Warrior Met Coal, Inc. (NYSE:HCC ) Q1 2022 Results Conference Call May 5, 2022 4:30 PM ET

David Gagliano - BMO Capital Markets

Lucas Pipes - B. Riley Securities

Nathan Martin - The Benchmark Company

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 Chinese buyers to initiate purchases of imported coals from the U.S. following the Olympic Games. However, they remain mostly on the sidelines for the entire quarter. Only a few transactions between North American suppliers and Chinese customers were completed in the very early days of the quarter.

With lower steel production for most of the quarter, the Chinese steel mills were able to manage with strong domestic coal production and imported landborne calls from Mongolia, albeit lower than historical levels as well as the residual Australian coals in the bonded warehouses. The World Steel Association recently reported that global pig iron production decreased by 8.8% in the first 3 months of 2022. China recorded a decrease in production of 11% for the period, while the rest of the world's pig iron production decreased by 4.3%. China's lower steel production is largely due to measures put in place for the Olympics as well as recent shutdowns related to COVID restrictions. While lower steel production volumes in the rest of the world were due to the ongoing supply chain issues, overall steel demand remains solid despite the lower volumes compared to the previous year.

As for Warrior, our sales volume in the first quarter this year was 1.1 million short tons compared to 2 million short tons in the same quarter last year. This quarter was lower than last year, primarily due to the ongoing labor strike lowering total production volume, plus approximately 100,000 tons that slipped into the second quarter due to shipping delays at the port. Shredging maintenance and congestion in the first half of the quarter delayed some shipments into March. While the mechanical failure of the ship loader in the last few weeks of the quarter related our final vessel loadings, which caused the volume slippage into the second quarter. These issues resulted in 54% of our sales volume shipping in March, backend loading the quarter sales volume and incurring higher demurrage costs of nearly $3 million.

In addition, although not as significant was the poor performance of our rail transportation provider in getting our product to the port in a timely manner. We believe these delays reduced our first quarter adjusted EBITDA by approximately $40 million, net income by $32 million and EPS by $0.63. Our sales by geography in the first quarter were 66% in the Europe, 13% in the South America and 21% in Asia. We did not sell any volume into China during the first quarter as the CFR China index price was below the Australian FOB price in the entire quarter, except for 3 days in early January. Our spot sales in the first quarter were approximately 15%. Production volume in the first quarter this year was 1.5 million short tons compared to 2.2 million short tons in the same quarter of last year. The tons produced in the first quarter resulted from running both longwalls and 5 continuous miner units of Mine 7 and 2 continuous miner units in the longwall of Mine 4. Our lead days on the longwalls did not materially change during the quarter and remained solid.

[Indiscernible] well and very efficiently in the first quarter as we ramped up production at Mine 4 to about 50% of its nameplate capacity of 1 million tons. We finished the quarter running the minds of the combination of salaried and hourly employees, representing approximately 50% of the normal workforce while producing approximately 75% of the normal production volume.

Capital spending and mine development in the first quarter this year was $20 million and remains on target for the full year, including the work on the 4 North portal, which we expect to be completed early next year. On that note, in light of the company's current free cash flow generation and our philosophy to invest in our core business, our Board recently approved the purchase of 2 new sets of longwall shields for the existing mines. This represents another significant investment of approximately $100 million to keep our mines well capitalized and performing most efficiently. We expect to make down payments this year, which is reflected in our annual guidance and final delivery is expected to be in the third quarter of 2023.

Before I ask Dale to address our first quarter results in greater detail, I wanted to take a moment to comment on the exciting and important announcements we made earlier this week. Specifically, we announced the relaunch of the development of our Blue Creek reserves, our decision to accelerate stockholder returns with special cash dividends with the first dividend of $0.50 per share and an update on our approach to capital allocation. I'll start by discussing our capital allocation approach since it provides the umbrella framework for understanding how we think about our short- and long-term stockholder value creation and also explains why our Board decided to unlock the value of Blue Creek and enhance stockholder returns of special cash dividends in addition to our regular quarterly dividend.

First, let us look at where we are from a cash and operating perspective. We are a much stronger cash position today than we were 2 years ago, having generated significant free cash flow over the last 2 years. Based upon the current industry outlook for higher met coal pricing in the near term, we will continue to generate significant amounts of free cash flow in the future. Second, we've demonstrated our ability to operate as a low-cost, low leverage company with strong liquidity to maintain flexibility through market cycles and volatility in the met coal market. This approach has enabled us to continue operating successfully over the past few years despite significant headwinds. That will not change regardless of macro pricing or our cash position. Third, at this point, we've built up the necessary liquidity to allow us to put our capital to work, both through making prudent investments in our business and returning cash to stockholders. In summary, while we are following the same long-standing capital allocation principles, as we always have, our cash balance and free cash flow generation give us additional flexibility and scale. Dale will have more to say about our capital allocation in a moment.

