Q1 2023 Warrior Met Coal Inc. Earnings Call
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Before we begin I have 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 releases and SEC filings.
I have also been asked to note that the company has posted reconciliations of the non-GAAP 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 Dot warrior met coal dotcom.
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. Walt Scheller, Chief Executive Officer, and Mr. Dale Boyles, Chief Financial Officer. Mr. Sheller, you may begin your remarks.
Thanks, Operator, Hello, everyone and thank you for taking the time to join US today to discuss our first quarter 2023 results.
After my remarks, Daryl will review our results in additional detail and then you'll have the opportunity to ask questions.
We were pleased to deliver another extremely strong quarter reflected in our financial results and better than expected sales and production volumes.
We ended the first quarter with the optimism that strong customer demand when facilitated drawdown to burn inventory with the expectation of continuous improvement and performance at the Mcduffie terminal.
We've previously spoken about the performance issues at the Mcduffie terminal and have taken a number of actions to address them.
Over the past few months, we've implemented several initiatives to improve learning throughput at the terminal.
Including the allocation of personnel and resources.
These initial efforts are focused primarily on addressing maintenance and equipment reliability issues on belt conveyor systems.
We're pleased with the progress made so far but we acknowledge that the terminals performance remains vulnerable and will require a long term support and attention from warrior.
One additional challenge is that the terminals are undergoing a significant overhaul of its ship loader number one belt structure, which will remain out of service until the end of the second quarter.
We will continue to work closely with the Alabama State Port authority to help achieve its objectives.
In the interim where we'll ship small volumes from alternative ports to ensure timely delivery for our customers and minimal extra cost.
Our commitment to delivering sustainable results with a terminal remains unwavering.
From a market perspective during the first quarter their steel industry demonstrated a better than expected performance.
As evidenced by a sustained increase in steel prices across North America, Europe , and select Asian regions.
European steel producers announced the restart of several previously idled blast furnaces and ramped up production aided by a notable correction in energy prices.
China remained focused on reopening the economy and bolstering its crucial property sector, resulting in an encouraging rise in steel production during the first two months.
Additionally, China's decision to lift the ban on Australian coal imports was confirmed during the quarter.
Although there have been limited transactions between the two countries so far.
From a supply standpoint in the first quarter the vulnerability of the global supply chain was on full display of strong rains and a significant train derailment impacted Australian supply performance.
These factors resulted in Australian exports trailing 2020 twos figures.
Over 15% for the first two months of the year.
As a result, it is likely the Australia could record its lowest exports for the first quarter in over five years.
Meanwhile, both Canada and the United States demonstrated robust performance during the same period.
With both countries recording positive growth.
In addition, we note the remarkable increase in Mongolian exports to China, which have surged by a staggering 470% in the first two months of this year.
As the first quarter due to a close global supply availability showed signs of improvement, especially from Australia.
Resulting in a more balanced market.
This was evidenced by a steady correction in pricing our primary index. The P. L. D F O B, Australia dropped by over 23% from its peak of $354 per short ton in February the $273 per short ton by the last day of March.
In contrast, the P. L D E F or trying to index experienced pair.
Terribly modest decline of approximately 8% from its peak of $311 per short ton in early March to $286 per short ton at the end of the month.
According to a recent report by the World Steel Association Global Pig Iron production increased by three 1% in the first three months of 2023 as compared to the same period last year.
The production increase was mainly driven by a strong start for Chinese production.
Which grew by seven 6% during the period.
Additionally, India continued its recent higher trend by growing five 9% during the period.
As anticipated production from major European producers declined by over eight 9% due to the implementation of numerous blast furnace idling and production cuts that originated during the previous fourth quarter.
Furthermore, Turkish steel production was significantly impacted by the tragic earthquake that hit the southern part of the country in early February .
Yeah.
Our first quarter sales volume of $1 9 million short tons with 73% higher than the comparable quarter last year.
The increase was driven by the drawdown of coal inventory levels in the first quarter due to the improved performance at the Mcduffie terminal.
Which enabled us to export more product.
In addition, better than expected production drove an increase in sales volume for the quarter.
Our sales by geography in the first quarter were 52% into Europe 20.
3% into South America, and 21% into Asia.
European sales continued to be strong with the blast furnace restarts that I previously mentioned, despite the economic headwinds facing the region.
Production volume in the first quarter was better than I expected and totaled $1 8 million short tons compared to $1 5 million short tons in the same quarter of last year.
