Warrior Met Coal, Inc. (NYSE:HCC) Q1 2023 Earnings Call Transcript May 3, 2023

Warrior Met Coal, Inc. beats earnings expectations. Reported EPS is $3.57, expectations were $2.75.

Operator: Good afternoon. My name is Kate, and I will be your conference operator today. At this time, I would like to welcome everyone to the Warrior Met Coal First Quarter 2023 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 Instructions] 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 to 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.warriormetcoal.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.warriormetcoal.com. Here today to discuss the Company’s results are: Mr. Walt Scheller, Chief Executive Officer; and Mr. Dale Boyles, Chief Financial Officer. Mr. Scheller, you may begin your remarks.

Walt Scheller: Thanks operator. Hello, everyone, and thank you for taking the time to join us today to discuss our first quarter 2023 results. After my remarks, Dale will review our results in additional detail, and then you’ll have the opportunity to ask questions. We were pleased to deliver another extremely strong quarter reflected in our financial results and better-than-expected sales and production volumes. We entered the first quarter with optimism that strong customer demand, with facilitated drawdown of our inventories with the expectation of continuous improvement and performance at the McDuffie Terminal. We’ve previously spoken about the performance issues at the McDuffie Terminal and have taken a number of actions to address them.

Over the past few months, we’ve implemented several initiatives to improve the loading throughput at the terminal, including the allocation of personnel and resources. These initial efforts focus primarily on addressing maintenance and equipment reliability issues on belt conveyor systems. We are pleased with the progress made so far, but we acknowledge that the Terminal’s performance remains vulnerable and will require long-term support and attention from Warrior. One additional challenge is that, the terminal is undergoing a significant overhaul of its ship loader number one belt structure, which will remain out of service until the end of the second quarter. We will continue to work closely with the Alabama State Port Authority to help achieve its objectives.

In the interim, Warrior will ship small volumes from alternative ports to ensure timely deliveries for our customers at minimal extra costs. Our commitment to delivering sustainable results at the terminal remains unwavering. From a market perspective, during the first quarter, the steel industry demonstrated a better-than-expected performance, as evidenced by a sustained increase in steel prices across North America, Europe and select Asian regions. European steel producers, announced the restart of several previously idle blast furnaces and ramped up production, aided by notable correction in energy prices. China remained focused on reopening their economy and bolstering its crucial property sector, resulting in an encouraging rise in steel production during the first two months.

Additionally, China’s decision to lift the ban on Australian coal imports, was confirmed during the quarter, although there have been limited transactions between the two countries so far. From a supply standpoint in the first quarter, the vulnerability of the global supply chain was on full display, as strong rains and a significant train derailment impacted Australian supply performance. These factors resulted in Australian exports trailing 2022’s figures, by over 15% for the first two months of the year. As a result, it’s likely that Australia could record its lowest exports, for the first quarter in over five years. Meanwhile, both Canada and the United States demonstrated robust performance during the same period, with both countries recording positive growth.

In addition, we note the remarkable increase in Mongolian exports to China, which have surged by a staggering 470% in the first two months of this year. As the first quarter due to a close, global supply availability showed signs of improvement especially from Australia, resulting in a more balanced market. This was evident by a steady correction in pricing. Our primary index, the PLV FOB Australia, dropped by over 23% from its peak of $354 per short ton in February, to $273 per short ton by the last day of March. In contrast the PLV CFR China Index, experienced a comparatively modest decline of approximately 8% from its peak of $311 per short ton in early March to $286 per short ton, at the end of the month. According to a recent report by the World Steel Association, global pig iron production increased by 3.1% and in the first three months of 2023, as compared to the same period last year.

The production increase was mainly driven by a strong start for Chinese production, which grew by 7.6% during the period. Additionally, India continued its recent higher trend by growing 5.9% during the period. As anticipated, production from the major European producers declined by over 8.9%, due to the implementation of numerous blast furnace idlings and production cuts that originated during the previous fourth quarter. Furthermore, Turkey steel production was significantly impacted by the tragic earthquake, that hit the southern part of the country in early February. Our first quarter sales volume of 1.9 million short tons, was 73% higher than the comparable quarter last year. The increase was driven by the drawdown of coal inventory levels in the first quarter, due to the improved performance at the McDuffie Terminal, which enabled us to export more product.

In addition, better-than-expected production, drove an increase in sales volume for the quarter. Our sales by geography in the first quarter, were 52% into Europe 23% into South America and 21% into Asia. European sales continued to be strong with the blast furnace restarts that I previously mentioned, despite the economic headwinds facing the region. Production volume in the first quarter was better than expected, and totaled 1.8 million short tons compared to 1.5 million short tons in the same quarter of last year, representing a 14% increase. Both mines operated at higher capacity levels in this quarter with a higher headcount compared to the prior year’s comparable quarter. Last year, at this time Mine 4 was being restarted and both mines operated at reduced capacity.

