Q2 2020 Warrior Met Coal Inc Earnings Call
Good afternoon, My name is Andrew and I will be your conference operator today.
At this time I would watch a welcome everyone to the warrior met coal second quarter Twentytwenty financial results Conference call.
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Before we begin I've been asked to know 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 S E filing.
I have also been asked you know that the company has posted reconciliations of non-GAAP financial measures discussed during this call in the tables accompanying the Companys earnings press release located on the investors section of the company's website that W. W.
Well, you Dot warrior met coal Dot com.
In addition to the earnings release the company has posted a brief supplemental slide presentation to the investors section of its website at Www Dot warrior met coal Dot com.
Here today to discuss the company's results are Mr. wall shallower Chief Executive Officer, Mr., Dale Pointless, Chief Financial Officer.
That's true shallower you may begin your remarks.
Right. So operator, Hello, everyone and thank you for taking the time to join US today to discuss our second quarter 2020 result.
After my remarks, Dan will review our result in additional detail then you will have the opportunity to ask questions.
The second quarter with a very challenging environment as the cover 19 pandemic continued its spread and disruptive impact on the U.S. and global economies.
We saw material cuts in steel production across our key geographies the led to lower demand for met coal.
In addition met coal pricing hit a four year low point in early June.
These key factors had a significant impact on our financial results for the second quarter as we will explain in further detail.
The widespread outbreaks of carbon 19 has affected us all a new an unprecedented ways.
We continue to operate our minds as a critical infrastructure business in the state of Alabama. These are challenging time and I would like to thank all of our employees for their hard work and resilient.
We've taken the necessary measures to adjust our workplace environment to comply with social different thing and personal hygiene guideline.
Work by various health organization, while maintaining our operations.
I'd also like to thank our supply chain partners have adapted their operations. During this pandemic to ensure that old waters customers received their orders on time.
As the quarter progressed, the full impact a cover 19 on the global steel markets became apparent.
And just taking decisive actions to align the production levels with reduced demand.
These actions have varied from simple operating rate adjustments to the idling a blast furnaces and in some cases, they tend to permanently closed on older and less affection production lines.
The results of these actions can now be major there's a global pig iron production data for the World Steel Association, where most of the steel producing region, excluding China were down significantly and average of 20% to 35% for the second quarter.
The first six monthly year global pig iron production was down 3.6%.
China continues to surprise to the upside growing its production by 2.2% for the same period.
It's worthwhile pointing out the Indias pig iron production, which is a growing importance to the global met coal seaborne trade was down over 32% for the second quarter compared to last year.
The rapid onset of production cuts across most of the world quickly translated into a softening met coal market, resulting in a price correction for met coal.
Despite several enough production cuts from met coal suppliers the rate of declining demand was simply to speed far outpacing supply response.
On April 1st the Australian PLD was valued at $145 per metric ton before being impacted by major correction.
Losing almost 27% of its value prior to retain its low point for the quarter of $106 per metric ton on June 2nd.
A valuation not seeing since 2016.
By the end of the quarter. The index, we gained a small portion of its losses closing at $116 per metric ton.
In addition to being challenged with lower index prices met coal producers were also impacted by lower relativities due to increased competition on fewer spot opportunities.
And in some cases coal blend adjustments made by customers as a result of increased coking times and other cost cutting measures.
There's little doubt that these pricing levels had cut deep into the global cost curve with several met coal producing regions trading at or below their cash costs.
Well I know many people are thinking about what this means for future quarters, let's take a minute to look at the second quarter result in more detail because they do provide an important data point.
Sales volumes in the second quarter were 1.5 million short tons compared to 2.2 million short tons in last year's second quarter, which was a record quarter for warrior.
Our sales by geography in the second quarter were 75% into Europe, and 25% in South America.
There were no sales into Asia in the second quarter this year compared to 18% in the same period last year as a result of customer significantly came back on steel production in countries, such as Japan, and South Korea.
Production volume in the second quarter 2020 was 2.1 million short tons compared to 2.2 married short tons produced in the same quarter last year.
As expected and previously communicated inventories were higher at the end of the second quarter than the first quarter of 2020.
