Warrior Met Coal Q3 2023 Earnings Call Transcript

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November 1, 2023

There are 4 speakers on the call.

Operator

Good afternoon. My name is Alan, and I will be your conference operator today. At this time, I would like to welcome everyone to the Warrior Third Quarter 20 23 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

2. Press Start, then 2. This call is being recorded and will be available for replay on the company's website. 20. 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.

Operator

20. For more information regarding forward looking statements, please refer to the company's press releases and SEC filings. 2. 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 20's earnings press release located on the Investors section of the company's website at www.warriormetcoal.com. 2.

Operator

In addition to the earnings release, the company has posted a brief supplemental slide presentation to the Investors section of its website at www.warriormetcoal.com. Here today to discuss the company's results are Mr. Walt Scheller, 2 Chief Executive Officer and Mr. Dale Boyles, Chief Financial Officer. Mr.

Operator

Scheller, you may begin your

Speaker 1

20. Thanks, operator. Hello, everyone, and thank you for taking the time to join us today to discuss our Q3 2023 results. 2. After my remarks, Dale will review our results in additional detail, then you'll have the opportunity to ask questions.

Speaker 1

2. We were pleased to deliver another strong quarter in which we were able to leverage our operational excellence to achieve record sales volume, which represented a 51% increase over last Warrior's Q3. We continue to see improved performance from our transportation partners and at the McDuffie terminal, which allowed us to ship more volume 2. Our quarter over quarter growth in sales volume also yielded strong profitability 2 as well, generating a cash margin of $158,000,000 or $70 per short ton. 2.

Speaker 1

Steel output from China, the world's largest producer, was stronger than we had anticipated and its widely publicized production cuts have not yet materialized. 2. In fact, weaker domestic demand has led China to export higher than normal volumes of steel, which has impacted supply in some of our customers' markets. 2. With the exception of India, most other major steel producing regions experienced lower demand and as a result, 2.

Speaker 1

We've heard of customers adjusting their production rates to match demand. In contrast, 2. The met coal index for premium low vol coals experienced a large upward trend during the latter part of the third quarter, 2, while most other indices experienced more modest gains. These factors have put our customers' margins under pressure 2nd quarter. In short contrast to the 2nd 2 quarter this year.

Speaker 1

The availability of premium hard coking coals was tight during the Q3 as several Australian producers began their maintenance programs. 2. In addition, the vulnerability of the supply chain was on display again with a slew of production issues, labor related constraints 2. However, we continue to see strong Mongolian met coal exports flowing into China as well as significant Russian coal exports finding their way into China and India. All of the major indices closed the quarter at their highs for the period.

Speaker 1

2. Our primary index, the POV, FOB Australia experienced the largest increase of all the indices, 2. $91 per short ton over the 2nd quarter and closing at $302 per short ton. In contrast, 2. The PLB CFR China Index increased by $51 per short ton with a closing price of $2.54 20.

Speaker 1

The odd between these indices swung into negative territory in mid August, achieving a delta of $48 per short ton at the end of the 3rd quarter. 20. According to World Steel Association Monthly Report, global pig iron production increased by approximately 1.5% 2. During the 1st 9 months of 2023 as compared to the same period last year. The positive growth was mainly driven by higher Chinese steel production, 2.

Speaker 1

Which grew by 2.8% in the 1st 9 months. India steel production, although lower in absolute terms compared to China, 2. Continued to grow at impressive rates, increasing by 8.2% for the same period. Most other large steel producing regions of the world experienced production 2 decline compared to the previous year period. As I noted, our record setting 3rd quarter sales volume 2,300,000 short tons was 51% higher than the comparable quarter last year.

Speaker 1

2. The previous record was set in the Q2 of 2019. The increase was driven by the improved performance by our transportation partners and the McDuffie terminal, 2, which enabled us to export more product and reduce our excess inventory. In addition, better than expected production contributed to an increase 2nd quarter. Our sales by geography in the 3rd quarter breaks down as follows: 30 9 percent into Europe, 22% into South America and 39% into Asia.

Speaker 1

The increase in Asian sales was primarily driven by higher spot volumes 2.2% sold into India and China during the Q3. Our spot volume was 44% and abnormally high with excess inventory in the Q3. 20. I want to spend a moment explaining the factors that went into the sales mix and how they impacted our average net selling price, revenue and net income. 20.

