Q1 2021 Warrior Met Coal Inc Earnings Call
[music].
Good afternoon, my name and Nick and I'll be your conference operating here Tonight.
And we'd like to welcome everyone on the Mowry meet coal first quarter 2021.
On the call.
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Before we begin I've been asked and I hope that this discussion today may contain forward looking statements and actual results may differ materially from both accounts.
For more information regarding forward looking statements. Please refer to the company's press release and SEC filings.
And so have been asked and help with the company.
Non-GAAP financial measures.
And tables, a copy and properties.
Press release located on the investors section on the company's website at Www yourself warrior met coal.
Oh.
In addition to the earnings release the company has posted a brief supplemental slide presentation and buzzwords.
Much like <unk>.
Oh boy, that's coal Dot com.
Here today to discuss the company results are Mr. Walt Gellar, Chief Executive Officer and Mr.
Sales.
Chief Financial Officer Mr.
Mr. Sheller you may have.
Begin with your remarks. Please go ahead.
Thanks, Operator, Hello, everyone and thank you for taking the time to join US today to discuss our first quarter 2021 results.
After my remarks, Dale will review our results and additional detail and then you'll have the opportunity to ask questions.
During the first quarter, we saw COVID-19, and the Chinese ban on Australia, and Kohl's have a continued impact on both pricing and demand across the met coal industry.
We continue to take the necessary measures to adjust our workplace environment to comply with social distancing and personal hygiene guidelines set forth by various health organizations.
The health and safety of our employees, while maintaining our operations.
Despite these challenging headwind, especially on met coal pricing.
Pleased to be free cash flow positive for the fourth consecutive quarter since the pandemic began.
We remain focused on preserving cash and liquidity, while men and can be aspects of the business that we can control.
Importantly, we achieved our second lowest quarterly cash cost per short ton since going public.
Yeah.
Because the Chinese ban on Australia coal has continued during the fourth first quarter, we were able to monetize our higher than normal inventory on Chinese spot volumes.
Which partially offset from the impact of the depressed pricing environment experienced and our natural markets.
For all and market fundamentals persisted across all geographies during the first quarter, allowing our customers to benefit from record high steel prices and strong demand for their products.
Global steel production remains on its recovery path to pre pandemic levels.
World Steel Association has reported and 6% increase and global pig iron production for the first quarter.
And with China, leading the charge with a year over year increase of 8%.
Excluding China and the rest of the world grew at a more moderate pace of 2%.
Unfortunately, the met coal markets remain split and a two tier pricing system due to the ongoing Chinese ban of Australian coal imports.
On one side, you have known Australian premium hard coking coal imported into China benefiting from a stable and elevated CFR based index price that was range bound between 214 and $223 per metric ton for most of the first quarter.
On the other side, you have Australia, and based premium coal that had been impacted by high volatility and low pricing.
We saw the Australian index price climbed from its low of $102 per metric ton at the start of the year and peak at a high of $161 per metric ton and late January.
At this point the price started its gradual decline hitting its low of $110 per metric ton in late March.
The prolonged import ban, but China has also created shifts and trade patterns and there's more Australia and closed on making their way into Japan, South Korea, India and Vietnam.
And also and more natural markets of Europe, and South America.
As anticipated Chinese buying there Chris was low during their new year celebrations and February.
However, it remains subdued for a longer period than expected following the holiday.
However, and uptick in transactions and interest was observed prior to the end of the quarter and has remained active since.
Because we had expected contracted sales into our natural markets were strong for the entire first quarter.
Sales volume and the first quarter was 2 million short tons compared to $1 8 million short tons and the same quarter last year.
Our sales by geography for the first quarter were 30 per cent into Europe, 14% into South America, and 56% into Asia.
Production volume and the first quarter of 2021 was $2 2 million short tons compared to a similar amount and the same quarter of last year.
The Monterrey, and well and the first quarter and we built a little more inventory.
And that's planned and previously communicated inventories remained elevated at the end of the first quarter compared to pre pandemic levels.
Coal inventory levels increased to 220000 short tons to one 2 million short tons at the end of the first quarter.
The higher than normal inventory levels will allow us to continue to supply our valued customers during the rest of the year.
Our gross price realization from the first quarter of 2021 with 95% of the Platts premium low ball F O B Australian index price and was higher than the 89% achieved and the prior year period.
Our better gross price realization was primarily due to a higher percentage of our sales to Chinese customers. That's a CFR index price.
Our spot sales volume and the first quarter was approximately 48% of total volumes compared to our normal expectation of approximately 20 per cent.
