Warrior Met Coal Inc (HCC) 2018 Q1 法說會逐字稿

Good afternoon, everyone. My name is Jamie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Warrior Met Coal First Quarter 2018 Financial Results Conference Call. (Operator Instructions)

Before we begin, I have been asked to note that today's discussion may contain forward-looking statements. Any actual results may differ materially from those discussed. For more information regarding forward-looking statements, please refer to the company's press releases and 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 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 of Warrior Met Coal; 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 first quarter results. After my remarks, Dale will review our results in additional detail, and then you will have the opportunity to ask any questions you may have.

Our first quarter results demonstrate that we're off to an outstanding start in 2018, carrying forward the significant momentum we have built over the past year. Q1 of 2018 set single quarter records for Warrior in both production and sales volumes. Production volume for the quarter was 2.1 million short tons, which was 30% higher than the same quarter in 2017. Our sales volume was also 2.1 million short tons and was 88% higher than the same period last year. We achieved this success by continuing to ramp up the production and sales that we began last year, and our results were even better than we expected. Our entire team pushed the business hard to deliver these excellent results and make the most of the high pricing environment for our premium met coal product and strong overall market conditions.

I'd like to thank all our employees for the work they've been doing to achieve the level of success we've had thus far in 2018. Our top priority remains working safely, as that is the first and most important step to working efficiently and ultimately achieving success in the marketplace. This continued hard work has enabled us to make progress in approaching production levels near the nameplate capacity of our assets, which is approximately 8 million short tons of met coal. We added another 32 miners and one shift for each continuous miner unit at No. 4 mine during the quarter. In addition, our coal inventory fell from 341,000 short tons at the end of last year to 316,000 short tons at the end of the first quarter on strong demand for our products.

Customer demand was driven by a number of factors. First, Chinese steel production drove a sharp increase in demand this past winter. Second, supply disruptions in Australia have continued to contribute to pricing volatility in the seaborne coal market. And third, weather-related issues also contributed to supply disruptions for Australian rail deliveries.

Perhaps most important, we continued to make the most of today's strong market conditions in the first quarter by leveraging our unique cost structure as we sold our high-quality product in a strong price environment. These contributed to strong free cash flow conversion, net income of $179 million and adjusted EBITDA of $216 million. The key drivers behind our performance continued to be our highly flexible mine plan, highly variable costs in areas like labor, royalties and logistics, and a strong balance sheet. These allow us to provide for an agile operational response to movements in the Australian premium low-vol hard coking coal index price and take advantage of market conditions opportunistically. We continued to achieve a high gross price realization reflecting the premiums we've received on our low- and mid-vol coal in a heightened pricing environment throughout the quarter. We set a high standard of achievement on price realization due to the premium nature of our coals, comparing the Australian low-vol index price to the company's blended average gross price for both low- and mid-vol coal.

We continued investing in our operations in the first quarter by spending $23 million in sustaining and discretionary capital expenditures. This spending level above our average normal sustaining requirement has helped to solidify our base operation and will significantly enhance our strength, efficiency and reliability in the future. Earlier today, we were pleased to take part in the opening ceremony for one such investment. The North portal facility for Mine No. 7. We were joined by a number of distinguished guests, including Alabama Governor, Kay Ivey, a great reminder of the significant impact we've had on our local communities.

The new portal, which initially will provide access for 200 miners to enter the northern sections of the mine, has been designed for growth and will accommodate nearly 500 underground employees. It will add to both the safety and productivity of our employees as it is put into use.

Before I turn it over to Dale, I'd like to comment on the special dividend of $350 million or approximately $6.53 per share that we paid to all shareholders in April. This distribution reflects our commitment to continue returning excess cash to shareholders above our quarterly dividends, and we're pleased that our strong balance sheet, minimal legacy liabilities and highly tax-advantaged position allows us to accomplish this goal.

In short, we're pleased to have started 2018 with this quarter's excellent performance, building on our strong operational and financial base and investing in the business to ensure our continued success. We expect to continue generating strong cash flows through the end of the year and to continue creating significant value for our shareholders.

