HarborOne Bancorp Q3 2024 Earnings Call Transcript

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Provided by Quartr
October 30, 2024

There are 7 speakers on the call.

Operator

Good afternoon. My name is Cole, and I will be your conference operator today. At this time, I would like to welcome everyone to the Warrior Third Quarter 20 24 Financial Results Conference Call. At this time, all lines are in a listen only mode. Following the presentation, we will conduct a question and answer session.

Operator

This call is being recorded and will be available for a replay on the company's website. I would now like to turn the call over to Deandre Wright, Vice President of External Affairs and Communications. Please go ahead, sir.

Speaker 1

Good afternoon and welcome everyone to Warrior's Q3 2024 earnings conference call. Before we begin, let me remind you that certain statements made during this call, including statements relating to our expected future business and financial performance, may be considered forward looking statements according to the Private Securities Litigation Reform Act. Forward looking statements, by their nature, address matters that are to different degrees uncertain. These uncertainties,

Speaker 2

which are described in more detail in

Speaker 1

the company's annual and quarterly reports filed with the SEC, may cause our actual future results to be materially different from those expected in our forward looking statements. We do not undertake to update our forward looking statements, whether as a result of new information, future events or otherwise, except as may be required by law. For more information regarding forward looking statements, please refer to the company's press release and SEC filings. We will also be discussing certain non GAAP financial measures, which are defined and reconciled to comparable GAAP financial measures in our 2024 Q3 press release furnished to the SEC on Form 8 ks, which is also posted on our website. Additionally, we will be filing our Form 10 Q for the quarter ended September 30, 2024 with the SEC this afternoon.

Speaker 1

You can find additional information regarding the company on our website at www.warriormetcoal.com, which also includes the 3rd quarter supplemental slide deck that was posted this afternoon. On the call with me today are Mr. Walt Scheller, Chief Executive Officer and Mr. Dale Boyles, Chief Financial Officer. After our formal remarks, we will be happy to take any questions.

Speaker 1

With that, I will now turn the call over to Walt.

Speaker 2

Thanks, Deandre. Hello, everyone, and thank you for taking the time to join us today to discuss our Q3 2024 results. After my remarks, Gail will review our results in additional detail, then you'll have the opportunity to ask questions. We were pleased with our Q3 results despite weak global demand and high quality steelmaking coal prices reaching a 3 year low. While we wait for market conditions to improve, we are carefully managing spot opportunities and are strategically exercising patience with certain geographies.

Speaker 2

Despite the external market factors impacting our results, the 3rd quarter represented a significant and positive milestone for us as we produced the 1st development tons from our world class Blue Creek growth project, on time and within budget. With our high quality asset base, highly flexible cost structure and a high performing workforce, we are well positioned to capitalize on improved global steel demand when the market turns. And at the same time, we're advancing the Blue Creek project completion with a rigorous focus on cost and execution. The Q3 turned out to be weaker than we had expected for our markets, primarily driven by a confluence of weaker demand, excess Chinese steel export into our customers' markets and ample supply of steelmaking coals. The reality of higher export volumes of lower cost Chinese steel has been a growing concern for some time, impacting all steel producing regions across the world.

Speaker 2

As such, global steel prices have either extended their downward trend or remained at low values, challenging our customers' margins. The consequences of excess Chinese steel also impact our own markets. This is because Chinese steel production predominantly relies on domestic coals and landlocked Mongolian coals, which typically do not impact the global seaborne met coal balance. Along with stable production from Australia, the USA and Canada, these factors have created the lowest pricing environment for steelmaking coal since June 2021. Our primary index, the PLV FOB Australia ended the 3rd quarter at $186 per short ton, which was $26 lower than the end of the 2nd quarter at $2.12 per short ton.

Speaker 2

During the month of September, the PLV FOB Australian Index established a low point for the year of $163 per short ton. Likewise, in September, the PLVCFR China Index also established its low point of the year at $177 per short ton. Similar declines were observed with the 2nd tier indices, although both indices displayed different levels of volatility in relation to the PLD FOB Australia Index. We achieved a consolidated gross price realization of 93% in the 3rd quarter, which was a function of product mix, geography and trade rates. At these low prices, we believe that several producers of steelmaking coal have not only experienced significant margin erosion, but may also have experienced realizations below their total cash costs, suggesting that the current pricing environment is not sustainable for extended periods of time.

