Q2 2024 Warrior Met Coal Inc Earnings Call
Speaker Change: © BF-WATCH TV 2021
Operator: Good afternoon. My name is Drew, and I will be your conference call operator today. I would like to turn the conference over to DeAndre Wright, Vice President of External Affairs and Communications.
Drew: Good afternoon. My name is Drew, and I will be your conference call operator today.
Speaker Change: At this time, I would like to welcome everyone to the Warrior Second Quarter 2024 Financial Results Conference Call.
Speaker Change: At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. This call is being recorded and will be available for replay on the company's website.
Speaker Change: I would like to turn the conference over to DeAndre Wright, Vice President of External Affairs and Communications. Please go ahead.
DeAndre Wright: Good afternoon, and welcome everyone to Warrior's second quarter 2024 earnings conference call. Before we begin, let me remind you that certain statements made during this call, including statements relating to our expected future business and financial performance, may be considered forward-looking statements according to the Private Securities Litigation Reform Act. Forward-looking statements, by their nature, address matters that are to different degrees uncertain. Those uncertainties, which are described in more detail in the company's annual and quarterly reports filed with the SEC, may cause our actual future results to be materially different from those expected in our forward-looking statements.
DeAndre Wright: Good afternoon, and welcome, everyone, to Warrior's second quarter 2024 earnings conference call.
Speaker Change: Before we begin, let me remind you that certain statements made during this call include statements relating to our expected future business and financial performance, may be considered forward-looking statements according to the Private Securities Litigation Reform Act.
Speaker Change: forward-looking statements, by their nature, address matters that are to different degrees uncertain.
Speaker Change: Those uncertainties, which are described in more detail in the company's annual and quarterly reports filed with the SEC, may cause our actual future results to be materially different from those expected in our forward-looking statements.
DeAndre Wright: We do not undertake to update our forward-looking statements, whether as a result of new information, future events, or otherwise, except as may be required by law. For more information regarding forward-looking statements, please refer to the company's press releases and FDC filings. We will also be discussing certain non-GAAP financial measures, which are defined and reconciled to comparable GAAP financial measures in our 2024 second quarter press release, furnished to the SEC on Form 8K, which is also posted on our website.
Speaker Change: We do not undertake to update our forward-looking statements, whether as a result of new information, future events, or otherwise, except as may be required by law.
Speaker Change: For more information regarding forward-looking statements, please refer to the company's press releases and FDC filings.
Speaker Change: We will also be discussing certain non-GAAP financial measures, which are defined and reconciled to comparable GAAP financial measures, in our 2024 second quarter press release, furnished to the SEC on Form 8K, which is also posted on our website.
Speaker Change: Additionally, we filed our 10-Q for the second quarter ended June 30th, 2024, with the SEC this afternoon.
Speaker Change: You can find additional information regarding the company on our website at www.warriormetcoal.com, which also includes the second quarter supplemental slide deck that was posted this afternoon.
Speaker Change: On the call with me today are Mr. Walt Scheller, Chief Executive Officer, and Mr. Dale Boyles, Chief Financial Officer. After our formal remarks, we will be happy to take any questions.
DeAndre Wright: Additionally, we filed our 10-Q for the second quarter ended June 30, 2024, with the SEC this afternoon. You can find additional information regarding the company on our website at www.warriormetcoal.com, which also includes the second quarter supplemental slide deck that was posted this afternoon. On the call with me today are Mr. Walt Scheller, Chief Executive Officer, and Mr. Dale Boyles, Chief Financial Officer. After our formal remarks, we will be happy to take any questions. With that, I'll now turn the call over to Walt. Okay, Walt?
Speaker Change: With that, I'll now turn the call over to Walt. Walt?
Walt Scheller: Thanks, DeAndre. Hello everyone, and thank you for taking the time to join us today to discuss our second quarter 2024 results. After my remarks, Dale will review our results in additional detail, and then you'll have the opportunity to ask questions. We delivered very strong results for the second quarter, driven by our continued success in maximizing the benefits of our high-quality assets and our operational capabilities. A highly successful operational performance led to double-digit increases in both sales and production volumes despite weaker global demand, which led to strong financial performance of adjusted EBITDA and free cash flow.
Walt Scheller: Thanks DeAndre. Hello everyone and thank you for taking the time to join us today to discuss our second quarter 2024 results.
Walt Scheller: After my remarks, Dale will review our results in additional detail, and then you'll have the opportunity to ask questions.
Walt Scheller: We generated $147 million of cash from operations, which was used to fund $122 million of CapEx and mine development during the second quarter, resulting in free cash flow of $25 million. In addition, we continue to make excellent progress on Blue Creek, meeting several key milestones as we advance the development of this world-class asset. This exceptional performance in the development of Blue Creek continued to drive value for our stockholders regardless of market factors. However, we were hoping to see signs of improving demand toward the end of the quarter, which did not materialize. Customers recognized these favorable supply conditions and were patient in their buying approach.
Speaker Change: We delivered very strong results for the second quarter, driven by our continued success in maximizing the benefits of our high-quality assets and our operational capabilities.
Speaker Change: A highly successful operational performance led to double-digit increases in both sales and production volumes despite weaker global demand. This led to strong financial performance of adjusted EBITDA and free cash flow.