Speaker 1

Warrior has experienced a larger spot volume this year primarily due to the end of the labor strike and to a lesser extent the quality transition at Mine 4. As 2. As we did not know when the strike would end, we entered 2023 assuming that additional production would have to be directed toward the spot markets. 20. However, as spot activity on our natural markets has been very weak this year and since spot demand was fairly stable in countries like China and India, we turned our focus to the Pacific markets.

Speaker 1

2. With these dynamics in mind, it's important to understand the pricing in the Pacific markets and how it differs from our traditional spot markets 2, depending on market conditions. Typically, the Pacific markets are priced based on a CFR basis rather than the PLB, FOB Australia basis, 2, which is more common in our traditional spot markets. The freight differential is borne by the supplier on a CFR basis whenever the buyer has market leverage, 20. Which is the case in the Q3.

Speaker 1

In a departure from historical trends, these industries have seen a dislocation, which are not currently moving in tandem, 2 with CFR prices trailing PLB FOB prices by approximately $80 per short ton on average. 2. This is occurring due to a number of factors, including the limited end markets for Russian coals and CFR China pricing 2 that was largely based on domestic dynamics rather than on a delivered basis from Australia. These dynamics resulted in a negative impact to our average net 20. Prices, revenues and net income during the Q3.

Speaker 1

With our headcount and production levels becoming more predictable over the coming quarters, 2. We'll be better positioned to contract our product in advance, which enables us to capture the benefit of the rise in pricing. 2. We might not see the impact of this in the Q4, but we believe we're well positioned to take advantage of higher pricing in the medium term. 2.

Speaker 1

Let us now return to other key details of our 3rd quarter performance. Production volume in the 3rd quarter was better than expected and totaled 2,000,000 short tons 2, compared to 1,600,000 short tons in the same quarter of last year, representing a 21% increase. This is the highest quarterly production output since the Q1 of 2021 and a record setting quarter for Mine 4. 2. Both mines operated at higher capacity levels in this quarter as a result of additional employees returning from the labor strike.

Speaker 1

Our headcount was 20. 44% higher in the Q3 compared to the prior year's Q3. The higher sales over production volume in the Q3 drove our coal inventory down to 489 2,000 short tons from 760,000 at the end of the second quarter. During the Q3, we spent $112,000,000 on CapEx and mine development. CapEx spending was $107,000,000 2, which included $66,000,000 on the Blue Creek project, which I'll discuss more in a moment.

Speaker 1

CapEx spending was a little lower than expected Q3 due to some delays in equipment deliveries and the timing of spending at Blue Creek. However, we expect to be within our full year spending guidance range 20. Mine development spending was $6,000,000 during the Q3 as we completed the development at Mine 4. 2. Now that we're mining in the new area for Mine 4, we're seeing a transition in quality from a mid vol to a high vol A, which is similar to Blue Creek.

Speaker 1

20. Turning to the development of our world class Blue Creek asset. During the Q3, we continued to make substantial progress on the project. 2. And I'm pleased to share that our work remains on schedule.

Speaker 1

During the Q3, we continued to make progress on the production slope, 2 service shaft, ventilation shaft, which will be fully connected next year to allow the continuous monitors to start development. 2. In addition, we continue to develop the site for the construction of the preparation plant and the Runamond Belt Structure as well as building the bathhouse and warehouse. 20. Capital expenses during the Q3 for the development of Blue Creek were $66,000,000 and totaled $191,000,000 year to date.

Speaker 1

2. We spent $238,000,000 since the beginning of the project. I'll now ask Gail to address our 3rd quarter results in greater detail.

Speaker 2

20. Thanks, Walt. For the Q3 of 2023, the company recorded net income on a GAAP basis of $85,000,000 or 1 point 6 $4 per diluted share, representing a decrease over the net income of $98,000,000 or $1.90 per diluted share in the same quarter of last year. 2. Non GAAP adjusted net income for the 3rd quarter, excluding the non recurring loss on the early 2.

Speaker 2

The divestment of debt, business interruption and other expenses was $1.85 per diluted share. 20. This compares to adjusted net income of $2.10 per diluted share in the same quarter of 2022. 20. These decreases quarter over quarter were primarily driven by a 26% lower average net selling price combined with lower financial results from our gas business, 2, which were offset partially by 51% higher sales volume.