Speaker 2

While we expect steelmaking coal prices to improve slightly in the 4th quarter, we believe the pricing environment will remain under pressure due to the persistent weakness in the global steel market and delayed infrastructure spending in India. According to the World Steel Association monthly report, global pig iron production decreased by 3.3% in the 1st 9 months of 2024 as compared to the prior year period. Pig iron production in China, which is the world's largest production region, fell by 4.6% for the same period. The rest of the world's pig iron production experienced a more modest decline of 0.5% for the 1st 9 months of the year. India remains a bright spot with a growth rate of 3% and is expected to continue growing with new blast furnace capacity coming online later this year.

Speaker 2

Several other regions also experienced positive growth for the period, such as Brazil and certain European countries. However, their gains were largely offset by declining production from Japan and South Korea. Now, let me turn back to our 3rd quarter results. Our 3rd quarter sales volume of 1,900,000 short tons was 17.5% lower than the comparable quarter last year. As I said earlier, we're carefully managing spot opportunities and strategically exercising patience with certain geographies until the market improves.

Speaker 2

Our sales by geography in the 3rd quarter break down as follows: 44% into Europe, 41% into Asia and 15% into South America. The majority of the sales into Asia in the 3rd quarter were to customers in Japan, China and India. As we've previously noted, demand from the Asian steel producers has been growing, resulting in higher sales to that geography. While sales from our traditional markets in Europe and South America remain lower, primarily due to weak spot market opportunities. Our spot volume was 23% in the Q3 of 2024, which was primarily sold into the Asian market.

Speaker 2

This percentage was significantly lower than the reported amounts for the 1st and second quarters of this year as we carefully manage spot opportunities during this period of low steelmaking coal prices. For the full year, we expect our spot volume to range between 25% to 30% of total sales volume. Production volume in the Q3 was 1,900,000 short tons compared to 2,000,000 short tons in the same quarter of 2023, representing a 3.8% decrease. During the Q3, we commenced continuous miner development of the 1st longwall panel at our world class Blue Creek Growth Project, producing the 1st development tons of 39,000 short tons. Our coal inventory increased slightly 915,000 short tons, which includes the Blue Creek development tons from 895,000 short tons at the end of the second quarter.

Speaker 2

During the 3rd quarter, we spent $123,000,000 on CapEx and mine development. Of that amount, CapEx spending totaled $116,000,000 which included $94,000,000 on the development of Blue Creek. Mine development spending on the Blue Creek project was $7,000,000 during the Q3 of 2024. Now that we have started developing the 1st longwall panel at Blue Creek, our mine development costs will continue to grow during the remainder of the year and until the longwall starts production, which we expect to occur in the Q2 of 2026. Our Blue Creek growth project continues to make excellent progress.

Speaker 2

During the Q3, we completed the installation and commissioning of the service gauge, slope belt, slope car, and raw coal belt. The completion of these major components allowed us to begin development of the initial longwall panel with the 1st continuous miner unit. On the surface infrastructure components, we continued to make significant progress on the construction of the preparation plant, which is expected to be online in the middle of 2025. On the coiled transportation components, good progress was made on the construction of the approximately 10 mile long clean coal belt structure, with the 1st mile nearly completed. Steady progress continued during the Q3 on the rail and barge loadouts as well.

Speaker 2

All of these components remain on schedule. In the near term, we're focusing on increasing our headcount at Blue Creek in order to start 2 additional continuous miner units in the Q4. Currently, we're on track to meet those goals. We're very pleased that the development for the 1st longwall panel started on schedule during the Q3 as originally expected and we're on track to produce approximately 200,000 short tons of High Vol A steelmaking coal in the second half of twenty twenty four. As we've said before, the development tons produced from half of this year to the first half of twenty twenty five are expected to be sold in the second half of twenty twenty five after the preparation plant comes online.