Inventories increased 593000 short tons to 1.6 million short tons during the second quarter.
Primarily due to lower sales volumes.
We expect our inventory levels to temporarily remained elevated as precautionary measure to reduce the risk should the might be disrupted were shut down back over 19 outbreak among our workforce.
Also the higher the normal inventory levels will allow us to capitalize on market opportunity and they become available as a result of our competitors being idled or shut down for a lengthy periods of time.
Our gross price realization for the second quarter 2020, with 100% of the Platts premium Lowball Fob, Australia index price.
It was higher than the 97% achieved in the prior year period.
Our higher gross price realization was primarily due to the falling price environment during the month of June.
The company spent $31 million on capital expenditures and mine development costs during the second quarter this year compared to $34 million in the same period last year.
This amount includes longwall panel development cost with four nor portal.
We will continue to balance our free cash flow and liquidity preservation, it gets maintenance and discretionary capital spending.
And the long term value of capital projects for the remainder of this year.
I'll now ask be able to address our second quarter results in greater detail.
Thanks Walt.
As Walt discuss the overall financial results for the second quarter were primarily driven by a significant reduction in U.S. and global economic activity as result of the spread of covered 19, this year compared to a fairly robust market environment in the second quarter last year.
In addition, last year's second quarter with a record quarter for war here in terms of both sales and production volumes.
These combined factors led to 34% mower sales volume and 38% more average net selling prices.
Slightly offset by lower cost on tighter spending compared to last year's second quarter.
As a result of the company's highly variable cost structure. These factors explained the majority of the financial Barents is in the second quarter compared to the same period last year.
Well the second quarter of 2020, the company record a net loss on a GAAP basis of approximately $9 million, where a lot of 18 cents per diluted share compared to net income of $125 million.
Well $2.43 per diluted share in the second quarter of 2019.
Non-GAAP adjusted net loss for the second quarter was $9 million well off an 18 cents per diluted share compared to $2.16 of income per diluted share in the second quarter of 2019.
Adjusted EBITDA was $20 million in the second quarter 2020, as compared to $176 million in the same period of 2019.
The quarterly decrease was primarily driven by a 34% decrease in sales volume.
And a 38% decrease in average net selling prices.
Our adjusted EBITDA margin was 12% in the second quarter of 2020 compared to 44% in the second quarter of 2019.
Total revenues were approximately a $164 million in the second quarter of 2020 compared to $398 million than the same period last year.
This decrease was primarily due to the decrease in sales volumes and average net selling prices and a weaker market environment due to the impact of cobot 19.
The average net selling price per short time decreased approximately 38% in the second quarter of 2020 compared to the same period in 2019.
As you May recall last year's second quarter saw stronger met coal demand and higher pricing.
The Platts premium low vol, Fob, Australia index price averaged $85 per metric ton lower in the second quarter of 2020 compared to the same quarter last year.
The index price hit a four year low of $106 per metric ton or $96 per short ton in early June.
Demurrage and other charges reduced our gross price realization to an average net selling price at a $108 per short ton and the second quarter of 2020 compared to $173 per short ton.
And the same period last year.
My in cash cost of sales was $130 million were 82% of mining revenues in the second quarter compared to $205 million were 53% of mining revenues in the second quarter 2019.
The decrease of $75 million or 37% and cash cost of sales was primarily attributed to three factors one a 34% decrease in sales volume.
To a 38% decrease in average net selling prices.
Three tighter cost management in 2020.
It is noteworthy to highlight the company's variable cost structure in the second quarter, where cash cost of sales decreased $21 million or 14% from the first quarter of 2020 as sales volumes were lower by 19% and average net selling prices were 11% lower.
Cash cost of sales per short ton Fob pork was $88 in the second quarter compared to $91 in the same period of 2019.
The decrease is primarily due to lower price sensitive costs, such as wages transportation and royalties that Barry with met coal pricing.
Our cost per tonne Fob pork was higher in the second quarter compared to the first quarter 2020.
Change in volumes somewhat distorts the picture a total spending.
As I pointed out earlier total spending on cash cost of sales declined 14% from the first quarter and volumes or 19% lower.
