Warrior Met Coal, Inc. (HCC) Q1 2021 Earnings Call Transcript

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Warrior Met Coal, Inc. (HCC 1.34%)
Q1 2021 Earnings Call
May 5, 2021, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

[Operator Instructions] We'd like to welcome everyone to worry marinko first quarter results call. [Operator Instructions] After the speech remarks we like in an answer section. If you'd like to ask a question, we process our number one on your telephone keypad. If you'd like to withdraw your question press 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 this discussion today may contain forward looking statements and actual results may differ materially from those discussions.

For more information regarding for liquid statements, please refer to the company's press release and SEC filings. I have also been asked to note that the company is supposed to work consolidations discussed on this call and able to comprehend company's earnings release located on the investors tech company website is www dot warrior calm. In addition to the earnings release, the company has posted a brief supplemental slide presentation to the investors at another [email protected]. here today to discuss the company results are Mr. Wall ceclor chief executive officer and Mr. Chief Financial Officer.

Mr. Schiller, he may begin with your remarks. Please go ahead.

Walter J. Scheller -- Chief Executive Officer and Director

Thanks, operator. Hello, everyone. And thank you for taking the time to join us today to discuss our first quarter 2021 results. After my remarks, Dell will review our results in additional detail, and then you'll have the opportunity to ask questions. During the first quarter we saw COVID-19 the Chinese fail on Australian calls have a continued impact on both pricing and demand across the mecole industry. We continue to take the necessary measures to adjust our workplace environment to comply with social distancing, and personal hygiene guidelines set forth by various health organizations to protect the health and safety of our employees while maintaining our operations. Despite these challenging headwinds, especially on NET Core pricing, we were pleased to be free cash flow positive for the fourth consecutive quarter since the pandemic began. We remain focused on preserving cash and liquidity while managing the aspects of the business that we can control. Importantly, we achieved our second lowest quarterly cash cost per tour done since going public.

As the Chinese ban on Australian coals continue during the forced first quarter, we were able to monetize our higher than normal inventories on Chinese spot volumes, which partially offset some of the impact of the depressed pricing environment experienced in our natural markets. growing market fundamentals persisted across all geographies during the first quarter, allowing our customers to benefit from record high steel prices and strong demand for their products. Global steel production remains on its recovery path to pre pandemic levels. The world steel Association has reported a 6% increase in global pig production for the first quarter, with China leading the charge with a year over year increase of 8%. Excluding China the rest of the world grew at a more moderate pace of 2%. Unfortunately, the metco markets remain split in a two tier pricing system due to the ongoing Chinese ban of Australian coal imports. On one side, you have non Australian premium hard coking coals imported into China benefiting from a stable and elevated CFR base index price that was range bound between 214 and $223 per metric ton for most of the first quarter.

On the other side, you have Australian base premium calls that have been impacted by high volatility and low pricing. We saw the Australian index price climb from its low of $102 per metric ton at the start of the year, and peak at a high of $161 per metric ton in late January. At this point, the price started its gradual decline, hitting its low of $110 per metric ton in late March. The prolonged import ban by China has also created shifts in trade patterns, as more Australian calls are making their way into Japan, South Korea, India and Vietnam and also in our natural markets of Europe and South America.

As anticipated, Chinese by Nicolas was low, join there. New Year's celebrations in February. However, it remained subdued for a longer period than expected following the holiday. However, an uptick in transactions and interest was observed prior to the end of the quarter and has remained active since.

We had expected contracted sales into our natural markets were strong for the entire first quarter. sales volume in the first quarter was 2 million short tons compared to 1.8 million short tons in the same quarter last year. Our sales by geography for the fourth quarter were 30% into Europe 14% into South America, and 56% into Asia. production volume in the first quarter of 2021 was 2.2 million short tons, compared to a similar amount in the same quarter of last year. The mines ran well in the first quarter, and we built a little more inventory. As planned and previously communicated, inventories remained elevated at the end of the first quarter compared to pre pandemic levels, call inventory levels increased to 220,004 times to 1.2 million short times at the end of the first quarter. The higher than normal inventory levels allow us to continue to supply our valued customers during the rest of the year. Our gross price realization for the first quarter of 2021 was 95% of the Platts premium lowball fob Australian index price and was higher than the 89% achieved in the prior year period.

