Good afternoon. My name is Rocco, and I will be your conference operator today. At this time, I would like to welcome everyone to the Warrior Met Coal First Quarter 2022 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [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've 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 to the Investors section of its website at www.warriormetcoal.com. Here today to discuss the company's results are Mr. Walt Scheller, Chief Executive Officer; and Mr. Dale Boyles, Chief Financial Officer. Mr. Scheller, you may begin your remarks, sir.

Thanks, operator. Hello, everyone, and thank you for taking the time to join us today to discuss our first quarter 2022 results. After my remarks, Dale will review our results in additional detail, and then you'll have the opportunity to ask questions. We were pleased to deliver our second consecutive quarter of record quarterly earnings in over 3 years on the back of strong customer demand. The global supply of met coal remained tight during the first quarter, even with China continuing to reduce its steel production. We're well positioned to continue meeting our customer commitments even in the face of potential global economic volatility in the future. Demand for premium met coals was strong throughout the first quarter due to sustained steel production and due to restocking by customers. We also experienced a short-term surge in demand due to panic buying associated with the Russian invasion of Ukraine. The Russian buyers searching for alternative coals in an already tight market pushed prices in uncharted territory. The [Technical Difficulty] that was largely responsible for making this past quarter the most volatile pricing period in recent history. However, the spike in pricing was short-lived as we saw all major indices give back a substantial portion of the gains brought on by the war. Our primary index, the PLB, FOB Australia started the quarter at $357 per metric ton, then climbed by over $313 per metric ton to its peak of $671 per metric ton on March 14, while closing the quarter at $515 per metric ton. In addition to strong demand, supply shortages continue to be a problem due to a mix of weather-related issues in Australia and logistical constraints in North America. As previously mentioned, the Russian invasion of Ukraine only exacerbated the already tight market conditions. We were expecting…

Thanks, Walt. Before I go into detail about the quarter, I want to address how we're thinking about capital allocation while we move ahead with the Blue Creek project. Given our strong liquidity position, now is the appropriate time to provide additional context to our thinking. In the press release we issued on May 3, we laid out our current policy in regard to capital allocation, which focuses on our ability to fund the operations regardless of volatility in the met coal market, investing in highly accretive growth opportunities such as Blue Creek and leveraging our free cash flow to return cash to stockholders through special cash dividends or stock repurchases. More specifically, there are certain key metrics that we are focusing on achieving as we make those capital allocation decisions, including through the development of Blue Creek. They include: first, maintaining a higher amount of minimum total liquidity of $250 million, including a minimum cash balance of $150 million; second, staying 1.5x to 2x levered. And third, balancing the value of our NOLs with stock repurchases, which could jeopardize those NOLs. We believe strongly that our capital allocation policy and our key metric guidelines provide the right approach. They balance capital investments for medium to long-term growth with near-term returns to our stockholders. Turning now to Blue Creek. In deterring to move forward with the project, we compared the Blue Creek potential to our investment criteria. The Blue Creek as one of the rare large-scale Tier 1 assets in the country, we expect the project to deliver an attractive internal rate of return on our investment of approximately 30%. As we think about how best to account for the $650 million to $700 million investment, we will be opportunistic in evaluating funding alternatives beyond our free cash flow. If…

Thanks, Dale. Before we move on to Q&A, I'd like to make some final comments on our outlook for the second quarter and full year of 2022. As Dale noted earlier in his remarks, our cash cost per short ton in the first quarter of 2022 was significantly higher due to the variable components of our cost structure, such as wages, transportation and royalties, plus the impact of inflation. We expect this trend of higher transportation and royalty costs to continue into the coming quarters until prices normalize back to historical levels. Another factor that may negatively impact our cash cost is the impact of rising inflation, as we noted earlier. U.S. inflation in March hit its fastest pace in 4 decades as pandemic-related supply and demand imbalances, along with stimulus measures intended to shore up the economy, push the consumer price index up to an 8.5% annual rate, a 40-year high. As we stated last quarter, we're expecting anywhere from 10% to 25% increases in steel prices, freight rates, labor and other materials and supplies this year. As Dale noted earlier, we incurred approximately $3 per short ton of higher inflation during the first quarter this year. These inflation increases affect, among other things, the cost of belt structures, roof bolts, cable, magnetite, rock dust and machinery and equipment purchases. The first few weeks of the current quarter have brought renewed strength in the met coal indices as additional sanctions and how right bands of Russian coals are making it difficult for certain customers to continue purchasing from Russian coal suppliers. We do expect some geographies such as India and China to continue buying Russian coals for the time being. But the recent rise in the indices is expected to be reversed as the risk of global economic downturn remains high due to inflationary pressures and high energy costs. In addition, we expect supply from Australia to be stronger beginning in the second half of the year. As a result, we expect the combination of lower demand and improved supply to provide pricing relief to purchasing managers. However, we still expect pricing to remain above cost curve economics as a result of trade disruptions caused by the war in Ukraine. With that, we'd like to open the call for questions. Operator?

