Q2 2019 Earnings Call
Good afternoon, My name is Jamie and I will be your conference operator today.
At this time I would like to welcome everyone to the warrior met coal second quarter 2019 financial results Conference call.
Oh lines have been placed on mute to prevent any background noise.
After the speakers remarks, there will be no.
There will be a question and answer session. If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad.
If he would like to withdraw your question you May press star into thank you.
Before we begin I've been asked to note that today's discussion may contain forward looking statements that 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.
Ive 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 Dot com.
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 or your met coal Dot com.
[noise] here today to discuss the company's results are Mr. Wallace Schiller, Chief Executive Officer, and Mr., Dale Boils Chief Financial Officer.
Mr. Shore you may begin your remarks.
Thanks, Operator, Hello, everyone and thank you for taking the time to join US today to discuss our second quarter 2019 results.
After my remarks, Jim will review our results in additional detail and then you'll have the opportunity to ask questions.
We have performed exceptionally well and exceeded our expectations in the second quarter.
Which led to a record quarterly high sales volumes.
The months' continued their strong performance achieving high levels of production that drove the record high sales volumes.
We achieved $398 million in revenue.
The $176 million of adjusted EBITDA.
And a warrior record quarterly high free cash flow of $197 million.
In addition, we continued our commitment of returning capital to stockholders with the payment of a $230 million special cash dividend.
As a result of the Companys performance in the first half the year and expected market conditions for the remainder of 2019, raising our full year guidance for sales and production volumes, which we will discuss later.
Production volume in the second quarter was 2.2 million short tons compared to $1.9 million produced in the same quarter of 2018.
An increase of 14%.
We successfully completed one longwall move in the second quarter this year compared to no longwall moves in the second quarter of 2018 and achieve production levels that were better than expected.
These results demonstrate the significant efforts made by our employees and anticipating and planning our longwall move proactively driving and production efficiencies and managing our equipment downtime.
The capital investments that we've made in our minds over the last few years continue to pay off as we strive to reach full capacity to improve production efficiencies and better equipment utilization with less downtime and a safe environment.
A good example from the recently completed quarter is the extra set of longwall shows that we purchased from mine seven the average should reduce the number of days it takes to move along wall and mitigate the impacts on production from the longwall move.
This that's for setting longwall shows also provides additional flexibility and risk mitigation to minimise periods of production downtime in the event that we encounter unexpected geological conditions.
The company spent $34 million on capital expenditures and mine development costs during the second quarter this year compared to $33 million in the same period last year.
This amount includes the longwall panel development costs for the extension of mind for the next area of the mine plan, we call for North.
In addition, the four north cash spending included construction of the service shaft and hoist as can be seen on pages 11, and 12 of our investor presentation on our web site.
When the four North extension is completed it will feature a new state of the art equipment and facilities, including a new portal bathhouse power substation and Bunkering system.
We expect to be the longwall mining in that area sometime in the next five to six years and intend to spread the capital spending over that same time period.
Sales volume of 2.2 million short tons in the second quarter of 2019 set a new quarterly record high and were 90% higher than compared to the same quarter of 2018.
Demand from our customers continued to be strong during the second quarter. This year.
Our sales by geography in the second quarter of 2019 or 59% into Europe , 23% in South America, and 18% into Asia.
The geographical mix. This year was consistent overall with last years second quarter.
Inventories decreased 84000 short tons to 484000 short tons from the first quarter, primarily due to higher sales volumes.
We continuously manage our inventory levels to the lowest level possible, while optimizing our supply chain and the flow of met coal deliveries to the port.
Our actual level of inventory can be significantly impacted by several factors that are primarily timing related such as missed lay can't schedules.
The loading delays caused by storms in the Gulf.
The Platts premium low vol. Australian index price closed the second quarter $11, a metric ton lower than where it started the quarter.
The index price declined as much is $19 a metric ton from the tie in mid May.
Hitting $194 a metric ton at the end of June .
Despite the volatility overall market conditions remained strong.
Our gross price realization for the second quarter was 97% of the Platts premium low vol, Fob, Australia index price and was down slightly from the prior year period.
Remember the actual percentage as a blended rate of our low and mid vol met coal sales.
There was no special discounting on our sales due to solid demand and price fundamentals, resulting from our high gross price realizations.
From a market perspective at the beginning of the quarter Global steel producer saw a rapid decline in their margins due to the combination of falling finished product pricing and increases in raw material costs, primarily iron ore.
Although margin erosion was a common theme across the world different regions had different reactions.
China on the one hand continue to produce at record levels, achieving an impressive year to date pig iron production growth of 18, 8.9%.