Speaker 2

Including the $94,000,000 we invested during the Q3 of 2024, year to date development spending on Blue Creek totals $246,000,000 We expect to invest approximately $325,000,000 to $375,000,000 in 2024 on the project, inclusive of the $246,000,000 already invested. For the entire project to date, through the end of Q3 2024, we've invested a total of $612,000,000 We remain focused on tight capital spending discipline to ensure the project will be completed within our reset baseline cost estimate on the original schedule, including the low wall startup in the Q2 of 2026. We currently have sufficient liquidity on hand to complete the project within the baseline cost estimate. Blue Creek represents 1 of the last remaining untapped premium high quality high vol A coal reserves in the US and we anticipate our coal will achieve premium prices. We expect incremental annualized production of 4,800,000 short tons of premium high vol A steelmaking coal after the start up of the longwall, which will enhance and strengthen our already strong global cost curve positioning and deliver incremental profit and cash flows.

Speaker 2

I'll now ask Dale to address our Q3 results in greater detail.

Speaker 3

Thanks, Walt. Despite the weaker global demand for steelmaking coal in the Q3 of 2024, we continue to deliver strong operational and financial performance by leveraging our high quality assets and strong operational competencies. For the Q3 of 2024, Warrior recorded net income on a GAAP basis of $42,000,000 or $0.80 per diluted share compared to net income of $85,000,000 or $1.64 per diluted share in the same quarter of 2023. Non GAAP adjusted net income for the Q3, excluding the non recurring business interruption expenses, was unchanged at $0.80 per diluted share. This compares to adjusted net income of $1.85 per diluted share in the same quarter of 2023.

Speaker 3

These decreases quarter over quarter were primarily driven by the 17.5 percent lower sales volume and a 7% lower average net selling price. This reduced our cash margin per ton to $48 per short ton in the Q3 of 2024 from $70 per short ton in the same quarter of last year. We reported adjusted EBITDA of $79,000,000 in the Q3 of 2024 compared to 146 $1,000,000 in the same quarter of last year. Our adjusted EBITDA margin was 24% in the Q3 of 2024 compared to 34% in the same quarter of last year. Our adjusted EBITDA margin per ton was $42 per short ton for the Q3 of 2024 as compared to $65 per short ton in the same quarter of last year.

Speaker 3

As I previously mentioned, these decreases quarter over quarter were primarily driven by the 17.5% lower sales volume, a 7% lower average net selling price and slightly higher cost. Total revenues were $328,000,000 in the Q3 of this year compared to $423,000,000 in the Q3 of 2023. This overall decrease of $96,000,000 was primarily due to a $73,000,000 decrease in sales volume combined with a $23,000,000 decrease due to the lower average net selling prices, plus lower demurrage and other charges. As Walt noted earlier in his comments, the decrease in sales volume was primarily driven by our selectivity with spot sales and our patience in waiting for market conditions to improve in the near term. Submerge and other charges were $3,000,000 lower compared to the Q3 of 2023 and resulted in an average net selling price of $172 per short ton in the Q3 of 2024 compared to $185 per short ton in the same quarter of last year.

Speaker 3

Cash cost of sales in the Q3 of 2024 was $230,000,000 or 72 percent of mining revenues compared to $259,000,000 or 62 percent of mining revenues in the Q3 of 2023. Of the $29,000,000 decrease in cash cost of sales, $45,000,000 of the decrease was primarily driven by the 17.5% decrease in sales volumes and lower variable transportation and royalty costs. These decreases were partially offset by $16,000,000 of higher production costs for employee wages and incentives associated with a higher headcount and higher supply and maintenance costs. Cash cost of sales per short ton, FOB port, was approximately $123 in the Q3 of this year compared to $115 in the Q3 of 2023. Although higher than last year's Q3, our Q3 cash cost per ton this year was similar to the Q2 of this year and is running slightly below the midpoint of our full year guidance.

