Q1 2024 Warrior Met Coal Inc Earnings Call

Participants

Walter Scheller; Chief Executive Officer, Director; Warrior Met Coal Inc

Dale Boyles; Chief Financial Officer; Warrior Met Coal Inc

Lucas Pipes; Analyst; B. Riley Securities, Inc.

Nathan Martin; Analyst; The Benchmark Company LLC

Katja Jancic; Analyst; BMO Capital Markets

Presentation

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 2024 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. If you would like to ask a question during this time, simply press star then one on your telephone keypad. If you would like to withdraw your question, press the pound key. This call is being recorded and will be available for replay on the company's website.
Before we begin, I've 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 have the non-GAAP financial measures discussed during this call in the tables accompanying the company's earnings press releases 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 for the Investors section of its website at www.warriormetcoal.com.
Here today to discuss the company's results are Mr. Walt Scheller, Chief Executive Executive Officer, and Mr. Dale Boyles, Chief Financial Officer. Mr. Scheller, you may begin your remarks.

Walter Scheller

Thanks, operator. Hello, everyone, and thank you for taking the time to join us today to discuss our first quarter 2024 results. After my remarks, Dale will review our results in additional detail, then you'll have the opportunity to ask questions.
We delivered very strong results for the first quarter, driven by our operational performance. The volume of steelmaking coal that we produce reached levels not seen since 2020. We took advantage of the inventory levels we had built over the preceding quarters to generate over $104 million in cash from operations, which we primarily used to invest in our Blue Creek growth project and returning additional cash to stockholders.
We also made excellent progress on Blue Creek meeting several key milestones as we advance the development of this world-class growth projects that has the potential to transform our company.
First, let me provide an overview of the steel and steelmaking coal markets during the first quarter. From orders perspective, the first quarter 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. 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 softness in India, demand was largely attributed to the slowdown in projects associated with the upcoming national elections in April to early June. In China, lower demand was a result of continued weakness in the property and construction segments for China 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, we were extremely pleased by the performance of our rail partner during the first quarter as we were able to navigate the temporary loss of the barging system without any impact for our customers. And with minimal impact to our costs. The authorities responsible for the repairs on the Demopolis law continue to guide towards the 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 and mobile to improve its performance, which has resulted in strong performance outcomes throughout the first quarter as previously mentioned, the major met coal indices experienced a steep correction in the latter part of first quarter. Our primary index, the PLD FOB Australia, ended the first quarter at $222 per short ton, which was $72 per short ton lower than at December 31 value and $85 lower than the peak of $307 per short ton achieved in early January.
Likewise, the PRB CFR China Index experienced a $68 per tonne decline during the same period. Closing the first quarter at a price of $233 per short tons. Similar declines were observed with the second tier indices, which also displayed lower relativities in relation to the PLD index averaging around 83% for the first quarter. As we've said on prior earnings calls now that Mine four 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 first quarter, 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 the first three months of 2024 as compared to the prior year period. The month of March was the fourth 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 and rest of the world. Production grew 1.9%, primarily in Asia and a few countries in Europe. India's steel production continued to grow at stable rates, increasing by 3.4% for the same period.
Now turning back to our first quarter results, our first quarter sales volume of 2.1 million short tons was 9% higher than the comparable quarter last year. This volume included the 129,000 tons that shifted into the first quarter from the fourth quarter 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 second quarter of 2023.
Our sales by geography in the first quarter breaks down as follows 44% in Europe, 18% in South America and 38% in 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.
Our spot volume was 37% in the first quarter 2024, which was higher than the 29% in the first quarter of last year. For the full year, we expect our spot volume to be approximately 25% of total sales volume. Production volume in the first quarter was 2.1 million short tons compared to 1.8 million short tons in the same quarter 2023, representing a 17% increase. the highest quarterly production output over the last three years. Both mines operate at higher capacity levels in this first quarter compared to the same quarter last year. As a result for the additional employees that return following the conclusion of a labor strike.
So higher sales over production volumes in the first quarter 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 first quarter 2024 compared to last year's first quarter. 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 for approximately 100 of those people at the Blue Creek mine.
As of the end of the first quarter 2024, we're on schedule. With our overall hiring, we plan to begin accepting applications for positions at the Blue Creek mine in the second quarter.
During the first quarter, we spent $102 million on CapEx and mine development. Capex spending was $100 million, which included $69 million on the Blue Creek project. Mine development spending on the Blue Creek project was $2 million during the first quarter 2020.
For 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 first quarter and what comes next, we accomplished key milestones on the major components for steam access, surface infrastructure and coal transportation. Same access components, including the production slow service shaft ventilation slash shaft remain on schedule for completion late in the second quarter of this year, which we expect will allow us to begin development of the initial longwall panel with the first continuous miner unit in the third quarter of this year.
We're extremely excited that the panel development is scheduled to begin on the originally expected time line and we are on track to produce approximately 200,000 short tons of high-vol A. steelmaking coal in the second half of 2024. The development tonnes produced from the second half of this year through the first half of 2025 are expected to be sold in the second half of 2025 after the preparation plant comes online in addition work continued on the surface infrastructure and coal 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 system, baghouse warehouse and electrical substations should be completed during the second quarter of this year. The coal transportation components are also on schedule and noticeable progress continued on the run-of-mine belt structure, a clean coal belt structure and rail and barge loadout.
On the financial side, we invested $69 million during the first quarter of 2024 on the development of Blue Tree, which brings the project to date spending to $435 million. The Company expects to spend approximately $325 million to $375 million 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 a longwall startup in the second quarter of 2026.
Blue Creek represents one of the last remaining untapped premium high-quality High-Vol A coal reserves in the US, which should achieve premium prices. You're expecting incremental annualized production of $4.8 million short tons of premium High-Vol A. steelmaking coal after the start-up of the longwall, which the Company expects will enhance and strengthen its already strong global cost curve positioning and deliver incremental profit and cash flows.
I'll now ask Dale to address our first quarter results in additional detail.