As government stimulus supported domestic demand for steel products.
Youre facing softer demand, especially in the auto sector, an increased competition of imports. So several steel producers apply production cuts to match output with customer orders.
Production in South America was largely in line with 2018 volumes, but below the heightened expectations of a strong 2019.
Despite the headwinds from compress steel margins.
Global Pig iron production grew by 5.1% for the first half 2019, largely driven by China and to some extent India.
Pricing for premium met coals remained strong for most of the quarter starting in mid May It was a slow but consistent erosion in pricing as a seaborne supply system continued to perform well and without any significant disruptions.
Demand for our premium calls was strong during the quarter. Despite the margin pressures on our customers.
Where's record performance continues to demonstrate the unique value of our highly focused business strategy as a premium pure play met coal producer.
Our goal is to operate profitably and maximize cash flow generation in any pricing environment.
Not just in the favorable conditions, we've experienced over the past couple of years.
We've invested in the business where appropriate to support this strategy.
We've also continued to reward our stockholders as conditions warrant.
Our operational successes, our current credit to the hard work and dedication of our employees and I. Thank them for all they have been doing to help us perform as strongly as we did in the second quarter.
Our top priority remains working safely as that is the first and most important step to working efficiently and ultimately achieving success in the marketplace.
In addition to discussing our strong performance in the second quarter. I also wanted to provide an update on our Bluecore growth, Florida project.
You can refer to slides 13 through 16, where quarterly investor presentation on our web site.
As stated last quarter. Luke Creek is one of the few remaining untapped reserves or premium high vol. A met coal in the United States.
We are excited by the promising results from our early work and believe Blue Creek has the potential to deliver significant value to our stockholders.
Our initial work has focused on the feasibility of a single longwall operation with annual production of approximately 3 million short tons with a potential mine life of 40 to 60 years.
Well, we continue to refine project parameters in 2019, our initial studies have demonstrated robust returns across a range of met coal prices.
These initial studies estimate capital expenditures of approximately $550 million to $600 million over five years.
Well you're continues to pursue several activities to maintain project momentum and optimize blue creeks project parameters.
These activities include additional core drilling together geological and my marketing data evaluating strategic rail and barge transportation partnerships and obtaining permits for slurry storage and course refuse areas.
[laughter].
The company is currently working with several vendors to finalize construction plans, including slope belt prep plant et cetera.
To ensure that the development plans are solid and possibly.
Allow for the full potential of two long walls, which would mean maximum annual production of approximately 6 million short tons if desired.
Additionally, we plan to continue to explore potential off take arrangements as well as project financing alternatives.
We expect Blue Creek will be fully permitted and shovel ready by early 2020 at which point, where you would be in a position to make a decision on future development.
We are extremely excited by the potential we see a blue Creek and believe the project could become the cornerstone of our future portfolio.
We look forward to providing updates to our stockholders over the next several months.
I will now stay out to address our second quarter results in greater detail.
Thanks Walt.
For the second quarter of 2019 net income on a GAAP basis was $125 million or $2.43 per diluted share compared to net income of $91 million or $1.72 cents per diluted share in the second quarter of 2018.
Excluding the nonrecurring other income non-GAAP adjusted net income for the second quarter of 2019 was $112 million or $2.16 per diluted share compared to one dollar and 81 cents per diluted share in the second quarter of 2018.
Adjusted EBITDA was $176 million in the second quarter as compared to adjusted EBITDA of $129 million in the same period of 2018, an increase of 37%.
The quarterly increase was primarily driven by a 19% increase in sales volume, which set a new quarterly record high in a 4% increase in average net selling prices over the same period last year.
The company the adjusted EBITDA margin was 44% in the second quarter compared to 40% in the second quarter of 2018.
Total revenues were $398 million in the second quarter of 2019 compared to $323 million in the same period last year.
This increase was primarily due to the 19% increase in sales volumes.
The average net selling price per short ton increased approximately 4% in the second quarter compared to the same period in 2018.
The price environment continued to be strong with index prices falling slightly in the second quarter.
From $205 per metric ton at the end of March to $194 per metric ton it to in the gene.
Our gross price realization was 97% in the second quarter of this year.
Demurrage and other charges reduced our gross price realization to an average net selling price of $173 per short ton in the second quarter of 2019.
Compared to $167 in the same period last year.
Mining cash cost of sales Fob port.
Was $205 million or 53% of mining revenues in the second quarter.
Compared to $177 million or 56% of mining revenues in the second quarter of 2018.
Cash costs of sales Fob port per short ton.
Was approximately $91 in the second quarter compared to $94 in the same period of 2018.
