Good afternoon, my name is Andrew and I will be your conference operator today. At this time, I would like to welcome everyone to the Warrior Met Coal Second Quarter 2020 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 SEC filings. I have also been asked to note that the company has posted reconciliation 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 to the Investors section of its website at www.warriormetcoal.com. Here today, to discuss the company's results are Mr. Walter 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 second quarter 2020 results. After my remarks, Dale will review our results and additional detail, then you will have the opportunity to ask questions. The second quarter was a very challenging environment as the COVID-19 pandemic continued its spread with disruptive impact on the US and global economies. We saw material cuts in steel production across our key geographies that led to lower demand for Met Coal. In addition, Met Coal pricing hit a four-year low point in early June. These key factors had a significant impact on our financial results for the second quarter as we will explain it in further detail. The widespread outbreak of COVID-19 has affected us all in new and unprecedented ways. While we continue to operate our mines as a critical infrastructure business in the State of Alabama, these are challenging times and I would like to thank all of our employees for their hard work and resilience. We've taken the necessary measures to adjust our workplace environment to comply with social distancing and personal hygiene guidelines set forth by various health organizations while maintaining our operations. I would also like to thank our supply chain partners who've adapted their operations during this pandemic to ensure that all of Warrior's customers receive their orders on time. As the quarter progressed, the full impact of COVID-19 on the global steel markets became apparent. The customers taking decisive actions to align their production levels with reduced demand. These actions have varied from simple operating rate adjustments to the idling of blast furnaces and in some cases the intent to permanently close down older and less efficient production lines. The results of these actions can now be measured through…

Thanks, Walt. As Walt discussed, the overall financial results for the second quarter were primarily driven by a significant reduction in US and global economic activity as a result of the spread of COVID-19 this year compared to a fairly robust market environment in the second quarter last year. In addition, last year's second quarter was a record quarter for Warrior in terms of both sales and production volumes. These combined factors led to 34% lower sales volumes and 38% lower average net selling prices, slightly offset by lower cost on tighter spending compared to last year's second quarter. As a result of the company's highly variable cost structure, these factors explaining the majority of the financial variances in the second quarter compared to the same period last year. For the second quarter of 2020, the company recorded a net loss on a GAAP basis of approximately $9 million or a loss of $0.18 per diluted share compared to net income of $125 million or $2.43 per diluted share in the second quarter of 2019. Non-GAAP adjusted net loss for the second quarter was $9 million or a loss of $0.18 per diluted share compared to $2.16 of income per diluted share in the second quarter of 2019. Adjusted EBITDA was $20 million in the second quarter of 2020 as compared to $176 million in the same period of 2019. The quarterly decrease was primarily driven by a 34% decrease in sales volume and a 38% decrease in average net selling prices. Our adjusted EBITDA margin was 12% in the second quarter of 2020 compared to 44% in the second quarter of 2019. Total revenues were approximately $164 million in the second quarter of 2020 compared to $398 million in the same period last year. This decrease was primarily due…

Thanks, Dale. Before we move on to Q&A, I'd like to make a few more comments. While we ended the second quarter with limited visibility and high uncertainty about customer demand, we now enter the third quarter with different expectations. We have reasons to believe that the worse in terms of reduced steel production is most likely behind us. At the same time, we remain concerned with pricing levels. Most of the major steel demand sectors such as automobile production and construction to name a few have started to show positive improvements from the recent lows. As a result, several producers have made plans to increase operating rates, albeit slowly and with measured adjustments. However, it is also clear to us and our customers still cannot predict when the demand for their products will return to pre COVID-19 levels. In addition, most of our customers remain challenged by thin margins, due to lower demand for the products, multi-year low steel prices and sustained higher iron ore cost. Hence, we are cautiously optimistic for third quarter volumes and we'll continue to keep close contact with our customers during this period, in order to optimize our sales orders and capitalize on opportunities that meet our profitability threshold. As previously mentioned, we expect that our current inventory levels will remain elevated through year-end as we intend to adjust production rates in accordance with demand and as we manage for potential disruption risks due to covid-19. Obviously, if we have the opportunity to sell additional volume materializes, we would expect to see a more rapid decrease in our inventory levels. As for the outlook on met coal pricing, we believe, current market forces will continue to limit the upside potential of all major indices. In order to change our short-term view, we need to see a combination of factors, material improvements in the imports of seaborne coals in the major markets like India, additional supply cuts from high-cost producers as well as some level of clarity around the import restrictions in the Chinese ports. Despite the many unknowns, there are few important reasons that our business is well positioned to weather any prolonged economic challenge. One; our highly talented workforce is committed to safely and efficiently driving results. Two; we maintain one of the world's highest quality met coal portfolios and a strong long-term customer relationships. Three; we have a strong balance sheet and adequate liquidity. Four; our low and variable cost structure enabled us to drive high margins and free cash flow across most business environment. Five; we've made significant investments in our operations over the past three years, allowing us to now reduce capital expenditures as needed without significantly impacting our operations. As a result of these factors. I'm confident we will emerge from this health crisis ready to achieve our long-term growth potential. With that, we'd like to open the call for questions, operator?

