Good afternoon. My name is Melanie, and I will be your conference operator for today. At this time, I would like to welcome everyone to the Warrior Met Coal Third Quarter 2022 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. This call is being recorded and will be available for replay on the company's 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 release and the SEC filings. I have also been asked to note that the company has posted reconciliations of the non-GAAP financial measures discussed during this call in the tables accompanying the company's earnings press release located on the Investors section of the company's website at www.warriormetcoal.com. In addition to the earnings release, the company has posted a brief supplemental slide presentation at the Investors section at 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 third quarter 2022 results. After my remarks, Dale will review our results in additional detail and then you'll have the opportunity to ask questions. I'm happy to share our performance from another very strong quarter, delivering results above expectations despite market headwinds. We again demonstrated our ability to leverage our efficient business model to make strong customer demand for our premium met coal and take advantage of strong met coal pricing to deliver those results. The most notable ongoing headwind constraining our performance relates to shipment delays, which is not a new challenge, but which became particularly problematic during the third quarter due to a variety of factors. Combination of disappointing rail performance, outages from major equipment maintenance work at the Port of Mobile that was eight weeks behind schedule, and substantial vessel congestion led to higher coal inventory levels, missed sales, and higher demurrage costs. While the port maintenance outages should be behind us, we expect to continue to experience port congestion challenges in the upcoming quarters. Also, we remain concerned about a potential labor stoppage from the National Railroad contract negotiations. Fortunately, we've recently started to see improvements in reducing these delays due to an increase in rail crew availability and the commissioning of the new tandem car dump at the Port of Mobile. We also expect to see gradual, but slow, improvement as our rail carrier continues to better calibrate their cycle times and as the port continues to address ongoing performance issues and high traffic volume. As we'll hear in a minute, if we could ship more, we could sell more. Given our strong customer base, low cost business model and liquidity position, we continue to leverage our…

Thanks, Walter. For the third quarter of 2022, the company recorded net income on a GAAP basis of $98 million or $1.90 per diluted share compared to net income of $38 million or $0.74 per diluted share in the same quarter last year. Non-GAAP adjusted net income for the third quarter excluding the non-recurring business interruption expenses and idle mine expenses was $2.10 per diluted share compared to an adjusted net income of $0.97 per diluted share in the same quarter last year. We achieved adjusted EBITDA of $172 million in the third quarter this year compared to $105 million in the same quarter last year. The quarterly increase was primarily driven by a 32% increase in average net selling prices and a 42% increase in sales volumes, partially offset by higher variable transportation and royalty cost and the impact of inflation on labor, materials, supplies and major equipment rebuilds. Our adjusted EBITDA margin was 44% in the third quarter this year compared to 52% in the same quarter last year. Total revenues were $390 million in the third quarter compared to $202 million in the same quarter last year. This 93% increase was primarily due to the 32% increase in average net selling prices and 42% higher sales volume. In addition, other revenues were positively impacted in the third quarter this year by a $6 or 145% increase in natural gas prices compared to the prior-year third quarter. The prior-year third quarter other revenues were also lower due to a $6 million loss on natural gas hedges that were in place at that time. The Platts Premium Low Vol FOB Australian index price, on average, was $13 per short tons lower in the third quarter of this year compared to the same quarter last year. The index price averaged…

Thanks, Dale. Before we move on to Q&A, I'd like to make some final comments on our outlook for the fourth quarter and full year of 2022. As we mentioned earlier, our inventory levels peaked again at the end of the third quarter, which was a result of strong production and continuing shipment delays. We've been pleased to see the gradual improvements in the shipping delays over the last few weeks and expect those to continue throughout the fourth quarter. Of course, this is highly dependent upon the National Railroad contract negotiations and absent any potential strike or other disruptions that could occur. We expect to make gradual improvements in drawing down our inventory levels as a result of the improvements in rail transportation and port performance in the fourth quarter. Looking ahead, we cannot identify a likely catalyst to strengthen the fragile demand for steel across Europe, the United States and several other developed countries. Therefore, we expect production cuts to remain a likely reality for the time being. In addition, we expect that recession fears, stubborn inflationary pressures, and a prolonged impact of the Russian-Ukrainian war to continue to weigh on our customer markets. We do see the possibility of an improvement in Chinese steel production in the fourth quarter, given the centralized efforts to stimulate the property sector. Should this materialize, we believe it will benefit the import of Mongolian and Russian coals the most. We also believe that we may continue to see met coal pricing supported by strong thermal demand, as well as the vulnerable met coal supply chain, which was recently demonstrated by production issues and weather concerns from the major producing regions. We're pleased that despite all of these headwinds, our customers have confirmed their volumes for the remainder of this year. With excellent liquidity and significant inventory, we remain focused on what we can control, finishing the year with continued strong financial results and moving ahead with our positioning as unique and resilient, pure play met coal provider for all economic environments. With that, we'd like to open the call for questions. Operator?

