Q3 2020 Warrior Met Coal Inc Earnings Call
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My name is Rob and I will be your conference operator today.
At this time all welcome everyone to the worrying about cool third quarter 2014 financial results Conference call.
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Before we begin I'd also note that today's discussion may contain forward looking statements.
Actual results may differ materially from those discussed.
For more information regarding forward looking statements. Please refer to the company's press release, unless you see violent.
Ive also been asked most of the companies posted reconciliations of the non-GAAP financial measures discussed during this call tables accompanying the Companys earnings press release located on the investors section of the company's website at <unk>.
Www dot worried about cool dot com.
In addition to the earnings release the company, we're supposed to the brief supplemental slide presentation.
Investors section of its website at www dot worry about cool dot com.
Here to discuss the company's results, obviously won't show <unk>, Chief Executive Officer, and Mr., Bill Boyle, Chief Financial Officer.
Mr. Shore 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 2020 resolved.
After my remarks, Yeah, we'll review our results in additional detail and then you will have the opportunity to ask questions.
The third quarter presented a challenging market environment as the COVID-19 pandemic continued its disruptive impact on the U.S. and global economy.
Although the steel and met coal industries operating well below their normal yearly level, we started to see higher sales volumes in the third quarter compared to the second quarter as customers in our key markets began to increase their operating rates and restock their inventories.
However, we cannot stay the same on pricing, we experienced our load average realized the met coal price since becoming a publicly traded company.
Despite these challenging headwinds in particular on met coal pricing.
We were pleased once again to be free cash flow positive for the quarter.
We remain focused on preserving cash.
Equity and managing the aspects of the business that we can control.
Excuse me, our lowest cash cost per short ton since going public.
At the same time, we carefully balanced our spending on longer term capex and by investments to keep us uniquely well positioned to benefit from the eventual recovery in steel production met coal demand and pricing.
We continue to take the necessary measures to just for workplace environment to comply the social doesn't think and personal hygiene guidelines set forth by various help organizations to protect the health and safety of our employees, while maintaining our operations.
Well, we continue to operate our mind as a critical infrastructure business in the state of Alabama. These are challenging times now I'd like to thank all of our employees for their hard work and resilient.
We've been fortunate to people or people employed during these unprecedented times, whereas the others in the industry I tied to either operations and from all employees.
We said on the last earnings call that we expected the worst to be behind us in terms of demand and expected the third quarter could bring higher sales volume as.
As well as better visibility from our customers.
We are pleased to see that most geographies and steel related sectors are performing in line with these expectations.
As reported by World Steel Association pig iron production for the third quarter rose by 4.5% compared to the second quarter.
Kind of Big our production has maintained a strong performance throughout the year, having produced 3.8% above last year for the first nine months.
Although the majority of the regions outside of China had displayed continuous month over month growth from the earlier lows in the second quarter.
Output remains lower year over year by 12.9%.
India has made a noticeable increase in pig iron production in the last three months and appears to be near their pre COVID-19 production rate.
We're stronger sales volumes for the third quarter were mostly due to the improvement in demand as previously mentioned.
However, we believe that our third quarter sales volumes benefited from some level of restocking by our customer that it overshot production curtailments earlier in the year and they were also taking advantage of the low market prices.
We do not expect this week talking to be repeated in the fourth quarter as most customers appear to be well stocked heading into year end.
Our fourth quarter sales volumes are expected to be in between the low point of the second quarter and third quarter.
We also entered the third quarter with reservations about pricing, which turned out to be true.
The absence of clarity concerning Chinese import quotas as well as the perception of a well supplied market kept all major indices tightly ranged bound for most of the quarter.
The platts premium Lowball Fob Australian index price oscillated between $105 per metric ton and $116 per metric ton for the first 11 weeks of the third quarter.
However, following the increase in buying activity in China, and India as well as further indication of demand recovering outside of China. The indices broke the right through their resistance level around mid September.
Closing the quarter at a high of $139 per metric ton.
This decline in pricing occurred in the back into the quarter. This limited our ability to capture the benefit of the rise in our realized pricing.
Similar to the challenges we experienced in the second quarter, we chose the decline several spot opportunities that fail to meet our profitability threshold.
Sales volumes in the third quarter were 1.9 million short tons compared to 2 million short tons in last years third quarter.
Our sales by geography in the third quarter were 51% into Europe, 27% into South America, and 22% in Asia.
These higher volumes were a nice rebound from the low volumes in the second quarter.
If you remember from our second quarter earnings call, we said that the second quarter should be the worst in terms of reduced steel production and met coal demand.
