Warrior Met Coal Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 1, 2024

There are 6 speakers on the call.

Operator

Good afternoon. My name is Megan, and I will be your conference operator today. At this time, I would like to welcome everyone to the Warrior First Quarter 20 24 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

This call is being recorded and will be available for replay on the company's website. Before we begin, I have been asked to note that today's discussion may contain forward looking statements and actual results may differ materially from those discussed. For more information regarding forward looking statements, please refer to the company's press releases and SEC filings. I have also been asked to note that the company has posted reconciliations of the non GAAP financial measures discussed during this call in the tables accompanying the company's earnings press release located on the Investors section of the company's website at www.

Speaker 1

Weirmetcol.com.

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.orearmaccoal.com. Here today to discuss the company's results are Mr. Walt Scheller, Chief Executive Officer and Mr. Dale Boyles, Chief Financial Officer. Mr.

Operator

Scheller, you may begin your remarks.

Speaker 1

Thanks, operator. Hello, everyone, and thank you for taking the time to join us today to discuss our Q1 2024 results. After my remarks, Dale will review our results in additional detail, and you'll have the opportunity to ask questions. We delivered very strong results for the Q1, driven by our operational performance. The volume of steelmaking coal that we produced reached levels not seen since 2020.

Speaker 1

We took advantage of the inventory levels we had built over the preceding quarters to generate over $104,000,000 in cash from operations, which we primarily used to invest in our Blue Creek growth project and return additional cash to stockholders. We also made excellent progress on the Blue Creek, meeting several key milestones as we advance the development of this world class growth project that has the potential to transform our company. First, let me provide an overview of the steel and steelmaking coal markets during the Q1 from Warrior's perspective. The Q1 was predominantly marked by a strong correction in pricing that started in early March and quickly accelerated. The rapid change in market sentiment was driven by a combination of macro factors.

Speaker 1

On the demand side, we observed the sudden retreat of demand interest from China and India. On the supply side, several loaded vessels were resold by end users, increasing available supply in an environment that was already experiencing additional supply availability. The softness in India demand was largely attributed to the slowdown in projects associated with the upcoming national elections in April through early June. In China, lower demand was a result of continued weakness in the property and construction segments that China is struggling to improve despite numerous stimulus efforts. As we've continued to observe for several quarters, demand from our contracted customers remained strong for the quarter, while our traditional markets offer limited spot sale opportunities.

Speaker 1

We were extremely pleased by the performance of our rail partner during the Q1 as we were able to navigate the temporary loss of the bargaining system without any impact to our customers and with minimal impact to our costs. The authorities responsible for the repairs on the Demopolis lock continue to guide towards a restart of River operations by the latter part of the second quarter. Likewise, we continue to see benefits from our collaboration with our terminal partner in Mobile to improve its performance, which has resulted in strong performance outcomes throughout the Q1. As previously mentioned, the major met coal indices experienced a steep correction in the latter part of the first quarter. Our primary index, the PLD FOB Australia ended the Q1 at $2.22 per short ton, which was $72 per short ton lower than its December 31 value and $85 lower than the peak of $307 per short ton achieved in early January.

Speaker 1

Likewise, the PLBCFR China Index experienced a $68 per ton decline during the same period, closing the Q1 at a price of $2.33 per short ton. Similar declines were observed with the 2nd tier indices, which also displayed lower relativities in relation to the PLB index, averaging around 83% for the Q1. As we said on prior earnings calls, now that Mine 4 has transitioned to a high Vol A quality and more volume is being sold into Asia, our overall targeted average net selling price is 85% to 90% of the PLD FOB Australian Index. We achieved a performance level of 84% in the Q1, which is a function of product mix, geography and freight rates. According to the World Steel Association monthly report, global pig iron production decreased by approximately 1.4% for for the 1st 3 months of 2024 as compared to the prior year period.

Speaker 1

The month of March was the 4th consecutive month in which global production increased on an average daily basis, excluding Chinese production. Chinese pig iron production was 2.9% lower in this period compared to last year. Excluding Chinese production, the rest of the world's production grew 1.9%, primarily in Asia and a few countries in Europe. India steel production continued to grow at stable rates, increasing by 3.4% for the same period. Now turning back to our Q1 results.