[Operator Instructions]. Your first question comes from Lucas Pipes with B. Riley Securities.

Good job on the quarter. My first question is on the inventory situation. And I wondered if you could maybe elaborate a little bit on what it will take to move those inventories back into a normal range of things. If I remember right, that was about 400,000 tons, but correct me if that needs to be updated. And again, so what might be necessary to get those inventories down into lower levels? And then I have a few more follow-up questions on the pricing side.

Lucas, with the rail transportation, the rail was probably shipping at about 50% of what we would consider to be normal. So we had upped the amount we were sending by barge. But what we've seen in recent weeks is rail improving very well beyond that type of a level. The other things that caused the inventory was the fact the – part of the inventory issues was the fact that, down at the port, one of the two car dumps – in fact, the most efficient car dump that dumps two cars at a time was taken completely out of service for a period of months, which led to lower capacities, lower throughput capacities at the port. And that is up and running, running very well. Their cycle times are fantastic. And the rail is moving better again now. So I would anticipate that, even though it's not going to disappear overnight, I think there'll be a gradual improvement of that in terms of the capacity improving and we'll have our inventory levels in line, probably, hopefully, by year-end. But again, that's all dependent on what happens with that rail, potential rail contract negotiation.

I do want to follow-up on the pricing side. So first, great strength in seaborne met coal markets. Again, if you could maybe elaborate on some of the drivers there, especially since some of the summer lows I think were around $190 per ton. So nice comeback there. If you could comment on what you see as the key drivers. And then there are some seeming arbitrage opportunities in the market. China CFR, I think, is $330 per ton or so. And there was a report that Blue Creek cargo was sent to China at that price, but obviously there are higher netback – higher transportation costs involved there. So if you have any view on to what extent that the Chinese market presents maybe an opportunity as well. Would appreciate your thoughts on the pricing dynamics.

I think what's going to really happen, if the Chinese demand improves, I think that's going to primarily go to – Mongolia is performing better and Russian calls are now flowing. A lot of those coals are flowing into China. So I think the majority of it will go in that direction for maybe some opportunity. But again, if you just look even at that opportunity, I believe the logical place for that coal to come from is Australia. That's a natural market. Or even the West Coast of the US. But from our perspective, that little bit of increase or pickup will help. I think the drivers of pricing have been, first of all, thermal. I think thermal, the fact that thermal skyrocketed in pricing gives a natural base to where met coals can go because most – not all, but a lot of met coals can be transferred over as crossover coals into the thermal market. And I think there's just overall supply constraints for the coal industry. And I think you've had the recent issues over in Australia with storms and other things that are just keeping supply really constrained. So I think those are the things that are the primary drivers for what's supporting the price.

I do want to ask one other question. On your cash position, $746 million, what amount of cash do you need to run the business as coal prices, knock on wood, stay elevated and you have needs from your capital structure with some depth there? And then also the funding of a Blue Creek. What amount of cash do you want to have on the balance sheet? And then, obviously, investors are looking to capital return. So, trying to find the number just to back into there. So thank you very much for your perspective on this.

We're not targeting this particular cash balance number. We're looking at kind of capital allocation as we move forward from here in light of the market conditions. While pricing has stayed high, demand has been weakening, as we said in our prepared remarks. So, right now, we're in the middle of putting together our budget for next year. And when you think about the context of Blue Creek, we can be looking at capital spending in excess of $400 million to $450 million, just in capital and mine development. So we want to put that together and see where we are. But we certainly want to keep enough cash on the balance sheet that we're going to protect ourselves meet all of our other obligations, as well as fund Blue Creek. So, being at this high level, we're just early into the spending of Blue Creek, about $20 million. Obviously, we've been seeing inflation in the business, so you might be some inflation there and some prices as we look out next year. So those things, we're just trying to take into context right now with the budget, as well as what's happening in the market. And as we move forward, like I said, we don't target a particular number, other than just making sure we have enough to fund all those needs. And to the extent we feel like there is excess cash, we're going to continue to return that to shareholders, like we've done a couple of times already this year through extra special dividends. So we're not turning those off. To the extent pricing remains high, we'll evaluate that on a periodic basis and maybe declare some additional special dividends.

And that's in one month and three month T bills. So I should probably start to model the 4% interest rate on that cash.

[Operator Instructions]. Your next question comes from Nathan Martin with The Benchmark Company.