Speaker 3

Cash cost per ton remains on track for the full year and in line with our average net selling price year to date. As a reminder, when we established guidance for the full year of 2024 back in February, we included additional costs for hiring approximately 250 people and operating the mines at a higher capacity rate after the labor strike ended in the first half of twenty twenty three. Our cash cost of production for the Q3 of 2024 was 66% of our total cash cost per short ton compared to 62% in the same quarter last year. Overall, transportation and royalty costs were 34% of our cash cost of sales per short ton in the Q3 this year on lower average net selling prices compared to 38% in the same quarter last year. As a result of the lower average net selling price and changes in our cash cost, our cash margin for short ton was $48 in the Q3 this year compared to $70 in the same quarter of last year.

Speaker 3

SG and A expenses were about $11,000,000 or 3.5 percent of total revenues in the Q3 of 2024 and were slightly higher than the Q3 of last year of 2.6%. This is primarily due to an increase in employee related compensation expenses. The interest income earned on our cash investments was lower in the Q3 of this year, primarily due to lower average cash balances and lower rates of return. Our interest expense was lower primarily due to the early retirement of debt in September of 2023 and the capitalization of interest related to the development of Blue Creek. Our low effective tax rate continues to reflect an income tax benefit for depletion expense and foreign derived intangible income.

Speaker 3

Turning to cash flow, during the Q3 of 2024, free cash flow was a negative $61,000,000 This was a result of cash flows generated by operating activities of $62,000,000 thus cash used for capital expenditures and mine development of $123,000,000 During the Q3, we invested approximately $50,000,000 of cash into longer duration fixed income securities with maturities greater than 12 months in advance of the Federal Reserve lowering interest rates. These amounts are reflected in the balance sheet as long term investments and are considered a part of our total liquidity. Our total available liquidity at the end of the Q3 of 2024 was $746,000,000 and consisted of cash and cash equivalents of $583,000,000 long term investments of $50,000,000 $114,000,000 available under our ABL facility. Now, let's turn to our outlook and guidance for the full year 2024. After another strong quarter of operational and financial performance, despite weak demand and pricing in the global markets, we have reaffirmed our outlook guidance for the full year as outlined in our earnings release.

Speaker 3

While we are trending toward the midpoint and higher end of our guidance ranges on volumes, we remain cautious, especially on spot opportunities until market conditions improve. Also as a reminder, the Q4 contains more holidays and fewer available production days. I'll now turn it back to Walt for his final comments.

Speaker 2

Thanks, Dale. We continue to expect our markets to improve over the next quarter or 2, hopefully above cost curve economics. Although we believe pricing may remain below averages we've seen in recent years, Improvements in demand are expected to come mainly from India and a few select countries. China's recently announced stimulus package and actions are notable, but we're cautious in judging the potential to boost demand in our markets and we'll need time to analyze the total impact. Overall, we expect steelmaking coal supply to be somewhat tighter than the last quarter of this year as the market feels the full impact of losing the Grubbsner supply and as Australia enters its typical wet season.

Speaker 2

In conclusion, despite near term challenges, we're on track to continue to deliver strong operational and financial performance by leveraging our high quality assets, strong balance sheet and best in class operations. With that, we'd like to open the call up for questions. Operator?

Operator

And our first question today will come from Lucas Pipes with B. Riley Securities. Please go ahead.

Speaker 4

Thank you very much, operator. Good afternoon, everyone, and good to hear about all the progress at Blue Creek and also your solid realizations during the quarter. My first question is on the commercial side. And Walt and Dale, I heard you right, spot exposure was 23% in Q3 and you're still looking at kind of 25% to 30% in 2024. And I wondered, first, could comment on the Q4 outlook in terms of spot pricing?

Speaker 4

And then more broadly, as you compete in Asia for business with Europe, Latin America still on the softer side, What are some of the competitive dynamics as you kind of price or look to put in place term business? Is it against the is it on the basis of the Australian PLV, high vol A discounts to that of any sorts would appreciate any thoughts you might be able to share? Thank you.