Speaker Change: We generated $147 million of cash from operations, which was used to fund $122 million of CapEx and mine development during the second quarter.
Speaker Change: Resulting in free cash flow of $25 million.
Speaker Change: In addition, we continue to make excellent progress on Blue Creek, meeting several key milestones as we advance the development of this world-class asset.
Speaker Change: This exceptional performance and the development of Blue Creek continue to drive value for our stockholders regardless of market factors.
Speaker Change: From a market perspective, the second quarter played out largely as we had expected with softer demand and stronger supply from all regions, resulting in a weaker steelmaking coal price environment.
Speaker Change: We were hoping to see signs of improving demand toward the end of the quarter, which did not materialize.
Speaker Change: In addition, we were surprised by the spot volume availability from Australia in May and June .
Speaker Change: Customers recognized these favorable supply conditions and were patient in their buying approach.
Walt Scheller: Other factors contributing to the weaker demand included Chinese steel exports at multi-year highs and global steel prices declining for most of the second quarter, reflecting the softer steel demand across all regions. As a result, steelmaking coal prices extended the sharp decline that started in March. We saw two attempted price spikes during the second quarter that were short-lived as the market fundamentals were not supportive. The steep correction in pricing experienced in March continued into the beginning of the second quarter, where we saw all indices establish recent lows around early April.
Speaker Change: Other factors contributing to the weaker demand included Chinese steel exports at multi-year highs and global steel prices declining for most of the second quarter, reflecting the softer steel demand across all regions.
Speaker Change: As a result, steelmaking coal prices extended the sharp decline that started in March.
Speaker Change: We saw two attempted price spikes during the second quarter that were short-lived as the market fundamentals were not supportive.
Speaker Change: We were again extremely pleased by the performance of our rail partner during the second quarter, as we were able to navigate the temporary loss of the barging system due to the failure of the Demopolis lock without any impact to our customers and with minimal impact to our costs.
Speaker Change: This lock was repaired and reopened toward the end of May, allowing us to return to moving our products on the river.
Speaker Change: Unfortunately, that reopening was short-lived as the river system had to be closed again in late June due to the failure of the Holt Lock, unrelated to the Demopolis Lock.
Speaker Change: Right now, we do not have an official repair plan from the local Corps of Engineers. However, we're planning that the repairs will take as long as the Demopolis Lock repairs of about four to five months.
Speaker Change: We expect to be able to manage the current Holt lock failure without interruption to our customers just as we did in the previous lock failure.
Speaker Change: The steep correction in pricing experienced in March continued into the beginning of the second quarter, where we saw all indices establish recent lows around early April .
Walt Scheller: Our primary index, the PLV FOB Australia, ended the second quarter at $212 per short ton, which was $95 lower than its first quarter high of $307 per short ton. Likewise, the POV CFR China Index experienced a $76 decline during the same period, closing the second quarter at a price of $224 per short ton. Similar declines were observed with second-tier indices, which were also lower relative to the PLV index. Five all-A prices ended the second quarter at $192 per short ton and averaged $197 per short ton for the second quarter, which is a function of product mix, geography, and freight rate. Pig iron production in China, which is the world's largest production region, fell by 3.6% for the same period.
Speaker Change: Our primary index, the PLV FOB Australia, ended the second quarter at $212 per short ton, which was $95 lower than its first quarter high of $307 per short ton.
Speaker Change: Likewise, the PLV CFR China Index experienced a $76 decline during the same period, closing the second quarter at a price of $224 per short time.
Speaker Change: Similar declines were observed with second-tier indices, which were also lower relative to the PLV index, averaging between 86 to 90 percent for the second quarter.
Speaker Change: High vol A prices ended the second quarter at $192 per short ton and averaged $197 per short ton for the second quarter.
Speaker Change: We achieved a consolidated gross price realization of 90% in the second quarter.
Speaker Change: which is a function of product mix, geography, and freight rates.
Speaker Change: According to the World Steel Association monthly report, global pig iron production decreased by approximately 2.6% for the first six months of 2024, as compared to the prior year period.
Speaker Change: Pig iron production in China, which is the world's largest production region, fell by 3.6% for the same period.
Speaker Change: Whereas, the rest of the world's production experienced a more modest decline of 0.3% for the first half of the year.
Speaker Change: India remains a bright spot with a growth rate of 2.7% and is expected to continue growing with new blast furnace capacity coming online later this year.
Speaker Change: Several other regions also experienced positive growth for the period, such as select European countries and Brazil.
Speaker Change: However, their gains were largely offset by declining production from Japan and South Korea.
Walt Scheller: Several other regions also experienced positive growth for the period, such as select European countries and Brazil. However, their gains were largely offset by declining production from Japan and South Korea. Now, let me turn to our second quarter results. Our second quarter sales volume of 2.1 million short tons was 18% higher than the comparable quarter last year. The overall increase is primarily driven by both mines operating at higher capacity levels this year compared to last year, with stable contractual demand from our traditional markets and solid Asian spot demand. Our sales by geography in the second quarter break down as follows: 39% into Europe, 38% into Asia, and 23% into South America.
Speaker Change: Now let me turn to our second quarter results.
Speaker Change: Our second quarter sales volume of 2.1 million short tons was 18% higher than the comparable quarter last year.
Speaker Change: The overall increase is primarily driven by both mines operating at higher capacity levels this year compared to last year.