Dale Boyles

Thanks walk through for the first quarter of 2024, the Company recorded net income on a GAAP basis of $137 million or $2.62 per diluted share compared to net income of $182 million, or $3.51 per diluted share in the same quarter of 2023. Non-GAAP adjusted net income for the first quarter, excluding the nonrecurring 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. We reported adjusted EBITDA of $200 million in the first quarter of 2024 compared to $259 million in the same quarter of last year.
Our adjusted EBITDA margin was 40% in the first quarter 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 million in the first quarter compared to $510 million in the first quarter of 2023. This overall decrease of $6 million 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.
Demurrage and other charges were $3 million lower compared to 2023's. First quarter Demurrage and other charges resulted in an average net selling price of $234 per short ton in the first quarter of 2024 compared to $257 per short ton in the same quarter of last year. Other revenues mainly from our gas businesses lower in the first quarter of 2024 compared to the same quarter of last year, primarily due to a 34% decrease and natural gas prices between the periods.
Platts premium low-vol FOB Australian Index price was relatively stable for much of the first quarter until early March when the index corrected sharply downward. The index price averaged $279 per short ton for the first quarter, which on average was $33 per short ton lower compared to the same quarter of 2023. We primarily target pricing our Mine seven 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 for high-quality product, which is approximately 30% of our volumes. However, we do use other indices 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 first quarter of 2024 was $284 million or 57% of mining revenues compared to $232 million or 46% of mining revenues in the first quarter of 2023. Of the $52 million increase in cash cost of sales, $22 million of the increase was driven by the 9% increase in sales volume. The remaining increase in cash cost of sales of $30 million 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. 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 first quarter this year compared to last year's first quarter. In addition, costs were higher in the first quarter 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 car credits, we're lower now that Mine four is producing from the North portal area at the mine. Overall, transportation and royalty expenses were 39% of our cash cost of sales per short ton in the first quarter 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 was approximately $133 in the first quarter of this year compared to $119 in the first quarter of 2023. On a per tonne 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 were higher on a per tonne basis of $3. This was due to the higher royalty rates in the areas currently being mined versus last year's first quarter quarter royalty rates.
Our cost of production was 61% of our total cash cost per short ton compared to 58% last year. A 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&A expenses were about $19 million or 3.7% of total revenues in the first quarter of 2024 and were slightly higher than 2023's first quarter of 2.8%, primarily due to an increase in employee related expenses. Interest income earned on cash investments was lower in the first quarter 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 lower effective tax rate reflects expense on lower pretax income compared to the first quarter of last year. Our tax expense reflects an income tax benefit for depletion expense and foreign-derived intangible income.
Turning to cash flow, during the first quarter of 2024. Free cash flow was $2 million was the result of cash flows generated by operating activities of $104 million less cash used for capital expenditures and mine development of $102 million. Free cash flow was $108 million lower than 2020 three's first quarter, primarily due to higher accounts receivable of $115 million and higher Blue Creek CapEx spending.
Free cash flow in the first quarter of 2024 was negatively impacted by an $86 million increase in net working capital from the end of 2023. The 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.
Total available liquidity at the end of the first quarter of 2024 was $801 million and consisted of cash and cash equivalents of $694 million and $107 million 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 second quarter volumes could be seasonally lower than the first quarter 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 remained strong. I'll now turn it back to Walt for his final comments.