Speaker 2

We reported adjusted EBITDA of 140 $2,000,000 in the Q3 of this year compared to $172,000,000 in the same quarter of last year. 2. The quarterly decrease was primarily driven by a number of factors. First, the average net selling price of our steelmaking coal was 26 percent lower than the prior year quarter. 2nd, as I mentioned, we saw lower financial results from our gas business.

Speaker 2

20. However, these were partially offset by the 51% increase in sales volume and lower transportation and royalty cost. 20. Our adjusted EBITDA margin was 34% in the Q3 of this year compared to 44% in the same quarter of last year. 2.

Speaker 2

Total revenues were $423,000,000 in the 3rd quarter compared to $390,000,000 in the Q3 of last year.

Speaker 1

20.

Speaker 2

This 9% increase was primarily due to the 51% increase in sales volume, offset by the 26% decrease in average net selling prices. 2. Other revenues from our gas businesses were 64% lower in the Q3 of this year, 20, primarily due to a 72% decrease in natural gas prices between the periods. The Platts premium low vol FOB Australian index price 20.3rd quarter. We remain on a slow but steady upward trajectory for much of the Q3, rising sharply towards the end.

Speaker 2

20. Since the rapid rise did not occur until late in Q3, we did not significantly benefit from the increase due to its timing. 20. The index price averaged $13 per short ton higher in the Q3 compared to the same quarter of last year. 20.

Speaker 2

The index price averaged $2.40 per short ton in the 3rd quarter. The mortgage and other charges reduced our average net selling price $185 per short ton in the Q3 this year compared to $2.48 per short ton in the same quarter of last year. 20. Demurrage and other charges were $6,000,000 lower compared to last year's Q3. The higher demurrage and other charges in the Q3 of last year were the result of 2nd quarter.

Speaker 2

Cash cost of sales was $259,000,000 20. 62 percent of mining revenues in the 3rd quarter compared to $202,000,000 or 54% of mining revenues in the Q3 of last year. 2. Of the net $57,000,000 increase in cash cost of sales, dollars 102,000,000 was due to the 51% increase 2 sales volumes, offset partially by $45,000,000 of lower transportation and royalty costs on lower average net selling prices. 2.

Speaker 2

Our headcount was 44% higher in this 3rd quarter compared to last year due to a focus on hiring workers during the labor 2nd strike and the addition of employees who returned from the labor strike in the Q2 of this year. In addition, 2. The inflation we experienced in operating expenses and purchase of equipment over the last 18 months has remained steady. We 2. We have not seen any significant changes up or down so far this year.

Speaker 2

Cash cost of sales per short ton FOB poured was approximately $115 in the 3rd quarter compared to $135 in the Q3 of last year. 2. While premium steelmaking coal prices were 6% higher in the Q3 of this year compared to last year, our average net selling prices were 26% lower. 2. This resulted in lower transportation multi cost, which were 38% of our cash cost per ton in the 3rd quarter 2 compared to 47% in the same quarter last year.

Speaker 2

Our cash cost of production per short ton 20.2% was flat in the Q3 as compared to the prior year Q3 despite the incremental cost associated with the 44% higher headcount. 20. In other words, despite the incremental cost of the returning employees from the labor strike, we were neutral on our cost per ton for the 3rd quarter 2. Due to the increase in production volumes, cash margins were $70 per short ton in the Q3 of this year 2. And we're impacted by the higher spot volume, as Walt noted earlier.

Speaker 2

SG and A expenses were about $11,000,000 2.6 percent of total revenues in the Q3 this year and were slightly higher than last year's Q3, primarily due to an increase in employee related expenses. 2. The interest income earned on our cash investments well exceeded the interest expense on our outstanding notes and equipment leases during the Q3 of this year, primarily due to our high cash balances earning sound investment returns. Our 3rd quarter income tax 2 expense reflects expense on pre tax income and includes an income tax benefit for depletion expense and foreign derived intangible income. 20.

Speaker 2

Also during the quarter, we successfully executed tender offers for our senior secured notes as part of our ongoing commitment to effectively manage our balance sheet. 2. By taking advantage of favorable market conditions, we reduced our leverage by $146,000,000 or nearly 50%, 2. Enhancing our already strong debt to equity ratio. In connection with this action, we recorded a loss of $12,000,000 on the early extinguishment of debt.