Speaker Change: Stable contractual demand from our traditional markets, and solid Asian spot demand.
Speaker Change: Our sales by geography in the second quarter break down as follows.
Speaker Change: 39% into Europe , 38% into Asia, and 23% into South America.
Walt Scheller: The majority of the sales into Asia in the second quarter were to customers in Japan, China, and India. As we've previously noted, demand from Asian steel producers has been growing over the last year, resulting in higher sales to that geography, while sales from our traditional markets in Europe and South America have been lower, primarily due to weak spot markets. Our spot volume was 30% in the second quarter of 2024, which was primarily sold in the Asian market. This rate was lower than 37% in the first quarter of the year.
Speaker Change: The majority of the sales into Asia in the second quarter were to customers in Japan, China, and India.
Speaker Change: As we've previously noted, demand from the Asian steel producers has been growing over the last year, resulting in higher sales to that geography, while sales from our traditional markets for Europe and South America have been lower, primarily due to weak spot markets.
Speaker Change: Our spot volume was 30% in the second quarter of 2024, which was primarily sold in the Asian markets.
Speaker Change: This rate was lower than 37% in the first quarter of the year.
Walt Scheller: For the full year, we expect our spot volume to be approximately 25-30% of total sales volume. Production volume in the second quarter was 2.2 million short tons compared to 1.9 million short tons in the same quarter 2023, representing a 13% increase. Both mines operated at higher capacity levels in the second quarter of this year compared to the same quarter last year. Our coal inventory increased slightly to 895,000 short tons from 892,000 short tons at the end of the first quarter.
Speaker Change: For the full year, we expect our spot volume to be approximately 25-30% of total sales volume.
Speaker Change: Production volume in the second quarter was 2.2 million short tons compared to 1.9 million short tons in the same quarter 2023, representing a 13% increase.
Speaker Change: This is the highest quarterly production output over the last three years.
Speaker Change: Both mines operated at higher capacity levels in the second quarter of this year compared to the same quarter last year.
Speaker Change: Our coal inventory increased slightly to 895,000 short tons from 892,000 short tons at the end of the first quarter.
Walt Scheller: During the second quarter, we spent $122 million on CapEx and mine development. CapEx spending was $111 million, which included $84 million on the Blue Creek Project. My development spending on the Blue Creek Project was $11 million during the second quarter of 2024. As we begin developing the first longwall panel at Blue Creek in the third quarter, our mine development costs will continue to grow in the second half of the year and until the longwall starts production, which we expect to occur in 2026.
Speaker Change: During the second quarter, we spent $122 million on CapEx and mine development.
Speaker Change: CapEx spending was $111 million, which included $84 million on the Blue Creek Project.
Speaker Change: Mine development spending on Blue Creek Project was $11 million during the second quarter 2024.
Speaker Change: As we begin developing the first longwall panel at Blue Creek in the third quarter, our mine development costs will continue to grow in the second half of the year and until the longwall starts production, which we expect to occur in 2026.
Walt Scheller: Next, I'd like to provide you with a progress report on our Blue Creek growth project, with updates on our remarkable development progress in the second quarter and what comes next. We've now completed major components for seam access on schedule, which include the production slope, service shaft, ventilation shaft, and fan. The next major step is completing the insulation of the service cage and the slope belt.
Speaker Change: Next, I'd like to provide you with a progress report on our Blue Creek Growth Project.
Speaker Change: with the updates on our remarkable development progress in the second quarter and what comes next.
Speaker Change: We've now completed major components for seam access on schedule, which include the production slope, service shaft, ventilation shaft, and fan.
Speaker Change: The next major step is completing the insulation of the service cage and the slope belt.
Speaker Change: Given our significant progress to date, we are able to begin development of the initial wall-to-wall panel with the first continuous monitor unit expected in the third quarter.
Walt Scheller: On the surface infrastructure components, we completed the construction of the bathhouse, warehouse, and critical electrical substations and made noteworthy progress on the construction of the preparation plant. On the coal transportation components, good progress was made on the construction of the run-of-mine and clean coal belt structure. Steady progress continued during the quarter on the rail and barge loadouts as well. All of these components remain on schedule.
Speaker Change: On the surface infrastructure components, we completed the construction of the bathhouse, warehouse, and critical electrical substations, and made noteworthy progress on the construction of the preparation plant.
Speaker Change: On the coal transportation components, good progress was made on the construction of the run-of-mine and clean coal belt structures.
Speaker Change: Steady progress continued during the quarter on the rail and barge loadouts as well.
Walt Scheller: In addition, we are focused on increasing our headcount in Blue Creek by approximately 100 people by the end of the year and are on track to meet that goal. We are extremely excited that the longwall panel development is scheduled to begin on the originally expected timeline, and we are on track to produce approximately 200,000 short tons of high-vol. Steelmaking coal will be sold in the second half of 2024. The development tons produced from the second half of this year to the first half of 2025 are expected to be sold in the second half of 2025 after the preparation plant comes online.
Speaker Change: All of these components remain on schedule.
Speaker Change: In addition, we are focused on increasing our headcount at Blue Creek by approximately 100 people by the end of the year and are on track to meet that goal.