Walter Scheller

Thanks, Dale. Before we move on to Q&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 second quarter. 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.
We also expect global met coal supply to be strong during the second quarter. 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 second quarter. For these reasons, we expect pricing to remain lower for the second quarter compared to the first quarter 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 at 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 and maximize average net selling prices for Warrior, even if we need to temporarily manage higher than normal inventory levels.
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 a world-class Blue Creek reserves. As mentioned earlier, we continued to make excellent progress in developing Blue Creek, we are on track for the first development times from continuous miner units in the third quarter 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?

Question and Answer Session

Operator

Lucas Pipes with B. Riley Securities.

Lucas Pipes

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

Walter Scheller

I think that's accurate. I think that, you know, when we look at the second quarter 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 second quarter. I'll just think it's some first quarter was really strong and we need to be a little cautious in the second quarter.

Lucas Pipes

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

Walter Scheller

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

Lucas Pipes

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

Walter Scheller

Yes.

Lucas Pipes

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

Walter Scheller

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 in into South America. It's just spot opportunities are pretty pretty thin. Those areas, again, where we're really just we don't have a whole lot of confidence and what will happen in China.

Lucas Pipes

Thank you for that. And then one one last one around Blue Creek. So And congrats on the progress to date. And you mentioned kind of all of that 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 from through these development panels in 2024? 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 to the sales implication from those development tons both this year and next year, that would be very helpful. Thanks.

Walter Scheller

Sure we'll monitor could we should mine a couple of hundred thousand tonnes this year and that will just be from the CM units as they start to ramp up. You will have to start one. And then shortly thereafter, after we clear a little more room, we'll start a second. And then after we clear a little more room, we'll start a third unit. So by the year end, we should be running three continuous miner units and have about 200,000 tonnes clean equivalent on the ground. And we of that coal will remain on the ground to get the prep plant up and running, which will be the middle of next year. And in the meantime, by then next year, we're looking at probably a total of about 1 million tons produced off the CMC sections, but we'll start to move that coal when the preparation plant comes online, which should be midyear. So that's when those sit lease should start looking at moving that coal into the market and selling that coal in the back half of '25.

Lucas Pipes

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

Walter Scheller

Thank you.

Dale Boyles

Thanks much.

Operator

Nathan Martin with The Benchmark Company.

