SunCoke Energy, Inc. Q2 FY2021 Earnings Call

Good day and thank you for standing by. Welcome to the SunCoke Energy Second Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker Shantanu Agrawal. Please go ahead.

Thanks, Kathy. Good morning. And thank you for joining us this morning to discuss SunCoke Energy’s second quarter 2021 results. With me today is Mike Rippey, President and Chief Executive Officer. Following management’s prepared remarks, we’ll open the call for Q&A. This conference call is being webcast live on the Investor Relations section of our website and a replay will be available later today. If we don’t get to your questions on the call today, please feel free to reach out to our Investor Relations team. Before I turn things over to Mike, let me remind you that the various remarks we make on today’s call regarding future expectations constitute forward-looking statements. The cautionary language regarding forward-looking statements in our SEC filings apply to the remarks we make today. These documents are available on our website as are our reconciliations to non-GAAP financial measures discussed on today’s call. With that, I’ll now turn things over to Mike.

Thanks, Shantanu. Good morning, everyone, and thank you for joining us today. I want to discuss a few highlights of our second quarter results before turning it back to Shantanu who will review them in detail. First, I would like to thank all of our SunCoke teammates for their continued commitment to our shared goals of working safely and efficiently to deliver high quality products and services to our customers. On the coronavirus front, we continue to take all necessary measures to ensure the health and safety of our workforce. We continue to strongly encourage all employees to get the COVID-19 vaccination as it gives the best protection against the virus while also protecting families and coworkers. Turning to our financial performance in the quarter, we are pleased with how our teams delivered across both the Coke and Logistics segments. Coke making operations continued to operate at full capacity, while our Logistics segment saw significant increases in volume. For the second quarter of 2021, we delivered adjusted EBITDA of $68 million, a 15% improvement over Q2 2020. During the second quarter, we also significantly strengthened our balance sheet with the execution of our debt refinancing transactions. We retired the existing 7.500% senior unsecured notes due in 2025 and issued 4.875% senior secured notes due in 2029. Additionally, we extended our revolving credit facilities maturity to June 2026 from August 2024. These refinancings both extend our maturity profile and lower our debt cost significantly. We will save in excess of $17 million in interest on an annual basis as a result of these refinancing activities. Operationally, our export and foundry coke initiatives continue to perform well and we are seeing a positive impact in our financial results. Our products are being well received as we demonstrate our ability to reliably deliver quality products during a time when supply chain disruptions and delays have become all too common. We remain committed to future growth in these markets as we continue to see solid prospects in the years ahead. CMT’s revitalization is also well underway, aided by global strength in commodity markets. We see continued improvement in both volumes and product mix, contributing meaningfully to our financial results. Based on our record first half performance and the expectation of continued strength in steel and coal markets for the remainder of the year, we are increasing our full year 2021 adjusted EBITDA guidance to $255 million to $265 million from the original guidance of $215 million to $230 million. With that, I’ll turn it over to Shantanu to review our second quarter earnings in detail.