Speaker Change: We are extremely excited that the longwall panel development is scheduled to begin on the originally expected timeline and we are on track to produce approximately 200,000 short tons of high vol A steelmaking coal in the second half of 2024.
Speaker Change: The development tons produced from the second half of this year to the first half of 2025 are expected to be sold in the second half of 2025 after the preparation plant comes online.
Walt Scheller: On the financial side, Warrior invested $84 million during the second quarter of 2024 in the development of Blue Creek, which brings the year-to-date spending to $153 million. The company expects to invest approximately $325 to $375 million in 2024 on the continued development of the Blue Creek Reserve, inclusive of the $153 million already invested. For the entire project to date, through the end of the second quarter, we've invested a grand total of $519 million.
Speaker Change: On the financial side, Warrior invested $84 million during the second quarter of 2024 on the development of Blue Creek.
Speaker Change: which brings the year-to-date spending to $153 million.
Speaker Change: The company expects to invest approximately $325 to $375 million in 2024 on the continued development of the Blue Creek Reserves.
Speaker Change: inclusive of the 153 million dollars already invested.
Speaker Change: For the entire project to date, through the end of the second quarter, we've invested a grand total of $519 million.
Walt Scheller: We remain focused on tight capital spending discipline to ensure the project will be completed within our reset baseline cost estimate and on the original schedule, including the long wall startup in the second quarter of 2026. I'll now ask Dale to address our second quarter results in greater detail. Thanks, Walt.
Speaker Change: We remain focused on tight capital spending discipline to ensure the project will be completed within our reset baseline cost estimate and on the original schedule, including the longwall startup in the second quarter of 2026.
Speaker Change: Blue Creek represents one of the last remaining untapped premium, high-quality, high-volume coal reserves in the U.S.
Speaker Change: which we anticipate will achieve premium prices.
Speaker Change: Warrior expects incremental annualized production of 4.8 million short tons of premium high volley steelmaking coal after the start-up of the longwall, which the company expects will enhance and strengthen its already strong global cost curve positioning and deliver incremental profit and cash flows.
Speaker Change: I will now ask Dale to address our second quarter results in greater detail.
Dale Boyles: Despite the weaker global demand for steelmaking coal in the second quarter, we continue to deliver strong operational and financial performance by leveraging our high-quality assets and strong operational competence. Strong financial performance allows us to invest in the future of our company and drive incremental value for our stock. We're investing nearly a billion dollars over five years in our company's future from the cast and array of our existing operation without taking on any additional financial leverage.
Dale Boyles: Thanks, Walt.
Dale Boyles: Despite the weaker global demand for steel making coal in the second quarter, we continue to deliver strong operational and financial performance by leveraging our high quality assets and strong operational competencies.
Speaker Change: Strong financial performance allows us to invest in the future of our company and drive incremental value for our stockholders.
Dale Boyles: We are investing nearly a billion dollars over five years in our company's future from the cash generated from our existing operations, without taking on any additional financial leverage.
Dale Boyles: In fact, we have deleveraged the company since the beginning of the development of Blue Crete and paid out incremental special dividends to our stock. That makes a strong statement about the high quality of our existing assets, our people, and our focus on generating value for our stockholders. The opportunity at Blue Crete, combined with our operational efficiency and strong existing assets, means that Warrior has a very bright future ahead.
Speaker Change: In fact, we have deleveraged the company since the beginning of the development of Blue Creek.
Speaker Change: and paid out incremental special dividends to our stockholders.
Speaker Change: That makes a strong statement about the high quality of our existing assets, our people, and our focus on generating value for our stockholders.
Speaker Change: The opportunity at BlueCrate, combined with our operational efficiency and strong existing assets, means that Warrior has a very bright future ahead.
Dale Boyles: Now let's look at the specific financial results for the second quarter. For the second quarter of 2024, the company recorded net income on a gap basis of $71 million, or $1.35 per diluted share, compared to net income of $82 million, or $1.58 per diluted share, in the same quarter of 2023. Non-gap adjusted net income for the second quarter, excluding the non-recurring business interruption expenses, was $1.
Speaker Change: Now let's look at the specific financial results for the second quarter.
Speaker Change: For the second quarter of 2024, the company recorded net income on a gap basis of $71 million, or $1.35 per diluted share, compared to net income of $82 million, or $1.58 per diluted share, in the same quarter of 2023.
Speaker Change: Non-gap adjusted net income for the second quarter, excluding the non-recurring business interruption expenses, was $1.35 per diluted share.
Dale Boyles: This comparison suggests a net income of $1.64 per diluted share in the same quarter of 2023. These decreases, quarter over quarter, were primarily driven by an 11% lower average net selling price and lower results from our gas business, partially offset by 18% higher sales volume. We reported adjusted EBITDA of $116 million in the second quarter of 2024, compared to $130 million in the same quarter of last year. Our adjusted EBITDA margin was 29% in the second quarter of 2024, compared to 34% in the same quarter of last year. Our adjusted EBITDA margin per ton was $55 in the second quarter of this year.
Speaker Change: This compares to adjusted net income of $1.64 per diluted share in the same quarter of 2023.
Speaker Change: These decreases, quarter over quarter, were primarily driven by the 11% lower average net selling price and lower results from our gas business, partially offset by 18% higher sales volumes.
Speaker Change: We reported adjusted EBITDA of $116 million in the second quarter of 2024, compared to $130 million in the same quarter of last year.