Congrats on the quarter. Maybe I'll start with revised full-year shipment guidance, tightening that up a little bit. What do you guys think gets you to near the bottom or maybe the top end there? If my math is correct, I think at the high end, you'd have to shift over 2 million tons in the fourth quarter. Obviously, you've had that buildup in inventories that you just alluded to and, hopefully, you can work that down. First, is that right? And do you think that's doable even given the logistics issues you guys and everyone else has been plagued with so far this year?

This is Dale. As Walt said, look, it really depends on the shipment delays and how rail transportation improves and whether or not there is any disruption. I don't think there's a high likelihood of an actual rail strike. But you never know what kind of disruptions you might have around those negotiations. So it's all going to dependent upon that and how much we can get out. Obviously, we have enough inventory to get to that number. So that is kind of on the high end. Think the low end, we'd need to ship about 1.6, which is pretty close to what we've done each of the last two quarters. So it's achievable, it's really dependent on things that are outside of our control.

I'm just curious, what would you guys say was the impact in the quarter from a logistics delays, from a shipment standpoint?

Probably a few vessels, two or three vessels, at least, I'd say. A couple of hundred thousand tons.

A lot of moving pieces on costs during the quarter. Dale, you did a good job kind of laying all that out. And inflation was another $4 a ton headwind again this quarter. Just curious, do you guys expect kind of that level of headwind to persist during the fourth quarter and maybe even going forward? Are you seeing any signs of that abating? Really just trying to get a feeling of what costs might be sticking, kind of going forward into 2023? And maybe where do you see that cost return number heading?

I think we're going to continue to see inflation impacting us, as we said in our prepared remarks. It's not only the cost, but it's the lead times as well that's getting pushed out 18, 24 months, something's even further out than that. But right now, we're moving around at about a $4 per ton impact on a quarterly basis. I wouldn't expect that to change much. As far as going into next year, it all depends on what happens with the Fed's actions. Right now, we are not hearing any reductions or cutbacks. We are looking at – as we continue to kind of work around these long lead times, we are trying to buy some things in advance and stick them in inventory. But I don't see abating anytime soon. So we might be well into next year before we see some abatement of this inflation. It's going to take some time for the Fed's action to kind of work through the overall global economy, I think.

Dale, could you remind me kind of what portion of your costs are variable? And let's just say assuming we do see a little bit of a deceleration in the net price in 2023 versus these elevated levels we've seen in 2022. Just curious how that could possibly factor or possibly lower your cost per ton next year?

We don't really look at a fixed and a variable component. We look at transportation and royalties are the biggest variable there. And at the end of this quarter, they were 47% of the cash cost per ton versus last year, they were only 39%. The cost of production remains pretty flat on a dollar basis in most quarters over the long run. There'll be some quarters that are higher than others, just depending on the amount of maintenance and things like that that gets done, but certainly transportation and royalties. So, as you look into the fourth quarter, as I said earlier, our fourth quarter will be – our transportation rates will be lower than the third quarter because of where met coal pricing is. So you may have some increase – just depending on where prices are, you may have some increase in royalties depending on ultimate price for the fourth quarter, but you could see our cost per ton decrease 10% to 12% in the fourth quarter.

There's just one more, if I may. Just would be great to maybe get a little more color on the labor situation. I know, Walt, you made a couple comments there. Are you guys still having some success on the hiring front? I know labor remains extremely tight not just been in this industry, but throughout – as of today, based on kind of where you see labor, logistics and some of your comments on the market, do you have any broad thoughts around where production and shipments could look like next year?

We are having success in hiring. It's just the issue now is, throughout the US, especially in mining, there's not a lot of experienced labor unemployed. So we're having to bring in unexperienced labor. It takes time to train them up, get them to where they can operate equipment safely. And so, yes, we're having success hiring, but it's taking a little bit more time than we'd like for all the training that has to go on. In terms of where we see next year going, we're still in the budgeting process. So we're working on that. But our expectation is we continue to build on where we are today. So we definitely look for things to continue to improve.

Your next question is a follow-up from Lucas Pipes with B. Riley Securities.

On this deceleration of demand that you mentioned a few times today, does that cause you to shift sales into maybe Warrior non-traditional markets, be it thermal, be it, for example, sales to China, things like that? Would appreciate, to what extent, there's a commercial adjustment from Warrior.

Interestingly, when you look at the third quarter and what we're projecting for the fourth quarter, the percentage of our product moving into Europe has remained really strong. In fact, it's probably up a little bit. So our customers in Europe continue, through to the end of the year, and I don't know of anything changing next year, continue to want their committed tons and continue to take those tons. So while we see things slowing down, I really think most of these customers who operate their own coke plants are going to continue to operate those coke plants. They'll buy less merchant coke, but they'll continue to operate. So I think our demand in Europe, I wouldn't be surprised to see it remain pretty stable. Now you see us flip flop in Asia and South America. We can go as high as 24%, 25% in South America, and then in the next quarter be at the same level going into Asia. I would look for those numbers to continue. And we will and do look at if there's opportunities to move a cargo of coal. If we have excess coal that can move as a thermal at a higher price, we'll consider that. But right now, we're pretty satisfied with where our order book is.

