Q1 2020 Earnings Call

That indeed is turned out to be the case. I would come back to that thought in a few minutes.

First I'd like to discuss how the widespread outbreak of covid-19 has affected us all in new and unprecedented ways while we continue to operate our minds as a critical infrastructure business in a state of Alabama. These are challenging times and I would like to thank all of our employees for their hard work and resilience in the face of adversity.

We taking the necessary measures to adjust our workplace environment to comply with social distancing and personal hygiene guidelines set forth by various health organizations while maintaining our operation.

Well, I know the Futures on everyone's mind. Let's take a minute to look at the first quarter results in more detail since they do provide an important Baseline.

Production volume in the first quarter of 2020 was 2.1 million short tons compared to 2.3 million short tons produced in the same quarter of last year a decrease of 9%

sales volumes in the first quarter were 1.8 million short tons compared to two point 1 million short tons in last year's first quarter.

Our sales by geography and the first quarter were 54% in their Europe 26% into South America and 20% into Asia the geographical mix this year was fairly consistent with last year's first quarter.

As expected in previously communicated inventories were higher at the end of the first quarter than the fourth quarter of 2019.

in the

Increase $229,000 short tons to 978000 short tons during the first quarter primarily due to higher production volumes.

We expect our inventory levels to remain temporarily elevated as a precautionary measure to reduce risk to the mines be disrupted or shut down by covid-19 outbreak among the workforce.

Also, the higher than normal inventory levels will allow us to capitalize on Market opportunities that may become available as a result of our competitors being either to shut down for lengthy periods of time.

We entered the first quarter cautiously optimistic about our customers ability to start ramping up production rates from the low levels and the fourth quarter of 2019.

What we'll pick our production for the first three months of the year was down by half of one percent the puzzled girl from China 2.4% partially offset by a sharp decline a 5.5% observed across the rest of the world of the quarter progressed all major medical indices increased due to the local Dynamics in China. We're resilient demand from the integrated steel mill wage challenge by three temporary Supply constraints.

First the DraStic reduction in domestic metco production as a result of lockdown measures in China do to covid-19.

Second the closure of the Mongolian Border in order to reduce the spread of covid-19 and third weather-related disruptions in the Australian supply chain.

Medical industry speak in mid-march. I see supplies constraints were eventually addressed. I started retreating. Give me back most of their gains as the impact of the buyers on Global Steel demand outside trying to became apparent. Our customers were quick to adjust to the threat posed by the virus taking measured actions starting in early March to align of production rates with a declining forecast in orders page.

As expected several customers with through existing and future calendars do to rapidly deteriorating conditions.

The supply response from major us and canadian-based met coal producers has been significant with a fairly large amount of production being temporarily taken offline a platypus meum low-ball SOB Australian index price closed the first quarter twenty $28 a metric ton higher than where it started the quarter.

Nicole Prices rose as high as $164 per metric ton during the first quarter before falling late in the quarter.

A gross price realization for the first quarter 2020 was 89% of the Platts premium low-ball fo be Australian index price and with lower than our 98% achieved the prior year.

Our lower bill is actually was primarily due to a rising price environment combined with a higher proportion of spot sales.

Spent $26 on Capital expenditures and Mine Development costs during the first quarter of this year compared to Thirty million dollars last year.

This amount includes a little more panel development cost for the extension of mind for into the next area of the mine plan. We call for North we expect to be mining in that area sometime in the next four to five years. Well now that's Dale to address a first-quarter results in Greater detail.

Thanks Walt.

For the first quarter of 2020 net income on a gaap. Basis was approximately $22.42 per diluted share compared to net income of $110 a month or $2.14 per diluted share and the first quarter of 2019 excluding non-recurring other income and losses. Non-gaap adjusted. Net income for the first quarter wage was $20 or $0.39 per diluted share compared to $2.30 per diluted share in the first quarter of 2019.

Adjusted ebitda was $62 in the first quarter of 2020 as compared to adjusted ebitda of $181 in the same period of 2019.

The quarterly decrease was primarily driven by a 31% decrease in average net selling prices in a 13% decrease in sales volumes.