Speaker 1

Our first quarter sales volume of 2,100,000 short tons was 9% higher than the comparable quarter last year. This volume included the 129,000 tons that shifted into the Q1 from the Q4 of last year as previously disclosed. The overall increase was primarily driven by the additional production volumes due to the return of workers following conclusion of the labor strike in the Q2 of 2023. Our sales by geography in the Q1 breaks down as follows: 44% into Europe, 18% into South America and 38% into Asia. As we've previously noted, demand from the Asian steel producers has been growing over the past several quarters, resulting in Asian sales up 17 percentage points in 2024 over the same quarter last year, while sales from our traditional markets were lower primarily due to weak spot markets.

Speaker 1

Our spot volume was 37% in the first quarter 2024, which was higher than the 29% in the Q1 of last year. For the full year, we expect our spot volume to be approximately 25% of total sales volume. Production volume in the Q1 was 2,100,000 short tons compared to 1.8 1,000,000 short tons in the same quarter 2023, representing a 17% increase. This is the highest quarterly production output over the last 3 years. Both mines operated at higher capacity levels in this Q1 compared to the same quarter last year as a result of the additional employees that returned following the conclusion of the labor strike.

Speaker 1

The higher sales over production volumes in the Q1 drove our coal inventory down to 892,000 short tons from 968,000 at the end of 2023. Our headcount was 33% higher at the end of the Q1 2024 compared to last year's Q1. As previously mentioned, the majority of this increase was related to the end of the labor strike. In our 2024 outlook, we've budgeted hiring 250 people in the business with approximately 100 of those people at the Blue Creek Mine. As of the end of Q1 2024, we're on schedule with our overall hiring and plan to begin accepting applications for positions at the Blue Creek Mine in the second quarter.

Speaker 1

During the Q1, we spent $102,000,000 on CapEx and mine development. CapEx spending was $100,000,000 which included $69,000,000 on the Blue Creek project. Mine development spending on the Blue Creek project was $2,000,000 during the Q1 2024. Now I'd like to provide you with a more detailed view on our Blue Creek growth project, including updates on our excellent development progress in the Q1 and what comes next. We accomplished key milestones on the major components for seam access, surface infrastructure and coal transportation.

Speaker 1

The seam access components, including the production slope, service shaft, ventilation shaft remain on schedule for completion late in Q2 of this year, which we expect to allow us to begin development of the initial longwall panel with the 1st continuous miner unit in the Q3 of this year. We're extremely excited that the 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 twenty twenty four. The development tons produced from the second half of this year through the first half twenty twenty five are expected to be sold in the second half of twenty twenty five after the preparation plant comes online. In addition, work continued on the surface infrastructure and coiled transportation components and that work remains on schedule. On the surface infrastructure, excellent progress continued on the building of the preparation plant and related material handling belt system.

Speaker 1

The bathhouse, warehouse and electrical substation should be completed during the Q2 of this year. The coal transportation components are also on schedule and noticeable progress continued on the run of mine belt structure, the clean coal belt structure and rail and barge loadouts. On the financial side, Warrior invested $69,000,000 during the Q1 of 2024 on the development of Blue Creek, which brings the project to date spending to $435,000,000 The company expects to spend approximately $1,000,000 to $375,000,000 in 2024 on the continued development of the Blue Creek reserves. We remain focused on tight capital discipline, ensuring the project will be completed with on our reset baseline cost estimate on the original schedule, including the low wall start up in the Q2 of 2026. Blue Creek represents 1 of the last remaining untapped premium high quality, high vol A coal reserves in the U.

Speaker 1

S, which should achieve premium prices. Warrior expects incremental annualized production of 4,800,000 short tons of premium high vol A steelmaking coal after the start up of the longwall, which the company ask Dale to address our first I'll now ask Dale to address our Q1 results in additional detail.