What amount of tons are committed for 2023?

I don't have that number. I can tell you that typically, our contracted tons have been running at about 80% or so. And spot tons have been running at about 20% or so. I don't look for that to change. But I don't have that actual number in front of me.

Your next question comes from Alex Hacking with Citi.

I have a couple of questions, if it's okay. Firstly, the realized price was quite strong compared to what we were modeling. Is that just an issue associated with the timing of your specific shipments? And then, the second question, given your current operating footprint, should we assume that mine production next year will be similar levels to what we've seen this year? Or would it potentially be higher?

Well, I'll start with the realized prices. Most of that is the lag effect. If you remember, most of our contracts are [indiscernible] priced on a, let's call it, an average of 40 days' lag. So, the average of the index price 40 days prior to loading the vessel. So a lot of that came from the higher prices earlier on. And so, that's kind of the real answer there on that particular realized pricing. Production, right now, we're working on our budgets, as I said earlier. If we're going to do in the range that we're talking about this year of somewhere around 6 million tons, up to 6.3 million tons, we could see somewhere in that range depending on the labor, whether or not we can get additional labor in and get it trained. And with the labor shortages, it's going to be hard to predict that and at what point we may able to get those levels up to – back to normal at some point down the road.

Your next question comes from Mark Zand with Wexford.

Can you go over what the remaining amount is to be spent on Blue Creek to get it up and going? And what's sort of the cadences? I know you'd mentioned $400 million to $450 million. And I thought I understood you say that was for next year. But please correct me or fill it in.

So we're early in. If you're not familiar with the timing of that project, I would suggest to look at the presentation or website for Blue Creek. That's a five-year build, $700 million project. That said, we've only spent $21 million so far this year. Next year will be a 200 plus million dollar year. As we finalize our budget, we'll have a better idea at the end of our fourth quarter. And then, the third year will be in a similar range. So the two highest spending years are coming up. And so, of that $450 million, next year, you could be $200 million to $250 million just for Blue Creek. We do have the remaining amounts for the shields that we put deposits on this year. That's about $60 million. And then we need to finish the 4 North portal. So when you consider all those things, we're in that range of somewhere between $400 million and $450 million next year.

And what's the mine life for Mine 4 and Mine 7?

When you look at the reserves and then you take into consideration any resources, Mine 7, I believe, is around little more than 20 years, Mine 4 somewhere around 30 years.

Just explain to me what the rationale is for Blue Creek, given that your nameplate capacity is, I don't know, 8 million tons at Mine 7 and Mine 4. And obviously, you've got a long mine life.

We're looking to grow the company, adding Blue Creek or grow the company 60%. And when we look at any potential M&A opportunity, you've got to look at Blue Creek in comparison to that. And when you look at the information that we've provided in our presentation on our website, you'll see that that project has an IRR of 30% or better and it's a high quality product that will get a premium price. And when we compare that to other mines that potentially we might think about acquiring, they just don't stack up to Blue Creek. So, that's the focus right now, is building out Blue Creek.

Just going back to a question that Lucas asked, it looks like your inventory tonnage is about a million tons or more, is that accurate?

No, 358,000 tons.

And just one final one. Who is the railroad that you use that's been causing these problems?

CSX is our primary rail provider.

So it's not like somebody that's local.

Your next question comes from Patrick Fitzgerald with Baird.

Could you go over your obligation with respect to paying down the bonds before you pay out any additional special dividends if there are any restrictions?

Well, there's certainly a lot of restrictions within the bond for different types of payments, but we have sufficient capacity to pay out restricted payments or dividends currently. And the bonds are a three-year no call. So, we cannot call the bonds for the first three years. But, however, we can take advantage of some opportunities when – and we did in the quarter when people offer in the open market to repurchase of those bonds. We repurchased a few bonds at a discount and took advantage of that discount and put some savings on the books here for the future. But there's a lot of nitty gritty details about the restrictions around the bonds. But primarily, it's the three year no call right now.

Do you know what the RP basket is currently?

Yeah, sure. We track all that all the time and it's not some of the details we get into discussing.

At this time, there are no further questions. I'll 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. We appreciate your interest in Warrior Met Coal.

Thank you. And that does conclude our conference for today. Thank you all for participating. You may now disconnect.