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

All right, great, thanks for taking my question. I just wanted to drill down a little bit on some of the expectations for the near term, given the inventory build here and the weak market. Can you give us a sense as to what your thoughts are with regards to the third quarter operating metrics, ideally production and -- sorry -- sales volumes to the extent that you can give us some sense there, and also production and cash costs, I noticed it crept up to the upper 80s, is that a level that we should be assuming moving forward or do we expect it to get back down to the low '80s in the second half?

I think, we intend to -- as we said, we think we saw the low point in Q2. So we expect to see a little bit of strengthening in Q3 and Q4, not going to say that'll be to a huge degree, but we expect to see a little strengthening in terms of demand, in terms of our cost structure -- or we intend to match more closely our production to our sales expectations, and to the extent we view that as being a little lower production, production always kind of drive the costs, so I would expect that our cost will be not significantly different from where we are today.

Okay. And then, with regards to the capital allocation change, as far as CapEx for full year 2020, what's the latest target there?

Yes, we haven't released what our target is, we're squeezing our capital as well. I mean, we're looking at everything we're doing, a lot of that capital is going into 4 North, which is the future mine and we don't want to stop spending that capital.

David, this is Dale, I'd just add, look, we're just going to balance all of our spending with what volumes and pricing looks like with the goal of trying to be free cash flow positive for the remainder of the year, we might be a little above or little below that, but we just continue to rationalize all our spending, but there are certain CapEx projects, we want to continue, and we think that we can do that by just managing all of our spending altogether.

Okay. And just -- I mean, at least for the Blue Creek, it sounds like obviously pushed out of the beginning of 2021. So I think there was $25 million or something like that, maybe I'm wrong, but $25 million-ish that was earmarked for early spending in 2020, second half, perhaps that's obviously not happening now in 2020, is that reasonable to do so?

That's correct. We had minimal spending for Blue Creek for the entire year.

Okay. All right, that's it from me. Thanks.

Thank you.

The next question comes from Scott Schier of Clarksons. Please go ahead.

Good afternoon, everyone. I think I asked this last quarter, but given kind of the inventory build, I wanted to try again. Are you anywhere close to the capacity at this stage and at what point if any, would you consider or kind of be forced to slow production rates to try to manage inventory levels?

We are not close to capacity at this point, but as I've already said, we intend to more closely match production with our sales volumes. So I would not expect an inventory build going forward. Hopefully, we'll see a little bit of reduction.

Okay, that's helpful. And then switching gears a little bit. I was hoping you could just give us a little bit more market color on what you're seeing currently in terms of demand. Can you talk about any kind of bright spots you're seeing, what areas remain weak and then what your sales split was over the quarter?

Our sales split over the quarter was 75% in the Europe, 25% into South America as I said, we didn't move anything into Asia in the second quarter. In the third quarter, we expect to be moving some call back in Asia, I think we'll get -- will start to move back toward where we were historically, I don't think we'll get there in one quarter, but over a period of a couple of quarters, I think we'll get back to the same levels where we were historically, which was 50% - 55% in Europe, 25% and so in the South America, the remainder going into Asia. I think we've seen across all of the areas in which we do business, the demand everybody kind of hunker down in Q2. And I think we've seen the demand on all of our customers pick back up, maybe not to normal levels, but to the levels that were higher than they were in Q2, and that's in South America, Europe, and as I said, we know it is in Asia because we are going move some coin into Asia this quarter.

Okay, great. I appreciate all the color. Thanks for taking my questions and best of luck.

Thank you.

The next question comes from Lucas Pipes of B. Riley FBR. Please go ahead.

Hi, good afternoon everybody. To follow up on the earlier questions, and maybe purchase it slightly differently, can you share your volume commitments for the second half of the year?

You know what, we don't normally do that, I can tell you that normally -- we had normally been in the 70% to 80% committed with 20% to 30% spot sales in the second quarter, it was more of a 50-50, and like we expect in volumes, I would expect those numbers to move generally back closer to normal, we may not get there by the end of the year, but I would expect the committed volumes would go well north of 50% and spot volumes would drop, that's really below that level of what that was in Q2.

Okay, that's helpful. Kind of a gradual ramp-up towards the more typical range of 70% to 80% over the back half?

Yes. I think so, I think that's reasonable.

I appreciate that, and then I wanted to get a better sense for what you expect on Q3 pricing, obviously that moving target were the spot prices are evolving, that will recover like some of the other commodities. But, what's your reach just in terms of mix between No. 7 mine and 4, inventory that you have on the ground, is it pretty plain vanilla for Q3 or any kind of special items that we should take into account given this very uncertain environment here.

I mean in terms of pricing, as I said, there is going to have to be some significant changes for us to see significant changes in pricing. I think we'll be kind of range bound. I don't know, we saw a low of 106 [ph]. I think that's about where we are today. I think we're going to see that kind of being around the bottom. I don't see any reason for prices to go significantly up at this point. So I think we'll be kind of muddling through this type of pricing for at least a quarter and then we'll see what happens in the fourth quarter. In terms of inventory mix, that shifts quarter to quarter. I don't think we'll see any dramatic differences in which calls move from where we had been in the past.