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

Thanks, Walt. Let me start by saying the company performed very well in the first quarter in both sales and production. Combining those results with a strong price environment, the company was able to achieve new quarterly record highs in net income, adjusted EBITDA and free cash flow.

For the first quarter of 2018, net income on a GAAP basis was $179 million or $3.36 per diluted share compared to net income of $108 million or $2.06 per diluted share in the first quarter of 2017.

Excluding onetime transaction and other expenses for the notes offering in the first quarter, non-GAAP adjusted net income was $182 million or $3.42 per diluted share. Adjusted net income in the first quarter of 2017 was $2.22 per diluted share and excluded expenses associated with the IPO last year.

Adjusted EBITDA was $216 million in the first quarter as compared to adjusted EBITDA of $135 million in the same period of 2017. The company's adjusted EBITDA margin, which we calculate as adjusted EBITDA divided by total revenues, and which we believe is one of the highest in the industry, was 51% for the first quarter compared to 53% in the same period last year.

Total revenues for the first quarter of 2018 were $422 million, which included met coal sales of 2.1 million short tons at an average net selling price of $195 per short ton. Total revenues in the quarter exceeded the first quarter of 2017 by $168 million. We also saw an 88% increase in sales volume and a 9% decrease in average net selling prices.

Our first quarter gross price realization was approximately 99%. Our Gross price realization represents a volume weighted-average calculation of our daily realized price per ton based on gross sales, which excludes demurrage and other charges, as a percentage of the Platts Australian premium low-vol hard coking coal index price. We believe that this new metric better reflects the changes in customer pricing formulas since the elimination of the quarterly benchmark price in the second quarter of 2017, and better reflects the current market price on shipments during the calendar quarter versus the one-month lag in the quarterly industry index price that we used previously

There were inherent limitations in the quarterly index, which replaced the benchmark method in Q2 of 2017. First, the average price was on a one-month lag and did not closely correlate with the timing of our shipments. Also, our new metric is based on the daily quoted price of one index, Platts, and not the average of 3 different indices.

Demurrage and other charges reduced our gross price realization to a net average selling price of $195 per short ton in the first quarter. This compares to a net average selling price of $214 per short ton in the same period last year. Mining cash cost of sales was $190 million or 46% of mining revenues in the first quarter compared to $106 million in the first quarter of 2017, driven primarily by the 88% increase in sales volume from the ramp-up of operations. Cash costs of sales per short ton, FOB port, was $90 in the first quarter compared to $94 in the same period of 2017, with the decreases in the per-ton values being primarily attributed to the leverage of the higher sales volume.

SG&A expenses were about $8 million or 2% of total revenues in the first quarter, which was $3 million higher than the same period of 2017, primarily reflecting the company's growth and incremental expenses associated with being a public company. Depreciation and depletion expenses for the first quarter of 2018 were $25 million or 6% of total revenues compared to $15 million in 2017. The increase in the first quarter expenses was primarily attributable to the ramp-up of sales and production at the mines.

Transaction and other expenses totaled $3 million for the quarter and consisted of fees and expenses associated with the tack-on $125 million notes offering. A portion of the fees and expenses associated with the tack-on notes offering was expensed, and another portion is presented net of the notes on the balance sheet and will be amortized to the P&L over the next 7 years.

Interest expenses were almost $9 million in the first quarter and included interest on our equipment promissory note and senior secured notes, plus amortization of our debt issuance costs associated with those notes in our ABL. As anticipated, Warrior did not incur any income taxes due to the utilization of this net operating loss carryforwards, or NOLs. One of our key long-term assets and strengths is our NOLs, which we expect will reduce our federal and state income tax liability to 0 until the NOLs are fully utilized or expired. We expect this will continue to drive significant free cash flow conversion over the next several years.

