Good afternoon. My name is Nick,
and I'll be your conference operator here today.
At this time,
I would like to welcome everyone to the Warrior Meade Coal First Quarter 2021 Financial Results Call. All lines have been placed on mute to prevent any background noise. After the speaker remarks, there will be question and answer session. Reed Coal First. 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 discussed. For more information regarding forward looking statements, please refer to the company's press release and SEC filings. I have also been asked to note that the company has Postal Reconciliations of non GAAP financial measures discussed during this call and tables accompanying the company's earnings press release located on the Investors section of the company's website at www.warriormetcoal.com. In addition to the earnings release, the company has posted a brief supplemental slide presentation to the Investors section of the website at www.warriormetfold.com. Here today to discuss the company results are Mr.
Walt Scheller, Chief Executive Officer and Mr. Dale Oils, Chief Financial Officer. Mr. Scheller, You may begin with your remarks. Please go ahead.
Thanks, operator. Hello, everyone, and thank you for taking the time to join us today to discuss our Q1 2021 results. After my remarks, Dale will review our results in additional detail and then you'll have the opportunity to ask questions. During the Q1, we saw COVID-nineteen in the Chinese ban on Australian coals have a continued impact on both pricing and demand across the met coal industry. We continue to take the necessary measures protect the health and safety of our employees while maintaining our operations.
Despite these challenging headwinds, Especially on met coal pricing, we were pleased to be free cash flow positive for the 4th 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 2nd lowest which partially offset some of the impact of the depressed pricing environment experienced in our natural markets. Strong market fundamentals persisted across all geographies during the Q1, 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 iron production for the Q1, 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 met coal markets remain split in a 2 tier pricing system due to the ongoing Chinese ban for most of the Q1. On the other side, you have Australian based premium coals 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 coals are making their way into Japan, South Korea, India and Vietnam and also into our natural markets of Europe and South America. As anticipated, Chinese buying interest was low during their New Year celebrations in February. However, it remains 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.
As we had expected, contracted sales into our natural markets were strong for the entire Q1. Sales volume in the Q1 was 2,000,000 short tons compared to 1,800,000 short tons in the same quarter last year. Production volume in the Q1 of 2021 was 2,200,000 short tons compared to a similar amount in the same quarter of last year. Quarter compared to pre pandemic levels. Coal inventory levels increased to 220,000 short tons to 1,200,000 short tons at the end of the Q1.
The higher than normal inventory levels will allow us to continue to supply our valued customers during the rest of the year. Our gross price realization for the Q1 of 2021 was 95% of the Platts premium low vol FOB Australian index price and was higher than the 89% achieved in the prior year period. Our better gross price realization was primarily due to a higher percentage of our sales to Chinese customers at the CFR index price. The end of our Q1 also coincided with the expiration 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 UMWA to reach a new contract, the UMWA 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 Bill to address our Q1 results in greater detail. Thanks, Walt.
For the Q1 of the company recorded a net loss on a GAAP basis of approximately $21,000,000 or a loss of $0.42 per diluted share Compared to net income of $22,000,000 or $0.42 per diluted share in the same quarter last year. Warren Reade Coal for the Q1 of 2021 as compared to $62,000,000 in the same quarter last year. The quarterly decrease was primarily driven by a 13% decrease compared to 27% in the same quarter last year. Total revenues were approximately $214,000,000 in the Q1 of 20 21 compared to $227,000,000 in the same quarter last year. This decrease was primarily due 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 Walt noted earlier.
The Platts premium low vol FOB Australian index price averaged $28 per compared to $122 per short ton in the same quarter last year.
Cost of
offset by lower variable cost and a focus on controlling cost. Cash cost of sales per short ton, FOB port was approximately $79 in the Q1 compared to $83 in the same period of 2020. Cash costs and price sensitive costs such as wages, transportation and royalties that vary with met coal pricing primarily due to lower professional fees and employee related expenses. Depreciation and depletion expenses for the Q1 of 2021 with $33,000,000 compared to $29,000,000 in last year's quarter. The increase quarter over quarter was primarily due to a higher amount of assets placed in service and higher spending levels.
Net interest expense was about $9,000,000 in the Q1 and included interest on our outstanding debt, plus amortization of our debt issuance costs quarter last year, primarily due to incremental borrowings on our ABL facility and lower returns on cash balances. We recorded an income tax expense of $24,000,000 during the Q1 of 2021 compared to an expense of $3,000,000 in the same quarter last year. The first quarter's tax expense included a non cash charge recognized upon the establishment of a valuation allowance against our state deferred income tax assets. In essence, our export sales are no longer subject to Alabama state income taxes and therefore the value of our state net operating losses the quarter. Turning to cash flow.