The decrease is primarily due to 14% higher production volumes and lower production spending reflecting the benefits of our capital investments in the prior periods that are paying off nicely.
As DNA expenses were about $11 million or 3% of total revenues in the second quarter compared to approximately $13 million in the prior year period.
Down primarily due to higher stock compensation expenses recorded in the same period last year.
Depreciation depletion expenses for the second quarter of 2019 were $26 million or 6% of total revenues compared to $21 million in 2018.
The increase in the second quarter of this year compared to the same period last year was primarily due to higher sales and production volumes and on high and our continued high investment in capital expenditures.
Net interest expense was about $7 million in the second quarter and included interest on our outstanding debt plus amortization of our debt issuance costs associated with our credit facilities.
Partially offset by interest income.
This amount was lower by $3 million compared to the same period last year due to the early retirement of a portion of our debt in the first quarter of 2019.
Other income of approximately $18 million was recorded in the second quarter of 2019.
Due to unexpected proceeds received from a settlement with Walter Energy, Canada, and its affiliates in the bankruptcy proceedings for old outstanding claims.
No additional material amounts are expected in the future.
Company reported non cash income tax expense of $33 million during the second quarter of 2019 and zero expense in the same period last year.
This result, primarily reflects the utilization of our net operating losses or in a levels with a corresponding decrease in the balance sheet account deferred income taxes.
As you May recall, we released the valuation allowance on the deferred income taxes associated with the company's infill wells in the fourth quarter of 2018.
We paid no cash taxes in the second quarters of 2019, and 2018 and continue to expect the utilization of our rental wells will reduce our federal and state income tax liability to zero until the end of wells are fully utilized or expire.
We expect this will continue to drive significant free cash flow conversion over the next several years.
Turning to cash flow.
During the second quarter, the company generated $197 million of free cash flow a warrior record quarterly high which was the result of cash flows provided by operating activities of $231 million.
Less cash used for capital expenditures and mine development cost a $34 million.
This compared to $100 million of free cash flow in the second quarter of 2018.
This higher result was primarily due to the quarterly record high sales volume higher average net selling prices in the second quarter of this year.
And a decrease in working capital of $39 million.
The decrease in working capital was primarily due to $22 million of lower accounts receivable and the collection of an income tax receivable for A.M.T. credits of $21 million.
Cash used in investing activities for capital expenditures and mine development costs was $34 million during the second quarter of 2019 compared to $33 million for the same period last year.
This year's second quarter results included $6 million of mind for development cost related to a continuous miner union and support costs that were incurred in developing new longwall panels in the four north area.
Cash flows used in financing activities were $239 million in the second quarter of 2019.
And primarily consisted of the payment of a quarterly dividend of $3 million plus the special dividend of $230 million.
The company's balance sheet remains strong with a leverage ratio of less than 0.5 times adjusted EBITDA.
In addition, we have ample liquidity with total available liquidity as of the end of the second quarter of $235 million, consisting of cash and cash equivalents of $119 million.
And $116 million available under our ABL facility.
Net of outstanding letters of credit of approximately $9 million.
We believe our strong balance sheet and significant free cash flow generation will provide us flexibility if we decide to pursue our Blue Creek development project next year.
In summary, we finished the second quarter with continued strong operational performance that drove record high quarterly sales volume and free cash flow combined with strong financial performance.
We expect to complete three more longwall moves in the remainder of the year for a total of five longwall moves in 2019.
Compared to the total of three moves we had in 2018.
After considering the Companys strong performance in the first half of this year and expected market conditions for the remainder of 2019.
We have update our guidance for sales and production volumes and noncash deferred income tax expense for the full year 2019.
The company is maintaining its guidance with respect to the other items for the full year 2019.
Our full year 2019 guidance is as follows.
Total sales of 7.5 to 7.9 million short tons.
Full production of 7.5 to 7.9 million short tons.
Cash cost of sales Fob port of 89 to $95 per short ton.
Capital expenditures of $100 million to $120 million.
Mine development cost of $18 million to $22 million.
As DNA expenses of $32 million to $36 million.
Interest expense net.
$30 million to $32 million.
Noncash deferred income tax expense of 20% to 23%.
And the cash tax rate of zero percent.
Lastly, I would like to note that during the second quarter. The company was notified by Apollo Global management that they had sold all the remaining shares of common stock of the company.
As a result, all for private equity firms that originally on warrior before our IPO have now exited their investments in the company in all material respects.
We'd like to thank them for the advice and expertise and wish them well.
I'll now turn it back to wall for his final comments.
Thanks, Dale before we move on to Q and eight I'd like to make a few more comments about the company and its prospects.