Our adjusted ebitda margin was 27% in the first quarter of 2020 compared to 48% in the first quarter of 2019.

total revenues were approximately $227 in the first quarter of 2020 compared to $378 in the same period last year

this decrease was primarily due to the decrease in average net selling prices in sales volumes in a week or Market environment than last year.

the average net selling price for a short time decreased approximately 31% in the first quarter of 2020 compared to the same period in 2019 as you may recall last year's first quarter saw stronger met cold demand and higher pricing the flats premium Global fo be Australian index average $51 per ton lower in the first quarter of 2012 compared to the same quarter last year the merge and other charges reduced our groups price realization to an average net selling price of $122 per short time in the first quarter of 2020 compared to $176 for a short time in the same period last year

Mine cash cost of sales was 151 million or 68% of mining revenues in the first quarter compared to $182 or 49% of mining revenues and the first quarter of 2019.

Cash cost of sales for short ton fob Port was approximately $83 in the first quarter compared to $87 in the same period of 2019.

decrease

This is primarily due to lower price sensitive costs such as transportation and royalties that very with metco pricing all set parsley by 13% lower sales volumes.

Sg&a expenses were about eight million dollars or 4% of total revenues in the first quarter of 2020 compared to approximately nine million dollars in the prior year. Primarily due to lower costs expenses.

Depreciation depletion expenses for the first quarter of 2020 were $29 compared to $22 in 2019. The increase quarter-over-quarter was primarily damage to the high level of capital spending during 2019.

Net interest expense was about eight million dollars in the first quarter and include the interest on our outstanding debt plus amortization of our debt issuance costs associated with our credit facilities partially all suck my interest income.

This amount was 1 million dollars lower compared to the same period last year primarily due to the early retirement of a portion of our debt and last year's first quarter.

re-recording on cash income tax expense of $3 during the first quarter of 2020 and $28 in the same period last year

These results primarily reflect the utilization of our net operating losses or nol with a corresponding decrease in a balance sheet account deferred income taxes.

We paid no cash taxes in the first quarter of 2020 or 2019. We continue to expect the utilization of our nols will reduce our federal and state income tax liability off 0 until the wheels are fully utilized or expire.

We expect this will continue to drive significant free cash flow conversion over the next several years.

Turning the cash flow during the first quarter of 2020. We use $5 of free cash flow, which was the result of cash flows provided by operating activities of $21 a month plus cash used for Capital expenditures in mind development cost of twenty six million dollars.

Free cash flow in the first quarter of 2020 was negatively impacted by an increase in net working capital.

The increase in net working capital was primarily due to higher accounts receivable and inventory partially offset by an increase in accounts payable.

Operating cash flows were significantly lower in the first quarter of 2020 compared to 2019 primarily due to lower average net selling prices of thirty 1% and lower sales volumes 13% cash used in investing activities primarily for Capital expenditures. And Mine Development costs was twenty million dollars during the first quarter of 2020 compared to Thirty million dollars and for the same period last year

cash flows provided by financing activities were $63 in the first quarter of 2020 and consisted primarily of the draw on our abl facility of $70 as a precaution a measure less payments for Capital leases, the four million dollars unless payment of the quarterly dividend three million dollars.

I've note our balance sheet remains strong with a leverage ratio of 0.52 times adjusted ebitda.

In addition, we have ample liquidity without the fixed costs associated with Legacy liabilities the low in variable cost structure.

A total available quit at the end of the first quarter of 2020 was $303 million dollars consisting of cash cash equivalents of $257 and fifty six million dollars available under a BL facility.

Their borrowings a $70 and now standing letters of credit of approximately nine million dollars.

As I mentioned earlier withdrew $70 on our abl facility as a precautionary measure to increase liquidity and reduce risk during these unprecedented times.

We intend on retaining declines and cash to preserve the quality and the growing uncertainty surrounding the covid-19 outbreak.

In summary, the first quarter results for production in sales volume turned out as expected in previously disclosed the overall Financial results were primarily driven by lower net selling prices and slash or sales volumes compared to last year's first quarter.

Now turning to our outlook for the remainder of the year in light of the uncertainties regarding the duration of the covid-19 pandemic and its overall impact on the global economy. And the company's operations. We are withdrawing our full year 2020 guidance issued on February 19th this time.