Representing a 14% increase.
Both mines are operating at higher capacity levels in this quarter with the higher head count compared to the prior year's comparable quarter.
Last year at this time mindful of is being restarted in both mines operated at reduced capacity.
Okay.
During the first quarter, we spent $83 million on Capex in mine development.
Capex spending was $68 million, which included $28 million on the Blue Creek project.
Mine development spending was $15 million during the first quarter.
We expect development of mine for will be completed in the next few months.
While development at Blue Creek will continue over the course of the project.
In February the labor Union, representing certain of our hourly employees announced they ended their strike and unconditionally offered to return to work.
We started with the return to work process, which primarily includes drug testing.
Our return to work physical and safety training.
The return to work process is still ongoing as it takes time to process all of the eligible employees through the testing and training.
Well, we expect a return to work process to take a little more time, we're reviewing and adjusting our work schedules to accommodate the eligible employees returning to work.
The number of anticipated eligible employees participating in the return to work process is approximately 300.
A little more than one third of those employees have already returned to work.
We expect that all of our current employees will continue to work full time at the mine. In addition to those returning to work.
With the returning employees were in the process of revising our internal budgets and outlook for the remainder of the year and expect the process to be completed by early June .
At that time, we expect to provide an external updates to the investment community on our 2023 guidance targets.
Our initial assessment indicates that the majority of any incremental production volume will primarily start to occur in June and impact the second half of the year.
With the expected incremental production, we expect to capitalize on opportunities to sell the incremental volume to our existing customers or opportunistic spot sales.
Meanwhile, we continue to negotiate in good faith, and new labor contract, while the eligible employees returned to work.
During the first quarter, we continued to make substantial progress on the development of Blue Creek.
Work remains on schedule.
Specifically the production slope service shaft and returned ventilation shaft, a little more than halfway completed at this point.
We recently broke ground on construction of the bathhouse and mine offices with the initial foundation work underway.
From a financial standpoint, we invested $28 million in the development of Blue Creek during the first quarter.
We expect to be making further investments on a larger scale during the remainder of this year.
Other key timeline tasks are underway in various stages of obtaining bids contract negotiations and revisions to project specifications.
We plan to continue providing updates we're not currently earnings call throughout the year.
I will now ask Gail to address our first quarter results in greater detail.
Okay.
Thanks Walt.
The first quarter of 2023, the company recorded net income on a GAAP basis of $182 million or $3.51 per diluted share representing a 25% increase over net income of $146 million or $2.83 per diluted share in the same quarter of.
Last year.
non-GAAP adjusted net income for the first quarter, excluding the nonrecurring business interruption expenses idle mine expenses, another noncash adjustments was $3.57 per diluted share.
This compares to an adjusted net income of $2.97 per diluted share in the same quarter of 2022.
These increases quarter over quarter, primarily driven by higher sales volumes.
Partially offset by lower average net selling prices and higher inflation.
We reported adjusted EBITDA of $259 million in the first quarter of 2023 compared to $244 million in the same quarter of last year.
Representing a 6% increase.
The quarterly increase was primarily driven by a 73% increase in sales volume, partially offset by lower average net selling prices and the impact of inflation on supplies and electricity.
Our adjusted EBITDA margin was 51% in the first quarter of 2023.
Compared to 64% in the same quarter of last year.
Total revenues were $510 million in the first quarter of 2023 compared to $379 million in the first quarter of last year.
Yes, 35% increase was primarily due to the 73% increase in sales volume.
Partially offset by lower average net selling prices.
Other revenues were higher in the first quarter of 2023.
Primarily due to the fact that the prior year included a mark to Mark loss of $13 million on our gas hedges.
Offset partially by a decrease in revenues due to lower natural gas prices.
The Platts premium low vol. Fob Australian index price on average was $131 per short ton lower in the first quarter of 2023 compared to the same quarter of last year.
The index price averaged $312 per short ton for the first quarter.
Demurrage and other charges reduced our gross price realization to an average net selling price of $257 per short ton in the first quarter of 2023.
Compared to $339 per short ton in the same quarter of last year.
Demurrage and other charges were $4 million in the first quarter. This year and were flat compared to last year's first quarter.
The charges were the result of temporary delays in vessel loadings due to severe weather and port congestion in the first quarter of this year.
Cash cost of sales were $232 million or 46% of mining revenues in the first quarter compared to a $134 million or 35% of mining revenues in the first quarter of 2022.