S. DNA expenses were about $8 million or 5% of total revenues in the second quarter of 2020 and were 22% lower than the prior year period, primarily due to lower professional fees and employee related expenses.
Appreciation in depletion expenses for the second quarter of 2020 or $22 million and were 14% lower than the same period last year.
The decrease quarter over quarter was primarily due to lower sales volumes.
Net interest expense was about $8 million in the second quarter included interest on our outstanding debt.
Plus amortization of our debt issuance cost associated with their credit facilities.
Partially offset by interest income.
This amount was $1 million higher compared to the same period last year.
Primarily due to incremental borrowings on our ABL facility and lower returns on cash balances.
We recorded a noncash income tax benefit a $4 million during the second quarter of 2020 compared to into income tax expense of $33 million in the same period last year.
Turning to cash flow.
And second quarter 2020 free cash flow with positive, which was the result of cash flows provided by operating activities a $32 million.
That's cash used for capital expenditures and mine development costs at $31 million.
Free cash flow in the second quarter 2020 was positively impacted by decrease in net working capital.
The decrease in net working capital was primarily due to lower accounts receivable offset partially by higher inventory.
Operating cash flows were significantly lower in the second quarter of 2020 compared to 2019, primarily due to lower sales volumes and lower average net selling prices.
Cashews and investing activities for capital expenditures and mine development cost were $31 million during the second quarter of 2020.
To $34 million for the same period last year.
While spending was lower by 9%. This year, we continue to rationalize spending in this challenging market environment.
Cash flows used by financing activities were $37 million in the second quarter 2020 and consisted primarily the repayment on our A.B.L. facility, a $30 million payments for capital leases a $4 million.
And the payment of the quarterly dividend a $3 million.
Of note our balance sheet remains strong with a leverage ratio of <unk> 0.9 times adjusted EBITDA.
In addition, we have adequate liquidity in light of the fact, we have shed our fixed cost legacy liabilities and today have a low and variable cost structure and no near term debt maturities.
Our total available liquidity at the end of the second quarter of 2020 was $268 million, consisting of cash and cash equivalent of $221 million and $47 million available under our ABL facility.
Net of borrowings of $40 million, an outstanding letters of credit of approximately $9 million.
Our strong balance sheet and total liquidity position allowed us to pay back $30 million on the ABL facility to keep our interest cost low.
Now turning to our outlook for the remainder of the year on April 20 night in light of the uncertainties regarding the duration of the coated 19 pandemic its overall impact on the global economy.
The company's operations, we've been through our full year 2020 guidance.
We initially delayed the development of the Blue Creek project until at least do like first and have now further delay that project until at least the early part of 2021.
This decision is not based on changes in the perceived value with the project, but rather on our short term focus of preserving cash and liquidity.
We also temporarily suspended our stock repurchase program.
We will continue to evaluate the impact of the cobot 19 pandemic on our business for the remainder of the year fiscal year.
And expect to provide further updates to our financial outlook and the development of the Blue Creek project during our next earning quarterly earnings call.
We also are continuing to appropriately adjust our operational needs, including management it expenses capital expenditures working capital cash flows and liquidity.
I'll now turn it back to wall for his final comments.
Thanks, Dale before we move on to queuing <unk> I'd like to make a few more comments.
Well, we ended the second quarter with limited visibility and high uncertainty about customer demand, we now into the third quarter with different expectation.
We have reason to believe that the worse in terms of reduce steel production is most likely behind us.
The same time, we remain concerned with pricing levels.
Most of the major still demand sectors, such as automobile production of construction to name a few I started to show positive improvements from the recent lows.
As a result, several producers have made plans to increase operating rates, albeit slowly and with measured adjustments.
However, it is also clear to us that our customers still cannot predict when the demand for their products well returned to pre cobot 19 levels.
In addition, most of our customers remain challenged by thin margins due to lower demand for the products multi year low steel prices.
And sustained higher iron ore costs.
Hence, we're cautiously optimistic for third quarter volumes, and we'll continue to keep close contact with our customers. During this period.
In order to optimize the sales orders and capitalize on opportunities that meet our profitability threshold.
