Q2 2021 Warrior Met Coal Inc Earnings Call
Okay.
Good afternoon, My name is kaley and I will be your conference operator today.
At this time I would like to welcome everyone to the warrior met coal second quarter 2021 financial results call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there'll be a question and answer session.
I would like to ask a question. During this time simply press the number 1 on your telephone keypad. If you would like to withdraw your question. Please press the pound key.
1 on your telephone Keypad, Inc.
Call is being recorded and will be available for replay on the company's website.
Before we begin I've been asked to note that today's discussion may contain forward looking statements and actual results may differ materially from those discussed.
For more information regarding forward looking statements. Please refer to the company's press release and SEC filings.
Losses in US Tonight that the company has posted reconciliations of the non GWA P financial measures discussed during this call in the tables accompanying the company's earnings press release located on the investors section of the company's website at Www Warrior met coal Dot com.
In addition to the earnings release the company has posted a brief supplemental slide presentation for the investors section of its website at Www Dot warrior met.
<unk> Dot com.
Here today to discuss the company's results on Mr Walk Schalow, Chief Executive Officer, and Mr. Dale Boyles, Chief Financial Officer.
Mr. Dan <unk>.
Again, thanks, operator, Hello, everyone and thank you for taking the time to join US today to discuss our second quarter 2021 results.
After my remarks, Dan will review our results in additional detail and then you'll have the opportunity to ask questions.
During the second quarter Global steel production continued its recovery trajectory from the impact of the COVID-19 pandemic.
We were pleased to see strong market demand from customers around the world.
Met coal prices improved during the quarter, we were able to take advantage of the groundwork. We previously established to increase sales and reduce inventories.
As a result, we were able to capitalize on Chinese ban on Australian coal imports through higher sales to Chinese customers at higher prices compared to the Australian F O b prices.
As a result of these pricing dynamics and our ability to successfully manage costs working capital and Capex spending we were able to deliver another strong quarter of free cash flow and adjusted EBITDA.
We continue to execute successfully on our business continuity plans in response to the USW strike, which began on April 1st.
Wowing us to continue to meet the needs of our valued customers.
While we continue to negotiate in good faith to reach new contract the U M. Debbie I. Unfortunately remains on strike.
Despite incurring incremental costs associated with the strike, we've been able to manage our working capital and spending to deliver strong results in this market.
He'll market fundamentals remained strong throughout the second quarter propelled by strong demand across the majority of sectors and tight supply across most regions.
Even the impact of the microchip shortage on automobile production was barely noticeable on overall steel demand.
The World Steel Association reported a 6.8% increase in global pig iron production for the first 6 months of the year.
With China, increasing its year over year production by 4%.
Excluding China the rest of the World grew its pig iron production on an impressive rate of 13%.
The strength observed in steel markets since the beginning of the year finally made its way into the met coal markets during the second quarter.
Although we had been expecting some level of upward pricing correction take place we were nonetheless surprised by the magnitude and speed of the correction.
During the second quarter, the Australian F O b indices experienced a gain of $82 per metric ton.
Rising from its low of $107 per metric ton on April 30th 2 as high of $194 per metric ton at the end of June.
Likewise, the CFR, China industries gain $93 per metric ton from its low of $216 per metric ton on April 1.
To a high of $309 per metric ton at the end of June.
The Chinese ban on Australia coal remains firmly in place with no signs of policy changes in the short term.
The global seaborne met coal trade has adapted quickly to these conditions as illustrated by the changing trade flows.
China has increased its reliance on imports for North America, Russia, and Landboard imports for Mongolia.
Australian coal producers have increased their exports to India, Japan, Korea, and Taiwan, and they've also exported more into our natural markets of Europe and South America.
These conditions are expected to continue as long as the band is in place.
We've been successful in placing some of our premium coal into China during the second quarter, while capturing 100% of our CFO for China Index price on the day of the sale.
Sales volume in the second quarter was $1.8 million short tons compared to $1.5 million short tons on the same quarter last year.
Our sales by geography in the second quarter with 31% into Europe, 6% in South America, and 63 per cent into Asia.