During the first quarter, we spent $83 million on CapEx and mine development. CapEx spending was $68 million, which included $28 million on the Blue Creek project. Mine development spending was $15 million during the first quarter. We expect development at Mine 4 will be completed in the next few months, while development at Blue Creek will continue over the course of the project. In February, the labor union representing certain of our hourly employees announced they ended their strike and unconditionally offered to return to work. We started – the return-to-work process, which primarily includes drug testing and return-to-work physical and safety training. The return-to-work process is still ongoing, as it takes time to process all of the eligible employees through the testing and training.

While we expect the return-to-work to take a little more time, we’re reviewing and adjusting our work schedules to accommodate the eligible employees returning to work. The number of anticipated eligible employees participating in the return-to-work process is approximately 300. A little more than one-third of those employees have already returned to work. We expect that all of our current employees will continue to work full time at the mines in addition to those returning to work. With the returning employees, we’re in the process of revising our internal budgets and outlook for the remainder of the year and expect the process to be completed by early June. At that time, we expect to provide an external update to the investment community on our 2023 guidance targets.

Our initial assessment indicates that the majority of any incremental production volume will primarily start to occur in June and impact the second half of the year. With the expected incremental production, we expect to capitalize on opportunities to sell the incremental volume to our existing customers or opportunistic spot sales. Meanwhile, we continue to negotiate good faith the new labor contracts while the eligible employees return to work. During the first quarter, we continued to make substantial progress on the development of Blue Creek and our work remains on schedule. Specifically, the production slope service shaft and return ventilation shafts are a little more than halfway completed at this point. We recently broke ground on construction of the bathhouse and mine offices with the initial foundation work underway.

From a financial standpoint, we invested $28 million in the development of Blue Creek during the first quarter. We expect to be making further investments on a larger scale during the remainder of this year. Other key time line tasks are underway in various stages of obtaining bids, contract negotiations and revisions to project specifications. We plan to continue providing updates during our quarterly earnings calls throughout the year. I will now ask Dale to address our first quarter results in greater detail.

Dale Boyles: Thanks, Walt. For the first quarter of 2023 the company recorded net income on a GAAP basis of $182 million or $3.51 per diluted share, representing a 25% increase over net income of $146 million or $2.83 per diluted share in the same quarter of last year. Non-GAAP adjusted net income for the first quarter, excluding the non-recurring business interruption expenses, idle mine expenses and other non-cash adjustments was $3.57 per diluted share. This compares to an adjusted net income of $2.97 per diluted share in the same quarter of 2022. These increases quarter-over-quarter were primarily driven by higher sales volumes, partially offset by lower average net selling prices and higher inflation. We reported adjusted EBITDA of $259 million in the first quarter of 2023, compared to $244 million in the same quarter of last year, representing a 6% increase.

The quarterly increase was primarily driven by a 73% increase in sales volume, partially offset by lower average net selling prices and the impact of inflation on supplies and electricity. Our adjusted EBITDA margin was 51% in the first quarter of 2023, compared to 64% in the same quarter of last year. Total revenues were $510 million in the first quarter of 2023, compared to $379 million in the first quarter of last year. This 35% increase was primarily due to the 73% increase in sales volume, partially offset by lower average net selling prices. Other revenues were higher in the first quarter of 2023, primarily due to the fact that the prior year included a mark-to-market loss of $13 million on our gas hedges, offset partially by a decrease in revenues due to lower natural gas prices.

Platts Premium Low Vol FOB Australian Index price on average was $131 per short ton lower in the first quarter of 2023, compared to the same quarter of last year. The index price averaged $312 per short ton for the first quarter. Demurrage and other charges reduced our gross price realization to an average net selling price of $257 per short ton in the first quarter of 2023, compared to $339 per short ton in the same quarter of last year. Demurrage and other charges were $4 million in the first quarter this year and were flat compared to last year’s first quarter. The charges were the result of temporary delays in vessel loadings, due to severe weather and port congestion in the first quarter of this year. Cash cost of sales were $232 million or 46% of mining revenues in the first quarter, compared to $134 million or 35% of mining revenues in the first quarter of 2022.

The increase of $98 million was primarily due to the 73% increase in sales volume, plus the impact of inflation. Inflation accounted for approximately $2 million of a higher cost or $1 per short ton higher than the fourth quarter, resulting from higher cost for supplies and electricity. Cash cost of sales per short ton FOB port was approximately $119 in the first quarter, compared to a similar amount in the first quarter of 2022. Met coal prices were lower in the first quarter of this year, compared to the first quarter of 2022. This resulted in lower transportation and royalty costs on a per ton basis, which were offset by higher cumulative inflation, higher wages on a higher headcount that drove higher production plus slightly higher transportation cost for loading vessels through alternative ports during the quarter.