Speaker Change: Our adjusted EBITDA margin was 29% in the second quarter of 2024, compared to 34% in the same quarter of last year.
Speaker Change: Our adjusted EBITDA margin per ton was $55 for the second quarter of this year.
Dale Boyles: As I previously mentioned, these decreases, quarter over quarter, were primarily driven by the 11% lower average net selling price and lower results from our gas business, which were partially offset by 18% higher sales losses. Total revenues were $397 million in the second quarter, compared to $380 million in the second quarter of 2023, and Higher Demerit and other charges were $4 million higher compared to the second quarter of 2023.
Speaker Change: As I previously mentioned, these decreases, quarter over quarter, were primarily driven by the 11% lower average net selling price.
Speaker Change: and lower results from our gas business.
Speaker Change: which were partially offset by 18% higher sales volumes.
Speaker Change: Total revenues were $397 million in the second quarter compared to $380 million in the second quarter of 2023.
Speaker Change: This overall increase of $17 million was primarily due to the 18% increase in sales volume, offset by the 11% decrease in average net selling prices, and higher demerit and other charges.
Speaker Change: The MERGE and other charges were $4 million higher compared to 2023 second quarter.
Dale Boyles: The merge and other charges resulted in an average net selling price of $186 per short time in the second quarter of 2024 compared to $209 per short time in the same quarter of last year. Other revenues, mainly from our gas businesses, were lower in the second quarter of 2024 compared to the same quarter of last year. Cash cost of sales in the second quarter of 2024 was $260 million, or 67% of mining revenue, compared to $229 million, or 62% of mining revenues in the second quarter of 2023.
Speaker Change: The merge and other charges resulted in an average net selling price of $186 per short time in the second quarter of 2024, compared to $209 per short time in the same quarter of last year.
Speaker Change: Other revenues, mainly from our gas businesses, were lower in the second quarter of 2024 compared to the same quarter of last year.
Speaker Change: primarily due to a 10% decrease in natural gas volumes between the periods.
Speaker Change: Cash cost of sales in the second quarter of 2024 was $260 million, or 67% of mining revenues, compared to $229 million, or 62% of mining revenues, in the second quarter of 2023.
Speaker Change: of the $31 million increase in cash cost of sales.
Dale Boyles: $41 million of the increase was driven primarily by the 18% increase in sales volumes and the higher employee wages and incentives associated with a higher headcount. This increase was offset partially by a decrease in cash cost of sales of $10 million attributed to lower variable costs of transportation and roll fees associated with lower steelmaking coal production. Cash cost of sales per short ton, FOB port, was approximately $124 in the second quarter of this year, compared to $129 in the second quarter of 2023.
Speaker Change: $41 million of the increase was driven primarily by the 18% increase in sales volumes and the higher employee wages and incentives associated with a higher headcount.
Speaker Change: This increase was offset partially by the decrease in cash cost of sales of $10 million attributed to lower variable cost of transportation and roll fees associated with lower steelmaking coal prices.
Speaker Change: Cash cost of sales per short time, FOB port, was approximately $124 in the second quarter of this year compared to $129 in the second quarter of 2023.
Dale Boyles: Our cash cost of production was 61% of our total cash cost per short-term compared to 59% last year. On a per ton basis, costs of production were flat in the second quarter compared to the prior year. This reflects the higher headcount and associated employee-related wages and incentives that were offset by the higher production volume.
Speaker Change: Our cash cost of production was 61% of our total cash cost per short ton compared to 59% last year.
Speaker Change: On a per ton basis, costs of production were flat in the second quarter compared to the prior year quarter.
Speaker Change: This reflects the higher headcount and associated employee-related wages and incentives that were offset by the higher production volumes.
Dale Boyles: Overall transportation costs in Wolpe costs 39% of our cash cost of sales per short ton in the second quarter this year on lower average net selling prices, compared to 41% in the same quarter last year. Transportation costs were about $3 per short ton, lower due to lower average net selling prices and their impact on variable transportation costs. This was net of the $1 per short-time impact of the higher rail max due to the Demopolis Lock failure.
Speaker Change: Overall transportation and wall P costs were 39% of our cash cost of sales per short time in the second quarter this year on lower average net selling prices compared to 41% in the same quarter last year.
Speaker Change: Transportation costs were about $3 per short ton, lower due to lower average net selling prices and their impact on variable transportation costs.
Speaker Change: This was net of the $1 per short time impact of the higher rail mix due to the Demopolis lock failure.
Dale Boyles: Likewise, royalty costs were lower by about $2.00 per short time on lower average net selling prices. As a result of these changes in our cash cost, our cash margin for a short time was $62 in the second quarter compared to $80 in the same quarter last year. The interest income earned on our cash investments was lower in the second quarter this year, primarily due to a lower average cash balance. Our interest expense was lower primarily due to the early retirement of debt in August of 2023 and the capitalization of interest to the construction of Blue Cross Blue Shield. Our low effective tax rate continues to reflect an income tax benefit for depletion expense on foreign-derived intangible income.
Speaker Change: Likewise, royalty costs were lowered by about $2 per short time on lower average net selling prices.
Speaker Change: As a result of these changes in our cash cost, our cash margin for short time was $62 in the second quarter compared to $80 in the same quarter last year.