Or better gross price realization was primarily due to a higher percentage of our sales to Chinese customers that the CFR index price or spot sales volume in the first quarter was approximately 48% of total volumes, compared to a normal expectation of approximately 20%. The end of our first quarter also coincided with the exploration of our collective bargaining agreement with the United Mine Workers of America on April 1. While we continue to negotiate in good faith with the NWA to reach a new contract, the new NWA has initiated a strike that continues today. Later in our prepared remarks, I'll provide more color on the business continuity plans we have in place to meet the needs of our valued customers.

I'll now ask you to address our first quarter results in greater detail.

Dale W. Boyles -- Chief Financial Officer

Thanks Well, for the fourth quarter of 2021. The company record a net loss on a GAAP basis of approximately $21 million, or a loss of 42 cents per diluted share, compared to net income of $22 million or 42 cents per diluted share in the same quarter last year. Non GAAP adjusted net income for the first quarter, excluding that non cash charge for Tax Valuation allowance was eight cents per diluted share, compared to 39 cents per diluted share in the same quarter of 2020. Justin EBITDA was $47 million in the first quarter of 2021 as compared to $62 million in the same quarter last year. The quarterly decrease was primarily driven by a 13% decrease, in average net selling prices partially offset by higher sales volume. Our adjusted EBITDA margin was 22% in the first quarter of 2021, compared to 27% in the same quarter last year. revenues were approximately $214 million in the first quarter of 2021, compared to $227 million in the same quarter last year.

This decrease was primarily due to the 13% decrease in average net selling prices, partially offset by an 8% increase in sales volume in a weak price environment as was noted earlier. The Platts premium lowball fob Australian index price average $28 per metric ton lower or down 18% in the first quarter of 2021. Compared to the same quarter last year, the index price averaged $127 per metric ton for the quarter. The merge and other charges reduced our gross price realization to an average net selling price of $106 per short term in the first quarter of 2021, compared to $122 per short term in the same quarter last year. cost of sales was $154 million, or 75% of mining revenues in the first quarter, compared to $152 million, or 68% of mining revenues in the same quarter of 2020. The slight increase in total dollars was primarily due to higher sales volume, offset by lower variable cost and a focus on controlling cost of sales per short ton fob port was approximately $79 in the first quarter compared to $83 in the same period of 2020.

$79 per short ton, was our second lowest quarterly amount in the last four years. Cash costs and price sensitive costs such as wages, transportation, and royalties that vary with net co pricing were lower in the first quarter, along with a focus on cost control. tissue, the expenses were about $8 million, or 3.6% of total revenues in the first quarter of 2021. And we're 10% lower than the same quarter last year, primarily due to lower professional fees and employee related expenses. depreciation depletion expenses for the first quarter of 2021, with $33 million, compared to $29 million in last year's quarter. Increase quarter over quarter was primarily due to a higher amount of assets placed in service and higher spending levels. The interest expense was about $9 million in the first quarter and included interest on our outstanding debt plus amortization of our debt issuance costs associated with our credit facilities, partially offset by interest income. This was approximately $1 million higher compared to the same period last year, primarily due to incremental borrowings on our abl facility and lower returns on cash balances.

We record an income tax expense of $24 million during the first quarter of 2021, compared to inexpensive $3 million in the same quarter last year. The first quarter is tax expense included a non cash charge, recognized upon the establishment of a valuation allowance against our state deferred income tax assets. This result was due to a change in Alabama State tax law in February, that became effective as of the beginning of the year. In essence, our export sales are no longer subject to Alabama state income taxes. And therefore the value of our state net operating losses have been written down to cash flow in the first quarter of 2021, we generate $23 million in positive free cash flows, which resulted from cash flows provided by operating activities the $45 million less cash used for capital expenditures in mind development cost of $22 million. free cash flow in the first quarter of 2021 was positively impacted by a small decrease in net working capital. The decrease in net working capital was primarily due to higher collections of accounts receivable, lower prepaid expenses and other receivables offset partially by an increase in inventory this quarter