And of our first quarter also coincide with the exploration of our collective bargaining agreement with the United and mine workers of America on April 1st.
While we continue to negotiate in good faith with you on <unk> to reach a new contract do you and that'd be a has initiated a strike there continues today.
Later on in our prepared remarks, I'll provide more color on the business continuity plans, we have in place to meet the needs of our valued customers.
I'll now ask you to address our first quarter results in greater detail.
Thanks, Paul.
For the fourth quarter of 2021, the company recorded a net loss on a GAAP basis of approximately $21 million or a loss of 42 cents per diluted share compared to net income of $22 million from 42 cents per diluted share and the same quarter last year.
Non-GAAP adjusted net income for the first quarter, excluding the noncash charge for tax valuation allowance was eight cents per diluted share compared to 39 cents per diluted share and the same quarter of 2020.
Adjusted EBITDA was $47 million and the first quarter of 2021 as compared to $62 million from the same quarter last year quarter.
Quarterly decrease was primarily driven by a 13% decrease and average net selling prices, partially offset by higher sales volume.
Our adjusted EBITDA margin was 22% and in the first quarter of 2021 compared to 27% and the same quarter last year.
Total revenues were approximately $214 million and the first quarter of 2021 compared to $227 million and the same quarter last year.
This decrease was primarily due to the 13% decrease and average net selling prices, partially offset by an 8% increase and sales volume and a weak price environment as Walter noted earlier.
The Platts premium low vol F O B Australian index price average $28 per metric ton lower or down 18% and the first quarter of 2021 compared to the same quarter last year.
The index price averaged $127 per metric ton per the quarter.
The emerge and other charges reduced our gross price realization to on average net selling price of $106 per short ton and the first quarter of 2021 compared to $122 per short ton and the same quarter last year.
Cost of sales was $154 million or <unk> 75 per cent of mining revenues and the first quarter compared to $152 million were 68 per cent of mining revenues and the same quarter of 2020.
The slight increase in total dollars was primarily due to higher sales volume.
Offset by lower variable cost and our focus on controlling cost.
Cash cost of sales per short ton Fob port was approximately $79 and the first quarter compared to $83 and the same period of 2020.
This $79 per short ton was our second lowest quarterly amount and the last four years.
Cash cost and price sensitive costs, such as wages transportation and royalties debt.
Barry with met coal pricing were lower and the first quarter, along with our focus on cost control.
SG&A expenses were about $8 million or three 6% of total revenues and the first quarter of 2021.
And were 10% lower than the same quarter last year, primarily due to lower professional fees and employee related expenses.
Depreciation and depletion expenses for the first quarter of 2021 with $33 million compared to $29 million and last year's quarter.
The increase quarter over quarter was primarily due to a higher amount of assets placed in service and higher spending levels.
Net interest expense was about $9 million and the first quarter and included interest on our outstanding debt plus amortization of our debt issuance costs associated with our credit facilities.
Partially offset by interest income.
This was approximately $1 million higher compared to the same period last year primarily.
Primarily due to incremental borrowings on our ABL facility and lower returns on cash balances.
We recorded an income tax expense of $24 million during the first quarter of 2021, comparator and expense of $3 million and the same quarter last year.
The first quarter's tax expense included a noncash charge recognized upon the establishment of a valuation allowance against our state deferred and income tax assets.
This result was due to a change and Alabama state tax law on February that became effective as of the beginning of the year.
In essence, our export sales are no longer subject to Alabama state income taxes, and therefore, the value of our state net operating losses had been written down.
Turning to cash flow.
During the first quarter of 2021, we generated $23 million and positive free cash flow.
Each resulted from cash flows provided by operating activities of $45 million less cash used for capital expenditures and mine development cost of $22 million.
Free cash flow and the first quarter of 2021 was positively impacted by a small decrease in net working capital.
The decrease in net working capital was primarily due to higher collections on accounts receivable.
Lower prepaid expenses and other receivables.
Net partially by an increase in inventory this quarter.
Operating cash flows were higher and the first quarter of 2021 compared to the same quarter last year, primarily due to higher sales volumes and lower cost.
Cash used in investing activities for capital expenditures and mine development costs were $22 million during the first quarter of 2021.
Compared to $26 million and the same quarter last year.
We continue to rationalize spending during these unprecedented times.
The company spent $13 million from 58% less on Capex and the first quarter of 2021 compared to the same period last year.
Which was largely offset by higher spending on mine development cost.