The higher than normal sales to Asia was primarily driven by Chinese demand, we capitalized upon during the second quarter.
Production volume in the second quarter of 2021, with $1.2 million short tons compared to $2.1 million short tons in the same quarter of last year.
The decrease is attributed to mine for being idle and mine 7 operating at lower rates due to the ongoing strike during the second quarter.
These results also include a zero day longwall move during the second quarter at mine 7.
Which was accomplished by having the extra set of longwall shields, we purchased some time ago.
Our gross price realization for the second quarter 2021, with 100% of the Platts premium low vol. Fob Australian index price and was the same amount achieved in the prior year period.
Our gross price realization was primarily due to a higher percentage of our sales to Chinese customers at the CFR index price.
Our spot sales volume in the second quarter was approximately 34% of total volumes down from 48% on the first quarter when compared to our normal expectation of approximately 20 per cent.
I'll now ask Dale to address our second quarter results in greater detail.
Thanks.
What a difference a year makes last year's second quarter saw the peak stages of COVID-19, and its impact on the steel on met coal industries trickle down to our company even as we continued to run both mines at near capacity.
In contrast this.
This year, our second quarter results were negatively impacted by the U N W day strike in which we idled mine for and significantly reduced operations at mine 7.
As we executed our business continuity plans to meet our contractual commitments to our customers, we drew down our inventory levels to take advantage of strong market conditions to generate strong results of adjusted EBITDA and free cash flow.
For the second quarter of 2021, the company recorded a net loss on a GAAP basis of approximately $5 million for a loss of 9 cents per diluted share compared to a net loss of $9 million or <unk> 18 per diluted share in the same quarter last year.
Non-GAAP adjusted net income for the second quarter, excluding the nonrecurring business interruption expenses, I don't mind expenses and incremental inflation.
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Adjusted EBITDA was $65 million in the second quarter of 2021 as compared to $20 million in the same quarter last year.
The increase was primarily driven by a 24% increase in sales volume and a 14% increase in average net selling prices.
Our adjusted EBITDA margin was 29% in the second quarter of 2021 compared to 12% in the same quarter last year.
Total revenues were approximately $227 million in the second quarter of 2021 compared to $164 million in the same quarter last year.
This increase was primarily due to the 24% increase in sales volume and a 14% increase in average net selling prices.
The Platts premium low vol, Fob Australian index price averaged $19 per metric ton higher or up 16% in the second quarter of 2021 compared to the same quarter last year.
The index price averaged $137 per metric ton for the quarter on the back of a 37% increase in the month of June alone.
The marriage and other charges reduced our gross price realization to on average net selling price of $123 per short ton in the second quarter of 2021.
Per to $108 per short ton in the same quarter last year.
Cash cost of sales was $152 million for 68% of mining revenues in the second quarter.
Compared to $130 million or 82% of mining revenues in the same quarter of 2020.
The increase in total dollars was primarily due to a $31 million impact of higher sales volume.
Largely offset by $9 million of lower variable cost and a concerted effort to keep our cost low and in line with lower production.
Cash cost of sales per short ton Fob port was approximately $83 in the second quarter compared to $88 in the same period of 2020.
Cash costs on price sensitive costs, such as wages transportation and royalties.
Bear with met coal pricing were lower in the second quarter combined with a focus on cost control.
Depreciation and depletion expenses for the second quarter of 2021 for $40 million compared to $22 million in last year's quarter.
The increase quarter over quarter was primarily due to 24% higher sales volume as these expenses are first capitalized into inventory and then relief on the tons are sold.
In addition, this quarter.
<unk> approximately $5 million of mine for depreciation that would have normally been capitalized into inventory with production. However, it was directly expense due to the idling the mine for.
SG&A expenses were about $11 million or 5% of total revenues in the second quarter of 2021 and were higher than the same quarter last year.
Primarily due to higher noncash stock compensation expense.
Which included an incremental $4 million associated with the accelerated vesting of awards to certain individuals that reach retirement eligibility.
During the second quarter, we incurred incremental nonrecurring business interruption expenses of $7 million directly relate to the ongoing U M D a strike.