As previously mentioned, we expect that our current inventory levels will remain elevated through year end.
As we intend to adjust production rates in accordance with demand and as we manage for potential disruption risk due to covert 19.
Obviously, if we had the opportunity to sell just the volume materializes, we would expect to see a more rapid decreasing our inventory levels.
As for the outlook on met coal pricing. We believe current market forces will continue to limit the upside potential of all major indices.
In order to change our short term view, we'd need to see a combination of factors.
But your material improvements in the imports of seaborne coal the major markets like India.
Additional supply cuts from high cost producers.
Well some level of clarity around the import restrictions in the Chinese ports.
Despite the many unknowns there are few important reasons that our business is well positioned to whether any prolonged economic challenge.
One are highly talented workforce is committed to safely and efficiently driving results.
Do we maintain one of the world's highest quality met coal portfolios, we have strong long term customer relationships.
Three we have a strong balance sheet an adequate liquidity.
For our low and variable cost structure enables us to drive high margins and free cash flow across most business environment.
And five we've made significant investments in our operations over the past three years, allowing us to now reduced capital expenditures as needed that significantly impacting our operations.
As a result of these factors I'm confident 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.
We will now begin the question and answer session.
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If you're using you speakerphone, please pick up your handset before pressing the key.
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At this time, we'll pause momentarily to assemble our roster.
First question comes from David Gagliano of BMO capital markets. Please go ahead.
Okay, great. Thanks for taking my questions I, just wanted to drill down a little bit on some of the.
Expectations for the near term given the you know the inventory build here and.
And the weak market can you give us a sense as to what your thoughts are with regards to.
Third quarter.
Operating metrics.
You know I daily production.
And ER, sorry sales volumes to the extent that you can give us some sense there and also.
Production and cash costs, I noticed crept up to the upper Eightys.
You know is that a level that we should be assuming moving forward or do you expect to get us back down to low Eightys and then second half.
Well I think we intend to as we said we think we saw the low point in Q2, so we'd expect to see a little bit of strengthening in Q3 Q4, nothing to say that will be to a huge degree, but we expect to see little strengthening in terms of demand.
In terms of our cost structure, Oh, we intend to match more closely our production to our sales expectations.
And you know to the extent, we view that as a being a little lower production no production always kind of drives cost. So I would expect that our costs will be.
No not significantly different from where we are today.
Okay, and then with regards to the capital allocation change.
As far as Capex for a enough for full year 2020 is what's what's the latest target there.
Oh, Yeah, we haven't released what our target is where squeezing our capital as well I mean, we're we're looking at everything we're doing you know love that capitals going into for North which is the future mind for and we don't want to stop spending that capital.
David This Dale I'd, just add that look we're just going to balance or all of our spending with a you know what volumes and pricing looks like a with a with a goal or trying to be free cash flow positive.
The remainder of the year, a you know we might be a little love a little below that but yeah. We just continue to rationalize dollar spending but there are certain capex projects you know we want to continue.
And we think that weekend, we can do that but just managing all of her spending all together.
Okay, and just I mean or at least for the Blue Creek. It sounds like obviously it pushed out to be they're trying to 21. So I think there was 25 million or something like that maybe I'm wrong, but 25 million or fish that was earmarked for early spend and 2022nd half perhaps that's obviously not happening now 2020 is a reasonable do so that's.
Correct, we have minimal spending for a blue crude for the entire year.
Okay.
All right that's it for me thanks.
Thank you.
The next question comes from stock share of Clarksons. Please go ahead.
Good afternoon, everyone, Hi office last quarter, but given kind of the inventory build I wanted to try. It again are you anywhere close to capacity. It at this stage at what point, if any would you consider or kind of be forced to slow production rates to try to manage inventory levels.
Well, we are not close to capacity at this point, but as I've already said, we intend to more closely matched production with our sales volumes. So I would not expect a an inventory build going forward.
Hopefully, we'll see a little bit of reduction.
Okay. That's helpful. And then switching gears a little bit I was hoping you could just give us a little bit more market color on what you're seeing currently in terms of demand.