Turning to cash flow. During the first quarter, we generated $171 million of free cash flow, which was a result of cash flows provided by operating activities of $194 million plus cash used for capital expenditures of $23 million. This compared to only $54 million of free cash flow in the first quarter of 2017. Our spending on sustaining and discretionary capital expense during the first quarter included a down payment on a new set of shields, which are expected to be delivered by the end of the year and further construction on the new portal at Mine No. 7. As Walt noted earlier, the new portal was completed in April and is now being used by the miners.

Cash flows provided by financing activities were $115 million in the first quarter of 2018 as compared to $191 million used in financing activities in the first quarter of 2017. The cash flows reflect a net proceeds of the tack-on notes offering of $125 million in the first quarter of 2018.

Our net working capital increased by $9 million from the fourth quarter of 2017, primarily driven by higher accounts receivable of $35 million on higher sales volumes in the first quarter, partially offset by improvement in other areas of working capital.

Our inventory decreased from 341,000 short tons at the end of the fourth quarter of 2017 to 316,000 short tons at the end of the first quarter of 2018. The decrease in inventories was mostly due to the higher sales volume and Warrior taking advantage of the high price environment during the first quarter.

Our total available liquidity as of March 31, 2018, was $422 million, consisting of cash and cash equivalents of $322 million and $100 million available under our ABL facility. We currently do not have any outstanding borrowings under the ABL facility.

As Walt mentioned earlier, Warrior declared a special cash dividend of $350 million or approximately $6.53 per share on Warrior's common stock, which was paid on April 20. The dividend was funded with cash on hand along with the net proceeds of the private tack-on notes offering of $125 million of 8% senior secured notes due 2024.

These new notes were offered as additional notes under an indenture dated November 2, 2017, pursuant to which Warrior also previously issued $350 million of 8% senior notes due 2024 last October. The company paid the special dividend on April 20 with the cash on hand as of March 31 of $322 million, including the proceeds of the notes plus the cash collections from its accounts receivable balance of $152 million through the payment date. More than enough cash has been collected to fund the operations even after payment of the dividend and the $19 million interest payment on the senior notes paid yesterday.

No amounts were borrowed on the ABL facility to fund the dividend payment, interest payment or the operations. Since the IPO last year and through the latest special dividend, the company has returned cash to shareholders of nearly $18 per share, almost equivalent to the IPO price of $19 a share, and continues to demonstrate our commitment to our capital allocation policy we announced last year.

As part of our previously announced capital allocation program, we're pleased to announce today that our Board of Directors has approved a $40 million stock repurchase program. Pursuant to this program, we may repurchase shares of our common stock from time to time in amounts, at prices and at such times as we deem appropriate, subject to market and industry conditions, share price, regulatory requirements and other considerations.

Now turning to our outlook for the remainder of 2018. In light of the company's successful first quarter performance, available NOLs and expected market conditions in 2018, Warrior is updating its guidance for the full year 2018. Our interest expense metric has been updated to reflect the first quarter tack-on notes offering. And we've updated the longwall moves later this year after strong production in the first quarter.

Our updated guidance for the full year 2018 is as follows. Coal sales of 6.8 million to 7.3 million short tons; coal production of 6.8 million to 7.3 million short tons; cash cost of sales, FOB port, of $89 to $95 per short ton; capital expenditures of $100 million to $120 million; SG&A expenses of $30 million to $33 million; interest expense of $40 million to $42 million; and a cash tax rate of 0%.

A number of factors may affect our outlook, including the number and timing of longwall moves and volatility in the Australian low-vol hard coking coal index price. We now expect to have 2 longwall moves in Q3 and 1 move in Q4 of 2018 that will lower total production in those quarters.

Under our current guidance for 2018, we expect to spend approximately $30 million to $37 million on discretionary projects. These include finishing the construction of the new portal at Mine No. 7 that was started in 2017, a down payment on net new set of longwall shields and other projects that will support our strategic goals.

Due to the long lead times on developing these projects this year, we expect to realize the majority of the benefits of this spending in 2019 and beyond. I'll now turn it to Walt for his final comments.