Speaker 2

All right. Thanks, Lucas. Lucas, as we look out into Q4 and our spot expectations, what we're doing is, as we said a couple of times, is that we're really carefully watching exactly where the market is and what type of market is, whether it's CFR or FOB. And the vast majority of Asian spot sales are CFR. So, we're monitoring that very carefully.

Speaker 2

And while we could move more tons, we're going to be pretty careful about when and where we decide to move them because of that. I think that turn business in Asia outside of the turn business, we have turn business in Japan, but in as you look into China and others, term business is kind of difficult to come by at reasonable pricing. So, right now, we're just being very careful about what we commit to and making sure that we're protecting what we think are outstanding assets and outstanding coal qualities until the market is able to recognize that value.

Speaker 4

Well, this is super helpful. So, on my numbers, you came in at about 90% realization in Q3 versus PLV. Is that a reasonable assumption for Q4, given your discipline on the score?

Speaker 2

I think you have to be really careful with it. As we've said before, we projected that we'd be in the mid-80s to 90s. And I think when you see us up in the 90s where we were, it's a reflection of a falling market. And I think we have to keep that in mind. If the market stays flat, I would expect the number to be a little lower than that 93%.

Speaker 2

I could be wrong, hopefully. And if the market goes up, I would expect that number to drop more considerably because, remember, that all trails by about a month. So, it's kind of difficult to really predict exactly where that will end up. But be careful with that $93,000,000 because it was a falling market.

Speaker 4

That's helpful. I'll turn over to the cost side. If I understood Dale right in his prepared remarks, he mentioned kind of variable costs on the transportation side. 1, could you speak to the sensitivity in transportation to changes in the price? And has all of that benefit kind of flown through at this point?

Speaker 4

Or could there be more variable cost adjustments on transportation in Q4? I would appreciate your thoughts on that. Thank you.

Speaker 2

Do you want to

Speaker 3

take it? Yes. So, yes, transportation now resets on a 1 month lag, Lucas, not a 3 month like we used to have. So there is a little bit to be gained maybe possibly in the Q4, but I don't see it as significant depending on the volumes. But there could be a little upside on transportation in the Q4.

Speaker 4

And more broadly on the cost side for Q4, any major moving besides that transportation? Thank you for that color. Any other moving pieces to keep in mind for Q4 on the cost side?

Speaker 2

There shouldn't be. We've had a couple of longwall moves in the Q3. Again, we've managed to get those moves down to 0 day or minimal moves. And also at the mouth of those sections, conditions get a little tougher. So, we're out of that.

Speaker 2

So, I don't see any major cost impacts in the Q4, positive or negative.

Speaker 4

Walt and Dale, I appreciate all your color and keep up the good work.

Speaker 3

Thank you. Thanks Lucas.

Operator

And our next question will come from Nathan Martin with The Benchmark Company. Please go ahead.

Speaker 5

Thanks, operator. Good afternoon, Walt. Good afternoon, Dale.

Speaker 2

Good afternoon. Maybe just following

Speaker 5

up on one of Lucas' questions. Clearly, like you guys said, markets kind of remaining depressed, you mentioned exercising some patience with sales, which I think is prudent. But how should we think about this impacting your opportunity to ship coal here in the Q4? Could you anticipate maybe Q4 shipments actually being down sequentially if demand doesn't improve?

Speaker 2

I don't believe so. I think we should be for where we expected for the Q4, you have to remember, again, as we said, we have fewer operating days. And I think as we look at the Q4, our expectations land right in the heart of our full year guidance.

Speaker 5

Okay. Well, I appreciate that. So if I say right in the middle of full year guidance of sales, right, that would be 7,800,000 tons. Is that what you're talking about for the full year? Yes.

Speaker 3

Yes. So that would put us, say, Q4 could be very similar, maybe slightly just slightly below the Q3. Yes.

Speaker 5

That's what I was thinking, Dale. Yes. So it looks like if you're flat, you get to about 7.9. So okay. That's very helpful.