Cash flows used by financing activities was $13 million and the first quarter of 2021 and consisted primarily of payments for capital leases of $8 million and the payment of a quarterly dividend of $3 million.
Our balance sheet remains strong with a leverage ratio of two four times adjusted EBITDA.
We believe our liquidity is adequate to navigate these uncertain times.
Our strong balance sheet with no near term debt maturities combined with a low and variable cost structure.
Has allowed us to continue paying our quarterly dividend during the pandemic.
Our total available liquidity at the end of the first quarter was $272 million, consisting of cash and cash equivalents of $222 million and <unk>.
<unk> million dollars available under our ABL facility.
Which is net of borrowings of $40 million and outstanding letters of credit of approximately $9 million.
Now turning to our and outlook.
Is the ongoing uncertainty related to our negotiations with the Union.
COVID-19.
And and make the Chinese ban on Australia, and coal and.
And the other potentially disruptive factors, we will not be providing full year 2000, and 'twenty one guidance at this time.
We expect to return to providing guidance once there is further clarity on these issues.
We continued to appropriately adjust our operational needs, including managing our expenses capital expenditures working capital liquidity and cash flows.
We have delayed the development of the Blue Creek project and our stock repurchase program also remains temporarily suspended.
I'll now turn it back to Walt for his final comments.
Thanks Dale.
Before we move on to Q&A I'd like to make some final comments.
And we still do not have a clear view of when the trade of seaborne met coal will return to normal and efficient market conditions.
Although we continue to believe that a partial or full easing on the Chinese ban on Australian coal and most likely to happen at some point in time.
We expect current pricing bifurcation and the markets to remain in place as long as the band remains in place.
We would expect the difference between the Australia and F O B and the China CFR indices to narrow once the ban is lifted returning to normal levels.
However, the correction may take some time as there are plenty of floating vessels with Australia coal is off the coast of China as well as large volumes of coal and the ports that have been offloaded, but have not cleared customs.
We believe that demand for our coal to remain strong for the next few quarters as indicated by our customers' buying patterns.
Also we believe that on the markets remain vulnerable to COVID-19 related demand disruptions, mostly in Asia, Europe and South America.
And we'll remain focused on serving our customers through the duration of our ongoing labor negotiations, while taking advantage of spot volumes when possible.
And as I mentioned earlier, our contract with you and there'll be a expired on April 1st and <unk> has initiated a strike the continues today.
We believe that we are well positioned to fill our customer volume commitments for 2021 of approximately 4.9 to $5 5 million short tons through a combination of existing coal inventory of $1 2 million short tons and expected production during the rest of the year.
For now we have idled mines for.
We expect production to continue at mine seven although at lower than usual rates.
While we have business continuity plans in place to strike and May still cause disruption to production and shipment activities and the plants may vary significantly from quarter to quarter in 2021.
Finally, as we navigate through these headwinds we will continue to execute our business continuity plans to meet our customer demands.
That we'd like to open the call for questions operator.
At this time I would like to welcome everyone.
Last question, please post on and the number one on your telephone keypad.
On pause just for a moment, the Pal and Q&A roster.
Your first question comes from the line of David Gagliano BMO. Please go ahead.
Hi, sorry, thanks for taking my questions I, just wanted to ask a little bit about the current strike situation and the commentary regarding volumes.
I guess, it's the obvious question right. So we had $2 1 million tons I think is sales and the first quarter.
The commentary around four nine to $5 5 million is that is that essentially.
If the strike is and.
You know remains in place for the remainder of the year and and how.
You know should we.
Model.
Quarterly sort of degradation and production I'm, assuming that the front end of that is going to be higher than that.
Full year average if theres, a wait and give us some color on how we should be thinking about sales loans each quarter as the strike force us.
We'll be giving you a quarter by quarter breakdown and grow its pretty tough David This is Walter.
And the reason for that is due to the fact that we just don't know what disruptions will be caused throughout the period of the strike the way we've kind of walked through this and the $4 nine to five five years and the first quarter, we actually had about 109 and sales for that and leave us with a 3 million to $3 six day hit.
We had $1 2 million and inventory if you take that down to the level, where we say we like to be able to around 400000 tons that brings us down to needing to produce two two to $2 eight for the remainder of the year, which brings us down to call. It 750000 a quarter.
And the 930000 a quarter.
And.
We think that will we'll be able to achieve that with the operating plans. We have we have enough lead time on a continuous monitor units at mine seven for us to be able to do that.
So that's that that's about as much.
God and because I feel comfortable giving you because I just don't know exactly how things will play out quarter to quarter.