Speaker 2

Thanks, Walt. For the Q1 of 20 24, the company recorded net income on a GAAP basis of $137,000,000 or $2.62 per diluted share compared to net income of $182,000,000 or $3.51 per diluted share in the same quarter of 2023. Non GAAP adjusted net income for the Q1, excluding the non recurring business interruption expenses, was $2.63 per diluted share. This compares to adjusted net income of $3.57 per diluted share in the same quarter of 2023. These decreases quarter over quarter were primarily driven by the 9% lower average net selling price, higher cash cost of sales and lower results from our gas business, partially offset by 9% higher sales volumes.

Speaker 2

We reported adjusted EBITDA of $200,000,000 in the Q1 of 2024 compared to $259,000,000 in the same quarter of last year. Our adjusted EBITDA margin was 40% in the Q1 of 2024 compared to 51% in the same quarter of last year. As I previously mentioned, these decreases quarter over quarter were primarily driven by the 9% lower average net selling price, higher cash cost of sales and lower results from our gas business, which were partially offset by 9% higher sales volumes. Total revenues were $504,000,000 in the Q1 compared to $510,000,000 in the Q1 of 2023. This overall decrease of $6,000,000 was primarily due to the 9% decrease in average net selling prices, offset by the 9% increase in sales volume and lower demurrage and other charges.

Speaker 2

Demurrage and other charges were $3,000,000 lower compared to 2023's Q1. Submerge and other charges resulted in an average net selling price of $2.34 per short ton in the Q1 of 2024 compared to $2.57 per short ton in the same quarter of last year. Other revenues, mainly from our gas businesses, were lower in the Q1 of 2024 compared to the same quarter of last year, primarily due to a 34% decrease in natural gas prices between the periods. Platts premium low vol FOB Australian index price was relatively stable for much of the Q1 until early March when the index corrected sharply downward. The index price averaged $2.79 per short ton for the Q1, which on average was $33 per short ton lower compared to the same quarter of 2023.

Speaker 2

We primarily target pricing our Mine 7 premium product from this index, which represents about 70% of our volumes. We primarily target the East Coast High Vol A Index for our Mine 4 high quality product, which is approximately 30% of our volumes. However, we do use from time to time to price our products, especially into Asia, which may be priced on a delivered or CFR basis. Cash cost of sales in the Q1 of 2024 was $284,000,000 or 57 percent of mining revenues, compared to $232,000,000 or 46 percent of mining revenues in the Q1 of 2023. Of the $52,000,000 increase in cash cost of sales, dollars 22,000,000 of the increase was driven by the 9% increase in sales volumes.

Speaker 2

The remaining increase in cash cost of sales of $30,000,000 was due to higher royalty costs resulting from higher royalty rates in the areas currently being mined and higher labor and supply related costs on higher production. The higher labor related costs were primarily due to the employees returning from the labor strike that ended in 2023 and additional wage increases. Our headcount was 33% higher in the Q1 this year compared to last year's Q1. In addition, costs were higher in the Q1 this year due to a higher spending of about $1 per ton on a higher mix of rail transportation and higher repairs and maintenance, all of which should be temporary. In addition, mine development credits were lower now than Mine 4 is producing from the North Portal area of the mine.

Speaker 2

Overall transportation and royalty expenses were 39% of our cash cost of sales per short ton in the Q1 of this year on lower average net selling prices compared to 42% in the same quarter last year. Cash cost of sales per short ton, FOB port, approximately $133 in the Q1 of this year compared to $119 in the Q1 of 2023. On a per ton basis, transportation costs were about $1 higher due to the higher rail mix, which was mostly offset by lower average net selling prices. Likewise, royalty costs were lower on lower average net selling prices, but were higher on a per ton basis of $3 This was due to the higher royalty rates in the areas currently being mined versus last year's Q1 royalty rates. Our cost of production was 61% of our total cash cost per short ton compared to 58% last year.

Speaker 2

The higher cost of production was primarily due to higher labor related costs to $4 per ton, temporarily higher repairs and maintenance cost of $2 per short ton and fewer mine development credits accounted for the remaining amount of the increase. SG and A expenses were about $19,000,000 or 3.7 percent of total revenues in the Q1 of 2024 and were slightly higher than 2023's Q1 of 2.8%, primarily due to an increase in employee related expenses. Interest income earned on cash investments was lower in the Q1 of this year, primarily due to lower invested cash balances. Our interest expense was lower primarily due to the early retirement of debt in August of 2023. Our low effective tax rate reflects expense on lower pre tax income compared to the Q1 of last year.