But now, let me tell you that everyone within Warrior is extremely excited about the potential of Blue Creek to transform the company. We are enthusiastic about the opportunity to build on a strong track record of creating value for stockholders with this project. Importantly, the timing for relaunching this project is ideal. We believe that the demand for premium high vol A coals will continue to increase due to their unique blending attributes. While the overall supply of premium coals will remain constrained due to declining production and a lack of new projects, which support strong pricing fundamentals in the future. Blue Creek's Tier 1 high vol A quality and the lack of Tier 1 projects in the United States suggest considerable demand for our product.

Another attractive feature of this new mine is we expect production costs to be in the first quartile of the global seaborne cost curve. We believe the combination of these factors will generate some of the highest met coal margins in the U.S. Once fully developed, Blue Creek is expected to expand our product portfolio to our global customers by offering 3 premium part coking coals that are expected to achieve the highest premium met coal prices in the seaborne markets. The new single longwall mine of Blue Creek is expected to produce an average of 4.8 million short tons per year of premium high vol A met coal. Once we've developed Blue Creek, we expect its new mine could increase our annual production of nameplate capacity to nearly 13 million short tons per year, resulting in an annual production growth rate of 60%. We control approximately 70 million short tons of reserves and 49 million short tons of resources at Blue Creek, which totals 119 million short tons. Based on the current schedule, we expect the first development tons from continuous miner units to occur in the third quarter of 2024, with the longwall scheduled to start up in the second quarter of 2026. All this detail and much more can be found in a slide presentation on the IR section of our website. As I mentioned, Blue Creek represents a transformational opportunity for Warrior. We could not be more excited to start this project and look forward to seeing the fruits of our investment once the development is completed.

Dale will now be able to address our first quarter results in greater detail, provide some additional metrics around our capital allocation strategy and provide additional information on how we are approaching the financing for Blue Creek.

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 there are financially prudent opportunities to tap external financial resources, we will look to do so. We're pleased that our strong base of operations has enabled us to take this flexible approach. However, we expect to generate enough free cash flow during the 5-year construction period to pay for the project entirely in cash, pay special dividends or repurchase stock and retire debt early by as much as 2 years. At that point, we expect the company would be debt free while producing approximately 13 million short tons per year.

In considering the timing of the development of Blue Creek and the required investment, there are several internal and external factors that influence our decision to move forward with the project now, despite the inflation we are currently experiencing. First, we refinanced our debt in the fourth quarter last year and pushed out the maturity until late 2028, well beyond the start of the Blue Creek longwall in 2026. Second, our cash and liquidity has significantly increased since we originally announced our intention with Blue Creek in early 2020, including an additional $241 million of cash and an additional $247 million of total liquidity on our balance sheet. Third, the strength of both current market conditions and high prices should allow the company to generate strong free cash flow this year, further reducing the funding risk of the project. Fourth, accelerating the project time line by 15 months also bring production online sooner, thereby increasing profitability and free cash flows in the next 5 years, 2 years before the maturity of our senior notes. Fifth, financing options still remain available if needed to maintain an efficient and low-cost capital structure. And finally, in addition to these factors, we expect to generate strong free cash flows over the 5-year construction period that will provide further liquidity to balance both the development of Blue Creek to make additional cash returns to stockholders. These factors, combined with the value that Blue Creek can deliver to our stockholders, give us confidence in the success of the project.

With that, I will turn to the first quarter results. For the first quarter of 2022, the company recorded its second consecutive quarter of record quarterly results of net income on a GAAP basis of $146 million or $2.83 per diluted share, compared to a net loss of $21 million or $0.42 per diluted share in the same quarter last year. Non-GAAP adjusted net income for the first quarter, excluding the non-recurring business interruption expenses, idle mine expenses and other income was $2.97 per diluted share compared to an adjusted net income of $0.08 per diluted share in the same quarter last year. Adjusted EBITDA was $244 million in the first quarter of this year, another all-time record high for a quarter as compared to $47 million in the same quarter last year. The quarterly increase was primarily driven by a 220% increase in average net selling prices, partially offset by a 42% decrease in sales volume. Our adjusted EBITDA margin was 64% in the first quarter this year, compared to 22% in the same quarter last year. We believe the financial impact of the shipping delays that Walt previously noted, reduced the first quarter sales volume by 100,000 short tons, adjusted EBITDA by approximately $40 million, net income by $32 million and EPS by $0.63 per share. The impact of the delays was magnified by the current high pricing environment.