These non recurring expenses were primarily for incremental safety and security legal and labor negotiations and other expenses.
As a result of the ongoing you on Debbie a strike that began on April 1st we idled 9.4 in the second quarter.
We incurred $11 million of expenses associated with the idling the mine for aim reduced operations at mine 7.
These expenses were primarily fixed cost in nature for electricity insurance maintenance labor and taxes.
Net interest expense was about $8 million in the second quarter included interest on our outstanding debt.
Interest on equipment financing leases plus amortization of our debt issuance cost associated with our credit facilities, partially offset by interest income.
The slight increase quarter over quarter was primarily related to new equipment financing leases.
We recorded an income tax benefit of $7 million during the second quarter of 2021 compared to a benefit of $4 million in the same quarter last year.
The second quarter of this year included a benefit due to the pretax loss and additional marginal gas well credits.
The year to date tax expense included a noncash charge of $25 million recognized upon the establishment of a valuation allowance.
Our state deferred income tax assets.
This result was due to a change in Alabama state tax law in 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 second quarter of 2021, we generated $53 million of free cash flow, which resulted from cash flows provided by operating activities of $69 million.
Cash used for capital expenditures and mine development cost of $15 million.
Free cash flow in the second quarter of 2021 was positively impacted by a $32 million decrease in net working capital.
The decrease in net working capital was primarily due to a decrease in coal inventory due to higher sales volume and lower production.
Our collections of accounts receivable.
Partially offset the decrease in accounts payable and accrued expenses from lower production volumes in the second quarter.
Cash used in investing activities for capital expenditures and mine development costs were $15 million during the second quarter of 2021 compared to $31 million on the same quarter last year.
We continued to rationalize spending during these unprecedented times however.
We do expect to spend more dollars in the second half of 2021 to keep the mine is well capitalized.
Cash flow is used by financing activities were $9 million in the second quarter of 2021 and consisted primarily of payments for capital leases of $6 million and the payment of a quarterly dividend of $3 million.
Our total available liquidity at the end of the second quarter was $288 million.
<unk> cash and cash equivalents of $267 million.
And $21 million available under our ABL facility.
This is net of borrowings of $40 million and outstanding letters of credit of approximately $9 million.
Our balance sheet has a leverage ratio of 1.3 times adjusted EBITDA and notably we have no near term debt maturities.
We believe our liquidity position and strong balance sheet.
Combined with a low and variable cost structure has enabled us to weather. This period of uncertainty and gives us the flexibility to continue to manage through a continued uncertain landscape.
Now turning to our outlook due.
Due to the ongoing uncertainty related to our negotiations with the Union.
19 pandemic, the Chinese ban on Australian coal another potentially disruptive factors, we will not be providing full year 2021 guidance at this time.
We expect to return to providing guidance once there is further clarity on these issues.
We continue to appropriately adjust our operational needs, including managing our expenses capital expenditures working capital liquidity and cash flows.
In addition, 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.
As we look forward, we expect a favorable market conditions to continue throughout the third quarter as.
As indicated by our contract and spot customers.
We recognize the uncertainty created by the Chinese government's mandate to limit 2021 steel production for 2020 levels and we'll continue to monitor the situation closely.
At the same time, we're also balancing our contractual obligations to our long term customers with the transitory opportunities created by the changes on the seaborne met coal trade flows.
We understand that many of you have questions about the status of the USW negotiations.
Estimates of potential outcomes and possible timeline.
Unfortunately, we cannot speculate at this time on any of those topics for various reasons.
Let me just say that we value and appreciate the hard work of our hourly employees.
Our priorities have always been keeping people employed with long lasting careers and ensuring the company remains financially stable in a particularly volatile coal market.
While we are disappointed that the union continues with the strike we continue to negotiate in good faith to reach a resolution.
Finally, as we navigate through these headwinds we will continue to execute our business continuity plans to meet our contractual customer commitments.
In closing, we believe we are well positioned to fulfill our customer volume commitments for 2021 of approximately $4.9 to $5.5 million short tons through a combination of existing coal inventory and expected production during the rest of the year.