During the Q1 of 2021, We generated $23,000,000 in positive free cash flow, which resulted from cash flows provided by operating activities of $45,000,000 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 Q1 of 2021 compared to the same quarter last year, primarily due to higher sales volumes on lower cost. Cash used in investing activities for capital expenditures and mine development costs were $22,000,000 during the Q1 of 20 21 compared to $26,000,000 in the same quarter last year. We continue to rationalize spending during these unprecedented times.
The the company spent $13,000,000 or 58 percent less on CapEx in the Q1 of 2021 compared to the same period last year, which was largely offset by higher spending on mine development costs. Cash flows used by Financing activities were $13,000,000 in the Q1 of 2021 and consisted primarily of payments for capital leases of $8,000,000 and the payment of the quarterly dividend of $3,000,000 Our balance sheet remains strong with a leverage ratio of 2.4 times adjusted EBITDA. We believe our liquidity is adequate to navigate these uncertain times. Our strong balance sheet with no near term debt maturities Our total available liquidity at the end of the Q1 was $272,000,000 consisting of cash and cash equivalents $272,000,000 available under our ABL facility, which is net of borrowings of $40,000,000 and outstanding letters of credit of approximately $9,000,000 Now turning to our outlook. Due to the ongoing uncertainty related to our negotiations with the union, the COVID-nineteen 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 is 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 Walt for his final comments. Thanks, Dale. Before we move on
to Q and A, I'd like to make some final comments. We still do not have a clear view of when the trade of seaborne met coals will return to normal and efficient market conditions. Although we continue to believe that a partial or full easing of the 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 ban 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 as there are plenty of floating vessels with Australian coals off the coast of China as well as large volumes of coals in the ports that have been offloaded, but have not cleared customs. We believe that demand for our coals will remain strong for the next few quarters as indicated by our customers' buying patterns. Also, we believe that our markets remain vulnerable to COVID-nineteen related demand disruptions, while taking advantage of spot volumes when possible. As I mentioned earlier, our contract with the UMWA expired on April 1st and UMWA has initiated a strike that continues today. We believe that we are well positioned to fill our customer volume commitments for 2021 and expected production during the rest of the year.
For now, we have idled Mine 4. We expect production to continue at Mine 7, 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?
Your first question comes from the line of David Cangliano, BMO. Please go ahead.
It. 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 2,100,000 tons, I think, of sales in the Q1. The commentary around $4,900,000 to $5,500,000 is that essentially if the strike what remains in place for the remainder of the year and how should we Model quarterly sort of degradation in production, I'm assuming that the front end of that's going to be higher than the full 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 the strike persists?
Well, the giving you a quarter by quarter breakdown is really pretty tough, Dan. This is Walt. 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 4.9% to 5.5% is in the 1st quarter, We actually had about $1,900,000 in sales. So that will leave us with $3,000,000 to $3,600,000 to hit.
We had $1,200,000 In inventory, if you take that down to the level where we say we like to be, which is around 400,000 tons, 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 we'll be able to achieve that with the operating plans we have. We have enough lead time On our continuous miner units at Mine 7 for us to be able to do that. So that's about as much Guidance, because I feel comfortable giving you because I just don't know exactly how things will play out quarter to quarter.
Understood. That makes sense in terms of the unknowns here. So but just to clarify, so 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, again, if the strike were to continue?
Yes, I
think that's reasonable.
Okay. And then just one other quick question. The cash costs were obviously, at least in my view, exceptionally good in the quarter. Was there anything extraordinary that suggests that we shouldn't assume a similar the level of cash costs 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? Hi, David, it's Dale.
Yes, 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, look for the rest of the year, we do expect our cash cost to be a little bit lower, but then again we're going to incur some cost With the Island of Mine 4 and some other costs associated with the strike, negotiation around legal fees and stuff like that. So we're going to have some other higher costs. So while the cost per ton may be down, you may have some other costs That offset that. So we don't see any significant change because of those offsetting issues.
Okay. Sorry. So just to clarify on a cash cost per ton basis, even with the lower volumes, Do you think your cash cost per ton have kind of offsetting issues that will result in cash cost per ton being similar in the near quarters.
Well, if
we sell what we have in inventory, right, which was produced you know at prior levels, right, prior levels of People working and everything. So those cash costs will turn until after you bleed off all that inventory. Then after that, you would Start to see the lower cash cost, right, on lower volumes. Again, like I say, in total, You'll have some offsetting incremental costs associated with the strike that we wouldn't normally have.
Thank
you. Next question comes from Lucas Pipes of B. Riley Securities. Please go ahead.
Hey, good afternoon, everyone. Hello. My first question is on the sales commitments for 2021, the 4,900,000 to 5,500,000 tons. And I wondered if it's possible to give us a little bit more of a flavor for what the geographic mix is of those commitments and would those be sold at the Quillen of the Australian benchmark, which obviously is still languishing due to the ban or would those also be commitments into the higher priced Chinese market, for example, or just off of higher U. S.
East Coast index pricing. We'd really appreciate Your thoughts and comments on that.
Thank you.