We're also a properly adjusting operational needs including managing expenses Capital expenditures working capital liquidity and cash flows.

For example as the cautionary measures, we have delayed the 25 million dollars budgeted for the development of the Blue Creek project until at least July 1st 2020 and have temporarily suspended our stock repurchase program.

We will continue to evaluate the impact of the covid-19 pandemic on our business for the remainder of the fiscal year and expect to provide further updates to our financial Outlook and the development of the Blue Creek project during our second quarter earnings call to be held in Late July.

We continue to pay our quarterly dividend at this time, but will continue to monitor liquidity in light of the covid-19 pandemic.

Now, I'll turn it back to Walt first final comment Thanks Dale before we move on to Q&A. I'd like to make a few more comments.

What we were pleased with our first quarter results. The rest of the years left certain. We are clearly seen the impact of covid-19 on global steel production and overall metco pricing in light of reduced off the bill manufacturing and a Slowdown of construction projects.

Although we did experience some reduction in sales orders toward the end of the first quarter. It is now apparent that the full impact of covid-19 on met coal demand erosion may not materialize until the second quarter of 2012-13 possibly Beyond as a result, the unprecedented level of uncertainty in our customers Market has made the job of forecasting which was already challenging even more difficult.

I need a regularly update our business continuity planning on global steel production and met coal demand for various potential developments related to covid-19 and will continue to take precautionary measures as necessary or possible.

With Captain will continue to keep close contact with our customers during this period in order to optimize our sales orders and capitalize on opportunities if and when they appear in the marketplace.

Regarding medical pricing. We expect all Industries to remain under pressure as long as the supply-demand balance remains stressed by the uncertainty of current events.

Despite the unknowns. There are a few important reasons that our business as well positioned to whether any prolonged economic challenge one. We have a strong balance sheet and adequate liquidity.

To Arlo And variable cost structure enables us to drive high margins and free cash flow across most business environments.

Three we've made significant investments in our operations over the past three years allowing us to now reduce Capital expenditures as needed without impacting operations.

For we maintain one of the world's highest quality medical portfolios. We have strong long-term customer relationships and five are highly talented Workforce is committed to safely get personally driving results.

As a result of these factors, I'm content. We will emerge from this Health crisis ready to achieve our long-term growth potential.

With that we'd like to open the call for questions operator.

At this time, we would like to remind everyone to ask a question, please press star then the number one on your telephone keypad. We will close momentarily to compile our question-and-answer roster.

Our first question is from David Graziano from BMO Capital Market. Go ahead.

Thank you. And thanks for taking my questions. I just wanted to chill down a little bit onto Q if possible. I know you guys which I get but just directionally if you give us a sense as to you know, it seems like sales volumes 1.8 million tonnes in the in the first quarter you give us a directional sense for the second quarter on sales volume and also on the cash cost performer, you know, again exceptionally strong good cash cost performance, uh, 83 bucks. I think it is and and and the first quarter is that sustainable second quarter. That's that's my first question.

Well in terms of the the market in Q2, that's David frankly. That's one of the reasons we were through Guidance. Just things are changing on a daily basis. You know, we had of them all we have customers shifting things out of the quarter. We've been had customers shift things back into the quarter. So it's really been very Dynamic. So we do expect to see do you real impacts of covid-19 in Q2 and probably Q3 and I don't I don't know what will happen beyond that. But in terms of our cost structure wage, I I think we're we're pretty solid there and I would expect us to continue to squeeze ourselves pretty hard in terms of manage our club.

Okay.

And and operational here on the cloud side any any um, upcoming, uh, you know, nuances associated with long loads or anything like that relative to the first quarter that we need to be thinking about. We took a longwall move at mine for that will happen at around the end of Q2. It could be cute to work you three. It's just hard to tell right now. It's right on the right on the edge of the two.

Okay, and then my last question just regarding the the pause and the in the spending of Blue Creek. Can you talk a little bit about you know the the press release by July first potentially and is is that I'm associated with restarting the spending at Blue Creek associated with you know expectations for covid-19 relief, or is it related to an improvement in market conditions.