Those numbers assume that mine for continues to be idle net production continues at mine 7 although at lower than usual rates.
While we have business continuity plans in place the strike may still cause disruption to production and shipment activities.
And the plants may vary significantly from quarter to quarter for the remainder of 2021.
With that we'd like to open the call for questions operator.
At this time I would like to remind everyone that to ask a question. Please press Star then the number 1 on your telephone keypad.
We will pause for just a 19th to compile the Q&A box back.
Your first question comes from David Gagliano with BMO capital markets. Please go ahead.
Hi, Thanks for taking.
Taking my questions I, just have a couple of quick ones for.
So can you just give us the number of our direct tons that were sold into China.
In the second quarter on what would be a you know the net back price of those tons.
And then on a related note can you just give us a sense as to what.
If any of the expected sales are for the third quarter.
On 2 parts direct into China, and then overall given the uncertainty around.
The duration on the strike and inventories down to 500000 tons, just to get a better sense as to your expectations for that.
Next couple of quarters for.
For sales lines.
Thanks, David This is Dale.
For the second quarter. It was about 600.600000 short tons sold into China.
So you know as we drew down our inventories more to that normal level.
No.
I'm not sure how much we will be selling into China. The rest of this year is going to depend on production.
But if we get some opportunities as you can see when you still.
Have about $1, 1 to 1.7 million tonnes and customer commitments for the rest of the year. So.
To the extent, we get the opportunity we will try to capitalize on it as best we can but at this point is kind of difficult to forecast that.
Okay. Just so just a quick follow up on 600000 tons and.
So you could probably back into it but what was actually probably can't what was the average price of the tons that were sold directly into China on a netback basis.
Well, we typically capitalized on the CFR price on the day of the sales. So we're not going to get into the details of what the net backwards on those particular transactions but.
Did help us achieve a 1.
100% of the benchmark debt really kind of drove up the realization gross profit I'm sorry, the gross price realization.
Because for the quarter.
Okay, and then and then just real quick you mentioned 1.1 on 1.2 left to sell.
Under customer commitments is that.
Effectively what we should be assuming for second half.
Sales volumes overall.
Well, that's our minimums to.
To the extent we produce more.
During the second half each.
Each quarter and debt.
That would help us generate any net positive upside from there.
Okay, I'll turn it over to someone else. Thanks.
Your next question comes from Nathan Martin with Benchmark. Please go ahead.
Hey, good afternoon, guys congrats on the quarter and thanks for taking my questions.
First of all for ABB.
To follow on with those comments I think maybe your sales number on the quarter caught some people by surprise and obviously it looks like you've already sold nearly 3 on a halfway in country in the first half.
But youre sticking with your plan. This total commitments are for 9 to 5 and a half.
It sounds like maybe Dale your point, what it was you know got 1.1 on $1.7 left.
Far as customer commitments are concerned for the year, that's the minimum there could be some upside I mean are.
Are we thinking about that correctly and maybe you know just looking at production. There you guys did 1 for 2 million tons of production of -7.
The second quarter.
I think that's repeatable and 3.2 or even for Q. If the strike continues thanks.
Hi, This is Walter first of all on the production, we didn't mind, 1.2 million tons out of mind 7 in the <unk>.
In the second quarter actually both mines before the strike began we had 1 full week of production out of both mines. So it's really not a complete quarter on just strike related production volumes. So I think just taking debt and assuming that's the correct number in Q3 and Q4 is probably.
A little aggressive.
On our sales I think we're just trying to we're looking at where our inventory levels are.
What we think are reasonably place.
Place production expectations, and we feel confident that we can hit.
Make our customer commitment for and hopefully have a little extra coal to sell to.
Some other opportunities.
Yeah, I apologize what that it's fair on the production for you guys. You did have about 150000 tons for for Martin for as well for like on idled. So on.
I guess, maybe just shifting over to the cost side. Obviously, you guys sold a decent chunk of inventory this quarter and as you mentioned before.