Speaker Change: SG&A expenses were about $15 million, or 3.9% of total revenues in the second quarter of 2024.
Speaker Change: And we're slightly higher than 2023 second quarter, 3.5%, primarily due to an increase in employee-related compensation expenses.
Speaker Change: The interest income earned on our cash investments was lower in the second quarter this year, primarily due to lower average cash balances.
Speaker Change: Our interest expense was lower primarily due to the early retirement of debt in August of 2023 and the capitalization of interest to the construction of Blue Creek.
Speaker Change: Our low effective tax rate continues to reflect an income tax benefit or depletion expense in foreign derived intangible income.
Dale Boyles: Turning to cash flow, during the second quarter of 2024, free cash flow was $25 million. This was a result of cash flows generated by operating activities of $147 million, and left cash used for capital expenditures in mine development of $122 million. Free cash flow was $48 million higher than the second quarter of 2023, primarily due to higher operating cash flows and lower Blue Creek CapEx spending. Free cash flow in the second quarter of 2024 was positively impacted by a $29 million decrease in net working capital from the end of the first quarter, primarily due to lower accounts receivable on timing of sales and lower steel making coal prices. Our total available liquidity at the end of the second quarter of 2024 was $816 million and consisted of cash and cash equivalents of $709 million.
Speaker Change: Turning to cash flow, during the second quarter of 2024, free cash flow was $25 million. This was a result of cash flows generated by operating activities of $147 million, less cash used for capital expenditures, and mine development of $122 million.
Speaker Change: Pre-cash flow was $48 million higher than the second quarter of 2023, primarily due to higher operating cash flows and lower Blue Creek CapEx spending.
Speaker Change: Free cash flow in the second quarter of 2024 was positively impacted by a $29 million decrease in net working capital from the end of the first quarter.
Speaker Change: primarily due to lower accounts receivable on timing of sales and lower steelmaking coal prices.
Speaker Change: Our total available liquidity at the end of the second quarter of 2024 was $816 million and consisted of cash and cash equivalents of $709 million and $107 million available under our AVL facility.
Dale Boyles: Now let's turn to our Outlook and Guidance for the full year 2024. After another strong quarter of operational and financial performance despite weak demand in the global market, we have reaffirmed our outlook and guidance for the full year as outlined in our earnings. We did a non-material adjustment to interest expense by lowering the full year expected amount. Thanks, Dale. Before we move on to Q&A, I'd like to make some final comments
Speaker Change: Now let's turn to our outlook and guidance for the full year 2024. After another strong quarter of operational and financial performance despite weak demand in the global markets,
Speaker Change: We have reaffirmed our outlook and guidance for the full year as outlined in our earnings release.
Speaker Change: We did a non-material adjustment to interest expense by lowering the full year expected amount. I will now turn it back to Walt for his final comments.
Walt Scheller: Thanks Dale. Before we move on to Q&A, I'd like to make some final comments.
Speaker Change: We're expecting demand to increase as the second half of the year progresses, although we still do not have firm signals and are therefore cautious.
Speaker Change: We will continue to be patient when possible and seek opportunities that maximize price realizations even if we need to temporarily manage higher than normal inventory levels.
Dale Boyles: We do not expect any meaningful demand improvements in our traditional markets of Europe and South America but are expecting to see demand improve in certain geographies like India and Southeast Asia. While we're well-prepared to address a variety of market conditions, we're also extremely excited and laser-focused on the disciplined development of our world-class Blue Creek Reserves. We're on track for the first development tons from continuous miner units in the third quarter of 2021.
Speaker Change: We do not expect any meaningful demand improvements in our traditional markets of Europe and South America, but are expecting to see demand improve in certain geographies like India and Southeast Asia.
Speaker Change: As for China, we anticipate still making coal production cuts will be implemented in the second half of the year as the recent stimulus efforts have failed to improve demand.
Speaker Change: We believe the steelmaking coal supply will be slightly tighter in the second half of the year due to a combination of supply disruptions, like mine fires, thermal mine maintenance, and longwall moves in Australia.
Speaker Change: We are well positioned operationally and from an inventory level standpoint to capitalize on increasing market demand in the second half of the year.
Speaker Change: While we're well prepared to address a variety of market conditions, we're also extremely excited and laser-focused on the disciplined development of our world-class Blue Creek reserves. We're on track for the first development tons from continuous miner units in the third quarter of 2024.
Speaker Change: with the Longwall scheduled to start up in the second quarter of 2026.
Speaker Change: With that, we'd like to open the call for questions. Operator?
Operator: We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been answered and you'd like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Lucas Pipes with B-Riley Security. Please go ahead.
Speaker Change: We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys.
Speaker Change: If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster.
Speaker Change: The first question comes from Lucas Pipes with B-Riley Securities.
Speaker Change: Please go ahead.
Lucas Pipes: Thank you very much, operator. Good afternoon, everyone.
Lucas Pipes: Walt, Dale, congrats on the progress at Blue Creek and I wanted to ask
Lucas Pipes: about your key milestones for the project between now and the end of the year. And then I also wanted to ask who will have the honor to mine the first ton of coal with the Continuous Miner Unit in Q3. Thank you all very much for your perspective.