Increase of $98 million was primarily due to the 73% increase in sales volume plus the impact of inflation.
Inflation accounted for approximately $2 million of the higher cost of $1 per short ton higher than the fourth quarter.
Resulting from higher costs for supplies and electricity.
Cash cost of sales per short ton, yes, it will be port was approximately $119 in the first quarter.
Compared to a similar amount in the first quarter of 2022.
Met coal prices were lower in the first quarter this year compared to the first quarter of 2022.
This resulted in lower transportation and royalty cost on a per ton basis.
We're all set by higher cumulative inflation higher wages on the higher head count that drove higher production.
Plus slightly higher transportation cost for loading vessels through alternative ports during the quarter.
Transportation and royalty costs were 44% of our cost per ton in the first quarter compared to 46% in the same quarter last year.
Despite the higher variable cost and inflation cash margins were $138 per short ton in the first quarter.
SG&A expenses were about $15 million or two 8% of total revenues in the first quarter of 2023.
We're higher than last year's first quarter.
Primarily due to an increase in noncash stock compensation expenses.
The interest income earned on our cash investments exceeded the interest expense on our outstanding notes in equipment leases during the first quarter of 2023.
Primarily due to our higher cash balances.
Our first quarter noncash tax expense, primarily reflects the utilization of our federal net operating losses or Nols.
Offset partially by the tax benefits for depletion and a tax benefit from foreign derived intangible income.
We expect.
Continued to utilize our federal Nols and tax credit carry forwards. We believe we may become a cash taxpayer in late 2023 or 2024.
Based upon our long term forecast of met coal prices and sales volumes and performance.
During the first quarter, we incurred incremental nonrecurring business interruption expenses of $4 million.
Which were lower by 37% than last year.
And that were directly related to the then ongoing labor strike.
These nonrecurring expenses were primarily incremental safety and security legal and labor negotiations and other expenses.
Turning to cash flow.
During the first quarter of 2023, we generated $110 million of free cash flow.
This was due to cash flows generated by operating activities of $193 million less.
Less cash used for capital expenditures and mine development cost of $83 million.
The end result was cash flow conversion.
A 43% this quarter versus 20% in the first quarter of 2022.
Free cash flow in the first quarter of 2023 was 122% higher than last year's first quarter.
Even though were negatively impacted by a $69 million increase in net working capital from the fourth quarter of 2022.
Three eight cents per share.
Now turning to our outlook and guidance for 2023, we believe we are on track to achieve our targets outlined in the outlook section of our earnings release.
His wall indicated earlier at this point, we have not update our internal budgets.
External guidance to account for any changes in cost and volumes associated with a union representing employees returning to work.
I'll now turn it back to Walter's final comments.
Thanks, Dale before we move on to Q&A I'd like to make some final comments on our outlook.
Cause we look forward, we anticipate ongoing stable demand for our products based on discussions with our diverse customer base.
While China's steel production remains difficult to predict our current view as it will correct during the year resolving into decline in the annual production year over year.
As restocking users and the <unk> first slowdown in the second half of the year begins to materialize, we expect steel prices to lose some or most of their recent gains.
Additionally, we foresee that merkel pricing will face further downward corrections absent any other unforeseen disruptions, primarily due to improving supply chain out of Australian and higher Mongolian exports to China.
As I said earlier, we expect to return to work process of eligible employees to continue to the end of May.
We're revising our internal budgets and outlook for the remainder of the year and expect that process to be completed in early June .
At that time, we expect to provide an external update to the investment community on our 2023 guidance targets.
Our initial assessment indicates that the majority of any incremental production volume will primarily star to occur in June and impact the second half of the year.
We expect a higher production volume in the second half of the year to result in higher sales volumes as well.
We expect 2023 will be a significant turning point in the development of our World Class Blue Creek mine that will drive long term stockholder value.
Later this year, we will begin groundbreaking for the larger infrastructure components, such as the new coal preparation plant a bathhouse of mine offices in overland belt conveyor and a barge load out.
We're excited to see the progress that will come this year as we expect to invest approximately $250 million on the project.
We are extremely excited about this organic growth project, which will transform warrior and allow us to build upon our proven track record of creating value for our stockholders.
As we have previously indicated we expect the first development tons from continuous monitoring units in the third quarter of 2024.
With a low wall scheduled to startup in the second quarter of 2026.