Cost would have been based on full year work force number for those times, assuming again the strike continues how do we think about what cost could look like going forward based on line 7 operating at reduced levels and have you seen any impact from inflation at this point if some of your peers have started to play out.
No we haven't seen a great deal of impact from inflation, yet I think in terms of our costs I think once you balance everything in the additional cost of.
Some of the strike issues.
And the fact that.
Prices go I've gone up quarter to quarter, we're going to see a little higher transportation costs. How are we going to see a little higher royalty costs, but all in all I think we will still end up in the same place we've been quarter after quarter and big pretty manageable around that level.
Okay. Thanks.
Thanks for that color Walter and just maybe 1 final bigger picture question for me.
They're thinking about looking ahead to 2022.
Let's just assume the strike has ended for Workforces back.
We think about production.
As mentioned before that you know you've had enough lead time with the continuous miners there at mine 7 should be set for production this year and fulfilling their commitments.
But now that you've been working with a slightly reduced changed their mindset.
How do we think about next year and possible changes you know if anything has to be ready for tomorrow.
Et cetera. Thank you.
My expectation would be that we would enter next year with the strike ended and we were back to full production my expectation that we would get back to normal full production volumes that we've achieved over the last few years.
So somewhere in that 7.7 and a half kind of range is that fair.
Yes.
Okay.
Perfect Great bulk deal I appreciate your thoughts on and thanks for the time best of luck on second half.
Okay.
Your next question comes from Matt Farwell with Roth capital.
So.
Hi, good morning.
Hi, good morning.
If you could just.
Give me an understanding of.
On productive capacity of mine number 7 I know that we've talked about.
You know.
So on some ideas.
Some idea on what production capacity is but is.
Is it is.
Is it 800000 is it not here on thousands is that all continuously mined tons or is the longwall running.
I just wanted to get some further clarification on that question.
First of all Walter currently operate in several of the Cm units are currently operating.
Productive capacity is variable based on how many folks we actually have.
But right now as I said, if you look at Q2.
And to back out that first week.
We would've probably been in need.
No what 950000 or something like that would have been about the number something like that might be off by 50000.
Great. Thanks, that's all I have for now thank you very much. Thank.
Thank you.
Once again, if you wish to ask a question. Please press star 1 on your telephone. Your next question comes from Lucas pipes with B Riley Securities.
Please go ahead.
Thanks, very much and good afternoon everybody.
I have a follow up question to Matts question, just there in terms of the cm units.
Are they able to keep pace at my number 7 with a long haul but the debt.
Panels are.
Getting getting cut or would you say debt.
Kind of long haul is catching up to the cm units. Thank you very much.
We don't have any concern with where our cm units are in relation to our loan was at this point, we're pretty confident about where we are from a lead time standpoint.
Okay.
Got it very very helpful.
Bigger picture question in terms of current market conditions obviously.
Noted.
And in your prepared remarks pretty pretty impressive turnaround.
I'm sure I'm sure there's factors in the negotiations, but is there a price where you'd say like look let's get people back to work.
I'm sure you can answer it directly but any thoughts.
You could share as to how this market environment factors in would.
It would be helpful. Thank you.
But when I look at the market over the last 10 years.
So volatile and we've seen prices down in the eighties, we've seen prices at 300.
And when we look at the market, we can't we can't just focus on the current quarter or what we see things happening in the next quarter and we have to look at for a 5 year contract. We have to look at what our costs would be throughout the duration at various.
Market points and that's.
Where we are very focused is making sure we had.
Call. It 1000 hourly employees and 400 or so salaried employees and we're trying to make sure that we have the ability to keep every 1 of those people working on.
The entire 5 years as we did in this last contract and Thats our goal.
Take care of these folks and make sure they have.
Compensation and we're also protecting the company at the same time.
I appreciate that thank you and best of luck.
Thanks Lucas.
At this time there are no further questions I will now turn the call back over to Mr. Shallow for adding on that.
That concludes our call. This afternoon. Thank you again for joining US today. We appreciate your interest in warrior met coal.
Thank you on that concludes today's conference. Thank you all for participating you may now disconnect.
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