Speaker 2

Our tax expense reflects an income tax benefit for depletion expense and foreign derived intangible income. Turning to cash flow. During the Q1 of 2024, free cash flow was 2,000,000 This was the result of cash flows generated by operating activities of $104,000,000 less cash used for capital expenditures and mine development of $102,000,000 Free cash flow was $108,000,000 lower than 2023's quarter, primarily due to higher accounts receivable of $115,000,000 and higher Blue Creek CapEx spending. Free cash flow in the Q1 of 2024 was negatively impacted by an $86,000,000 increase in net working capital from the end of 2023. Increase in net working capital was primarily due to the previously mentioned increase in accounts receivable and higher sales volumes, partially offset by lower inventories.

Speaker 2

Our total available liquidity at the end of the Q1 of 2024 was 801,000,000 and consisted of cash and cash equivalents of $694,000,000 $107,000,000 available under our ABL facility. Now let's turn to our outlook and guidance for the full year 2024. We have reaffirmed our outlook for the full year as outlined in our earnings release. While our Q2 volumes could be seasonally lower than the Q1 due to weak spot demand from our traditional markets and Asia, and in particular India, we expect better demand in the second half of the year. Our contracted volume in our traditional markets remains strong.

Speaker 2

I'll now turn it back to Walt for his final comments.

Speaker 1

Thanks, Dale. Before we move on to Q and A, I'd like to make some final comments. We expect demand from world's largest met coal import regions to remain softer throughout the Q2. On one hand, India's steel demand is expected to be subdued until later in the summer as the country awaits the completion of its national election process and the impact of the monsoon season. On the other hand, China is harder to predict, but the absence of convincing improvements in the property and construction segments are leading us to remain cautious.

Speaker 1

We also expect global met coal supply to be strong during the Q2 as is normally the case. We expect disruptions caused by the Baltimore bridge collapse to be manageable by the industry and should be contained within the Q2. For these reasons, we expect pricing to remain lower for the Q2 compared to the Q1, potentially challenging some of our peers who are higher cost and marginal producers. Although we have good visibility into our contracted volumes, spot opportunities are expected to remain scarce and mostly skewed towards the Pacific Basin, where current pricing levels and freight costs are driving lower than desired average net selling prices. For these reasons, we will continue to be patient when possible and seek opportunities that maximize average net selling prices for Warrior, even if we need to temporarily manage higher than normal inventory levels.

Speaker 1

While we're well prepared to address a variety of market conditions, we are also extremely excited and laser focused on the disciplined development of our world class Blue Creek reserves. As mentioned earlier, we continue to make excellent progress in developing Blue Creek. We are on track for the first development tons from continuous miner units in the Q3 of 2024 with a lone wall scheduled to start up in the Q2 of 2026. With that, we'd like to open the call for questions. Operator?

Operator

Your first question comes from the line of Lucas Pipes with B. Riley Securities. Please go ahead.

Speaker 3

Thank you very much, operator. Good afternoon, everyone. Well, Dale, for my first question, I want to touch a little bit on the near term outlook. It sounded like by the sound of your kind of closing comments there, Walt, that in Q2, we should expect lower shipments, but your realizations to kind of continue that favorable trend from Q1. So I wondered if you could maybe expand on that a little bit, would appreciate your thoughts.

Speaker 3

Thank you very much.

Speaker 1

I think that's accurate. I think that when we look at the Q2 and where demand is and what's going on globally, we expect prices to stay relatively stable. And our production profile, as we said, we look at the whole year and we look at sales and production for the Q2. We just think it's Q1 was really strong and we need to be a little cautious

Speaker 3

in the Q2. And in terms of sales, should we think of it being less than production?

Speaker 1

No, I'm not saying it will be less than production. I just think that the Q1 was pretty strong. We had the 2 rollover vessels that went into the Q1 that got added in there. And we're just always kind of cautious as to where we'll be for the quarter.