Walt Scheller: Key milestones will be getting that first continuous miner unit up and running, which will happen pretty quickly here. It will happen in the third quarter. And then the other key milestone will be getting that second continuous miner unit running before the end of the year, after we've cleared enough space for the first continuous miner unit. We've talked about the completion of the slope, and the slope belt is being installed now. We'll have the service cage up and running pretty quickly here in the third quarter.
Speaker Change: Thank you. Key milestones will be getting that first continuous miner unit up and running, which will happen...
Speaker Change: pretty quickly here. It will happen in the third quarter and then the other key milestone will be getting that second continuous monitor unit running before the end of the year after we've cleared enough space with the first continuous monitor unit.
Speaker Change: We've talked about the completion of the slope and the slope belt is being installed now. We'll have the service cage up and running pretty quickly here in the third quarter. So the real key...
Walt Scheller: So the real key... The key moments are going to be getting those first two and the Continuous Miner Unit running. And I have no doubt that our mine manager over there will insist that he be the one to make the first cut with the continuous miner.
Speaker Change: The key moments are going to be getting those first two...
Speaker Change: continuous minor units running and I have no doubt that our mine manager over there will insist that he be the one to make the first cut with the continuous minor.
Lucas Pipes: That's understandable. Thank you all for that color. In terms of your annual guidance, when I look at the midpoint, it implies about 3.5 million tons of production in the second half versus 4.2 million tons in the first half.
Speaker Change: That's understandable. Thank you all for that color.
Speaker Change: In terms of your annual guidance, when I look at the midpoint, it implies about 3.5 million tons of production in the second half versus the first half at 4.2 million tons.
Speaker Change: quite a bit of a pullback. And I wondered, is there anything that you see, and I appreciate that's at the midpoint, but is there anything that you see?
Speaker Change: operationally that would call for that reduction or is that a degree of conservatism either
Speaker Change: operationally or because of where the market is. Thank you very much for your perspective. You know, we always like to under-promise and over-deliver, but frankly, we've got three long-wall moves that will occur.
Speaker Change: And while we have shields, and there should be zero-day moves...
Speaker Change: You still have to slow down toward the end of the panel in order to complete the meshing process and get that face bolted up.
Speaker Change: before we move over to start the new long wall phase. So that'll be on all three of those long wall moves. And then we also have...
Speaker Change: We always expect that around the holidays...
Speaker Change: between absenteeism and just trying to get people a little extra time off, we expect a reduction in production levels.
Speaker Change: Thank you. And then the cost guidance is related to that conservatism as well. You had a nice improvement there quarter over quarter.
Dale Boyles: Yeah. Lucas, this is Dale.
Speaker Change: Yeah, Lucas, this is Dale. I mean, if you look at our year to date, you know, we're right on track of where we said we would be in our range, so...
Dale Boyles: I mean, if you look at our year to date, you know, we're right on track of where we said we would be in our range. So, you know, when you look at where prices are and versus what our guidance is built on, we're pretty much in line with all that. So all that seems to be, you know, actually unfolding as we said. So we feel good about where we are.
Speaker Change: You know, when you look at where prices are and versus what our guidance is built on, we're pretty much in line with all that. So all that seems to be, you know, actually unfolding as we said. So we feel good about where we are.
Lucas Pipes: Alright, well I appreciate the color and to the entire team, best of luck. Thank you.
Speaker Change: Alright, thank you Lucas.
Speaker Change: The next question comes from Nathan Martin with The Benchmark Company. Please go ahead.
Nathan Martin: Yeah, thanks operator. Good afternoon, guys.
Nathan Martin: Maybe start on the pricing side. Walt found, like you said, capture rate up to about 90% this quarter, which is better than, I believe, it was 84% in the first quarter.
Speaker Change: I'm guessing likely aided a bit by the quarter-over-quarter decline in net prices, but...
Speaker Change: You guys still feel confident that Warrior can hit kind of that 85 to 90% bogey that Dale mentioned previously, the Aussie benchmark, for the full year? Or should we assume...
Speaker Change: maybe given the higher high volet production that we're seeing from MIME 4, which I think is running at pretty near record levels, at least through the first half, and still, you know, that wider historical spread between high volet and the benchmark that maybe it ends up being a little bit lower than that range. It would be great to get your thoughts.
Speaker Change: Well, actually, we've seen the spread close back up a little bit, which is very positive. And I think your first comment about the declining price...
Speaker Change: pushing that those relativities up higher is very that's very accurate and I think what we'll see is if we see continued declining prices unfortunately I think you'd continue to see that percentage
Speaker Change: [inaudible]
Speaker Change: right I completely understand that that mentality of Walt um maybe maybe just related to then kind of the cadence of shipments for the remainder of the year you know you guys mentioned
Speaker Change: So three long one moves, two in cue three, one in cue four, if I remember correctly.
Speaker Change: Walt, you mentioned a slight build in inventories quarter-over-quarter. When would you expect maybe some of those inventories to be drawn down, whether it be third quarters, fourth quarters, any specific thoughts or drivers around shipments between the quarters in the last half of the year?
Walt Scheller: Well, I think the first thing we have to remember here is, as we've said, we're going to mine a couple hundred thousand tons out of Blue Creek, which is going to be incremental inventory. So if we just maintain our inventory levels flat for four and seven, we actually increase our inventory by 200,000 tons.