Operating cash flows were higher in the first quarter of 2021, compared to the same quarter last year, primarily due to higher sales volumes and lower cost. pressures and invest investing activities for capital expenditures and mine development costs were $22 million during the first quarter of 2021, compared to $26 million in the same quarter last year. We continue to rationalize spending during these unprecedented times. The company spent $13 million per 58% less on capex in the first quarter of 2021 compared to the same period last year, which was largely offset by higher spending on mine development cost. Cash Flows used by financing activities were $13 million in the first quarter of 2021 and consisted primarily of payments for capital leases of $8 million in the payment of a quarterly dividend of $3 million. Balance Sheet remains strong with a leverage ratio of 2.4 times adjusted e but we believe our liquidity is adequate to navigate these uncertain times. Our strong balance sheet with no near term debt maturities, combined with a low and variable call structure has allowed us to continue paying our quarterly dividend during the pandemic.

Total available liquidity at the end of the first quarter was $272 million consisting of cash and cash equivalents of $222 million with $50 million available under a abl facility which is net of borrowings of $40 million and now saying letters of credit for approximately $9 million. Now attorney drawer an outlook is the ongoing uncertainty related to our negotiations with the Union, the covid 19 pandemic, the Chinese ban on Australian coal and other potentially disruptive factors, we will not be providing full year 2021 guidance at this time. We expect to return to providing guidance once there's further clarity on these issues. We continue to appropriately adjust our operational needs, including managing our expenses, capital expenditures, working capital, liquidity and cash flows. We have delayed the development of the blue Creek project, and our stock repurchase program also remains temporarily suspended.

I'll now turn it back to Walters final comments.

Walter J. Scheller -- Chief Executive Officer and Director

Thanks, Dale. Before we move on to q&a, I'd like to make some final comments. We still do not have a clear view of when the trade of seaboard metals will return to normal and efficient market conditions. Although we continue to believe that a partial or full easing of a Chinese ban on Australian coal is most likely to happen at some point in time. We expect current pricing bifurcation in the markets to remain in place as long as the band remains in place. We expect the difference between the Australian fob and the China CFR indices to narrow once the ban is lifted, returning to normal levels. However, the correction may take some time. Is there a plenty of floating vessels of Australian calls off the coast of China, as well as large volumes of calls in the ports that have been offloaded but have not cleared customs. We believe that the demand for coal to remain strong for the next few quarters, as indicated by our customers buying patterns.

Also, we believe that our markets remain vulnerable to COVID-19 related demand disruptions. Mostly in Asia, Europe, South America will remain focused on serving our customers through the duration of our ongoing labor negotiations while taking advantage of spot volumes when possible. As I mentioned earlier, our contracts with the NWA expire on April 1. And the NWA has initiated a strike that continues today. We believe that we are well positioned to fill our customer volume commitments for 2021 of approximately 4.9 to 5.5 million short tons through a combination of existing coal inventory of 1.2 million short tons and expected production during the rest of the year. For now, we have idle mind for we expect production to continue at mine seven, although at lower than usual rates.

While we have business continuity plans in place to strike may still cause disruption to production, and shipment activities. And the plans may vary significantly from quarter to quarter in 2021. Finally, as we navigate through these headwinds, we will continue to execute our business continuity plans to meet our customer demands.

With that, we'd like to open the call for questions operator.

Questions and Answers:

Operator

[Operator Instructions] First question comes from the line of David Gagliano with BMO Capital Markets. Please go ahead.

David Gagliano -- BMO Capital Markets -- Analyst

Hi, sorry. Thanks for taking my questions. I just wanted to ask a little bit about the current strike situation and the commentary regarding volumes. I guess it's the obvious question, right. So we had 2.1 million times I think of sales in the first quarter. The commentary around 4.9 to 5.5 million is that is that essentially, you know, if the strike isn't, you know, remains in place for the remainder of the year, and how, you know, should we model, you know, quarterly sort of degradation and production, I'm assuming that the front end of that is going to be higher than the four year average. If there's a way you can give us some color on how we should be thinking about sales lines each quarter, as a stripe process.