Okay. Really appreciate the color. And best of luck, especially during this time.

Thank you.

[Operator Instructions] The next question comes from Alex Hacking of Citi. Please go ahead.

Hi, thanks for the call. Just a follow-up on the sales question, one more time, if I may, is there any way you can quantify the kind of improvements that you've seen in July and maybe June from what you were seeing in April and May. Thanks.

No, it's really when -- we were looking at a couple of months as we go in terms of what commitments are made and what vessels are nominated and those things. So what we've seen is, yes, the difference between the commitments that we had for June versus July, [indiscernible] significantly lower, and as we look at where our commitments for July and August, we just have reason to believe, Q3 will start to move in the right direction in terms of demand.

Okay, thanks. And then I guess, just following up on Blue Creek. This is a project that's going to have a long development cycle and met coal prices are going to be volatile. You're able to kind of postpone the project now because it's still in the very early stage, you know, with two or three years into the development and met coal prices plummet again, would you guys have the flexibility to kind of push back development or once you guys are seriously into the weeds on the project, do you kind of need to push ahead, like I know this is a very forward-looking question on a project that hasn't even started yet, but I'm just trying to get a sense for how future volatility is going to affect. Thank you.

Well, thank you for the question. What we've said in the past about the Blue Creek project is it's kind of -- we kind of building that they stage project, where there are some lumpy items, for instance, the initial development of the shaft and slope and a few things like that, once you start it, you kind of need to finish it. But then it's kind of a natural break point where if you wanted to stop the project before you started CM development, it would be a very easy time to do that. And once you started CM development, again it's still relatively easy to stop at any point going forward from there. At that point, kind of the lumpiness becomes around building of a prep plant. It's something that once you start, you kind of want to finish it. Few things like that, but we've kind of cash in the project so that if we did need to stop, if things turn sour, and we want to start the project, there is some very clear financial needs that we would have for a given period of time.

Okay, thanks. And then just one more, if I may, you mentioned earlier, you know, potential obviously that a mine could get close by --, you know COVID, how concerned are you about that? How is the situation in the areas that you're operating? How much absenteeism are you facing at the moment? Any color there would be helpful. Thank you very much.

We've had a few positive cases, and we've been very, we've worked very closely with the hourly workforce to identify how we would address those types of situations and thankfully, we haven't had any real outbreak at our operations, here in Alabama, the numbers had been going up. So I can't tell you what will happen tomorrow, but we're prepared. And as I said with the inventory levels that, if we do end up in a situation where we need to shut down for a few weeks, we're prepared to be able to do that. So we've kind of tried to when we can run in the second quarter, we ran hard to make sure that if we did have a situation arise, we're prepared for it.

I appreciate the color. And good luck. Thank you very much. Hugh.

[Operator Instructions] The next question comes from Chris Terry of Deutsche Bank. Please go ahead.

Hi, Walt and Dale. Couple of questions from me, just starting on the second quarter costs a little bit further. Is there a dollar per ton number that you'd be willing to talk about that's related to the actual COVID impacts and what's that going forward. Does it actually impact or is it so immaterial that you wouldn't quote that number.

Yes. Thanks Chris for the question. It's not material. We do, we are incurring some cost for temperature checks, things like that. I think probably, we've seen more on the inefficiency side with staggered shift times, the number of fewer people can go down in the shaft at a time in our main buses [ph], so more inefficiencies, I would say, rather than just direct cost.

Okay, thanks. And then Blue Creek, I know you've had lot of questions on that so far, but just one other one, you basically go through the second half of 2020 and then you get to the started 2021, and it will depend on if we still had coal prices where we are today, you would probably defer that again or like what's the decision process to actually start it?

That will be a part of our budgeting process that where we will work through with the Board and will take into consideration where the market is, where we see the market going, and how do we finance the project. So we'll look at things carefully towards the end of the year and determine how do we approach it going into early next year.

Okay, thanks. And just one final one from me, I guess with the election not too far away into end of the year, is there any impact to your mines at all to related to the Stream Protection Act. Just want to understand a little bit better under either party, just some of the operating conditions if there is a change in the current government.

Well, in terms, I think you were asking about the Stream Protection Act. I think that would all depend on, we have no idea what that would look like and what challenges though would be to it, and just what all would be included, so it'd be really difficult for me to speculate as to whether any impact would be from that.

Okay, thanks. So just circling back to the, I guess the, the inventory that you've said, so trying to match inventory levels over the time, what's your like -- once you get through the actual COVID period, and there is less risk around any uncertainty on the operation side, what sort of level of inventory do you like to carry or what do you think is a good number to use by the next year, etc. what would that number be ideally.

I think long-term, and I'm not going to say that means early next year, but I think long term, we've always said, less than 500,000 makes sense.

Okay, that's it from me. Thanks guys.

Thank you.

Thanks.

This concludes our question-and-answer session. I would like to turn the conference back over to Walt Scheller, for any closing remarks.

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

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.