And understood that makes sense in terms of the and <unk>.
Loans here.
So, but just to clarify so is it reasonable at this point to.
Effectively just kind of spread it evenly over the other.
Under of the year and and use that four nine to $5 five range. If it again, if the strike were to continue.
And that's reasonable.
Okay.
And then just one other quick question on the cash costs were obviously at least in my view.
And you know exceptionally good and in the quarter was there anything.
Destroyed and area that that suggested we shouldn't assume a similar well.
Level of cash costs, you know going forward, obviously, the volume is going to be lower so we have to adjust for that but.
And if we just sort of gross that number up and then adjusted the lower volumes is that still a reasonable kind of a way to approach it.
Hi, David its Dale.
Yeah I mean.
Really focused on keeping our cost low and we obviously get a little more volume and the quarter. So there was nothing.
Other than that significant.
But for the rest of the year, we do expect our cash cost to be a little bit lower but then again, we're going to incur some cost.
Well the island and the mine for and.
And some other costs associated with the strike you know negotiation vs around legal fees and stuff like that so we're going to have some other higher cost.
So while the cost per ton may be down he may have some other cost.
Debt offset that so.
You know, we don't see any significant change because of those offsetting issues.
Okay, and sorry, just to clarify on a cash cost per ton basis.
Even with the lower volumes you think your cash cost per tonne have kind of offsetting issues that will result in.
Cash cost per ton.
And being similar in the near quarters well.
And if we if we sell and what we had and inventory right which was produced.
You know at prior levels right higher levels of our.
People working and everything so those cash costs and will turn on.
Until after you bleed off all that inventory then after that you would start to see.
The lower cash cost right on lower volumes.
And again like I say total you'll have some offsetting incremental costs associated with the strike and we wouldn't normally have.
Okay. Thanks, I'll get back in the queue. Thank you.
Thank you.
Thank you again, if you have a question. Please press Star then one.
Next question comes from Lukas pipes from Securities. Please go ahead.
Hey, good afternoon, everyone.
All right.
But my first question is on the sales.
Commitments for 2021 to $4 nine to $5 5 million tons and I.
And I wonder if it's possible to give us a little bit more of a flavor for whats. The geographic mix is of those commitments and with dose be sold at the filling of the Australian.
Benchmark, which obviously is still languishing due to the ban or with US also be commitment.
Commitments into the higher price Chinese market for example, or just a office.
U S East Coast Index pricing, what would really appreciate your thoughts and comments on that.
The the commitments are to our primary customers and in Europe, South America, and a few others and into Asia.
And those are based on the Australia and.
Low vol price.
But there are also opportunities and swapping opportunities and things that allow us to also participate much as we did and the first quarter and the Chinese market CFR prices and what we've seen is there's been kind of enough of that to offset some of the lower pricing and bring us back to kind of a normalized level.
And I think that's what we'll see throughout the year is I expect it to get closer to traditional.
<unk> targets, which were 55 and new Europe, 30, or so into <unk>.
South America, and 15, or so into Asia, I expect us to move in that direction, but I don't expect us to be the whole way back into those numbers.
Yes.
That's helpful. So for four now.
Now kind of modeling pricing near the benchmark.
Would that be.
Very simplistically be debt the right way to think about it.
Just out of Australia and benchmark.
Yes.
Thank you.
And then I wanted to return to Dave's question on the cost side. So so if we kind of think about.
700 to 900000 930000 tons per quarter that means your inventory and the second quarter he could be since you're selling.
All out of inventory, so that would still be at delta and the lower kind of current costs.
And similar to Q1, and then should we be thinking about a step up and costs and the back on a per ton basis.
And as you exhaust day inventory and and again and assuming strike continues of course, so it's a kind of Q3 than this and.
And should that be a step up on on the cost per tonne basis or.
Or not.
And I think.
And what hopefully I'll be clear, but yes in Q2, you would see a similar cost if not and not just a little bit slightly higher.
But after that after you sell off the inventory Dan what we're producing now would clearly be it a little bit lower cost per ton, but in your P&L. We will have some additional cost other than cost of sales and that will be such as mine for idling cost and.
Other cost as I said related to the strikes such as legal fees around the negotiations and.
And some other expenses that we incur there so we're not I'm talking about total dollars.
And while your cost per ton, maybe a little bit lower.
On just a pure cash cost of sales are going to have some other cost kind of offsetting that.
Okay. That's helpful. I appreciate that.
My Macy's will come back to that later, but I wanted to ask one final question.
Just.
Your variable cost structure and spin I.