Talking about any kind of bright spots, you're seeing what areas for made weekend and what your so split was over the quarter.
Oh, so split over the quarter a was.
75% in New York, 25% into.
South America as I said, we didn't move anything into Asia in the second quarter and the third quarter, we expect to be moving some call back and as you I think we'll get well start to move back toward where we were historically I don't think we'll get there in one quarter, but over a period of a couple of quarters I think we'll get back to the same levels.
Well the war historically, which is 50, 55% into Europe, 25% and so in the South America, but the remainder going into Asia.
I think we've seen across all of the areas in which we do business. The demand you know everybody kind of hunkered down in Q2, and I think we've seen the demand on all of our customers pick back up maybe not to a normal levels, but the levels that were high.
Other than they were in Q2 and that that's in South America, Europe, and as I said, where we know it isn't Asia, because we're going to move some Cohen to Asia This quarter.
Okay, Great I appreciate all the color. Thanks for taking my questions best of luck.
Thank you.
The next question comes from Lucas pipes of B. Riley FBR. Please go ahead.
Good afternoon everybody.
So look I wanted to.
Follow up.
Sure.
Yes.
Thank you.
Differently.
Can you share your commitments.
<unk>.
Well you know what I've said, we don't normally do that I can tell you that normally we had normally been in the 70% to 80%.
Ah committed with 20% to 30% spot sales in the second quarter. It was more of a 50 50.
And like we expect in volumes I would expect those numbers the move generally back closer to normal we may not get there by the end of year, but I would expect the committed volumes would.
Go north of well north of 50% a in spot volumes would drop.
That's really below that level.
Lovely without a Q2.
Okay.
That's helpful.
It's kind of a gradual ramp up towards.
It's difficult range.
<unk>.
Yeah, I think so I think that's reasonable.
Hi, I appreciate that and then.
Two.
Got a better sense for what you expect on [noise].
Q3 pricing, obviously that some moving target.
Spot prices.
So they'll be copper like some of the other commodities.
What's what's your reach just in terms of mix between number seven lined up for inventory that you haven't found as it is it pretty plain vanilla for Q3 or.
Special items that we should take into account gets industry I'm sorry.
<unk>.
I think in terms of pricing as I said, we you know there's gonna have to be us some significant changes for us to see significant changes in pricing Nick will be kind of range bound data I don't know, even though we saw low and one of the six I think that's about where we are today I think we're going to see that kind of being around the bottom.
Oh I don't see any reason for prices to go significantly up at this point.
So I think will be.
Kind of muddling through this type of pricing for at least a quarter and then we'll see what happens into the fourth quarter.
In terms of inventory mix, you know that shifts quarter to quarter.
I don't think we'll see a dramatic differences.
In which calls move.
From where we had been in the past.
Okay.
I really appreciate the color.
Especially during.
Thank you.
Again, if you have a question. Please press Star then one.
The next question comes from Alex Hacking of Citi. Please go ahead.
Hi, Thanks for the thanks for the call. It just a follow up on the sales question that one more time, if I may.
Is there anyway, you can quantify the kind of improvements that you've seen and [noise].
Hi July or maybe June from what you were saying in April and May. Thanks.
Well, it's really yeah, we when we look out what we were looking out you know a couple of months as we go as we go a in terms of what commitments are made and what vessels are nominated and those things. So what we've seen is yes. The difference between the commitment that we.
I had for June versus July.
June was significantly lower and as we look at where our commitments for for July and August. We just have reason to believe a Q3 will be minimal start to move into right direction in terms of demand.
Okay. Thanks, and then I guess just following up on on Blue Creek.
You know this a project that's gonna have a long development cycle and you know met coal prices are are going to be volatile.
You know, you're you're able to kind of respond the project now because yeah. It's still in the very early stages.
Yes, you know were two or three years into the development that met coal prices plummeted again.
They would you guys have the flexibility to kind of push push back development.
Or once you guys are seriously into the reads on the project do you kind of need to push ahead like I know this is a very forward looking question on a project [laughter] that hasn't even started yet but.
I'm, just trying to get a sense for how future volatility is going well sceptics. Thank you.
Or well thank you for the question.