[Operator Instructions] Today's first question comes from David Gagliano with BMO Capital Markets.

I have a few. I'll try and keep them tight. On -- first of all, on a near-term basis, just on the timing of the inventory unwind, obviously, the guide unchanged for the year on sales, if you take the midpoint, it implies 1.6 million tons on average of sales volumes per quarter I think, in the next few quarters, a pretty significant increase. Is it reasonable to assume that's sort of spread evenly over the next few quarters? Or how should we think about that piece?

Thanks for the question, David. This is Walt. I would expect it to be more back half loaded. I think the second quarter, we'll continue to see some issues down at the port where they're working on one of the car dumps. So I expect the second quarter to not quite be as strong as the third and fourth quarter will be. So I think it will be a little more back half loaded.

Okay. Fair enough. And then just in terms of switching gears to the shareholder returns piece of this and the balancing between that and funding Blue Creek. Is the plan to build up enough cash near term to fund Blue Creek essentially upfront and then start returning cash to shareholders? Or do you plan to fund Blue Creek more closely with the timing of the CapEx schedule that was provided in the slide deck the other day, and then return cash more upfront, if that makes sense.

Yes. David, this is Dale. No, I would say we would continue to do the shareholder returns over time of the project. We think we can do that. Obviously, we're building more cash, given that prices have stayed higher longer than I think anybody anticipated. But heading into next year, if you look at the presentation, we spend 2/3 of the capital in '23 and '24. So we're going to stockpile a little more cash. But given where the markets are and the cash that we're generating, we believe we could do one or multiple special dividends in the coming year or 2.

Okay. And so just to try and drill down a little bit more on that answer. Would you want to have -- like the -- I do have the CapEx timing on Blue Creek, and that's very helpful. And so is it reasonable to assume that you'd want to have the cash on the balance sheet before the CapEx, what I'm saying like $500 million of CapEx tied to Blue Creek before you would return cash to shareholders? Or is that not how to think about it?

No. We've just said, look, the minimum because we can't predict what the -- obviously, the markets will do and whether or not there's any demand destruction from all the things that are going in the markets today. I mean, so we haven't set a target of where we'll start returning cash to shareholders, so we target cash balance other than a minimum. I said in my comments, look, over that 5-year period, you're going to have peaks and valleys with met coal pricing. And while the construction, the price is going on, we want a minimum of $150 million of cash at all times. But you can expect it to be higher than that so that we can fund the project. We don't want to go into your drain all of our cash in returns and then you don't have the cash if the market turns on you to fund that year. So we think given the ability to stockpile a little cash here and do both, we'll accomplish both objectives.

Okay. That's helpful. I'll turn it over to somebody else.

[Operator Instructions] Today's next question comes from Lucas Pipes of B. Riley Securities.

I first wanted to touch on the NOLs. Could you remind us what the remaining balances in an environment like today when prices are so robust and you generate a lot of taxable income. How will this affect this balance over the course of this year?

Lucas, thanks for your questions, it's Dale. Yes. Coming into the year, we had almost $800 million of federal NOLs and then almost $1 billion in state NOLs. So yes, we came into this year with a lot of those remaining. And given where we're generating a lot of cash and a lot of profitability, we're going to be using a lot of those NOLs this year. And just depending on how long prices stay as high as they are will depend on how fast we use them. And so this will be a big usage for the year, no matter what. But -- so it's kind of hard to predict where we'll be at the end of this coming year, but that continues to provide extra cash here for returns to shareholders as well as funding BlueCreek.

Yes. Very helpful. And then in terms of the discussion around capital returns, historically, your share repurchases have featured less prominently in your discussions. Would that change, assuming second quarter is even better than the first, given volumes and such. And we look at the end of this year and also almost exhausted. Would your repurchases move up in the priority list?

Yes. I'm not sure it would be that early in the second quarter or third quarter. I would expect that would probably be, from that standpoint, stock repurchases probably in next year. It really depends on how fast we use them up this year. But at the current pace, obviously, you're going to blow through them pretty quick. But we don't expect prices to stay here for the remainder of this year. We do think there's going to be the correction period and it's going to be pretty steep as we've seen pretty significant swings even in the last couple of months, in fact, overnight, big swings, $70, $80. So it can adjust real quickly. So we'll make that decision later on, but I don't think it's as early as the second or third quarter and maybe [indiscernible] quarter.