Thanks, Mike. Turning to slide four, our second-quarter net loss attributable to SXC was $0.11 per share, down $0.19 versus the prior year period. Current quarter earnings per share reflect a $0.27 impact of debt extinguishment related charges in connection with debt refinancings. Adjusted EBITDA came in at $68 million for the quarter. The increase was primarily due to approximately 2.2 million tons of higher throughput volumes at our Logistics segment. Turning to the adjusted EBITDA bridge on slide five. Second quarter 2021 adjusted EBITDA was higher by $9 million or 15% over the prior year period. Our Coke operations again performed well this quarter and results were reasonably consistent with the second quarter of 2020. The majority of the period-over-period increase in adjusted EBITDA was driven by our Logistics segment as CMT continues to see significant increases in the coal export and iron ore volumes. With little change in corporate and other, we ended second quarter at $68 million of adjusted EBITDA. Turning to slide six to discuss our liquidity position in Q2, as you can see from the chart, we ended the second quarter with a cash balance of $51.7 million. The highlight of the quarter was our debt refinancing transactions, as mentioned by Mike earlier. Along with the meaningful expansions on debt maturities we’ll also benefit from significant cash interest savings in excess of $17 million on an annual basis. In the second quarter, cash flow from operating activities generated close to $40 million. We spent $13.6 million on CapEx during the quarter and paid dividends of $5 million at the rate of $0.06 per share. We paid $10.5 million as transaction fees for issuance of the new senior secured notes and extension of the revolver. We also paid $22 million as premium to call the 2025 senior notes as part of the refinancing transaction. Our total debt balance increased by $9 million over the quarter and stood at approximately $667 million at the end of the second quarter. On an LTM adjusted EBITDA basis, our gross leverage ratio is just under three times and we expect additional deleveraging to continue over the balance of the year. In total, we ended the quarter with a strong liquidity position of approximately $237 million. Now moving to slide seven to discuss our Domestic Coke business performance and revised full year outlook. Second quarter adjusted EBITDA per ton was $58 on 1,063,000 sales ton. Our Domestic Coke fleet continues to run at full capacity and our products in both export and foundry coke markets are well received. Based on the performance during the first half of the year and the expectations for the remainder of 2021, we are increasing the Domestic Coke adjusted EBITDA guidance to $234 million to $238 million from original guidance of $219 million to $224 million. We are also projecting coke production to be higher by 50,000 tons from the original guidance. As a reminder, the coke production guidance includes all three products: contracting blast furnace coke, export coke, and foundry coke. Moving to slide eight to discuss our Logistics business. The Logistics business generated $11.4 million of adjusted EBITDA during the second quarter of 2021, as compared to $3 million in the prior year period. The increase in adjusted EBITDA is primarily due to higher throughput volumes at CMT. The segment as a whole handled 5.1 million tons of throughput volumes during the quarter as compared to 2.9 million tons during the prior year period. CMT handled 1.9 million more tons versus the prior year period mainly driven by higher coal exports and the addition of iron ore as a new product. Increased global demand, strong API2 index pricing and elevated natural gas pricing in Europe continue to spur U.S. thermal coal exports. Given our strong first half 2021 results and looking at the API2 forward curve, we now expect to deliver full year Logistics adjusted EBITDA in the range of $45 million to $48 million, as compared to original guidance of $20 million to $25 million. We anticipate handling approximately 7.5 million tons of coal along with approximately 3.5 million tons of other products at CMT for the full year 2021. The volume guidance for our domestic coal terminals remains unchanged at approximately 10.5 million tons. Turning to slide nine, which summarizes our revised 2021 guidance. We now expect consolidated adjusted EBITDA to be between $255 million and $265 million, as compared to original guidance of $215 million to $230 million. This incorporates increased profitability expectation from export foundry sales in the Coke segment and higher volumes at CMT in the Logistics segment. Our capital expenditures are now estimated to be approximately $90 million, as compared to the original guidance of $80 million with inflationary pressures being the main driver for the increase. Our revised free cash flow guidance stands at $85 million to $100 million with the increase in adjusted EBITDA mostly offset by the 2025 senior notes call premium and debt issuance cost. With that, I’ll turn it over to Mike.

Thank you, Shantanu. Wrapping up on slide 10, as always safety and operational performance is top of mind for our organization. We work to continue to perform safely, while successfully executing against our operating and capital plan for the remainder of the year. As we end the second quarter, we are fully sold out for 2021 and are running at capacity. Our order book is full for this year; we will continue to focus on further developing our customer base and participation in export and foundry coke markets for future years. We’ve made good progress on revitalizing CMT during the first half of the year. Based on our projections, the second half should surpass the first. We will continue to build on this foundation for CMT’s long-term success. As I mentioned earlier, we significantly strengthened our balance sheet during the quarter with the execution of the debt refinancings. The revised debt structure aligns well with our business model and capital allocation priorities. For the remainder of the year, we will continue to work toward reducing our debt balance. In the longer term, we will continually evaluate the capital needs of our business, our capital structure and the need to reward shareholders, and we’ll make capital allocation decisions accordingly. Finally, based on the reliability and performance of our operating segments, we look to achieve our adjusted EBITDA guidance of $255 million to $265 million for 2021. With that, let’s go ahead and open the call for Q&A.

Your first question is from Matthew Fields of Bank of America.

Hi, everyone. Congrats on great execution in the foundry coke market and the Logistics market and with the successful refinancing. Just wanted to sort of touch on the debt reduction comment. What kind of pay down can we expect to see over the back half or is there something more that you kind of have in the hopper? What’s the kind of gross debt number that we can look to see reduced from June 30 to the end of the year?

Well, I think, Matthew, your math is usually pretty spot on given the guidance that we’ve laid out.

Okay. And then, gradually that we’re not going to be at so much debt reduction from here to the end of the year, you’ve obviously got a good amount in the first half, but that guidance, the newly revised higher guidance, you’re kind of well below your historical leverage target. So I guess the question is, what changes first: capital allocation or the leverage target?

Well, here we might disagree with that. Our long articulated, and perhaps, not well-articulated target was 3 times or less. And perhaps, I have not emphasized fully enough the 'or less' part. We’re delighted to be just below 3 times as we finished the second quarter. But the 'or less' part becomes something that I need to emphasize more. So for the time being our focus is, as we’ve said, to continue to pay down debt, get below that three times. And in the years ahead, we’ll talk more about capital allocation recognizing fully the need to our shareholders to continue to invest in our facilities to maintain them at the high level that they are today and have a prudent debt level as well.