Total revenues were $379 million in the first quarter compared to $214 million in the same quarter last year. This 77% increase was primarily due to the 220% increase in average net selling prices, partially offset by 42% lower sales volumes in the first quarter versus the same period last year. In addition, other revenues were positively impacted in the first quarter this year by an 87% increase in our natural gas prices, offset by non-cash mark-to-market loss on our gas hedges of approximately $13 million. This mark-to-market hedge loss is attributed to hedges put into place prior to the war in Ukraine, which has triggered a run-up in natural gas prices recently. Our gas operations are generating strong results, just not as much as they could be due to the hedges.

The Platts Premium low vol FOB Australian Index price averaged $361 per metric ton higher and was up 284% in the first quarter of this year compared to the same quarter last year. The index price averaged $488 per metric ton for the first quarter. Demurrage and other charges reduced our gross price realization to an average net selling price of $339 per short ton in the first quarter this year compared to $106 per short ton in the same quarter last year. Demurrage charges were approximately $3 million higher in the first quarter this year versus last year, primarily due to the port delay issues that Walt discussed earlier in his comments.

Cash cost of sales was $134 million or 35% of mining revenues in the first quarter compared to $154 million or 74% of mining revenues in the same quarter last year. The decrease in total dollars was primarily due to a $65 million impact of 42% lower sales volume, partially offset by $45 million of higher variable costs associated with price-sensitive wages, transportation and royalty costs. In addition, our costs were higher due to inflation increases on belt structure, roof bolts, cable, magnetite, rock dust and other materials and equipment. Despite the higher variable cost and inflation, cash margins were $220 per short ton in the first quarter compared to only $27 per short ton in the same period last year, demonstrating the leverage to higher met coal prices, driving both profitability and free cash flow.

Cash cost of sales per short ton, FOB port, was approximately $119 in the first quarter compared to $79 in the same quarter last year. Transportation and royalty costs accounted for $32 of the increase, plus an increase in production costs due to rising inflation of approximately $3 per short ton. Cash costs on price-sensitive items such as wages, transportation and royalties that vary with met coal pricing were significantly higher in the first quarter of this year compared to the same quarter last year. As you may remember, transportation costs lag on a 1-quarter basis, and index prices averaged $361 higher in the first quarter versus the same quarter last year. As a result of the significantly higher prices period-over-period, variable transportation and royalty costs are significantly larger components of the cost per ton than the normal approximately 1/3 percentage. Variable transportation and royalty costs were 46% of the cost per ton of $119 in the first quarter this year, compared to only 29% in the same quarter last year, driven primarily by higher met coal pricing.

As coal prices stay at or near these all-time highs, we expect our transportation and royalty costs to be a higher percentage of our total cash cost in the coming quarters. SG&A expenses were about $14 million or 3.7% of total revenues in the first quarter this year and were higher than the same quarter last year, primarily due to higher stock compensation expense, due to retirement eligible employee equity grants and a 60% higher stock price. During the first quarter, we incurred incremental non-recurring business interruption expenses of $7 million that were directly related to the ongoing labor strike. These non-recurring expenses were primarily for incremental safety and security, legal and labor negotiations and other expenses. Idle mine expenses were $3 million in the first quarter and represent expenses incurred with the operations at both mines, running at reduced capacities, such as electricity, insurance, maintenance, labor, taxes and are primarily fixed in nature.

Turning to cash flow. During the first quarter of this year, we generated $50 million of free cash flow, which resulted from cash flows provided by operating activities of $70 million, less cash used for capital expenditures and mine development costs of $20 million. This resulted in free cash flow conversion of 20% this quarter versus last year's first quarter of 50%. Free cash flow in the first quarter of this year was negatively impacted by $159 million increase in net working capital from the fourth quarter of 2021. The increase in net working capital was primarily due to an increase in accounts receivable on higher met coal pricing, combined with lower sales volumes, which increased our inventories due to the shipping delays previously noted. Our total available liquidity at the end of the first quarter was $557 million, representing an increase of $78 million or 16% over the fourth quarter of 2021 and consisted of cash and cash equivalents of 434 and $123 million available under our ABL facility. This is net of outstanding letters of credit of approximately $9 million.

Now turning to our outlook and guidance for 2022. We believe we are well positioned to fulfill anticipate customer commitments for 2022. In the current operating environment and without a new labor contract, we believe that we'll be able to meet our production and sales volumes, including the outlook section of our earnings release. The volumes outlined include the restart of Mine 4 at about 50% of capacity and running Mine 7 at lower operating rates than normal production.

I'll now turn it back to Walt for his final comments.

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.

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.