Walt Scheller: In terms of working that inventory down, as I said, we're going to be very patient. We are not going to jump into the market just to dump tons. We don't need to do that. So we're going to be patient, and if we see market opportunities that, in our opinion, justify going ahead and moving additional coal, we'll do that. But we're not in, and we don't feel pressured to do so.
Dale Boyles: Yeah, Nate, I'll just add to that. If you look at last year, if you remember, third quarter, we really pushed a lot of volume out to introduce our products into Asia, and then, you know, we pulled back in the fourth quarter, and we only shipped about a million five last year or so. We try to take advantage of market situations when we can, and if we think the latter half of the year... prices are going to increase, then we're going to be a little more patient with our approach. Q3 could be a little lower, and Q4 could be a little higher. It just really depends on what the market or customer demand is.
Lucas Pipes: Got it. Thanks. Thanks, Dale. Thanks, Walt.
Lucas Pipes: And then maybe just one last question on Blue Creek. It's one I get from investors fairly often. You know, looking at the slide deck, obviously some of these numbers are a little stale at this point, but specifically focused on the cash costs and the possibilities around the Blue Creek product. You know, I know you guys have said that it should eventually help lower the overall average cash costs for Warrior.
Lucas Pipes: You know, your slide deck is still showing around $70 or so, but maybe we could just get some thoughts on where that number could look like once you guys update some of these economics, especially given some of the inflationary pressures that we've already applied to the CapEx budget. Thanks.
Speaker Change: Can we just get some thoughts on where that number could look like you know once you guys update some of these some of these economics.
Speaker Change: You know, especially given some of the inflationary pressures that we've already acquired through the Capex budget.
Nate: No good question Nate.
Speaker Change: We do expect to be updating all of those project economics.
Speaker Change: You know as we said the scope change last year really had no effect on us because we had the improvement in transportation costs and everything so no net impact on the overall economics actually thank you know, they're going to be better with a higher met coal pricing assumption. So.
Speaker Change: Sometime next year, we'll get a get that information back out but that $70. All in before you know we've been talking about the inflation in supplies and everything being 30%, 35%. So it'd be tack that on and you're starting to get to you know, where we think it'll be no I don't.
Speaker Change: That's the exact number but that's a pretty good idea.
Speaker Change: We're we're probably headed right now.
Speaker Change: Great. Thanks, I set up the detail I'll leave it there guys I appreciate the time best of luck in the second half.
Speaker Change: Thank you.
Speaker Change: Again, if you have any question. Please press Star then one.
Operator: The next question comes from Katja Jancic of BMO Capital Markets.
Katja <unk>: The next question comes from Katja <unk> with BMO capital markets. Please go ahead.
Katja Jancic: Hi. Thank you for taking my question.
Katja: Hi, Thank you for taking my question I think in the prepared remarks, you. Walter you mentioned that the spot exposure in our 24 is going to be between 25% to 30% is that a bit higher than what was previously expected I thought our initial expectation was around 25%.
Walt Scheller: I think in your prepared remarks, Walt, you mentioned that the spot exposure in 24 is going to be between 25 to 30 percent. Is that a bit higher than what was previously expected? I thought initially the expectation was around 25 percent.
Walter: I think we had said 25% to 30% of all along and but you know.
Speaker Change: The issue is the Theres been really no material as nation of spot activity in Europe or South America. It also it's just you know it's just having to continue to move Nicole in the Asia and a lot of that's happening in the spot market.
Katja Jancic: Is it in the near term because, as you mentioned, right now the spot activity is a little softer, and the spot volume could be, or the spot exposure could be lower during, let's say, the third quarter?
Speaker Change: Is it in the near term because as you mentioned right and all of this productivity is a little softer than the spot volume could be or just spot exposure could be lower during let's say the third quarter.
Walt Scheller: Yeah, it could be. Again, we were at 37% in Q1, down to 30% in Q2, and we're still saying 25% to 30%, so it has to go down. In order for us to hit our range, it has to be below 30% in the third or fourth quarter to drag our number down where we believe it'll end up.
Speaker Change: Yeah. It could be again, we were at 37% in Q1.
Speaker Change: Down to 30% in Q2, and we're still saying, 25% to 30%. So it has to go down in order for us to hit our range. It has to be below 30 in the third or fourth quarter to drag our number down where we believe it'll end up.
Speaker Change: And one more if I may longer term ones Blue Creek starts ramping up does that exposure change.
Walt Scheller: I think that exposure increases.
Speaker Change: I think that exposure increases the first couple of years of Blue Creek.
Speaker Change: Another $4 8 million short tons into the market.
Speaker Change: And getting that that cool established and finding homes for it. So I think the the percentage of spot will increase.
Speaker Change: For that term for the next few years.
Speaker Change: Okay perfect. Thank you.
Speaker Change: Thank you.
Mr. <unk>: At this time there are no further questions I will now turn the call back over to Mr. <unk> for any comments.
Operator: That concludes our call this afternoon. Thank you again for joining us today. We appreciate your interest in Warrior.
Mr. <unk>: That concludes our call. This afternoon. Thank you again for joining US today, we appreciate your interest in warrior.
Speaker Change: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Speaker Change: Okay.
Speaker Change: [music].
Operator: ??? ??? ???
Speaker Change: Yeah.
Speaker Change: [music].