Speaker 3

But that 85% to 90% realization on the benchmark, that's the right way to think about it?

Speaker 2

Yes.

Speaker 3

Okay. Thank you for that. And in terms of your kind of market outlook, you comment there's still some risks out there. And I just wondered if you could maybe speak to where things might be getting a little bit better, where they're still more challenged? Thank you.

Speaker 1

I just think, as I said with India, I think India is a real bright spot, but I think we've got to let them get through the elections and through the monsoon season. What we're seeing in Europe is, again, contracted volumes are moving very well there and into South America. Just spot opportunities are pretty thin in those areas. And then we're really just we don't have a whole lot of confidence in what will happen in China.

Speaker 3

Thank you for that. And then one last one around Blue Creek. So congrats on the progress to date. And you mentioned kind of all of the pieces are lined up for starting the longwall panel development later this year. And I wondered if you could remind us what production you expect through these development panels in 2024?

Speaker 3

And then I think you mentioned a number for 2025, but if you could remind me of that, I would appreciate it. And then if you could also explain the sales implication from those development tons both this year and next year? That would be very helpful. Thank you.

Speaker 1

Sure. We should mine a couple of 100,000 tons this year and that'll just be from the Centimeters units as they start to ramp up. We'll have to start 1 and then shortly thereafter, after we clear a little more room, we'll start a second. Then after we clear a little more room, we'll start a 3rd unit. So by the year end, we should be running 3 continuous miner units and have about 200,000 tons clean equivalent on the ground.

Speaker 1

And we that coal will remain on the ground till we get the prep plant up and running, which will be in the middle of next year. And in the meantime, by then, next year, we're looking at probably a total of about 1,000,000 tons produced off the Centimeters section. But we'll start to move that coal when the preparation plant comes online, which should be mid year. So that's when those we should start looking at moving that coal into the market and selling that coal in the back half of 'twenty five.

Speaker 3

Excellent. Well, I look forward to that and really appreciate all the color and continued best of luck.

Speaker 1

Thank you. Thanks, Louis.

Operator

Your next question comes from the line of Nathan Martin with The Benchmark Company. Please go ahead.

Speaker 4

Thanks, operator. Good afternoon, guys. Congrats on the strong operational performance. And maybe just to follow-up Lucas' last question there, Targeted prep plant start up, I think you said second half of 'twenty five, then maybe you can move some of those tons. When do you expect to have your rail loadout and barge loadout in place at that point?

Speaker 4

Or would you be looking to truck coal? Just any more details there would be great.

Speaker 1

I think in the back half, we'll still be working on the I think we'll be running trucks over to a train loadout at that point on the back half of the year next year while we continue to complete the Overland Belt to the rail loadout. By barge, I'm not as certain by barge when we'll start moving some of those tons by barge. But I know we'll be able to our expectation is we'll be moving to the rail loadout as soon as the preparation plan starts up.

Speaker 4

Okay, got it. Well, appreciate that. And then maybe just kind of a modeling question. I'm sorry if I missed it. I know you guys mentioned the capture rate of 84% in your prepared remarks for the Q1.

Speaker 4

Could you kind of walk us through how you get to that 84% just so we can be clear?

Speaker 2

Yes, Nate, this is Dale. It's really just our average net selling price divided by the average of the index for the quarter. Straight, just try the easy way to model it. Okay.

Speaker 1

Are you Are you Are you Are you Are you Are you

Speaker 3

Are you 2.34 percent? 2.79 dollars Yes, the

Speaker 2

calendar average.

Speaker 4

I apologize for cutting off. What were the numbers again? Sorry.

Speaker 2

So our net average selling price of $2.34 okay, in short tons divided by $2.79 which was the average on a short term basis for the Q1.

Speaker 4

Okay, got it. And then maybe just an update on logistics. How are kind of the upgrades at the port progressing? I think you guys said they did pretty well this quarter. I know you said rail is exceptional, but have you seen any effects from the Panama Canal or the Red Sea?

Speaker 4

Just curious there.