Thanks, Dale. Before we move on to Q&A, I'd like to address our outlook for the rest of 2018 and how we're looking at the marketplace at the moment.

We're continuing to see robust customer demand within our core markets for our premium met coal products. As a result, we have a strong order book for the second quarter that will benefit from the current high met coal price environment. However, we expect sales and production volumes for the second quarter will not be as high as our first quarter based on a few factors. First, coming off 3 longwall moves in the fourth quarter 2017, we ran the operations harder than we originally planned in order to take advantage of the hot price environment during the first quarter. As a result, our operational results were better than we expected. We ran the mines an extra 6 days during the first quarter, which will result in bringing forward an extra longwall move into 2018 and a shift of approximately 200,000 tons from Q2 into Q1.

Second, we plan on a 6-day outage during the second quarter to complete several expected maintenance projects that will lower production at both mines by approximately 200,000 tons. This outage had already been reflected in our previously issued guidance for 2018.

Third, as a result of record first quarter production, we now expect to have 2 back-to-back longwall moves in the third quarter, which means slightly less production in the second quarter. As we near the end of the panels, the coal becomes -- seems to become thinner and mining equipment nears its required rebuilding.

With all that said about expected volumes in the second quarter, we have tightened the guidance ranges on our key metrics for 2018, remain cautious and conservative in our approach to the full year until we get another quarter behind us.

We believe customer demand will continue to be strong over the course of 2018 and anticipate near-term met coal prices will be largely dependent upon a few key factors. These factors include higher global steel production underpinned by strong economic growth, continued supply disruptions in Australia and Chinese environmental policies. While most of the Australian weather-related disruptions and port and rail constraints have recently been resolved, there are a number of infrastructure issues that are expected to continue to impact Australian production and keep global supply tight. These include a potential 20 million ton reduction in coal rail volumes as a result of changes to maintenance schedules by a key Queensland rail operator.

In regard to Chinese environmental policies, we are continuing to see the replacement of smaller steel mills in China with larger blast furnaces that are located closer to the coast in an effort to curb pollution in cities, which has benefited seaborne producers by making their coal more attractive to Chinese steel producers. Additionally, Chinese winter restrictions on blast furnace operations appeared to have had a lower-than-expected impact on met coal demand with soft enforcement on steel and coke production limits keeping demand relatively high. It remains to be seen if China will change its enforcement approach to the established limits and what impact this will have on global met coal pricing. The actually impact of each of these factors on met coal pricing in the short term is difficult to predict. However, long-term dynamics for met coal pricing remain positive with strong demand growth expected out of countries such as India.

In conclusion, Warrior's outlook remains strong as we aim to return our operations to the nameplate capacity of 8 million short tons. We expect Warrior's premium, high CSR coal, coupled with our highly flexible cost structure will enable us to continue to generate industry-leading margins and strong cash flows through this cycle.

As I said on previous calls, we run the business as if the next pricing downturn is just around the corner, with conservative targets and flexible operations to adjust to the market environment as it changes throughout the year. Having said that, we're pleased with our results for the first quarter of 2018 and believe the company is on track to meet or exceed our goals for the remainder of the year.

With that, we'd like to open the call for questions. Operator?

(Operator Instructions) Our first question comes from Curt Woodworth from Crédit Suisse.

So I just wanted to drill down into the guidance. So if you look at your run rate this quarter walled at 8.4 million. I think if I'm understanding it correctly, you are saying that take 200,000 tons out of 2Q for the outage, and then you've got 3 additional longwall moves, which would be about 400,000 to 500,000 tons. So that would put you theoretically at a run rate of production closer to 7.8 million. And then within that, you still have sort of the efficiency gains you're going to get throughout the year, labor productivity. I think you're adding more CM units. And then you would also have optionality, if you wanted to, to add more days, I guess, like you did this quarter. So it seems like, A, is that math roughly correct? And then is there any other outstanding issue that we would need to think about certainly as it would pertain to were you at the low end of the guidance, which seems very low?