However, we also remain concerned about pricing for the remainder of the year.
Production volume in the third quarter of 2000, 21.9 million short tons compared to 2.2 million short tons in the same quarter of last year.
It's a logical thinking on our last earnings call, where we said we expected to better match, our sales and production volumes in the second half of 2020.
As planned and previously communicated inventories remained elevated at the end of the third quarter compared to the second quarter.
Inventories slightly decreased 58000 short tons to 1.5 million short tons during the third quarter.
We expect inventory levels to temporarily remain elevated as a precautionary measure to reduce risk. He said the mines be disrupted or shut down by a widespread COVID-19 outbreak among our 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 idled or shut for lengthy periods of time.
Our gross price realization for the third quarter of 2020 with 90% of the Platts premium low vol Fob Australian index price.
And was lower than the 102% achieved in the prior year period, which included a rapidly decreasing price environment.
Our lower gross price realization was primarily due to the rapidly rising price environment of 28% in the month of September and a higher percentage of our sales being exposed to spot sales with lower relativity due to a fundamental oversupply in the marketplace.
Our spot sales in the third quarter was approximately 50% compared to a normal expectation of approximately 20%.
The company spent $28 million on capital expenditures and mine development costs during the third quarter compared to $33 million in the same period last year.
This amount includes the longwall panel development cost for the four north portal.
We will continue to balance our free cash flow and liquidity preservation against maintenance and discretionary capital spending and the long term value of capital projects for the remainder of this year.
I'll now ask to be able to address our third quarter results in greater detail.
Thanks Walt.
As was discussed the overall financial results for the third quarter were primarily driven by a significant reduction in U.S. and global economic activity as a result of the spread of COVID-19, this year compared to a fairly robust market environment last year.
Third quarter was about balancing competing priorities right.
Iran. The mines without piling or laying off employees, while keeping our cost low and extremely depressed and challenging price environment.
We balance those results with continued to make significant capex and mine development investments.
Our ability to remain free cash flow positive for the third quarter with an important outcome of the success of our balancing at.
Overall, our total liquidity increased by $12 million from the second quarter to $280 million at the end of the third quarter.
For the third quarter of 2020, the company recorded a net loss on a GAAP basis of approximately $14 million.
Or a loss of 28 cents per diluted share compared to net income of $45 million or 87 cents per diluted share in the same quarter last year.
Non-GAAP adjusted net loss for the third quarter was $14 million or a loss of 28 cents per diluted share compared to 79 cents of income per diluted share in the third quarter of 2019.
Adjusted EBITDA was $16 million in the third quarter 2020, as compared to $83 million the same quarter last year.
The quarterly decrease was primarily driven by a 36% decrease in average net selling prices.
Our adjusted EBITDA margin of 9% in the third quarter of 2020 compared to 29% in the same quarter last year.
Total revenues were approximately a $180 million in the third quarter of 2020 compared to $288 million in the same quarter last year.
This decrease was primarily due to the 3% decrease in sales volumes and the 36% decrease in average net selling prices and a weaker market environment due to the impact of COVID-19.
As you May recall last year's third quarter saw stronger met coal demand and higher pricing.
Platts premium low vol, Fob Australian index price averaged $40 $47 per metric ton lower or 29% lower in the third quarter of 2020 compared to the same quarter last year.
The index price remain range bound most of the third quarter until the final month of September.
Demurrage and other charges reduced our gross price realization to an average net selling price of $91 per short ton in the third quarter of 2020.
Compared to $141 per short ton in the same quarter last year.
Mining cash cost of sales was $151 million or 86% of mining revenues in the third quarter compared to $189 million or 67% of mining revenues in the third quarter of 2019.
The decrease of $39 million or 21% and cash cost of sales was primarily attributable to three factors one a 3% decrease in sales volume.
236% decrease in average net selling prices and three tire cost management in 2020.
Cost of sales per short ton Fob port.
Proximately $78 in the third quarter compared to $95 in the same period of 2019.
Our third quarter cash cost of sales per short ton was the lowest quarterly amount since going public in 2017.
The decrease from last years same quarter was primarily due to lower price sensitive call such as wages transportation royalties that vary with met coal pricing.
Tightly managing our cost and a challenging pricing environment.
The tons sold in the third quarter were mostly mined in the second quarter and low met coal prices under highly efficient mining rates and with a continued focus on cost reduction.
In addition, we sold a higher percentage of lower cost mines, seven low vol coal in the third quarter than the second quarter.
This lag effect is primarily due to the high levels of inventory on hand this year.