Probably a little bit of both probably more covid-19 than Market, but right now, you know the way the markets deteriorated here in the last week or two I would be would be lying if I didn't say. Oh that's also on my mind a little bit.

Okay. All right. That's it for me. Thanks. Thank you, David.

Our next question is from Scott from Clarkson. Go ahead.

Thank you. Good afternoon. Everyone. Well, well obviously your minds are running very well getting that you have almost 1 million tons of inventory of the stage. Is there any consideration of slowed down production to bring these levels down? I think I recall you saying the past around 400,000 tonnes was about an ideal level and uh as a second part about how much capacity do you have to continue to inventories?

Scott is is I said in my comments. There's a couple of reasons we kind of signal at the Q4 call that we do want to be a lot like you to walk in Q4. I think we brought about a hundred and fifty thousand tons of inventory in this quarter. We've been a little more than I expected cuz the mines ran a little better than we expected but not uncomfortable with where that level is right now because frankly if we would have an outbreak covid-19 at one of our operations, it could easily result in a multi-week shut down and we want to make sure that you know, we have contractual obligations and we want to make sure we have call on hand to fulfill those obligations that are committed through the second quarter wage. Definitely. I think there's the potentials of the same thing happening at other operations globally which could result in opportunities for us to potentially. Yep.

Step in and take care of those. So we're not uncomfortable with that.

I don't know that we've ever really discussed our Max Capacity, but it's well beyond where we are today.

in terms of total inventory levels

Okay, it's very very helpful. I appreciate that Switching gears a little bit. It was good to see the regular cash dividend declared and paid and I know you mentioned listen to the prepared remarks a little bit odd that we have seen many other companies in the space to spend dividends or shareholder return programs. Can you just walk us through your thought process around? Uh, any any factors that may make it time to rethink life is it?

Well, I think Scott is entailed, you know, if the pandemic continues to worsen or have a greater impact and the durations even longer thank you know, that's one of the other things that you put on the table, but for now, you know, we got a very strong balance sheet with plenty of liquidity. So we didn't see the need at this point to suspend service.

Okay, that's helpful. Thanks for taking my questions. Good luck. Thank you.

Our next question is from Lucas pipe from B Riley FDR. Go ahead.

Hey, good afternoon. Everyone. Good job on the cost just to complete to the market realities first wanted to ask ask about free cash flow. So Q one was slightly negative obviously or a few things going on with working capital, but I know you'll spend the guide but just kind of high-level you think about where the market is today. For example, the lower sales realizations would cost could look like in this environment. I understand there are a lot of uncertainties with volume, but just kind of high-level the expect to be free cash flow positive here with this price apart the very much appreciate that thank you. Yeah looks this is Dale. Yeah. I think we would be free cash flow positive. You know you have

From seasonal working capital build. We have the last three years in the first quarter round your receivables and inventories. Obviously, we've already talked about inventory, so I thought that was the primary drivers, you know, we were working on Capital spending some I wouldn't say to the extent that we may be working on it in the future. Just depending on the office environment, but you know, I think it would be positive. I don't see a problem there. Should we need to be able to really dial back all expenses in all capital spending?

Now that's that's helpful. Thank you for that. Hi. My second question is in regards to sales commitments kind of months. I think about this environment sure you getting calls from your customers that you mentioned something along those lines in your prepared remarks as well. But but when you think about 2012 or what amount of volume is low before I understand the pricing may not be fixed. But just in terms of having having customers from the other side of it off that's again, we've been through guidance because so much of that is is in flux right now. We have customers, you know wanting to push Congress out for a quarter and we really just don't know how quickly things are going to pick back up in Europe with auto manufacturing. So even though we have called spoken for

It's not under.

In the some of those make push out a quarter, I think in total volumes over the period of the contract. They'll still be taken care of, but it's easy to see cold if there's going to move an office late June not moved for July and then just pushes the whole way out through the year and you have coal that was going to move in December that then moves into next January. So it's really dead difficult for me to to nail that one down for you.

Okay, let me maybe try to select a different date. Typically this time here. What amount of your volume service spoken for?