Two different differentiator.
And I would say.
Really really positioned you well during a pretty balanced on met coal market over the past five.
Five years can you I know this is difficult, but given given you're negotiating but.
And how important is is that going forward cash and variable cost structure, including on the labor side. Thank you for for any thoughts you could share.
Well I think a huge part of that variability was around the rail contract and the variability for the royalty rates.
In actuality when we look at the labor variability. It has had I would say a very small impact.
The last five years.
And primarily with things just like Oh.
Bonuses based on the benchmark pricing.
And so.
I think it.
For the past five years, the debt that variability has had very little impact.
Yeah, the bigger amount of cost and the transportation and royalties and as we've said in the past that's about a third of the total cash call. So on.
Of that $79 you know a third of that is just.
And just pure variability and then the other piece of that is the mining cost whatever it takes to get it out of the mine and while there's some variability to that.
It's a smaller piece of the total.
That's helpful and and in an environment like Q1.
Like we just had.
On a dollar per ton basis, what would be the labor variability.
Tailwind on on the cost side, So you guys roughly.
Oh.
The variability and the future quarters, no no and so.
No.
And when I look at Q1 was a terrific cost number that you just reported.
And some very very good job Darrin, what I, what I'm trying to get at is in a quarter like Q1, where pricing is very low and obviously your costs were fantastic how much of the lower cost was due to.
And the variable cost structure on the labor side debt.
And so part of the prior or current labor agreement.
Again, it's a small percentage of the total cost so even in an environment like we just had would still be a small and small percentage right right very helpful. I. Appreciate that thank you very much and and best of luck.
Okay.
And if you have a question. Please press Star then one.
Our next question is from.
And beyond.
Question from BMO.
Please go ahead.
Alright, great. Thanks for taking my follow ups I just have a couple of quick ones. I was wondering if you talk a little bit more about the Jimmy <unk> charged and the first quarter.
You know and what those were related to and how they may not.
And inspire and in the coming quarters and then the second question just regarding the strike if you can just.
Possibly give us a little color on you know what.
What are the key issues here and and and are there negotiations still happening and.
And you are kind of the status of the on the talks between the two sides at this point thanks.
Yeah.
Alright, David Day, I'll take the first one on demurrage.
Converges with just a little bit higher and the first quarter, a couple of things one higher moisture content and normal because of weather related heavy rains and Alabama over the past few months I and the normal rainy season here.
And then with a higher proportion of sales going into China.
There was some ash penalties because they have a very low cash requirement.
So the penalties and demurrage, who are related to the primary two factors.
And on the contract negotiations we are currently negotiating on a weekly basis with E. On W. E are.
We had reached a tentative agreement with the international and it was voted down by the local locals.
Oh about a month ago day.
Issues or you know just about although it's always the typical with who's on our labor contracted days.
Days off its pay and benefits just all the normal things.
Okay is there are there any sort of next steps that we should your votes or anything coming up.
And now that we should be thinking about.
No nothing scheduled at this point.
Okay. Thanks very much.
Sure.
Thank you. The next question comes from Matt Farwell Roth Capital. Please go ahead.
Thanks for taking my question just wondering if you could provide an estimate for what the idling costs from mine four and might be.
And just so we can understand what.
And what the cash flow impacts are and in 2020 one.
Yes for my for theirs is it going to vary obviously, we've got some of your fixed costs like electricity year property taxes, but we do have a very small crew that has to continue to firewall from mine and those kind of things so.
And a range of $2 million to $3 million a month to maintain.
The island.
Okay.
And so it seems like the liquidity as well.
Well sufficient to handle the strike at least for the next 12 months.
Is that fair statement.
Yeah, I think so I think we've developed.
And our continuity plans are for the rest of this year with our customers and.
And those have several different alternatives and as we go forward and we'll adjust those as we go and we need to.
But we do feel like our liquidity is sufficient $272 million 220 of that is cash.
And you know we don't have any near term.
Commitments for our debt maturities.
We don't have any significant funding the pension liabilities or anything like that so it's really just your normal expenses and the business. So given what we've outlined here with our commitments and how we're planning to meet those commitments, we feel very good that are less.
Liquidity is adequate to navigate through these times right now.
Okay, great. Thanks for taking my question.
Thank you.
Just on we have no further questions and I'd like to turn the call back over to Mr. Young for closing remarks.
That concludes our call. This afternoon and thank you again for joining US today, we appreciate your interest and warrior met coal.
Thank you and that concludes today's presentation you may now.
And I'll disconnect. Thank you for participating.