Speaker 1

Well, as far as what's going on in Mobile, things are going very well. The improvements they've made have made a huge difference in the efficiency down at Portamobile. For our customers, what we're still seeing with the issues in the Red Sea is longer transit times for that coal to get to customers and the same thing is with the Panama Canal. So we're seeing longer transit times, which can then also impact transportation costs. But that's really been the impact and that's been going on for a couple of quarters now.

Speaker 4

Okay, great. And then maybe just one more. Walt, you mentioned in your prepared remarks, in the labor front regarding hiring. What kind of progress have you guys made at the existing mines? I think you said 250 total, maybe 100 of that at Blue Creek.

Speaker 4

And how has the initial reception been to Blue Creek as you start your hiring ramp up there?

Speaker 1

Well, I tell you, we are naturally, we have a schedule and a budget on what we expect and we are right on budget for where we expected to be year to date. And what we're seeing in terms of people looking toward Blue Creek is we're seeing a strong reception of those of applicants for those roles. So we're pretty happy with where things are right now and we think we're right on schedule.

Speaker 4

All right. Great. Very helpful, guys. Appreciate the time and best of luck.

Speaker 1

Thank you. Thanks, Dane.

Operator

Your next question comes from Katja Jansick with BMO Capital Markets. Please go ahead.

Speaker 5

Hi. Thank you for taking my question. Regarding the Blue Creek incremental volume, do you expect to contract that incremental volume next year once you start selling in the second half? Or is that going to be more spot exposed?

Speaker 1

I think what we'll be doing there is going out and canvassing customers to see who's interested in trying the product. And so I think it will be contracted. It's not going to go out I don't think it will go out into the spot market. It will be people getting test volumes and smaller volumes so they can see what the product's like.

Speaker 5

And maybe just as a follow-up, I'm assuming it's going to be tracking more the East Coast High Vol A Index. Is that fair?

Speaker 1

Yes.

Operator

Perfect. Thank

Speaker 1

you. Sure. You're welcome. Thank you.

Operator

Your next question comes from the line of Lucas Pipes with B. Riley Securities.

Speaker 3

The first one, just a reminder, I think we discussed this 3 months ago, but looking for a quick update. In terms of kind of the split between CFR and FOB business by my number 7, my number 4? What's the rough breakdown today?

Speaker 1

I think you can look at when we talk about where the coals flowing to the all coal flowing into Europe, which was 44 percent for the quarter is all FOB. Everything going to South America, which was 17%, 18%, That's all FOB and probably percentage going into Asia is FOB. So the remainder everything else going into Asia would be CFR,

Speaker 2

Azania.

Speaker 3

Got it. And so for the rest of the year, we can probably just call this kind of roughly constant?

Speaker 1

Our expectations are we get back to spot cargoes of 25% where we were much higher than that in the first quarter. So, I guess, our expectation right now, at least, is that we'll have a little higher volumes going into Europe and South America. I mean, that could change. But I think right now, given the information we've shared with you, our expectation is those number in the Europe and South America increase on a percentage basis a little bit.

Speaker 3

And is that for the remainder of the year or for Q2 specifically?

Speaker 1

That's for the remainder of the year. We said we expected spot volume to be 25 percent for the year. And I think you can expect the spot volumes will almost completely be going into Asia.

Speaker 3

Very helpful. I appreciate that. And then I noticed recently on the results of the proxy vote that a proposal related to a poison pill bylaw provision was adopted. And I wondered if you could maybe share a little bit how this came about and if there was any specific catalyst that drove that? Thank you very much.

Speaker 1

You know what, I think just looking at that provision, I think a lot of shareholders just think that's kind of commonplace. The biggest thing that we didn't think is commonplace in that provision or request was the request that it be put into the bylaws. But we've gone out every time we've done anything, we've gone out and asked for shareholder approval anyway. So, it wasn't something that we really thought was necessary because we've been doing it in the past anyway.

Operator

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

Speaker 1

That concludes our call this afternoon. Thank you again for joining us today, and we appreciate your interest in Warrior.

Operator

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

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Earnings Conference Call
Warrior Met Coal Q1 2024
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