Good afternoon. My name is Kate, 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 speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star then the one on your telephone keypad. If you would like to withdraw your question, press the star then the two. This call is being recorded and will be available for replay on the company's website. Before we begin, I have been asked to note that today's discussion may contain forward-looking statements and actual results may differ materially from those discussed.
For more information regarding forward-looking statements, please refer to the company's press releases and SEC filings. I have also been asked to note that the company has posted reconciliations of the non-GAAP financial measures discussed during this call in the tables accompanying the company's earnings press release located on the investor 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 investor 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.
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 would facilitate a drawdown of our inventories with the expectation of continuous improvement in 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're pleased with the progress made so far. 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 cost. 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 a 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 2 months. China's decision to lift the ban on Australian coal imports was confirmed during the quarter, although there have been limited transactions between the 2 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 drew 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% 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.
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. 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. 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 furnaces 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, a 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 process 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 in good faith a new labor contract 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 shaft 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 timeline 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.
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 the higher cost, or $1 per short ton higher than the fourth quarter, resulting from higher costs 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. Net coal prices were lower in the first quarter 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 the higher headcount that drove higher production, plus slightly higher transportation costs 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 exceed 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 net coal prices, sales volumes, and performance. During the first quarter, we incurred incremental non-recurring 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 non-recurring 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 CapEx 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 it 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. 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 costs and volumes associated with the union represented employees returning to work. I'll now turn it back to Walt for his final comments.
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 it will correct during the year, resulting in a decline in the annual production year-over-year. As restocking eases and the potential for a 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, an overland belt conveyor, and a barge loadout. 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 the longwall scheduled to start up in the second quarter of 2026. With that, we'd like to open the call for questions. Operator?
At this time, I would like to remind everyone that to ask a question, please press star, then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. The first question comes from Lucas Pipes of B. Riley Securities Please go ahead.
Thank you so much, operator. Good afternoon, everyone, and congrats on a terrific start to the year. My first question is in regards to the staffing levels today and your outlook on that. Could you comment when you would expect to be fully staffed? In a way, do you have excess labor after the end of the strike in February? Is that your expectation? Thank you very much for your comments on that.
Thank you, Lucas. Appreciate your question. After we get the employees back, that have decided to come back, we will still be about 200 people short or 150-200 short of where we were pre-strike. We'll be continuing to hire aggressively throughout the year, and probably into next year as we begin to look at Blue Creek as well. That, that's how we'll be doing that. That's, you know, one of the things we're looking at is exactly how many people, you know, 'cause we're in the process. Like I said, some of them have already come back and, you know, by the end of May or early June, we expect to have the folks back who are gonna make it.
Very, very helpful. Thank you for that. When you think about that, 150 to 200 headcount shortage, how would you bridge that? Is that attrition, retirements? Would appreciate any comments on what changed in the interim.
Lucas, I think we just had as the striking miners, whenever they were told to return to work, I think we had some of them who, for whatever their personal reasons were, decided not to return, whether they took employment at other operations or whether they just retired or for whatever reason, personally, they're just ready to move on.
That's very helpful. Thank you for that. Shifting topics really quickly. Dale, you commented on using up the federal NOLs either later this year or early 2024, and I wondered if you get to that situation, could that have an impact on your capital return approach, i.e., could it make more sense at that point to have a greater share buyback, for example? I would appreciate your thoughts on that. Thank you.
Good question. Thanks, Lucas. Yes, as we've said before, once we get through the NOLs, I think we would probably have a more balanced fixed quarterly dividend with variable quarterly dividends combined with stock buybacks at some point. you know, and, you know, we've said, look, we're committed to returning excess cash even during the development of Blue Creek, if there's excess cash available. Once we get past the NOLs, I think we would have a more robust, capital return program, including all of those, different options.
Very helpful. Thank you. I'll squeeze in a market-related question. When I look at Platts met coal pricing as of last night, FOB Australia PLV 229, CFR China delivered coal price 243. When I think of kind of very roughly about a $30 freight rate from Mobile to China, I'd come at a kind of net back price of $213 if you were to sell into China. I wondered, is this market open to you and how would you approach the China opportunity today? Thank you very much.
I think your numbers are kind of spot on with where everything is. You know what we'll be looking at as we look at the remainder of the year, and whatever our spot opportunities are, we'll look for whatever is the best opportunity. If that happens to be moving those tons into China at a little lower rate than we could than what we're doing from a contractual standpoint, then that's what we'll have to consider. But we're looking at all those things right now.
Very helpful. Again, thank you very much. Again, terrific work. Really appreciate it.
Thank you.
Thanks.
Again, if you have a question, please press star then one. The next question is from Nathan Martin from The Benchmark Company. Please go ahead.
Thank you, operator. Good afternoon, guys. Congrats on the quarter. Thanks for taking the questions.
Nathan.
Walt, you made the comment that production was even better than expected in the quarter. I know, I think for instance, it looks like Mine 4 production was up over 30% quarter-over-quarter. Was that really just better productivity or the ability to put more miners to work? Then, you know, maybe where are you applying the bulk of the union workers that have returned at this point? Would be great to get your thoughts there.