Walter J. Scheller -- Chief Executive Officer and Director

We'll be giving you a quarter by quarter breakdown as well, it's pretty tough to have this as well. And the reason for that is due to the fact that we just don't know what disruptions will be caused throughout the period of the strike. The way we've kind of walked through this in the 4.9255 is the first quarter we actually had about one nine in sales. So that leaves us with 3 million to three, six to hit. We have 1.2 million in inventory. If you take that down to the level where we say we'd like to be able to around 400,000 times. That brings us down to needing to produce 2.2 to 2.8 for the remainder of the year. Which brings us down to call it 750,000 a quarter to 930,000 a quarter. And we think that you know we'll we'll be able to achieve that with the operating plans we have. We have enough lead time on a continuous monitor units at mon seven for us to be able to do that. So that's, that's about as much God because I feel comfortable giving you because I just don't know exactly how things will play out quarter to quarter.

David Gagliano -- BMO Capital Markets -- Analyst

And understood that makes sense in terms of the unknowns here. So but just to clarify, so it's Is it reasonable at this point to effectively just kind of spread it evenly over the remainder of the year and use that 4.9 to 5.5? range? If it again, if the strike were to continue?

Walter J. Scheller -- Chief Executive Officer and Director

That's reasonable.

David Gagliano -- BMO Capital Markets -- Analyst

Okay. And then just one other quick question. The cash costs were obviously, at least in my view, you know, exceptionally good in the quarter, was there anything extraordinary that that suggests that we shouldn't assume a similar level of cash costs, you know, going forward, obviously, the volumes are going to be lower, so we have to adjust for that. But if we just sort of gross that number up and then adjust for the lower volumes, is that still a reasonable kind of way to approach it?

Dale W. Boyles -- Chief Financial Officer

David is Dale, yeah, I mean, we really focused on keeping our costs low, and we obviously got a little more volume in the quarter. So there was nothing other than that significant load for the rest of the year, you know, we do expect our cash costs to be a little bit lower, but then again, we're gonna incur some cost with the island of mind for some other costs associated with the strike, you know, negotiation, these round legal fees and stuff like that. So we're gonna have some other higher costs. So while the cost per turn may be down, you may have some other costs that offset that. So you know, we don't see any significant change because of those offsetting issues.

David Gagliano -- BMO Capital Markets -- Analyst

Okay, so sorry, just to clarify on a cash cost per ton basis, the even with the lower volumes, you think your cash cost per ton have kind of offsetting issues that will result in cash costs for time being similar, and the near quarters?

Dale W. Boyles -- Chief Financial Officer

Well, if we, if we sell what we have an inventory, right, which was produced, you know, at prior levels, right, our levels of people working in everything, so those cash calls from a turn, until after you bleed off all that inventory, then after that, you would start to see the lower cash costs, right on lower volumes. Again, like I say, codal will have some offsetting incremental costs associated with strike that we wouldn't normally have.

David Gagliano -- BMO Capital Markets -- Analyst

Okay, thanks. I'll get back in the queue. Thank you.

Dale W. Boyles -- Chief Financial Officer

Thank you.

Operator

Thank you. [Operator Instructions] Next question come from Lucas Pipes with B. Riley Securities. Please go ahead.

Lucas Pipes -- B. Riley Securities -- Analyst

Hey, good afternoon, everyone. But my first question is on the sales commitments for 2021 to 4.9 to 5.5 million tonnes. And I wonder if it's possible to give us a little bit more of a flavor for what the geographic mix is of of those commitments. And with those be sold at the equivalent of the Australian benchmark, which obviously is still languishing due to the ban, or with those also be commitments into the higher priced Chinese markets for example, or or just off of higher US East Coast index pricing, what would really appreciate your your thoughts and comments on that? Thank you.