Curt, in my opinion, the math you're doing requires us to run almost flawlessly. What we've said is, we ran these mines very hard. We were in the best part of longwall panels because we were still early in the longwall panels where the coal is thickest. Equipments have been most recently rebuilt. So it gave us the best opportunity. And we pushed these mines really hard in the first quarter. I would rather wait another quarter to see how our performance is there to do a further update. Right now, we've brought the bottom up a couple hundred thousand, brought the top up 100,000. We do have this outage where we're going to be out for about a week in the second quarter. We had baked that into the original plan, but you definitely see that in the second quarter and that will dropout some tons. And as I've said, everything, we're nearing the end of these panels. We're pushing them harder, so we're going to get to the end of the panels a little more quickly than we had anticipated. The additional longwall move, the way you have to think about that, that was going to be right at the beginning of January next year. When you draw that back into this year, what happens is you don't have the opportunity to make those tons back up. So while it's a good thing to bring another longwall move back into 2018 because that means we're running really well, the upside is a little bit limited by the fact that you do have that longwall move, and it's just not going to be additional free running. So I'd rather wait another quarter for us to be any more bullish than we are today.

Okay. But you're also going to get the productivity benefit of the new portal. And I think you had stated that you would add more CM units, maybe that's not going to happen. But that's fine, I understand. And then just second question on the buyback, the $40 million. Should we think about that as something you would like to build upon in the future depending on met prices? Is it a shift away from the recent history of paying special dividends? Or how do you -- how should we think about sort of the addition of that in terms of capital allocation?

Curt, this is Dale. Yes, the answer to that question, really just gives us more optionality. When we first announced our capital allocation policy, we said that we'll return cash to shareholders through specials as well as the implementation of a repurchase plan. And we're just now getting to that point. And so I think this just adds another tool to the toolbelt that we can further expand as we grow and as we continue this ramp-up in our business. So it's a modest size here to start with, and we certainly can upsize that as we move forward.

Our next question comes from David Gagliano from BMO Capital Markets.

I actually -- Dale, I didn't quite understand the commentary on the pricing convention. Are you changing in any way the pricing convention that you talked through previously? Or is it just a change to the reference in the discount that you had this quarter, the 99% number, because it's a Platts Index?

Yes. We're just changing the reference. This whole quarterly index that kind of replaced the benchmark, the old benchmark method, with that being on a one-month lag basis, it really does not -- it did not match up with how our customers price. As we've said before, we have different categories of pricing and a large portion of those priced, for example, 10 days prior to loading the vessel. Well, if you're using a quarterly lag with a -- a quarterly index with a one-month lag, you're not even -- you're not pricing in the same ballpark. I mean, you could -- with a rising or falling price environment. So what we did is we changed and said, look to better reflect how we perform against current pricing in the market, let's take -- because we really look at this Platts index, right, the low-vol index that's quoted by Platts. So what we did is we've just taken the daily actual price there and comparing to what our realization is on a volume-weighted basis, so that then you can see, okay, that's more current because, otherwise, you're trying to explain anomalies to this one-month lag quarterly that has no bearing or relationship to how our current customers price. We only have one -- a couple of customers that price on that old index average. And so everybody's moved to more using these averages around the shipment date. So we thought this is a better reflection of actually our realizations of the current pricing environment rather than something that's kind of outdated. So that's why we changed. It's just more closely correlated to how we're pricing with our customers.

But I do think you will still see, as we've said in the past, if you look at the trailing 12 months, you're going to see that our realizations, if you want to compare that to that new index price or benchmark price, you'll see they're going to be very close. We've always said we'd be 98%, 99% of that number. And I think that will remain to be true. But we're just trying to give you more of a real-time feel for how we're doing.

Okay. And so the pricing comparison really should not be on any kind of lagged basis moving forward, unlike what was, I think, historically said, correct? Just to be clear.

Yes, Yes. That was clear. That's correct.