With that we would 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 one on your telephone keypad.
We will pass for just a moment to compile the Q&A roster.
My first question comes from Lucas pipes be Riley Securities. Please go ahead.
Thank you so much operate a good afternoon, everyone and come back.
On a terrific start to the year.
My My first question is in regards to the staffing levels today and and your outlook on that could you comment when you would expect to be fully staffed and.
Do you have.
Excess labor after after the end of the strike in February or instead of your expectation. Thank you very much for your comments on that.
Thank you Lucas.
I appreciate your question.
After we get the employees back.
Have decided to come back we will still be about 200 people short for 150 to 200 short of where we were pre strike.
So we will be continuing to hire aggressively throughout the year.
Probably in the next year as we begin to look at the Blue Creek as well.
So that's that's how we will be doing that and that's one of the things. We're looking at is.
Exactly how many people you know because we're in the process and like I said some of them have already come back and by the end of May or early June we expect to have the folks back we're gonna make it.
Very very helpful. Thank you for that and when you.
When you think about that 150 to 200 head count shortage.
How how would you've reached that his dad attrition retirement match.
Would appreciate any any comments on what what changed in the interim.
This is I think we just had as the.
Mmm striking miners.
Whenever they.
We're told to return to work or I think we had some of them who for whatever their personal reasons were.
Decided not to return whether they.
Took employment to add other operations or whether they just retired or for whatever reason personally. They there was just ready to move on.
That's that's very helpful. Thank you for that and on that shifting topics really quickly Dale you prominent on using up the federal Nol's either later this year or early 2024 and I wondered.
If.
If if you if you if you get to that situation could that have an impact on.
Capital return.
<unk> I could it make more sense at that point to have a have a greater share buyback for example, I would appreciate ya.
Thoughts on that thank you.
No. Good question. Thanks Lucas.
As we've said before once we get through the Nols. So I think we would probably have a more balanced fixed quarterly dividend with variable quarterly dividends combined with stock buybacks at some point.
You know and we said look we're committed to returning excess cash even during the development of Blue Creek, if if there's excess cash available. So once we get past the Nols I think we would have a more robust capital return program, including all of those different options.
Very helpful. Thank you then.
Squeezing a market related question when I look at plats medical pricing as of last night, if I'll be Australia P. L. V 229, CFR, China delivered cold price 243, and when I think it kind of very roughly about a 30 dollar freight rate from mobile.
To China.
Come at a kind of netback price at two 213.
If if you were to sell into China. So I wondered is this market open to you and how would you approach to China opportunity today. Thank you very much.
Well I think the numbers are a ton of spot on with where everything is and you know what we'll be looking at as we look at the remainder of the year in whatever our spot opportunities are we'll look for whatever is the best opportunity and if that happens to be moving those funds into China.
On a little lower rate than we could what we're doing from a contractual standpoint, then that's what we'll have to consider but we're we're looking at all those things right now.
Very helpful again.
Thank you very much and again terrific work really appreciate it.
Thank you thanks.
Again, if you have a question. Please press Star then the line. The next question is from Nathan Martin from the Benchmark Company. Please go ahead.
Thank you all for it are good afternoon Gaza Congrats on the quarter. Thanks for taking my question.
Made the comment that production was even better than expected in the quarter and I know I.
I think for instance, it looks like mind for production was up over 30 per cent quarter over quarter was that really just better productivity or or the ability to put more miners to work and then.
Maybe where are you applying the bulk of the union workers that have returned at this point would be great to get your thoughts Sir.
For the the the productivity with simply being able to run.
The longwall as much as we could and putting more C. M units back in line as far as where the employees that are coming back to work or going.
Those employees when they left were assigned to a certain mind and they returned back to that mine and what we've seen as if you're really considers to be you know really.
For the most part.
Three portals pretty big portals, it's about equally spread between the three is the people return to work. So mindful will get about a third of the people in mind seven of them get about two thirds roughly.
Okay. That's that's helpful. And then maybe along the same lines and didn't understand you guys are waiting to update production shipment guidance till June but you have to think.
Think about the potential for an increase due to the return of some of the Union workers.
Is there any C M. We'd work that would need to be done kind of a head of a potential ramped more nameplate capacity production.
No really it's we've been since the strike started we've really been running five days a week in the real opportunity here is to add an additional shifts.
Our minds are skip constrained and how much cold they can get out per day, and they'd been running really well. So the real opportunity is finding you've got to find additional hours where you can.