Speaker 5

Appreciate that guys. And maybe just coming back to the 3Q gross price realization, the 93, I know I asked about that last quarter. Obviously, Lucas just touched on that as well. But maybe from just the pure math of it, I know there are several investors out there that maybe appreciate a walk through there. So when people are trying to calculate the average net price for really any given quarter, A, what's the best time period to use so that we can get to that 93% number you guys talked about?

Speaker 3

Well, we just take the averages of the PL what our realization is of the PLV during that period, right? And that's really the simple math about it. You have to take out the demurrage and all those things in our average net selling price. So that's really it's that simple, really.

Speaker 2

And you're really looking at for instance, for the Q4, you're really looking at coal pricing from September, October, November, not October, November, December because of the 1 month lag. So, you really need to go back to September pricing, October pricing and November pricing to figure out where we're likely to be.

Speaker 5

Okay. And I think that might be some of the issues. Like if I look at again the 1 month lag, let's say, Walt, for 3Q, right? So we're looking at instead of the normal calendar, we're looking at June, July, August, kind of with the FOB Australian premium low vol price about $2.30 and it's difficult to get to that 93% realization. Maybe some of it is backing out the demurrage pieces.

Speaker 5

I don't know if there's any other things you want to add right now or we can just take it offline.

Speaker 3

All right.

Speaker 2

Yes. We'll take it offline.

Speaker 5

Okay. Appreciate that. And then maybe just one final question on the cost side. You guys have said previously the full year 'twenty four cost per ton guidance range of $125 to $135 assumes roughly a $2.50 to $2.60 per metric ton off the premium low vol price. Given where markets are today, call it $200, $204 could you give us an idea of what cost per ton might look like at that price?

Speaker 3

Well, I think we would be in the lower end of that range. If you look on a year to date basis, we're at $127,000,000 And if you look at the average selling price, $198,000,000 convert that to metric, then you're looking at 88% net realization of that versus the $250,000,000 So that's why I'm saying we're right in line today. But if Q4 pricing is lower, our cost hopefully will be lower in the 4th quarter. Now it depends on the volumes, right, the volume impact. So but we should be, if pricing stays lower and we don't have any upticks from here, we should be in that lower end of the range.

Speaker 3

Because you're going to have your volume impact, right? So if we cut back volumes significantly, that could have an impact on it.

Speaker 5

Yes, makes sense. Lower denominator. Okay, perfect. Guys, appreciate the time. Best of luck in the Q4.

Speaker 2

Thank you.

Operator

Our next question will come from Katya Janek with BMO Capital Markets. Please go ahead.

Speaker 6

Hi. Thank you for taking my questions. I know next year second half of next year you're going to start shipping or selling the Blue Creek volume. Are you already in conversations with customers about that volume?

Speaker 2

Yes, we are.

Speaker 6

And what are the conversations? Are you going to be contracting that already or it's going to be more on the spot side?

Speaker 2

I think it will be the expectation of contract. I mean, these are going to be again, it's a new coal mine. Everyone's going to want to see how it works in their coke ovens. So, we're going to be shipping that off to customers to try a couple of holds or a full cargo of. But we'll be placing that call with various customers to give them a first try at it.

Speaker 6

And then, this year, I think you mentioned you're going to be hiring about 2 50 people or you're on track to hire 250. Looking to next year, how many more people do you need to hire?

Speaker 2

I think next year for Blue Creek, we're probably going to be in we're still doing the budgeting process, but the 100 range, I would say, something like that, I don't know for sure. But for some reason, I just feel like that's going to be around the number. But again, we're in the budgeting process right now, so I don't really don't have that's just a

Speaker 3

Yes, just a swag right there. I mean, it may be a little more than that, but we need to finalize the budget for next year.

Speaker 6

And then is it fair to assume that some of that will put some pressure on the cost side, at least in the first half of the year?

Speaker 3

No, not until you sell some of that coal, all that will go to the mine development.

Speaker 6

Okay, perfect. Thank you so

Operator

much. And at this time, there are no further questions. I would like to turn the call back over to Mr. Scheller for any closing remarks.

Speaker 2

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

Operator

Thank you. And that does conclude today's conference. Thank you all for participating. And at this time, you may now disconnect your lines.

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