What we've said in the past about the blueprint project is it's kind of Oh, we kind of build or that they stage project, where there are some lumpy items for instance, the initial development of the Oh.
The shaft and slope and a few things like that once you started you kinda need to finish it but that's kind of a natural breakpoint.
Where if you wanted to stop the project before you started C. M development it'd be very easy time to do that and once you've started cm development again, it's still relatively easy to stop at any point going forward from there at that point kind of the lumpiness becomes around a building of a prep.
Plant is something that once you started you kind of want to finish it you know a few things like that but we've kind of.
Fashion to the a project so that if we didn't need to stop the things turned south we want to stop the project. There's some very clear a financial needs and that we would have forgiving periods of time.
Okay. Thanks, and then just one one more if I wonder if I may you know you mentioned earlier.
No potential obviously that a mine could get close by.
You know co bid.
I mean, how how concerned are you about that how is the situation in the areas that you're operating how much jobs. Since he is room are you say, saying at the moment any color that would be helpful. Thank you very much.
Well, we've had we've had a few positive cases, a and weve been very we've worked very closely with the hourly workforce to identify how we would address those types of situations and thankfully, we haven't had any real outbreak at our operations.
I'm here in Alabama, the numbers had been going up so I can't tell you what will happen tomorrow, but no we're prepared and as I said with the inventory levels that if we do end up in a situation, where we need to shut down for a few weeks. We're we're prepared to be able to do that so we've kind of tried to you know when we can.
Run in the second quarter, we ran hard to make sure that if we did have a situation arise we were prepared for it.
I appreciate the color and good luck. Thank you very much.
Thanks.
Again, if you have a question. Please press Star then one.
The next question comes from Chris Terry of Deutsche Bank. Please go ahead.
[laughter] Oh, Yeah Walton don't give you a couple of questions from me I'm just starting on on the second quarter costs, a little bit further is or is there a dollar per ton number that you'd be willing to talk about that's related to the actual covidien pacsun, what's that going forward.
What does it actually impact or is it so immaterial that you wouldn't you wouldn't quite at that number.
Yeah that Ah Thanks, Chris for the question. It's it's not material. We do we are incurring some cost for temperature checks things like that I think probably see more on the inefficiencies side with a staggering ship times the number of Pete.
Fewer people can go down in a shaft at a time in L. man buses, so more inefficiencies I would say rather than just direct cost.
Okay. Okay. Thanks, and then so bluecore and I've got a lot of questions on that so far but just just one other one it. So you basically go through the second half with 2020, and then you get to the Saudis 2021, and it will depend on if we still had coal prices, where we are today.
Hi, you'd probably defer that again or like what's the decision process to actually start it.
Well you know what does that will be part of our budgeting process that we're well we will work through with the board and we'll take into consideration you know where the market is where we see the marketing going.
And how do we financed the project. So we'll we'll look at things carefully toward the end of the years and determine how do we approach it going into early next year.
Okay. Thanks, and then just one final one for me I would just wouldn't be selection not too far away into ended the year is it isn't any impact to your margins at all to related to the strange protection actually just just wanted to understand a little bit better.
And under either party just some of the operating conditions, if there's a changing and in the current government.
Well in terms I think you're asking about the same protection Act I I think that would all depend on Oh, we have no idea what that would look like.
And what challenges there would be to it and just what all would be included so it'd be really difficult for me to.
Speculate as to what any impact would be from that.
Okay.
Thanks, and just circling back to the I guess they are being even treatment you said so.
I want to match inventory levels.
Time, what what's your loved once you get through the actual coated with period I mean is less risk around any uncertainty on the operational side, what sort of levels of imagery <unk> Jude law to carry or what do you think said good number to use maybe next year et cetera, like what would that number be ideally.
I think long term and I'm not gonna say that means early next year or anything, but I think long term. We've always said you know and less than 500000 makes sense.
Okay. That's it for me thanks, guys.
Thank you thanks.
This concludes our question and answer session I would like to turn the conference back over to walk solar for any closing remarks.
That concludes our call. This afternoon. Thank you again for joining US today. We appreciate your interest in more your met coal.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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