You know it varies it varies based on what demand is because we'll have some times where again customers either us or customers will either way to push pull out on contract or we met if we think we have better opportunities to push cold out into the following quarter. So it's it's really tough to say

Okay, I I I will try one more follow-up. I think the market is concerned, you know about fairly severe oversupply of offensive and that some producers run into problems with, you know, finding a home for their their product and how do you how do you think about that life in this market? I know you suspected guidance, but what sort of insurance is so to say might there be a place to find a home for the birth mind Stone don't have to get stopped out here would really appreciate your thoughts on that thinking. Well, that's why we're withdrawing guiding cuz we just we just don't know again. I'd love to answer your question. But if I could answer your question, I wouldn't be withdrawing guidance. So

Sorry, I can't give you a little more there. Yeah, it just a reminder Lucas, you know, most of these contracts all have force majeure Clauses in them. So if you've already seen our salar and others wage or steel producers, you know issue those letters so that that just kind of, you know takes a step back as well when you're talking about commitments month.

Got it. Got it. Now. I mean, it's I understand. It's just very uncertain environment and appreciate all the color. I appreciate you know, you making these tough decisions and I had issue press the bucket and stay help me. Thank you you as well.

The next question is from Matthew fee from Bank of America. Go ahead.

Hey guys. Hope you and your families are doing as well as can be expected you made a comment earlier about sort of maintaining liquidity and strong balance sheet in the cake that for opportunities in case some of your competitors are shuttered or clothes or curtailed. Are you specifically talking about sort of picking up incremental pieces of business or you talking about kind of m&a transactions for distress competitors or both? I'm talking about picking up incremental pieces of business.

Okay, great. And then thank you and then you know another sort of clarification on liquidity, you know, appreciate drawn down a piece of the revolver because of all certainty in the marketplace. You know, how do you think about kind of balancing the need for that liquidity sort of on hand versus wage, you know, which is basically hedging your bets in case things are you know, very bad versus kind of taking advantage of potentially you're stronger balance sheet in case things are better than people feel, you know, potentially buying back that at a discount or or making some kind of other transaction. How how do you balance those kind of 2 needs?

Well, it's a daily balance. Just depending on what the market looks like. So, you know that that's probably more of a real-time decision, you know, once you start to see the recovery from this pandemic and and believe that you kind of are coming out of it and you try to balance thinking something, you know along those terms, but I think for now, it's highly unknown what the true impact on demand and pricing will be so I think our Focus will be on the validity like most everybody else and not reserving that liquidity versus versus, you know by Baghdad at a discount at this point and you got to remember are profiled on the debt as in November of this year.

Right and then sort of the ties into the next question which is you know, if you know, it's not if but when Blue Creek goes ahead it's going to be a lot more sort of capital spending time with the current kind of bonds relatively High coupon for Saline.

How do you think about sort of potentially coming to market for a unsecured deal maybe large ordeal to sort of boost liquidity plus get you sort of part of the way towards funding Blue Creek. Um

If and when the call Price becomes more and I mean table.

I think that was something we would definitely get consideration too depending on on the market conditions. I'm not willing to pay a high coupon for that. I'm some of the spreads are pretty high out there on some of these deals as well. So I'm not sure that that makes sense right now in might later at some point. But again, we're I think we're focused on preservation a total liquidity right now and we'll look at things like that, but it's hard to tell exactly what we might do there.

Okay, so maybe you know is is the I don't want to sort of put words in your mouth but is the message right now kind of sit on the liquidity until we have a clearer picture of the future.

Yeah, I think that's pretty much what we've been saying. Okay. All right, that's it for me. I guess. Thanks very much and good luck. Thank you.

Again, if you have a question, please press * then 1 our next question is from Chris from Jeffrey. Go ahead. Hey guys. Thanks for taking my call. It's good to see the flexibility that you have in the business where you can cut volumes a bit and still have decline in unit cost is pretty unusual and cold obviously, but my question is really relate to the cash generation and the free cash flow Outlook and the understanding of course that you've suspended guidance. But if we look at the the first quarter the capex Run rate than a quarter was below your prior full-year guidance excluding Blue Creek. My my first question is was there any cat back to associated with blue Creek in that first quarter capex, and should we expect capex through the rest are assuming kind of Market still like they are today. Should we assume your cat packs run-rate recorder to be lower than what it was in the first quarter. That's my first question.