Walter J. Scheller -- Chief Executive Officer and Director

The commitments are to our primary customers in Europe, South America, and a few others into Asia. And those are based on the Australian lowball price. But there are also opportunities and swapping opportunities and things that allow us to also participate, much as we did in the first quarter in the Chinese markets and CFR prices. And what we've seen is there's been kind of enough of that to offset some of the lower pricing and bring us back to kind of a normalized level. And I think that's what we'll see throughout the year is I expected to get closer to traditional targets which were 55 into Europe 30 or so into South America and 15 or so into Asia. I expect us to move in that direction, but I don't expect us to be the whole way back into those numbers.

Lucas Pipes -- B. Riley Securities -- Analyst

That's, that's helpful. So for, for now, kind of modeling pricing near the benchmark, what would that be? very simplistically be the right way to think about it. And if that Australian benchmark.

Walter J. Scheller -- Chief Executive Officer and Director

Yes.

Lucas Pipes -- B. Riley Securities -- Analyst

Thank you. And then I want to return to Dave's question on the cost side. So so if we kind of think about things, 700 to 900,009, or 30,000 tons per quarter, that means your inventory like in the second quarter, he would be essentially selling all out of inventory. So that would still be at Dale, the lower kind of current costs, similar to q1, then should we be thinking about a step up in costs in the back on a per ton basis? As you exhaust the inventory? And and again, assuming strike continues, of course. So it's kind of q3 then should that be step up on a cost per ton basis? Or, or not?

Walter J. Scheller -- Chief Executive Officer and Director

I think, what hopefully, I'll be clear, but yes, thank you, too, you will see a similar cost if not just a little bit, slightly higher. But after that, after you sell off the inventory, then what we're producing now would clearly be at a little bit lower cost per ton. But in your p&l, we will have some additional cost other than costs of sales. And that will be such as mine for idling costs. And other costs, as I said, related to the strikes, such as legal fees around them negotiations, and some other expenses that we incur, incur there. So when I'm talking about total dollars, while your cost per turn, may be a little bit lower. on just a pure cash cost, the sales are going to have some other costs kind of offsetting that.

Lucas Pipes -- B. Riley Securities -- Analyst

That's, that's helpful. I appreciate that. May May, May circle back with that later. But But I want to ask one, one final question. Just your variable cost structure has been a true different differentiator. And I would say, really, really positioned you Well, during a pretty volatile time that medical market over the past five years, can you I know this is difficult, but given given you a negotiating but how important is is that going forward to have a variable cost structure, including on the labor side, thank you for for any thoughts you can share?

Walter J. Scheller -- Chief Executive Officer and Director

Well, I think a huge part of that variability was around the rail contract and the variability for the royalty rates. In actuality, when we look at the labor variability, it has had, I would say, a very small impact over the last five years, primarily with things just like bonuses based on the benchmark pricing. So I think it for the past five years, the that that variability has had very little impact.

Dale W. Boyles -- Chief Financial Officer

Yeah, the bigger amount of costs are the transportation royalties. And as we've said in the past, that's about a third of the total cash costs. So that $79, you know, a third of that is just pure variability. And then the other piece of that is the mining costs, whatever it takes to get it out of the mind. And while there's some variability to that, it's a smaller piece of the total.

Lucas Pipes -- B. Riley Securities -- Analyst

That's, that's helpful. And in an environment like Q1, like we just had, on a kind of dollar per ton basis. What would be the labor variability tailwind? On the cost side for you guys? Roughly?

Walter J. Scheller -- Chief Executive Officer and Director

The variability in the future quarters?

Dale W. Boyles -- Chief Financial Officer

No, no. And so when I when I look at q1 was terrific costs, number that you just report it. So it's very, very good job there. And what I what I'm trying to get at is in a quarter like Q1 repricing is very low. And obviously, your costs were fantastic. How much of the lower cost was due to the variable cost structure on the labor side that at the part of the prior or current labor agreement.

Lucas Pipes -- B. Riley Securities -- Analyst

Again, it's a small percentage of the total cost. So even in an environment like we just had would still be a small, small percentage.

Dale W. Boyles -- Chief Financial Officer

Right.

