Yahoo Finance Warrior Met Coal, Inc. (NYSE:HCC) Q1 2024 Earnings Call Transcript
Warrior Met Coal, Inc. (NYSE:HCC) Q1 2024 Earnings Call Transcript May 1, 2024
Warrior Met Coal, Inc. beats earnings expectations. Reported EPS is $2.63, expectations were $2.02. Warrior Met Coal, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
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 [Operator Instructions]. This call is being recorded and will be available for replay on the company's Web site. 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 Web site 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 Web site 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 2024 results. After my remarks, Dale will review our results and additional detail, and you will 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 produced 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 return additional cash to stockholders. We also made excellent progress on Blue Creek, meeting several key milestones as we advanced 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 first quarter from Warrior's 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. 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. 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 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 this 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 the first quarter. Our primary index, the PLV FOB Australia ended the first quarter at $2.22 per short ton, which was $72 per short ton lower than its December 31st value and $85 lower than the peak of $307 per short ton achieved in early January. Likewise, the PLV CFR China Index experienced a $68 per ton decline during the same period, closing the first quarter at a price of $2.33 per short ton. Similar declines were observed with the second tier indices, which also displayed lower relativities in relation to the PLV Index, averaging around 83% for the first quarter.
As we've 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 PLV 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, 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 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 the conclusion of the labor strike in the second quarter of 2023. Our sales by geography in the first quarter 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. 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. This was the highest quarterly production output over the last three years. Both mines operated at higher capacity levels in this first quarter compared to the same quarter last year as a result of the additional employees that returned following the conclusion of the labor strike.
The 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 had budgeted hiring 250 people in the business with approximately 100 of those people at the Blue Creek Mine. As of the end of first quarter 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. 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 of 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 first quarter and what comes next. We accomplished key milestones on the major components for seam access, surface infrastructure and coal transportation. The seam access components, including the production slope, service shaft, ventilation shaft, remain on schedule for completion late in second quarter of this year, which we expect to 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 timeline 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 tons 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 belt system. The bathhouse, warehouse and electrical substation 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, the clean coal belt structure and rail and barge loadouts.
On the financial side, Warrior invested $69 million during the first quarter 2024 on the development of Blue Creek, 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 the longwall start up in the second quarter 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. Warrior expects 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 strike and strength and it's already strong global cost curve positioning and deliver incremental profit and cash flows.
I'll now ask Dale to address our first quarter results and additional detail.
Dale Boyles: Thanks, Walt. 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, were lower in the first quarter of 2024 compared to the same quarter of last year, primarily due to a 34% decrease in natural gas prices between the periods. The 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 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 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 volumes. The remaining increase in cash cost of sales of $30 million was due to higher royalty cost 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 first quarter this year compared to last year's first quarter. In addition, costs were higher in the first quarter this year due to 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. Overall transportation and royalty expenses were 39% of our cash cost of sales per short ton in the first quarter 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, was approximately $133 in the first quarter of this year compared to $119 in the first quarter 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 first quarter royalty rates. Our cost of production was 61% of our total cash cost per short ton compared to 58% last year. The higher cost of production was primarily due to higher labor related costs of $4 per ton, temporarily higher repairs and maintenance costs 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 low 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. This was a 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 2023'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. 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. Our 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 remains strong. 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. 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 their 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 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 to 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 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 third quarter 2024 with the longwall scheduled to start up in the second quarter of 2026. With that, we'd like to open the call for questions. Operator?
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