We're very pleased with the company's strong operational and financial performance in the second quarter of 2019, and we appreciate the support and engagement. We have received from our stockholders and of course our employees.
As our sales and production volumes have increased we benefited from the increased operating leverage and have invested in long term projects that will benefit our operations in the future.
We expect our contracted sales volume to remain consistent for the year and expected a higher portion of our spot sales will be directed toward Asia.
As your peers, but demand remains tempered and as large several large south American steel producers undergo routine maintenance programs in the third quarter.
Although some early indicators point to a reversal in steel pricing, we remain cautious and expect the next quarter to bring continued pressure on index pricing and demand due to the reasons previously discussed.
In addition, we expect the typical seasonality factors and the anticipation of a reliable seaborne supply chain to have some bearing on index pricing.
As Dale noted after considering the strong performance of our operations in the first half of 2019 and the expected market conditions for the remainder of the year, we're updating our 2019 sales and production guidance targets.
As I've said on previous calls we run the business is as if the next pricing downturn in geological issue or just around the corner.
With conservative targets and flexible operations that allow us to adjust to the market environment as it changes throughout the year.
We expect to update our 2019 guidance during the year as necessary to adapt to changing market conditions and changes in the business.
With that we'd like to open the call for questions operator.
[noise], ladies and gentlemen at this point, we'll begin the question and answer session to ask a question you May Press Star and then one using your Touchtone telephone.
If you are using a speaker phone we do ask you. Please pick up your handset before pressing the keys.
To withdraw your question you May press star into.
Again that is star and then one to ask a question.
Well pause momentarily to assemble the roster.
Our first question today comes from David Gagliano from BMO. Please go ahead with your question.
Hi, Thank you for taking my questions. The a question really is is similar to the ones that you've been asked basically.
After almost every call you you.
You know obviously raised the guidance for the year.
On the sales volumes and then while you just addressed this I think a bit in your prepared remarks. My question is.
It still looks pretty conservative even after one factors and the impact of an additional longwall move it's about a million ton roughly a million ton decline second half versus first half.
Is that.
More likely.
Ah chalked up to conservativism or is it based on market conditions or something going on at the mine.
Oh no. We're just we're we're tracking and doing things the way we normally do as I said, we're just being conservative with the way we approach.
Our expectations and we do have three longwall move we can always have a anything happened that at operations or whether in the golf. So Oh, we're just taking a.
A cautious approach.
Okay, just wanted to check the box on that one thanks very much.
Well thank you David.
Our next question comes from Daniel Scott from Clarksons. Please go ahead with your question.
Hi, Thanks, and great quarter, guys, I'm really well done.
My question is about inventories if I checked my notes from the first quarter call. I think you had a substantial builds in the first quarter I think it was 400000 tons and just kind of based on sales modest production for this quarter was a slight draw am I thinking about that the right way is there still a pretty good pile of coal and <unk>, maybe around timing of shipments.
Oh, yes, there is still a decent size amount of coal and we'll work that down through the through the rest of the year.
Okay, Great and when you think about you know obviously these paid a special you're you're generating tremendous amount of cash these days, whereas the thinking kind of now going forward, especially with Apollo out about.
Special dividends versus maybe another incremental share repurchase or are we going to start maybe.
Hoarding money, a little more in in anticipation of Blue Creek.
Hi, Dan its Dale.
Well nothing's changed with Apollo's exit, we're really haven't changed our capital allocation policy.
We are going to.
Continue we have a new $70 million stock repurchase plan that will be executing but we'll also consider special dividends.
You know as we get later into the year ring and get our Blue Creek analysis finished.
You know we may have something else after that but you know once we know definitively it would've gone do Bluecore got data points in the right direction for.
Any changes in our capital allocation policy.
Okay that makes sense and then finally for me when you look at your sales mix by geography, I you talked about you know spot tons are probably most likely be to a to the Asian clients do you see a material shift kind of based on what pricing is doing and seeing you know a little slow slowness in Europe .
About how your production or your sales mix might change in the back half of the year and into next year.
I don't think the sales mix will change much I think short term law would think softening a bit in Europe , we're going to see the broader opportunities moving into a into Asia, but as we build our book for next year I would expect it will be balanced about the same way it has been.
I guess just to tack on to that is ER <unk> shipping rates are higher than they've been and is that is going to.
Has that effect to some extent the reach of the cores the quality offset that.
I think the quality offsets that.
All right great congratulations on the quarter.
Thank you thanks, Dan.
Our next question comes from Lucas pipes from B. Riley FBR. Please go ahead with your question.