Well, there was I guess the first one there there was no spending relate to Blue Creek in the first quarter. And as far as your run rate question again, who knows we don't know we don't offer disability in the second half. Yes to be able to provide you any guidance on what capex will be on a run-rate basis. Uh, we're just going to have to monitor the situation with the pandemic and the impact on demand pricing and look at what we are willing to spend the rest of the year. So I would not take that number x 4 months if I were you so, okay. Thank you suspended guy that you know, so it's just, you know, there's no visibility right there. And in terms of the receivable, I understand their seasonality around the building receivables in the first quarter. Is there a risk for twenty twenty that you know, because your customers all the money you're having hard times themselves it maybe you don't get the reversal of that receivable off.

In in the first from the first quarter, in other words, the the the the benefits that he should get to the rest of the years as it does not happen.

There's nothing there's nothing there that we believe they would prevent us from not recovering that build in receivables. And so I just my last question you commented earlier about expecting to most likely be I mean obviously think there's a lot of moving Parts here, but potentially being free cash flow positive for 2020 is that true at current spot prices. I mean if you look at 1 a.m. And permit Rotana for Benchmark pricing is that do you think you could be free cash flow positive and that sort of price environment? I think that okay. That's just me. Thank you.

Thank you.

And this question is from Lucas pipes from the Riley FBR. Go ahead. Yes. Thanks very much for taking my follow-up question. I wanted to ask about changes in customer mix and then also kind of changes on the spot vs. Permitted volumes any additional color you might be able to walk I don that it you know, the 10K you had two fairly large customer kind of not a user any walk-ins how that might impact sales that had the big of of your customers. Thank you very much. Well our sales let's say is Lucas our sales mix was roughly the same as it was last year in the first place order with, you know, the majority going into Europe a little less going into South America and then the remainder of going into Asia and I think that's that's likely to remain the same.

By and large, I mean we every now and then we'll have a quarter or South America and they just swapped places.

But I think by and large the mix of the year were made about the same. Remember what the second part of the question was in terms of estimated time. We had more spot in the first quarter than we would normally have had.

And that was due again as soon as covid-19 started to show its face around Europe and other places. You had people shifting pretty quickly trying to either get vessels are or delayed vessels. So we we ended up with a little more spot sales than what would be normal.

Again with with guidance for the rest of the year Lucas again. It's why we withdrew I just I just don't have the I don't have a good feel for exactly what will be spot. And what will be the contractual the rest of the year. That's helpful. I I appreciate that against

Thank you.

Our next question is from Curt Woodward from Credit Suisse. Go ahead. Yeah, good evening, everyone.

Like her from a marketing perspective all you know, most of your contracts, you know with Legacy long-term customers that you know, Japan and Korea cutting last four action pretty quickly now, it's can you can you pivot into more, you know other markets you traditionally don't go into like could you try to sell more into China right now? I mean the Arbitrage is relatively open and it does seem like their economy is coming back. If you could just kind of talk to, you know commercially what you're doing right now is my first question.

Well, we have a lot of our calls are all of our cold reality that plugs into Asia flows through X cold. So they're monitoring those markets and seeing where the opportunities are in the Asian market place where things have tightened up. I can take obviously Japan has tightened up quite a bit. So we expect them to be monitoring that and but I do think there may be opportunities in China open up in the relatively short-term.

Okay, and then could you give us a sense of what your current like mine plan is right now, like what what's kind of the capacity utilization of your operations today?

Well in the first quarter, it wasn't quite we didn't push the mind as hard as we did in the first quarter last year that was for a few different reasons that you could see the last year pricing was over $200 a ton and we were running the operations of flat out this year. Were were not quite running. We were not quite running at that level in the same quarter and

See where we go from here.

Can you give us a sense for what? Your operating rate is right now? I'd rather not it's you know, we're we're still operating, but I'd rather not discuss exactly what we're doing today. I'm okay. Thank you very much. Thank you.

At this time, there are no further questions. I will now turn the call back over to mr. Sheller for any comments about

That concludes our call this afternoon. Thank you again for joining us today, and we appreciate your interest in Warrior met coal.

Thank you for thank you and this concludes our conference today. Thank you all for participating you may now disconnect.