Well, the productivity was simply being able to run the longwall as much as we could and putting more CM units back in line. As far as where the employees that are coming back to work are going, those employees, when they left, were assigned to a certain mine, and they returned back to that mine. What we've seen as if you really consider us to be, you know, really, for the most part, three portals, three big portals, it's about equally spread between the three as the people return to work. Mine four will get about a third of the people, and mine seven will get about two-thirds, roughly.
Okay. That's helpful. Then maybe along the same lines, again, I understand you guys are waiting to update production shipment guidance till June, but, you know, as I think about the potential for an increase due to the return of, you know, some of the union workers is there any CM lead work that would need to be done kind of ahead of a potential ramp to, you know, more nameplate capacity production?
No, really it's, you know, since the strike started, we've really been running five days a week, and the real opportunity here is to add on additional shifts. Our mines are skip constrained in how much coal they can get out per day, and they've been running really well. The real opportunity is finding, you've got to find additional hours where you can mine. That's what it really comes down to. We're building all that.
Yeah.
into our budget right now.
Got it. Makes sense. Maybe shifting to the budget you just mentioned. You know, as we think about Blue Creek CapEx, I think you commented on the last call, Walt, that you guys were still entering into some of the key large contracts and would be in a better position to update us later in the year. You know, maybe could you talk about what kind of progress you've had there, you know, any expectations on, you know, labor being sticky, lead times that everybody's seeing kind of extend and possibility for any pressure on CapEx and then maybe when we could expect to get any updates. Appreciate it.
Thanks, Nathan. This is Dale. I'll answer that one. Yeah, we're still early on, as we said in our prepared remarks. You know, still working primarily on the slopes, more than halfway down, and we're gonna be breaking ground some of the larger stuff later this year. Once we get those contracts, we'll have a better idea if there are any changes in cost. That's gonna come late, probably in the year, before we know that. As we said, look, for the last 15 months, we've been seeing inflation in labor. We've seen it in supplies and materials. Even beginning to see it in rate increases in electricity costs. We would expect some type of inflation, but it's a 5-year project, so some of that will normalize or even out over that time.
We may have some scope changes as we get into all the specifics of the contracts with each of those major components. Still a little too early to tell.
Well, I appreciate those thoughts, Dale. Then maybe just one last thing. I mean, strong cost performance, I would say in the quarter, guys, you know, despite some of those items you just mentioned, you know, down quarter-over-quarter, even with an increase in realized prices. Some of that just, you know, the one quarter lag on the rail side, I would expect that's probably a headwind in the second quarter. Just wanna make sure I think about that correctly from a modeling standpoint.
That would be correct. You're right. Rail rates will go up in the second quarter based on the higher average met coal price in the first quarter.
Okay, perfect. I appreciate the time. Best of luck with the rest of the year.
Thank you.
The next question is from Luther Lu of LMR Partners. Please go ahead.
Thank you. Hi, Walt. You mentioned in the prepared remarks that there's a major repair at the McDuffie terminal currently. Would that impact the second quarter shipment?
No, that impact occurred, we're probably six weeks or more into that. It's the rails, basically the rail and the belt system that the ship loader runs on needed to have a significant amount of structural work done. We've been dealing with that for the last couple of months. The improvements in load rates at the number two ship loader have just been really strong and have allowed us to perform, has allowed the port to perform in a manner that's allowed us to reduce inventory, you know, by a couple 100,000 tons. We've been very satisfied with that. It's critical for them to get that ship one loader back up and running as well so that more than one vessel can be loaded at a time.
Okay. One of the mines in Alabama right now is not producing much. You know, your peer is trying to put in longwalls and ramp up production in 2024. Will the terminal be able to handle extra 2 million tons of annualized production in the current state?
That's why we need that number one ship loader back up and running, Luther.
I see. Okay. Could you give us some color on just exactly how much the demurrage cost was for demurrage in the first quarter?
It was $4 million in total.
Okay.
Couple bucks. A little less than a couple bucks.
Okay, got it. Thank you very much for the color.
Thank you.
The next question is a follow-up from Lucas Pipes of B. Riley Securities. Please go ahead.
Thank you very much for taking my follow-up question. It's high level market related. Do you have good insights into Europe, South America, Asia too? I wondered if you could maybe expand a little bit on your comments in the prepared remarks that you would expect pricing to continue to moderate. What are you seeing out of these different end markets? Would very much appreciate your color. Thank you.
We're still seeing strong demand out of all those markets, but I guess what we're seeing is it's the supply side of the equation where we're starting, as I said, with Mongolia, increasing their shipping or their trucking into China just dramatically. With, it looks like, you know, Australia is starting to get their production or their transportation issues and production issues back in line. I think we're gonna have more supply available. You know, we've been saying for quite a few quarters that we thought there would come a time when pricing would moderate. Even in our budget this year, I think our estimate was about $200. We're not surprised at all with where the market's going as supply constraints seem to be easing.
I think that's, you know, we're just not real surprised with where it's headed right now. You know, even at $230, we expect a little more downward pressure.
That's very helpful. Appreciate the color and, best of luck.
Thank you.
At this time, there are no further questions. I will now turn the call back over to Mr. Scheller for any comments.
That concludes our call this afternoon. Thank you again for joining us today, and we appreciate your interest in Warrior Met Coal.
Thank you. That concludes today's conference. Thank you all for participating. You may now disconnect.