Lucas Pipes -- B. Riley Securities -- Analyst

Very helpful. I appreciate that. Thank you very much and best of luck.

Dale W. Boyles -- Chief Financial Officer

Thank you.

Walter J. Scheller -- Chief Executive Officer and Director

Thank you

Operator

[Operator Instructions] Our next question is from David. Please go ahead.

David Gagliano -- BMO Capital Markets -- Analyst

Alright, great. Thanks for taking my follow up. So I just have a couple of quick ones. I was wanting to talk a little bit more about the Jumeirah is charged in the first quarter. You know, and what those were related to, and how they may transpire in the in the coming quarters. And then the second question just regarding the strike, if you can just possibly give us a little color on, you know, what are the key issues here? And, and, and are there you know, negotiations still happening? And kind of the status of the of the talks between the two sides at this point? Thanks.

Walter J. Scheller -- Chief Executive Officer and Director

Alright, David, they all take the first one on demerge diverge was just a little bit higher in the first quarter, couple things one higher moisture content than normal because of the weather related heavy rains in Alabama, over the past few months, in the normal rain season heater. And then with a higher proportion of sales going into China. There was some ash penalties because they have a very low ash requirement. So the penalties and demurrage were related to those primary two factors.

Dale W. Boyles -- Chief Financial Officer

And on the contract negotiations, we are currently negotiating on a weekly basis with the NWA. We had reached a tentative agreement with the international and it was voted down by the local locals about a month ago. The issues are you know just about all what's always the typical issues on a labor contract his days off, it's pay benefits, just all the normal things.

David Gagliano -- BMO Capital Markets -- Analyst

Okay, is there are there any sort of next steps that we should your votes or anything coming up that, you know, that we should be thinking about?

Walter J. Scheller -- Chief Executive Officer and Director

Now, nothing scheduled at this point.

David Gagliano -- BMO Capital Markets -- Analyst

Okay, thanks very much.

Operator

Thank you. The next question comes from Matt Farwell, wealth capital, please go ahead.

Matt Farwell -- Roth Capital -- Analyst

Thanks for taking my question. Just wondering if you could provide an estimate for what the idling costs for mine for might be. Just so we can understand what the cashflow impacts are in, in 2021.

Walter J. Scheller -- Chief Executive Officer and Director

Yeah, for my for, there's, those are gonna vary. Obviously, we got, you know, some of your fixed costs, like electricity, your property taxes, but we do have a very small crew that has to continue to fireball for mine and those kind of things. So, you know, we're in the range of two to $3 million a month to maintain the island.

Matt Farwell -- Roth Capital -- Analyst

Okay, so it seems like the liquidity is well, sufficient attempt to handle the strike, at least for the next 12 months. Is that a fair statement?

Dale W. Boyles -- Chief Financial Officer

Yeah, I think so. I think we've developed, you know, our continuity plans for the rest of this year with our customers, you know, and those have several different alternatives as we go forward, and we'll adjust those as we go as we need to. But we do feel like our liquidity is sufficient to earn 72,000,220 of that is cash. And, you know, we don't have any near term commitments for our debt maturities. We don't have any significant funding and pension liabilities or anything like that. So it's really just a normal expenses in the business. So given what we've outlined here with our commitments and how we're planning to meet those commandments, we feel very good that our liquidity is adequate to navigate through these times right now.

Matt Farwell -- Roth Capital -- Analyst

Okay, great. Thanks for taking my question.

Dale W. Boyles -- Chief Financial Officer

Thank you, Matt.

Operator

We have no further questions. now like to turn the call back over to Mr. gela for closing remarks.

Dale W. Boyles -- Chief Financial Officer

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

Operator

[Operator Closing Remarks]

Duration: 35 minutes

Call participants:

Walter J. Scheller -- Chief Executive Officer and Director

Dale W. Boyles -- Chief Financial Officer

David Gagliano -- BMO Capital Markets -- Analyst

Lucas Pipes -- B. Riley Securities -- Analyst

Matt Farwell -- Roth Capital -- Analyst

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