And then when I look at Warriors historical production, there were periods when you approached 8 million tons or maybe on an annualized level, we're higher than that 8 million ton figure. How does the guidance today at the midpoint, what are kind of the key puts and takes. If I compare 6 million tons to say, 8 million tons or so in the past, what are the -- how would you bridge that? Is it labor? Is it where you are in the mine plan? Would appreciate that perspective and maybe some color as to when we could approach the 8 million ton level, short-term level again?

It's entirely or almost entirely labor. Right now, we are getting close to running Mine 7 at 100% capacity. At Mine 4, we're really running at about 50% capacity. That bridges that brings you up more than another 1 million tons once you get it back to full capacity, and then there's just some [indiscernible] that gets you the other 1 million tons. We continue to see the workforce grow month-to-month. And so our expectation is that we will continue to grow our production as we go through the year and/or resolve the current labor situation. So that's our expectations to continue to grow through one of those 2 methodologies.

Really appreciate the color and best of luck.

Ladies and gentlemen our next question today is a follow-up from David Gagliano of BMO Capital Markets.

All right. The question really is actually related to what you just said a moment ago. We've had so much volatility like you said, overnight even. And it's always tricky, right, trying to pinpoint numbers. I know last quarter, there was a move away from speaking about realized pricing relative to benchmarks at a discount, that kind of thing, given the impact that the timing of deliveries has on that spread. So I was wondering if maybe we could talk about a little bit of a different context. If we were to -- here it is [May], what's a reasonable assumption for lag timing, just generally speaking, on average, if we look at index pricing and Warrior's realized pricing, how far back should we be lagging for the current quarter, for example?

Typically, our pricing is set based on anywhere. It depends based on contract, but it's up to about a month. So we'll be averaging prices from the previous 30 days in order to set our pricing.

Okay. And that's still a reasonable assumption given everything going on in the world today?

It is. And the only variable to that is spot pricing is done at whatever the day's pricing is or when that is set. I want to reiterate though what Dale said, because we could easily have a considerable adjustment in pricing and our rail costs are still going to be reflective of what the previous quarter's pricing was. So if you had a significant price adjustment in 1 quarter, the rail adjustment will not necessarily follow very quickly. So you could see high rail rates or high transportation rates for a quarter beyond that adjusted price.

Okay. That's helpful. And just in terms of -- given everything going on in Europe, I know Warriors provides quite a bit of the volume into sale mills directly in Europe. I was wondering if you could just talk a little bit about what the European customer base is saying in terms of their appetite for taking full delivery and any commentary regarding price sensitivity and demand sensitivity?

Actually, we see very robust demand out of our customers in Europe. And in fact, when folks were trying to scramble to figure out where they're going to replace the coal that was coming out of Russia, so we see increased demand in Europe from some of those customers. And I think everyone is still planning on taking full commitments and full deliveries and we haven't seen any change to that.

Yes. They even got some calls about using our coal with thermal coal. So we've had a lot of inquiries over the last couple of months given the situation in Ukraine.

Okay. That's helpful.

And our next question today comes from Nathan Martin at The Benchmark Company.

Congrats on the quarter. I think most of mine have probably been asked at this point, but maybe I'll come back to costs. Obviously, cash cost guidance up a little bit here. I think in your prepared comments, Dale, you mentioned that I think it was roughly 46% is the variable cost in the first quarter, if I recall, and maybe as Walter said that. But you also commented that if prices stay elevated, we could probably see an elevated level like that versus the normal, I think it's 30% -- maybe 33% of costs related to variable items. So I guess maybe my question is, with this new raise in cash cost guidance, what kind of net price are you guys assuming? I think previously, you said you were assuming a pretty steep fall off as we progress through the year. How has your view changed there?

Well, I think what we did is try to look and say, well, how much and how far would it fall and given the prices average $488 a metric ton in the first quarter, they got to draw drop pretty far in the next 3 quarters to average even $400. So we kind of developed our metrics around upper 3s or around that $400 number because as Walt said, we're going to have a quarter where there's a steep drop, and then it's going to be another quarter before our transportation costs drop. So that's why we've got to factor in that 1 quarter lag.

Okay, Dale. So if I understand you correctly, you're kind of assuming upper 300 to 400 kind of like a full year average, and that's incorporated in that new 115 and 125 for short-term guidance?

Yes, because every quarter after the first quarter would have to average somewhere $270, something like that. So you'd have to have some pretty big drop-off for the rest of the year.

Got it. Makes sense. That's really all I had guys. I appreciate the time. Best of luck.

Ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to Mr. Scheller for closing remarks.

Thank you. And that concludes today's conference. Thank you all for participating. You may now disconnect.

Thank you, sir. Today's conference has now concluded, and we thank you all for your participation. You may now disconnect your lines. And have a wonderful evening.