The commitments are to our primary customers in Europe, South America And a few others into Asia. And those are based on the Australian low vol price. But there are also opportunities and swapping opportunities and things that allow us to also participate much as we did in the Q1 set 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 expect it 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.
First. That's helpful. So for now kind of modeling pricing near the benchmark, would that be Very simplistically be the right way to think about it. And with that Australian benchmark?
Yes.
Thank you. And then I want to return to Dave's question on the cost side. So if we kind of think about, I think 700,000 to 9,030,000 tons per quarter. That means your inventory like in the second quarter, you'd 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 Kind of as you exhaust the inventory and again assuming strike continues of course.
So kind of Q3 then, should that be On the cost per ton basis or not?
I think And what hopefully I'll be clear, but yes, in Q2, you would 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 But in your P and L, we will have some additional cost other than cost of sales. And that will be the negotiations and some other expenses that we incur there. So we're not I'm talking about total dollars. So while your cost per ton may be
a little bit
lower on just a pure cash cost of sales, we're going to have some other costs kind of offsetting
first. That's helpful. I appreciate that. May circle back with that later. But I want to ask one final question.
Just your variable cost structure has been a a true differentiator. And I would say We've really positioned you well during a pretty volatile met coal market over the past 5 years. Can you I know this is difficult, but given you're negotiating, but how important is that going forward to have a variable cost structure, including on the labor side. Thank you for any thoughts you can share.
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 Primarily with things just like bonuses based on the benchmark pricing. So I think it for the past 5 years, that variability has had very little impact.
Yes, 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 cost. So Of that $79 a third of that is just pure variability. And then The other piece of that is the mining cost, whatever it takes to get it out of the mine. And while there's some variability to that, It's a smaller piece of the total.
That's helpful. And then in an environment like Q1, like we just had on a kind of dollar per ton basis, what would be the labor variability tailwinds on the cost time for you guys,
roughly.
The variability In the future quarters?
No, no. So when I look at Q1 was a terrific cost number that you just reported. So it's a very good job there. And what I'm trying to get at is in a quarter like Q1 where pricing 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 As a part of the prior or current labor agreement.
Again, it's a small percentage of the total cost.
So even in an environment like we just had, it would still be a small percentage.
Right.
Very helpful. I appreciate that.
Warren Reade Colfer. Our next question is from David Cagnino, a follow-up question from BMO. Please go ahead.
All right, great. Thanks for taking my follow-up. I just have a couple of quick ones. I was wondering if you
could talk a little bit
more about the Jumeirah's charge in the Q1 and what those were related to and how they may transpire in the coming quarters. And then the second question, just regarding the strike, if you can just possibly give us a little color on what are the key issues here And are there negotiations still happening and kind of the status of the talks between the two sides at this point? Thanks.
Hi, David. This is Dale. I'll take the first one on demurrage. Converge was just a little bit higher in the Q1. A couple of things.
1, higher moisture content than normal because of the weather related Heavy rains in Alabama over the past few months in the normal rainy season either. And then with a higher proportion of sales going into China, there were some ash penalties because they have a very low cash requirement. So the penalties and demurrage were related to those primary two factors.
And on the contract negotiations, we are currently negotiating on a weekly basis with the UMWA. We had reached a tentative agreement with the international, and it was voted down by the locals about a month ago. The issues are just about What's always the typical issues in a labor contract, it's days off, it's pay, it's benefits, just all the normal things.
Okay. Is there are there any sort of next steps that we your votes or anything coming up That we should be thinking about.
No. Nothing scheduled at this point.
Okay. Thanks very much.
Thank you. The next question comes from Matt Farwell, ROTH Capital. Please go ahead.
Thanks for taking my question. Just wondering if you could provide an estimate for what the idling costs for Mine 4 might be, just so we can understand what the cash flow impacts are in 2021.
Yes. For Mine 4, those are going to vary. Obviously, we've got some of your fixed costs like electricity, your property taxes, We do have a very small crew that has to continue to fireball some mine and those kind of things. So we're in a range of $2,000,000 to $3,000,000 a month to maintain the idling.
Okay. So it seems like the liquidity is well sufficient to handle the strike at least for the next 12 months. Is that a fair statement? Yes, I think so. I think we've
developed our continuity plans for the rest of this year with our customers 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 $272,000,000 $220,000,000 of that is cash, and we don't have any near term commitments for Our debt maturities, we don't have any significant funding of pension liabilities or anything like that. So It's really just your normal expenses in the business. So given what we've outlined here with our commitments and how we're planning to meet those commitments, we Feel very good that our liquidity is adequate to navigate through these times right now.
Okay, great. Thanks for taking my question.
Thank you.
This time, we have no further questions. Now I'd like to turn the call back over to Mr. Geller for closing remarks.
That concludes our call this afternoon. Thank you again for joining us today. We appreciate your interest in Warrior Meht Coal.
Thank you. And that concludes today's presentation. You may now disconnect. Thank you for participating.