We do not expect a similar cash cost per short ton in the fourth quarter, primarily due to the lower expected volumes as Walt mentioned earlier.
We expect total cash cost of sales dollars.
It'd be similar to the third quarter on lower sales volumes, which will result in a higher cash cost of sales on a per short ton basis.
Eschewing expenses were about $8 million or 4.5% of total revenues in the third quarter of 2020 and were 12.5% lower than the same quarter last year, primarily.
Primarily due to lower professional fees and then fully related expenses.
Appreciation depletion expenses for the third quarter of 2020 or $28 million and were 8.6% higher than the same quarter last year.
The increase quarter over quarter was primarily due to a higher amount of assets placed in service.
Net interest expense was about $8 million in the third quarter and included interest on our outstanding debt with amortization of our debt issuance costs associated with our credit facility.
Partially offset by interest income.
This amount was approximately $1 million higher compared to the same period last year, primarily due to incremental borrowings on our ABL facility and lower returns and cash balances.
We recorded a noncash income tax benefit of $8 million during the third quarter of 2020 compared to income tax expense of $8 million in the same quarter last year.
This quarter's tax benefit is attributed to the pre tax losses, and additional marginal gas well credits from our gas businesses.
Turning to cash flow.
Third quarter 2020 free cash flow was positive and over $1 million, which was the result of cash flow provided by operating activities of $29 million.
Less cash used for capital expenditures and mine development cost of $28 million.
Free cash flow in the third quarter of 2012 was positively impacted by a $20 million decrease in net working capital.
The decrease in net working capital was primarily due to the income tax refund for A.M.T. credits received during the quarter.
Operating cash flows were significantly lower in the third quarter of 2020 compared to the same quarter last year, primarily due to lower sales volumes and lower average net selling prices.
Cash used in investing activities for capital expenditures and mine development cost.
$28 million during the third quarter of 2020 compared to $33 million.
For the same quarter last year.
While spending was lower by 15%. This year, we continue to rationalize spending in this challenging market environment.
Cash flows used by financing activities were $6 million in the third quarter of 2020 and consisted primarily of payments for capital leases, a $3 million and the payment of a quarterly dividend of $3 million.
We continue to focus on cash preservation and total liquidity during the quarter and our balance sheet remains strong with a leverage ratio of one and a half 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 with no near term debt maturities.
Our total available liquidity at the end of the third quarter was $280 million.
Insisting of cash and cash equivalents.
$216 million and $64 million available under our ABL facility net of borrowings of $40 million and outstanding letters of credit of approximately $9 million.
Now turning to our outlook for the remainder of the year.
April 29th in light of the uncertainties regarding the duration of the COVID-19 pandemic. Its overall impact on the global economy and the company's operations, we've been through our full year 2020 guidance.
We initially delayed the development of the Bluecore project until at least July 1st have now further delay that project until at least the early part of 2021.
This decision was not based on changes in the perceived value with the project, but rather on our short term focus on preserving cash and liquidity.
We also temporarily suspended our stock repurchase program.
We will continue to evaluate the impact of the 'cause it 19 pandemic on our business for the remainder of the fiscal year, we expect to provide further updates to our financial outlook and the development of the Bluecore project during our next quarterly earnings call.
We also continue to appropriately adjust our operational needs, including managing expenses capital expenditures working capital.
Cash flows and liquidity.
I'll now turn it back to wall for his final comments.
Thanks, Bill before we move on to Queuing day, I'd like to make a few more comments.
Most of the major steel demand sectors, such as automobile production and construction continued to show encouraging signs of recovery.
While we entered the fourth quarter with improving expectations for steel and met coal demand and better visibility with our customers. We do not expect a repeat of third quarter sales volumes.
We expect our fourth quarter sales volumes to be somewhere between the worst of the second quarter and third quarter, which contain some amount of restocking by our customers.
Therefore, we are cautiously optimistic on fourth quarter volumes and the continued to keep close contact with our customers. During this period.
In order to optimize our 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 the year end.
As we intend to adjust production rates in accordance with demand and as we managed for potential disruption risks due to cope in 19.
Obviously, if the opportunity to sell additional volume while meeting our profitability threshold materializes, we would expect to see a more rapid decrease in our inventory levels.
As for the outlook on met coal pricing.
We believe improving fundamentals should provide a more positive pricing environment than what we just experienced in the third quarter.
However, we recognize the pricing movements are often subject to market dynamics that are both difficult to predict and or quantify.
The recent indication of a ban on imported Australian coal into China is a good example, and has left us without a clear indication of the direction of price for the short term.
As I've stated before despite the many unknowns there are a few important reason that our business is well positioned to weather any prolonged economic challenge.