And so that that's what it's really what it really comes down to.
And we're building all that.
Budget right now.
Got it.
So then maybe shifting the budget just mentioned as we think about Blue Creek Capex. Thank you commented on the last call wall cause you guys were still entering into some of the key large contracts.
Would be in a better position to update US later in the year you know maybe could you talk about what kind of progress you've had there any expectations your labor being sticky re times, it but everybody seemed kind of extend and possibility for any pressure on capex and maybe when we could expect to get any updates I appreciate it.
Thanks, Nathan This day I'll I'll answer that one.
We're still early on as we said in our prepared remarks steel.
Still working primarily on the slopes.
More than halfway down and we're gonna be breaking ground some of the larger stuff later this year. So once we get those contracts will have a better idea to any changes in cost, but that's gonna come late probably in the year.
Before we know that as we said look for the last 15 months, we've been seeing inflation.
And labor extended and supplies and materials, even beginning to see it in rate increases in electricity costs. So we would expect some type of inflation, but it's a five year projects of some of that will normalize or even out over that time and then we may have some scope changes as we get into all those.
Specific <unk> of the contracts with.
Each of those major components.
Still look too early to detail.
Well I I appreciate those thoughts Dale and then maybe just one last thing I mean strong cost performance I would say in the quarter guys. You know despite some of those items you just mentioned down quarter over quarter, even with an increase in realized prices some of that just the one quarter lag on the rails side.
I would've backed that's probably a headwind in the second quarter just wanted to make sure I think about that correctly for modeling standpoint.
That would be correct, you're right real rates will go up in the second quarter based on the higher average met cole price in the first quarter.
Okay perfect I appreciate the time best of luck with the rest of the year.
Thank you.
The next question is from <unk> of LMR partners. Please go ahead.
Thank you high work you mentioned in your prepared remarks that the there's a major repair at the <unk> terminal currently would that impact the second quarter.
Shipment.
No that that impact occurred.
Probably six weeks or more into that.
It's the.
The rails basically the rail and the bell system that the ship loader runs on needed to have a significant amount of structural work done.
And so we've been dealing with that for the last couple of months, but the improvements and load rates as the number two ship loader have just been <unk>.
Really strong and have allowed us to perform has allowed the port to perform in a manner that's allowed us.
To reduce inventory.
By a couple of hundred thousand tonnes. So we've been very satisfied with that but it's critical for.
For them to get that shipped one load or back up and running as well so that.
More than one vessel can be loaded at a time.
Okay, and and one of the mine's in Alabama, right now is not producing much but you know did.
You appear is trying to put in long walls and ramp up production in 2024.
Well determine I'll be able to handle extra to to me and and tons of annualized production in the <unk> current states.
That's why we need a number one ship letter back up and running Luther.
I see okay.
And and could you give us some color on this.
Exactly how much that emerged cause or was it <unk> in the first quarter.
It was $4 million in total okay.
Couple couple box little lessons a couple of Bucks.
Okay got it thank you very much for the color.
The next question is a follow up from Lucas types of being Riley security. Please go ahead.
Thank you very much for taking my follow up question. It's it's high level market related do you have good insights into Europe , South America Asia, too and I wondered if you could maybe expand a little bit on your comments in the prepared remarks that you would expect pricing to continue to moderate what are you seeing out of these different and markets what would very much <unk>.
<unk> your color. Thank you.
Alright, well, we're still seeing strong demand out of all those markets, but I guess, what we're seeing is it's the <unk>.
[noise] supply.
Side of the equation wherever starting as I said with Mongolia, increasing their shipping or their trucking into China, just dramatically and with it looks like Australia is starting to get their production or their transportation issues and production issue.
He was back in line.
So I think we're gonna have more supply available and you know we've always we've been saying for quite a few quarters that we thought there would come a time when pricing would moderate.
And even in our budget. This year I think our estimate was about $200.
So we're not surprised at all with where the market's going is supply constrained seemed to be easing and I think that.
We're just not real surprise with where it's headed right now and you know even at 230, we expect a little more downward pressure.
That's very helpful. I appreciate the color and best of luck.
Thank you.
At this time there are no further questions I will now turn the call back over connect your shower for any comments.
That concludes our our call. This afternoon. Thank you again for joining us today and we appreciate your interest and where your medical.
Yeah.
Thank you that concludes today's conference. Thank you all for participating you may now disconnect.