Nathan Martin

Thanks, operator. Good afternoon, guys. Congrats on the strong operational performance. And maybe just to follow up with Lucas, last question there on your targeted plant start-up, I think you said second half of 25 maybe to move some of those tons. When do you expect to have your rail loadout and barge loadout in place at that point? Or would you be looking to truck coal, just any more details there would be great.

Walter Scheller

I think in the back half, we'll still be working on the of the I think we'll be running trucks over to a train load out at that point on the back half of the year next year. While we continue to complete the overland belt to the rail load out 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 my Our expectation is we'll be moving to the rail load out since the preparation plant starts up.

Nathan Martin

Okay. Not all appreciate that on. And then maybe just kind of a modeling question. Sorry if I missed it. I know you guys mentioned the capture rate of 84% in your prepared remarks for the first quarter. Could you kind of walk through how you get to that 84% just so we can be clear.

Dale Boyles

Yes, Nate, this is Dayle. It's really just our average net selling price divided by the average of the index for the call straight. Just trying to easy, easy way to model it.

Nathan Martin

Okay. Do you (multiple speakers) --

Dale Boyles

(multiple speakers) Yes, the calendar average.

Nathan Martin

I apologize for coming off what were the numbers again, sorry.

Dale Boyles

So our net average selling price of 234.
Okay. And short tons divided by 279, which was the average on a short term basis for the first quarter.

Nathan Martin

Okay, got it. And then maybe just an update on logistics power, kind of upgrades to support progressing. I think you guys said that did pretty well this quarter. I know you said rail is exceptional, but anything any effects from the Panama Canal or the Red Sea on? Just curious, there.

Walter Scheller

Was as far as what's going on in mobile things are going very well. The improvements they've made and have made a huge difference in the efficiency down at the Port of Mobile and for our customers. And 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 bombed, the Panama Canal. So we're seeing longer transit times, which can then also impact transportation costs are. But that's really been the impact and that's been going on for couple of quarters now.

Nathan Martin

Okay, great. And then maybe just one more on what you mentioned in your prepared remarks on the labor front regarding hiring, what kind of progress have you guys made at the existing mines, i think he said 250 total maybe 100 about a Blue Creek. And how has the initial reception been to Blue Creek as you start your hiring ramp up there?

Walter Scheller

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

Nathan Martin

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

Walter Scheller

Thank you.

Dale Boyles

Thanks, Ben.

Operator

Katja Jancic with BMO Capital Markets. Please go ahead.

Katja Jancic

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

Walter Scheller

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

Katja Jancic

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?

Walter Scheller

Yes.

Katja Jancic

Perfect. Thank you.

Walter Scheller

Welcome.
Thank you.

Operator

Lucas Pipes with B. Riley Securities. Please go ahead.

Lucas Pipes

Thank you very much, operator. Thank you very much for taking my follow-up questions on the first one, just a reminder, I think we discussed this three months ago, but I'm looking for a quick update in terms of kind of the split between CFR and FOB business. And by my number seven mine before, what's the what's the rough breakdown today?

Walter Scheller

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

Lucas Pipes

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

Walter Scheller

Our expectations or we get back to a 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 shared with you, our expectation is those number one in Europe and South America increase on a percentage basis a little bit.

Lucas Pipes

Is that for the remainder of the year or for Q2 specifically?

Walter Scheller

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

Lucas Pipes

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

Walter Scheller

Again. What I think just looking at that provision, I think a lot of shareholders you think that's kind of common place. The biggest thing that we didn't think was is common place in that provision or request was the requests that have been put into the bylaws. But yes, we've gone out every time we've done anything we've gone out and ask for shareholder approval anyway, so that it wasn't something that we really thought was necessary because we've been doing it in the past. Anyway, it.

Lucas Pipes

All right. Well, I appreciate it. Thanks again and again, best of luck.

Walter Scheller

Thank you very much.

Dale Boyles

Thanks, Lucas.

Operator

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

Walter Scheller

Thank you again for joining us today and we appreciate your interest in Warrior.

Operator

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