One our highly talented workforce is committed to safely and efficiently driving results.
Two we maintain one of the world's highest quality met coal portfolios.
And have strong long term customer relationships.
Three we have a strong balance sheet and adequate liquidity.
For our low and variable cost structure and able to serve to drive high margins and free cash flow across most business environments.
And five we made significant investments in our operations over the past three years, allowing us to now reduce capital expenditures as needed without 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.
Thank you.
At this time, we would like to remind everyone that to ask your question. Please press Star then the number one on your telephone keypad well pause.
Pause for just a moment to compile the Q and a roster.
At today's first question comes from David Gagliano would be capital markets. Please go ahead.
All right great. Thanks for taking my questions I, just like a just a couple of clarifications first of all.
Yeah, when we say between the worst of the second quarter.
In the third quarter I mean is it simply saying second quarter was 1.5 million third quarter to 1.9, so what you're saying 1.7 million tons or it's kind of word it a little vague to me. So can you just clarify what you mean by the worst of the second quarter.
Yes. It was what we were saying is the second quarter was the worst of the year. So we expect it to be in that range. You said 1.7, that's halfway between the two.
Okay.
Okay. So and then the cash cost commentary was basically the total dollar amount the same volumes.
Volumes.
Lower so I mean, that's pretty much it for that.
And then the only other question I have is on the pricing came in at 90% of the average or whatever and I know there's timing differences.
So the only other question in terms of short term how should we think about the you know that discount relative to the average for the for the fourth quarter, it's quite a bit wider than it has been in the past.
Well I think you need to watch what's going on in the market into <unk> are we in a rising market are falling market. My expectation is in a falling market. You know we hit 139 and now we're back down to one or seven so for at least the first part of the fourth quarter.
My expectation would be because we you know we sell based on it.
15 to 30 days before the.
Vessel loads. So my expectation is it is it would be a higher number for that period I can't tell you what's going to happen the rest of the quarter. If we end up having the prices go back up then we'll end up back in <unk> with a lower number at that point, just given the lag in timing.
Okay, Okay, I understand and then.
The other thing the other thing that happened in the third quarter was the fact that we had higher spot sales than normal we were at 50 50, our expectation is in the fourth quarter for that to start to get a little close a little better in line hopefully more like a 60 40 number even north of that but.
But that's the other thing that kind of a drag drove the price down a little bit.
Okay, and then in terms of the actual market.
Itself, obviously quite a bit going on with China et cetera, and in terms of your positioning and your views towards what's going on in the spot market right now what what no.
What are you hearing on a day to day basis in terms of the the the impact.
You know the change in policies, China in China is having.
In the seaborne market now and do you have any thoughts on you know adjusting your.
Your volumes, obviously, you've done that in the past and.
A weak market I'm just wondering if it's just we're heading in that direction again well.
Well, we don't see a weak market actually demand has been very strong.
For our products the issue has been when a China said they weren't going to take the Australian coal and you had a dozen or so vessels out there floating around that needs to be placed that immediately drove the pricing down.
And until those are some of those vessels are still floating until that all gets taken out of the marketplace. I think we'll continue to see prices depressed, but the demand.
With our customers, we are not seeing any weakness out of our customers in.
Oh, Europe, South America, or even our customers in Asia.
Okay. That's helpful. Thanks.
Thank you.
And our next question today comes from Lucas pipes from B. Riley Securities. Please go ahead.
Hey, good afternoon, everybody in town.
Good job on the cost side and managing this environment.
Hi, Thank you I wanted to to.
Ask on Blue Creek, so weather delay here on the project in the prepared remarks, you commented that this is really kind of due to the uncertainties to covert if I if I understood you correctly, but it's there may be a broader rethinking of the merits of the project not not because of that.
The project itself, just because the market environment has been a.
Pretty depressed from a pricing standpoint, and when you think about where what what would the equity side trading.
Maybe there are other places to put capital even even as the.
The market comes back a little bit so would appreciate your thoughts on on that thank you.
I I think what we've said in the past is that this is based on what was going on in the marketplace. Currently we still think it's a fantastic project frankly I don't think there is another project in North America that has anywhere near the value of this project. It's just a matter of us looking at how do we how do we finance the fraud project, how do we do.
All that out and when do we get started on it because it's a big commitment offered the company and we want to be sure that once we start moving in that direction.
We're ready to do it so all we have not lost confidence even at even at a $100 at home I think the pay back on this project is very very high and so we are not that's not what's driving our decision making on the project.
That's that's helpful. Thank you for that and then.