Transportation and royalty costs were 44% of our cost per ton in the first quarter, compared to 46% in the same quarter last year. Despite the higher variable cost and inflation, cash margins were $138 per short ton in the first quarter. SG&A expenses were about $15 million or 2.8% of total revenues in the first quarter of 2023 and were higher than last year’s first quarter, primarily due to an increase in non-cash stock compensation expenses. The interest income earned on our cash investments exceeded the interest expense on our outstanding notes and equipment leases during the first quarter of 2023, primarily due to our higher cash balances. Our first quarter non-cash tax expense primarily reflects the utilization of our federal net operating losses or NOLs offset partially by the tax benefits for depletion and a tax benefit for foreign derived intangible income.

We expect to continue to utilize our federal NOLs and tax credit carryforwards. We believe we may become a cash taxpayer in late-2023 or 2024 based upon our long-term forecast of met coal prices, sales volumes and performance. During the first quarter, we incurred incremental nonrecurring business interruption expenses of $4 million, which were lower by 37% than last year and that were directly related to the then ongoing labor strike. These nonrecurring expenses were primarily for incremental safety and security, legal and labor negotiations and other expenses. Turning to cash flow. During the first quarter of 2023, we generated $110 million of free cash flow this was due to cash flows generated by operating activities of $193 million, less cash used for capital expenditures and mine development costs of $83 million.

The end result was cash flow conversion of 43% this quarter versus 20% in the first quarter of 2022. Free cash flow in the first quarter of 2023 was 122% higher than last year’s first quarter, even though negatively impacted by a $69 million increase in net working capital from the fourth quarter of 2022. The increase in net working capital was primarily due to an increase in accounts receivable as a result of higher sales volume and the timing of sales as well as lower accrued expenses and accounts payable, partially offset by lower inventories. Our total available liquidity at the end of the first quarter was a record $986 million, representing an increase of $33 million or 3% over the fourth quarter and consisted of cash and cash equivalents of $863 million and $123 million available under our ABL facility.

From a capital allocation standpoint, the company remains committed to return the excess cash to stockholders to increase stockholder value, while driving long-term growth with the investment in the development of our world-class Blue Creek reserves. We continue to demonstrate that commitment in the first quarter by increasing our fixed quarterly dividend by 17% and paying a special cash dividend of $0.88 per share. Now turning to our outlook and guidance for 2023. We believe we are on track to achieve our targets outlined in the outlook section of our earnings release. As Walt indicated earlier at this point, we have not updated our internal budgets or external guidance to account for any changes in cost and volumes associated with the union represented employees returning to work.

I’ll 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 on our outlook. As we look forward, we anticipate ongoing stable demand for our products based on discussions with our diverse customer base. While China’s steel production remains difficult to predict, our current view is that we’ll correct during the year resulting in a decline in annual production year-over-year. As restocking eases and the potential slowdown in the second half of the year begins to materialize, we expect steel prices to lose some or most of their recent gains. Additionally, we foresee that met coal pricing will face further downward corrections absent any other unforeseen disruptions primarily due to improving supply chain out of Australia and higher Mongolian exports into China.

As I said earlier, we expect the return-to-work process of eligible employees to continue through the end of May. We are revising our internal budgets and outlook for the remainder of the year and expect that process to be completed in early June. At that time, we expect to provide an external update to the investment community on our 2023 guidance targets. Our initial assessment indicates that the majority of any incremental production volume will primarily start to occur in June and impact the second half of the year. We expect the higher production volume in the second half of the year to result in higher sales volumes as well. We expect 2023 will be a significant turning point in the development of our world-class Blue Creek mine that will drive long-term stockholder value.

Later this year, we will begin groundbreaking for the larger infrastructure components such as the new coal preparation plant a bathhouse of mine offices and overland belt conveyor and a barge load out. We’re excited to see the progress that will come this year as we expect to invest approximately $250 million on the project. We’re extremely excited about this organic growth project which will transform Warrior and allow us to build upon our proven track record of creating value for our stockholders. As we have previously indicated we expect the first development tons from continuous mining units in the third quarter of 2024 with a Longwall scheduled to start up in the second quarter of 2026. With that, we’d like to open the call for questions.

Operator?

Q&A Session

Operator: [Operator Instructions]. The first question comes from Lucas Pipes of B. Riley Securities. Please go ahead.

Operator: [Operator Instructions] The next question is from Nathan Martin from The Benchmark Company. Please go ahead.

Operator: The next question is from Luther Lu of LMR Partners. Please go ahead.

Operator: The next question is a follow-up from Lucas Pipes of B. Riley Securities. Please go ahead.

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

Walt Scheller: That concludes our call this afternoon. Thank you again for joining us today and we appreciate your interest in Warrior Met Coal.

Operator: Thank you. That concludes today’s conference. Thank you all for participating. You may now disconnect.