Speaker 2

2. The loss represents a premium to pay to retire the debt and associate fees and expenses in connection with the transaction. 20. In addition, the company will have the ability from time to time in the future to make 1 or more restricted payments in the form of special dividends or stock repurchases 20, up to an aggregate amount of approximately $300,000,000 However, any future special dividends or stock repurchases 20. We are at the discretion of the Board and subject to a number of factors, including business and market conditions, future financial performance and other strategic investment opportunities.

Speaker 2

2. During the Q3, we incurred incremental non recurring business interruption expenses of $347,000 which were significantly lower than 20 2nd quarter last year. The decrease is primarily due to the end of the labor strike earlier this year. We expect to incur ongoing legal 20 2 expenses associated with the ongoing labor negotiations. Turning to cash flow.

Speaker 2

During the Q3 of 2023, free cash flow was $26,000,000 This was the result of cash flows generated by operating activities of $138,000,000 2. Cash used for capital expenditures and mine development cost of $112,000,000 Free cash flow was significantly lower than in last year's Q3, 2, primarily due to less cash generated from operating activities and higher Blue Creek CapEx spending. Free cash flow in the Q3 of this year was negatively impacted by a $9,000,000 increase in net working capital from the Q2 of 2023. Increase in net working capital was primarily due to an increase in accounts 2. On higher sales volumes, partially offset by lower inventories and higher payables and accrued expenses.

Speaker 2

20. Despite the higher capital spending associated with the Blue Creek project year to date, we have generated free cash flow of $114,000,000 2, of which $46,000,000 has been returned to stockholders in the form of a special dividend earlier this year on top of the regular quarterly dividends.

Speaker 1

20. Our total available liquidity at

Speaker 2

the end of the 3rd quarter was $810,000,000 representing a decrease of $141,000,000 over the 2nd quarter 2. And consisted of cash and cash equivalents of $687,000,000 $123,000,000 available under our ABL facility. 20. The decrease is related to the extinguishment of debt and related fees and expenses during the Q3 as previously discussed. 20.

Speaker 2

Finally, turning to our outlook and guidance for the full year 2023. We update our guidance for mine development and interest income 20. As outlined in our outlook section of our earnings release, no other key metrics were changed from our prior earnings release. 2. Since we reduced our excess inventory in the 3rd quarter, our sales and production volumes should be similar amounts and lower in the 4th quarter.

Speaker 2

2. It's worth noting that the implied 4th quarter volumes between our midpoint and upper end of our guidance range for the full year 20. Indicates the Q4 will be our lowest volumes of the year as Walt will discuss in a moment. I'll now turn it back to Walt for his final comments.

Speaker 1

20. Thanks, Dale. Before we move on to Q and A, I'd like to make some final comments. We remain cautious for the Q4, especially in light of the evolving 2nd situation in the Middle East and also because of the distortion in price indices. Demand for steel is expected to remain weak, 2.

Speaker 1

However, we do recognize the uncertainty in the global economy and are closely monitoring its impact on steel 10. We expect met coal pricing to remain under pressure during the Q4, potentially clawing back some of the gains we saw recently, 2, mainly supported by expected improvements in coal availability. For Warrior, now that we've reduced our excess inventory, we expect our 4th quarter volumes 2. It will be seasonally lower as implied by our year to date performance compared to our full year volume guidance. There are a number of factors contributing to those lower 4th 2 Quarter Volume Expectations.

Speaker 1

1st is the continued weak customer spot demand in our natural markets. 2nd is that we have fewer operating days associated with the end of the year holidays. 3rd, we'll perform some needed mine maintenance. And 4th, 2. We'll take a more strategic approach to maximize market pricing and profitability for our premium hard coking coals into the spot market.

Speaker 1

20. With that, we'd like to open the call for questions. Operator?

Operator

20. Our first question comes from Lucas Pipes from B. Riley Securities. 20. Please go

Speaker 3

ahead. Thank you so much, operator. Good afternoon, everyone. Walt and Dale, appreciate all the color And my first two questions, Tay, and to your final comments there, Walt. 20.

Speaker 3

First on the production side, when I think about the low end of guidance for the full year and what that implies for 2. Q4, I come out to about 1,100,000 tons. And when I looked at your historical production, I'd have to go back to 2021. 2. And of course, you have to strike to see that level of output.

Speaker 3

So are you seeing anything 2. Specifically in your mine plan that would that could lead to this low end of the guidance for the full year on the production side or was that maybe just a degree of conservatism? Thank you.