And then just the -- bit of a follow up to the previous question. I mean, I guess, I'm just going to ask it directly. Should we expect additional special dividends along with this buyback program given that even on lower met prices, we're coming up with over $200 million of free cash over the next 3 quarters on a sort of $180 met? That might change a little bit, but we're in that zip code. So should we continue to expect some more of these special dividends over the next few quarters?

Well. It's hard to predict exactly how we'll do this. It's all going to be dependent upon our performance, market conditions, commodity price outlook and all of those factors, right? But what it does do is gives us the opportunity to combine the use of special cash dividends as well as at attractive opportunities repurchase our shares when we think that's the -- is appropriate at that time. So I think it gives us just another tool that we can use in combination with the cash special -- the special cash dividend.

Our next question comes from Lucas Pipes from B. Riley FBR.

First question for Dale. Obviously, you've issued some debt alongside the issuance of the special dividends. And I wanted to ask what sort of debt levels you're targeting? Should we think about -- kind of hear about these levels as appropriate? Or what's your level of comfort on the leverage side? I would appreciate your thoughts.

Sure. If you look at the trailing 12 months, I think we're -- this puts us on about 0.68. So well below 1x leverage ratio. And as we've said before, our target range is really that 1.5 to 2x, and that's where we feel comfortable. And as far as additional debt, I think we're just going to have to look at the market conditions, commodity prices, what are the opportunities and evaluate all that with our capital allocation policy in the future. So never say never, right? But we're always going to evaluate debt to make sure that we have the optimal capital structure here. But we're still sticking with that 1.5 to 2x leverage range for our balance sheet.

And would you tie that leverage ratio to a kind of earnings scenario under -- given met coal price? Or is a metric such as LTM the guidepost on that leverage ratio?

I'm not sure I understand your question, but yes, there is a pricing scenario within that 1.5 to 2x. And if you just took last year's volumes, you can see that we can really be in a range of more down in that 1.30, 1.35 to 1.50, 1.55 for a target range like that at 1.5 to 2x.

Got it. So kind of EBITDA in a 1.50, 1.55 environment and then 1.5, 2x leverage. That's kind of where you'd be comfortable?

Yes.

That's very helpful. And also Dale, a question on the NOLs. If I recall correctly, there were limitations as to changes in ownership. For example, I think shareholders couldn't accumulate more than 5% without there being a risk to the NOL within a 1 year anniversary of the IPO. And then you also had the very favorable private letter ruling that removed restrictions on the use of the NOLs. And I think that had a 3-year anniversary from the IPO, if I recall correctly. Could you just remind us kind of what limitations there were? And to the extent that also ties in with the share buyback program and if that could create complication?

Yes. So very -- I'm not sure we have enough time today or next week for an in-depth discussion of all the limitations around Section 382, but think of it this way. We had through April 1st of 2018, so just recently, we passed the 2-year anniversary. That was the most restricted period. If we had had a more than 50% change of ownership under these calculations, we would have lost all the NOLs, okay? So now we're under a different set of Section 382 rules, where you basically have a 3-year look back from each of these change of control calculations or change of ownership or shift in the ownership with the 5% holders. So our last shift calculation was the IPO date. So -- then you have a 3-year look back from there. So that carries forward every 3 years to the extent you have any of these. So you do have these restrictions of creating new 5% holders and that charter restriction is still in place 3 years after the IPO to help protect the NOLs. Now in relation to the share repurchase program, we're still subject to those rules, but we believe we create a process and the controls to ensure that we don't trip any of those rules, so that we would limit the NOLs. So we're -- we make sure that we can do this without impairing those assets because those are tremendous assets for this company. Just looking at Q1, if you think about a all-in tax rate of 25%, 21% federal and then state for Alabama, we would have paid somewhere around $31 million of cash taxes. So that's a huge savings just in Q1. So we want to make sure that we protect these. And we feel like we've built in the controls under this ownership change rules -- set of rules to prevent that.

(Operator Instructions) Our next question comes from Daniel Scott from MKM Partners.