One of the things I often hear from investors is youre.
Track record of returning capital to shareholders Jeanette <unk> in a very efficient form I think investors really think of you as.
As as a leader in that regard Steris <unk>.
Men within the company that has as prices recover you would kind of a.
Follow that that example, after after the last cycle or would you say was disclosed project still being so attractive.
Where do you see Todd just going forward.
I think what we've always said in the past is that we will return excess.
Oh cash to shareholders in one form or another.
And we're still sticking by that and you know what is excess cash will be determined at the time.
So we're looking at it.
Okay. That's that's helpful now would.
Look as is the data I would just point out too that look with.
Most everybody cut their dividends period altogether, and but while it is a a small stipend.
You know, we continue to pay our quarterly dividend.
As we said we would do.
HM Okay.
That's that's good to see him and you certainly done a very good job in navigating this environment.
I'll try to sneak one last question then and that's it.
Bigger picture on the demand side.
And from sums to steel companies almost the iron ore companies, we're hearing more about.
The desire to substitute met coal before U.S.G. or concerns or or just.
Just just being in a carbon constrained world are you.
What do you think about that right medical substitution and and and steel production, which would really appreciate your thoughts is this a 10 year trend, oh, well or maybe something closer than that thank you.
No I think if you look over a 10 year period, I think the especially the very high quality coals will continue to do very well I think the replacement you'll see is the.
Replacement of potentially PCR goals, if anything over that short to medium term.
Longer term, who knows there everybody is working hard to develop ways to.
Reduce their carbon footprint, but I think over the short to medium term I think the demand for at least the quality of calls that we have here at warrior will continue to be very strong.
I appreciate that very much a lot of daylight, that's the flock and yeah.
If you turn to optimal opposite levels.
Stronger pricing very soon.
Thank you. Thanks, thanks for the questions.
And as a reminder, ladies and gentlemen, if youd like to ask a question. Please press Star then one.
Next question comes from Chris Terry with Deutsche Bank. Please go ahead.
Yes.
Hi, Walter So a couple of questions from me on on the company specifics and also the market just in terms of the coal market. I think you said you so 22% in Asia.
With the bandits in place right now is there any opportunity to increase ship assays into Asia right now for you.
Well I think again right now you have the that being into Asia, you've got a bunch of vessels floating around in Asia that would probably be easier to place into other places in Asia than taking products from a north America over there.
We have not [noise] domain.
There may have been one vessel in the last few years of where your coal that we didnt sell but was actually sold into China, but very little where your coal has gone into China, you know our product primarily moves into Japan and.
South Korea.
Okay and is your expectation that we follow something similar to last year and the ban pro.
Really rolls off in January or is it is it's hard to tell.
You know what it is so hard to tell with what they're doing you know our expectation is that it.
It gets relieved in whether its December January but it's just so hard to tell with what the Chinese are going to do.
Okay.
Couple of questions. So just on the Capex.
Yeah, roughly 110 <unk> million dollar levels, if you annualize that corridor.
Can you keep it at that level for another 12 months, if if coal prices don't rebound.
Well I think we what we've done and we said is look we've trying to balance keeping as long term investments with the low met coal pricing as well as challenging our costs and trying to keep them as low as possible. So.
To the extent, we can continue to invest.
We have we will just point out that you know of.
The call. It 85 million spent this year you know 48 of that's really sustaining the rest of that is all discretionary that we could have probably trim back quite significantly, but we've chosen to continue to invest.
And managed to be free cash flow positive so.
Again, we're trying to balance the priorities of being short term needs and the market conditions.
And investing for the future as well so.
That's kind of where we are.
Okay.
Makes sense and then can you sort of remind us maybe over the next couple of quarters. If you have any longwall moves.
Oh I believe we will have a longwall move that.
That crosses between the end of Q4 and Q1.
We're not we're just not sure whether with hit at the end of December early January.
Okay and the last one for me I mean, you've obviously you 290 middle of liquidity, you'll reassess flu crate timing early next year, you said, what's the latest thinking on the financing of that just the cash flow from operations versus I guess using debt.
Yes, nothing's really changed there Chris.
We don't still continue to look at all of our options. It's just.
You know right now focused on preserving cash and liquidity.
In an existing market.
Okay, all the best going thank you. Thanks.
Thank you.
At this time there are no further questions I'd like to turn the conference back over to Mr. shoulder for any final remarks.
Thank you that concludes our call. This afternoon. Thank you again for joining US today, we appreciate your interest and where your met coal.
Thank you and that concludes today's conference. Thank you all for participating you may now disconnect.
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