Speaker 1

No, that one would be 2. Scornarily conservative. Our expectations are well above that. I would say you can imply a 1.5 ish number. 20.

Speaker 1

Yes. $1,000,000 $1,000,000 $1,000,000 $1,000,000,000 $1,000,000,000 $1,000,000,000 $1,000,000,000 $1,000,000,000

Speaker 2

2. This is Dale, Lucas. I would expect probably sales volume to be a similar number. And I think 2. Both of those would kind of get you right near the upper end of our guidance, if you just kind of take the year to date results.

Speaker 3

20. Got it. That's very helpful. Thank you. And then I do want to time the commercial side.

Speaker 3

2. Lots to discuss there, but maybe just to keep the discussion focused for now. In the Q4, what 20. What percentage of your anticipated sales would be linked to the Australian FOBPLV Index? 2.

Speaker 3

What percentage would be more spot exposed and what is the best benchmark 2. To use as inadequate as it might be for those spot volumes. Thank you.

Speaker 2

2. This is Dale. Probably about a quarter or 25% I think is spot in the 4th quarter 2. And that just depends on where that goes. If that goes into India, it could be on a CFR India or China index, Could be an HC-sixty four, could be some PLV Australia.

Speaker 2

2. But the contract should be the contracted volume should be at the POVF, FOB Australian rate index.

Speaker 3

2. So there is a range of potential pricing in the season and you will be efficient. Now 20. Hypothetically, of the range of those indices that you mentioned, what would be the most conservative netback price today?

Speaker 1

Today,

Speaker 2

2. I really don't know what that would be today. Lucas, I'm sorry, I didn't check on those rates today. 2. But just suffice to say, the spot volume, because of all the dislocation that we've talked about, 2.

Speaker 2

With not only the R between the indices, but then the additional freight, we saw some of those differences greater than $100 a 2. Back during the quarter. So if you do have the supply coming back online out of 12. Australia pretty strongly in the 4th quarter. I think you will see PLB prices drop and you'll see those arbs narrow 2.

Speaker 2

Quite substantially. So it would be a real, real guess to tell you what that might be right now on that spot volume.

Speaker 3

20. Okay. This is still helpful color, Dale. I appreciate that very much. I'll try to squeeze one 2.

Speaker 3

I think in your prepared remarks, you mentioned equipment delays. 2. 1, can you expand on that? And then 2, equipment delays can often cause knock on effect, where 2. The development doesn't go as initially planned.

Speaker 3

You work around things and that can lead to cost pressures. Is that reading too much into this? 2. Are you still monitoring that situation from a cost perspective? Thank you.

Speaker 1

Actually, some of the equipment delays were for mines 4 and mines 27. And even with Blue Creek, we've placed those orders far enough out in advance that we remain comfortable with the delivery times 2. For everything we've ordered, we've made sure we've done everything we can to lock those things in and get our slots with vendors

Speaker 3

2. Terrific. Really appreciate the color and best of luck.

Speaker 1

20

Operator

20. At this time, there are no further questions. I will now turn the call back over to Mr. Scheller for any comments.

Speaker 1

20. That concludes our call this afternoon. Thank you again for joining us today. We appreciate your interest in Warrior.

Operator

20. Thank you. And that concludes today's conference. Thank you all for participating. You may now disconnect.

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Key Takeaways

  • Warrior delivered a record Q3 sales volume of 3.3 million short tons, up 51% year-over-year, driving a cash margin of $158 million (about $70 per short ton) as improved logistics and terminal performance enabled higher exports.
  • The average net selling price fell 26% year-over-year due to a dislocation between PLV FOB Australia and CFR Pacific benchmarks, weaker demand in key markets, and higher export volumes from China and Russia.
  • Production rose 21% year-over-year to 2 million short tons—the highest since Q1 2021—after the labor strike ended, headcount climbed 44%, and Mine 4 transitioned to higher-volatility coal quality.
  • The world-class Blue Creek project remains on schedule, with $66 million in Q3 capex spent on production slope, service and ventilation shafts, and site infrastructure, bringing total investment to $238 million.
  • Q3 GAAP net income was $85 million ($1.64 per share) and adjusted EBITDA was $142 million (34% margin), free cash flow was $26 million, debt was reduced by $146 million, and liquidity stood at $810 million; Q4 volumes are expected to be seasonally lower.
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Earnings Conference Call
Warrior Met Coal Q3 2023
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