time impact of inflation. Despite the higher variable cost and inflation, cash margins were $104 per short-time in the fourth quarter. SGMA expenses were about $12 million, or 3.4% of total revenues in the fourth quarter of 2022, and were higher than the fourth quarter of 2021, primarily due to an increase in stock compensation expense of $2 million and charitable donations of $1 million. The interest income earned on our cash investments exceeded the interest expense on our outstanding notes and equipment leases during the fourth quarter of 2022, primarily due to our high cash balances. Our fourth quarter non-cash tax expense primarily reflects the utilization of our federal net operating losses, or NOLs, offset partially by the tax benefits for depletion. During 2022, we utilized a significant amount of our federal NOLs and have approximately $122 million remaining, plus $23 million of tax credit carry-fords. We expect to continue to utilize our federal NOLs and tax credit carry boards and believe we may become a cash taxpayer in late 2023 or 2024, based upon our long-term forecast and met coal prices, sales volumes, and performance. During the fourth quarter, we incurred incremental non-recurring business interruption expenses of $3 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 $2 million in the fourth 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 restart of mine floor operations during 2022. versus the prior year comparable quarter when it was fully idle. Turning to cash flow. During the fourth quarter of 2022, we generated $97 million of free cash flow, which resulted from cash flows provided by operating activities of $195 million, thus cash used for capital expenditures and mine development cost of $98 million. This resulted in free cash flow conversion of 65% this quarter versus 63% in the fourth quarter of 2021. Free cash flow in the fourth quarter of 2022 was positively impacted by a $47 million decrease in net working capital from the third quarter of 2022. The decrease in net working capital was primarily due to a decrease in accounts receivable due to lower average net selling prices, partially offset by higher inventories and lower accounts payable. Our total available liquidity at the end of the fourth quarter was a record $953 million, representing an increase of $84 million, or 10%, over the third quarter, and consisted of cash and cash equivalents of $830 million and $123 million available under our ABL facility. From a capital allocation standpoint, the company continues to be committed to returning excess cash to stockholders to increase stockholder value. while driving long-term growth with the investment in its world-class Blue Creek reserves. We demonstrated that commitment in 2022 by increasing our fixed quarterly dividend by 20% and paying two different special cash dividends, which together totaled $1.30 per share. A strong macroeconomic environment that pushed prices to levels never seen before in this sector enabled us to provide the stockholder returns on top of relaunching a significant value creation opportunity in Blue Creek. In addition, and more recently, the company announced further returns to stockholders with another increase in its fixed quarterly dividend of 17% and another special dividend of 88 cents per share to be paid in early March. In summary, despite the multiple issues in rail transportation and operational issues at the McDuffie terminal throughout 2022, that led to lower shipment volumes, we delivered record-breaking financial results. Some of those all-time records were revenues of over $1.7 billion, adjusted net income of $666 million, or $12.88 per diluted share, adjusted EBITDA of nearly $1 billion, cash flows from operations of $842 million, free cash flow of $588 million, and total liquidity of $953 million. In addition, we relaunched our growth investment in the Blue Creek Reserves in 2022, which we expect to create significant stockholder value. Now, turning to our outlook and guidance for 2023, we believe we are well positioned to achieve our targets outlined in the outlook section of our earnings release. The achievement of those targets will be driven in part by the continuous improvements in performance at the McDuffie Terminal and in rail transportation to allow us to draw down our coal inventory in 2023 as we currently expect. We expect capital standing for the year to be an all-time record high as we continue the development of Blue Creek, complete the 4 North portal, and make final payments on the two sets of longwall shields. Even future capital returns beyond those recently announced from excess cash flows will be at the discretion of the Board of Directors and subject to consideration of several factors. including business and market conditions, future financial performance, and other strategic investment opportunities. I'll now turn it back to Walt for his final comments.