Obviously, a very, very strong production quarter there, running at over 8 million tons a year. As we think about how you've been ramping up over the last several quarters from the downcycle to what would be your nameplate capacity, is this a now typical year for nameplate capacity with 3 longwall moves and this kind of performance in the first quarter? Or is there more upside next year versus this year? And I guess tied to that, how many longwall moves are we looking at in 2019?

Well, I think the longwall moves, in my opinion, you're going to have some years where you only have 2. You're going to have every now and then a year where you have 4, like we did last year. But the norm is going to be 3. In terms of how we'll do quarter-by-quarter, it's really -- again, it's dependent on where we are somewhat in the longwall panels because in a couple of our longwalls, the coal is thicker, so we get more tons per foot at the beginning of a panel. Towards the end of these panels, the equipment is always pretty well beat up because of some of the rock we do cut. And so we typically have a little more maintenance delays as we get to the end of these panels coupled with a little lower tons per foot. I think what you saw in the first quarter is just -- an indication of just what we can to do. And what we can't lose sight of is there's always going to be longwall moves, and we're always going to have those periods where the conditions -- the coal thins, conditions get a little tougher. But I think we -- I think I've said before that if you really watch us these first 2 quarters this year, you're going to see how the company operates without any longwall moves and kind of compare that to how we did last year, in the early part of the year, after we completed our longwall moves, and that will tell you the kind of progress we're making. Now we are adding one more CM unit this year. But the reality is, the guys that we hired, we're getting more and more production out of them -- productivity out of them, which is a good sign. So we're making a lot of headway, but we're not there yet.

Okay. That's helpful. And then as far as on unit costs, with such strong performance through the thicker seams, all the right things happening at the same time, cost still came in at $90 a ton, which is within your very tight guidance. And with 3 longwall moves coming up the balance of the year, is it going to be a challenge then to hit that unit cost guidance?

I'm pretty confident we'll be able to hit that guidance. We had a few things that we worked pretty hard on in the first quarter as well, things like building seals and sealing scenarios that hadn't previously been sealed and the cost associated with that. So we were pretty aggressive both in our production expectations and in our -- the work we wanted to get done in the coal mines, which cost a little more to get done.

Okay. That's great. And then last from me. I think I ask this every quarter. At what point in this cycle, or however you want to think about it, does the potential to spend a lot of money to put a third mine in the Blue Creek seam start to counterbalance your focus on returning cash to shareholders?

Well, I think we are in the process of value -- doing the engineering evaluations around Blue Creek. And our expectation is we'll start to more carefully evaluate that project and look at how and what are the right conditions for us to begin that project. It's -- again, it's a great project, it's a great coal in that mine. It will be the right time, hopefully sooner rather than later, to get moving on that project.

And our next question comes from Lucas Pipes from B. Riley FBR.

I actually just wanted to follow up on Dan's question there and maybe speak more -- ask more broadly on the costs side. Are you seeing inflationary pressures be -- like when I think of underground mines, steel components can be a major cost component. Is that starting to flow through already? On the machinery side are prices for continuous miners, for example, coming up? And then I know last year you were hiring a lot of people. Are you still hiring folks? And how tight is the labor market? Just kind of from a high-level point of view, Walt, I would really appreciate your thoughts.

Well, to this point, we have not seen a great deal of inflationary pressure. We anticipate that could come. But we haven't experienced that yet. In terms of hiring, we're still aggressively hiring month by month. So that goes on. And I -- we still have probably -- we still have a good number of people to hire yet, and we'll get there. But we're trying to make sure we get as many experienced miners that we can that allows us to get the productivity more quickly.

Can you share how many folks you're still looking to hire? I think you mentioned it on the fourth quarter call or maybe it was third quarter last year on that update call. Can you share that?

We want to add an incremental probably 70 or 75 people. But we'll also -- we'll have more hires than that to cover up any turnover we have as well. So incrementally, we want to add about 70 to 80 people.

And ladies and gentlemen, at this time, I would like to turn the conference call back over to management 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.

Ladies and gentlemen, that does conclude today's presentation. We do thank you for attending. You may now disconnect your lines.