Hey, good afternoon, everyone and I would like to second yeah. Congratulations on another and test a quarter, so really well done.
I wanted to follow up a Blue Creek it sounds like you're pretty excited about the opportunity there, but you're still evaluating the project.
Could you remind us kind of what are the key thinks you're evaluating at this time.
And.
Not to get carried away or anything, but should we kind of be thinking about this project as a.
Oh go ahead at this point or are they still kind of major issues that you're trying to sort out first before you would make that kind of go ahead.
Thank you very much for your perspective.
Thank you well our goal is to be able to put this in front of the board a little later in the year.
For a discussion I've as we've said we're drilling some additional holes to determine quality to confirm quality I shouldn't say determent to confirm quality for the first five to 10 years of mining at that site, we're doing some sanity checks and engineering around the overall cost of the project a we are evaluating the market for the coal I'm just trying to get some additional permitting done. So I think we're we're tying up what loose ends. We think we have before we can make a a strong recommendation to the board later this year.
Got it that's very helpful. So, but you wouldn't expect any any in it right.
Changes from your base assumptions that you've disclosed to the market to date.
That's fair.
That's that's fair, we don't anticipate anything different but we'll see.
Got it okay, well really appreciate it and keep up the great work. Thank you.
Thank you.
Our next question comes from Alex Hacking from Citi. Please go ahead with your question.
Yeah. Thanks to the thanks for the call just following up on on Blue Creek.
You mentioned you know interest from steel mills in in participating I guess, what kind of structures would you be thinking about that just just kind of a typical but take take or pay agreement.
Yes, or no we wouldn't do you take or pay or you know, we may do something with it.
We're just looking at all opportunities, we're not saying that's a strong.
Direction that we're going in we just got to look at all our options available to us and as we work through those with the pros and cons.
But you know it would be some kind of.
If we went that route to be some kind of yeah, you know off take agreement maybe with some amount of.
Capital to to offset the total call something in that general nature.
Okay makes sense and then.
In terms of the <unk>.
And then in terms of the Capex you know obviously, it's spread out over several years five years I think you know how what's the cadence of that is in roughly.
You know equal per year or is the capex kind of heavily weighted upfront. Thanks.
I would say, it's more heavily laden load toward the back end of the first the first half of slope development and putting in a couple of shale gas is the first 18 months or so but then after that you start continuous miner development equipment purchases building out a prep plant. So I would expect really the back half of the.
Of the project is a little more capital intensive.
Okay. Thanks, and then when you talk about putting it in front of the board later this year does that mean that you know assuming everything.
Looks good and the board approves I thought you would sort of announce a go ahead decision before the end of this year. Thanks.
I don't know that it will happen before the end of this year, but I would look at something probably possibly late this year or early next year.
Okay. That's great. Thank you so much.
Thank you.
Once again, if he would like to ask a question. Please press Star then one.
Our next question comes from Chris Terry from Deutsche Bank.
Hi, Walt and dial a couple for me I'm just in terms of the realization than 97% to 98% that you've achieved for the first off I'm, sorry, apologies if youve already spoken about this but just for the second half would you expect similar levels to that or a slightly higher thanks.
Well I think you could expect something similar to that I mean, it could be a little higher because we had been in a falling market. So the way that works you know, it's usually on a trailing basis, because but lot of our shipments or the average of the index price 30 days prior to the loading of the vessels. So.
But you got to remember that's also a blended mix percentage includes our mid vol sales to mid vol sales are a little bit higher than the local sales in a particular quarter that can have some impact on it too so but in generally you know I would expect a very similar result.
Okay. Thank you and then just just in terms of Blue Creek in thinking about it against a potential women I do you continue to assess that and how do you. How do you see the differences between organic versus inorganic growth. Thanks.
Oh, we do continue to look at opportunities as they present themselves. We just think this is an outstanding project and we're going to measure everything against it.
And determine what we think is in the best interest of our shareholders.
Okay and then the final one from me just <unk>. There was a question earlier on on the inventory levels, but what do you want to keep sort of through the cycle that <unk> point 5 million tons. You have now presumably you run that down a little bit at some point, but what's your sort of baseline level that you like to maintain.
I think anything less than 300, or so get pretty a pretty lean so it in that three to 400 range.
Okay. That's it from me thank you.
Thank you.
And ladies and gentlemen, we've reached the end of the question and answer session. At this time I'd like to turn the conference call back over to Mr. seller for any closing remarks.
Well that concludes our call for this afternoon. Thank you again for joining US today. We appreciate your interest from where your met coal.
Ladies and gentlemen that does conclude today's conference call. We do thank you for joining today's presentation.
You may now disconnect your lines.