All right. Thanks very much for that answer. We appreciate the emphasis on the 'or less' part. Very helpful and good luck on the rest of the year.

Thanks. Appreciate it.

The next question is from Lucas Pipes of B. Riley Securities.

Thank you very much, and good morning, everyone, and congrats on the strong quarter and strong outlook for the year.

Thanks, Lucas.

Mike, I want to touch a bit on the minimum customer commitments for next year. I mean this is something we’ve been talking about for really the past 12 months. I think it was last August that you disclosed additional information there. So I wondered kind of what’s your outlook here, there continues to be a lot of talk about carbon reduction goals in the industry? And I would appreciate if you could share your thoughts about, one, on 2022 minimum commitments, but then also longer term, how do you see SunCoke positioned on that front? Thank you very much.

Lucas, those are great questions. While we're not ready to discuss 2022 just yet, you are correct in referencing August of last year when we began talking about entering the foundry and export markets with about 400,000 to 450,000 tons available for sale. We have achieved that. This year, we are operating at full capacity and selling those quantities into the export and foundry markets. Next year, we expect the volume to increase to roughly 800,000 tons due to the renewals we made with what was then ArcelorMittal. Given the current strength of our markets, we believe we are well-received and should continue to sell effectively, regardless of potential changes. Reflecting on 2021 and the requirements for entering the foundry and export markets shows this progression. Regarding carbon, that's a long-term issue, and many have committed to becoming carbon neutral by 2050. We support initiatives aimed at decreasing the carbon footprint associated with steel production. It's worth noting that the U.S. carbon footprint is very favorable compared to that of European and Asian steelmakers, making us the best in terms of carbon emissions today. I expect this to keep improving. We contribute to this effort by consistently producing high-quality Coke. The superior quality and strength of our Coke provide better support for the burden in blast furnaces, allowing for increased use of substitute fuels like natural gas or HPI. As our customers work to lower their carbon footprints and increase alternative fuel usage, we are prepared to support them with our high-quality Coke, which we believe is unmatched domestically and possibly globally. Additionally, we aim to maintain our leading environmental technologies, ensuring best-in-class practices in the Coke-making process. We actively encourage discussions around carbon footprint reduction and feel well-positioned to engage in these efforts.

Terrific. It’s really helpful. Thank you, Mike, for that detail. Second question turning over to your Logistics business, obviously a remarkable recovery and seaborne coal prices in particular? And kind of as you look at how this business is positioned today, you raised guidance. Is there interest for longer-term arrangements again? There were discussions in the past about possibly selling CMT, is that something that you would consider here and make them more interested parties as well? So I appreciate kind of a more comprehensive discussion of the market and then also the strategic outlook for CMT? Thank you very much.

Good question, Lucas. We’re very pleased with the performance. A few years ago, CMT was primarily serving two customers, and when those customers went through bankruptcy, it was a significant setback for us. The challenge for our team was to transform that asset into a merchant facility. Had we not succeeded in this repositioning, we might have considered selling the asset to someone better suited for revitalization. Our teams faced this challenge head-on, and as evident from our results, they responded remarkably. They have been proactive, reaching out and exploring new supply chains, which is not an easy task, as disrupting a well-functioning supply chain requires patience. Despite some transitions, our teams have surpassed expectations, partly due to the strength in global commodity markets, with higher API2 prices by historic standards. The forward API2 curve remains strong, so we're optimistic about CMT's prospects in the thermal sector and other commodities, such as iron ore and pet coke. We aim to build on our team's recent successes. I couldn’t be more satisfied with the work they’ve accomplished over the last 18 months to turn this facility around and reposition it.

Very helpful, Mike. And a quick follow up on that, when I think about 7.5 million tons of coal, 3.5 million tons of other materials. How does that compare to the nameplate capacity and so is there kind of little room to the cart to maybe increase volumes further given the strong market backdrop?

Let me say, there is a little more room, Lucas. So it’s a great question. I’d like to see us, perhaps, a little longer term handling 15 million tons through there. We’ve made some debottlenecking investments at the facility to allow for that to happen. We were going to be happy with 11 million tons this year and maybe 12 million tons is an all-time record for us. I don’t go back that far, because I recall some of the folks that were around the media talking about 12 million tons years and when we get to 12 million tons, we’re not going to be satisfied; we’ll look to debottleneck and get to 15 million tons.

Very good. I will leave it here. Thank you very much for all the color and best of luck.

Thanks.

Your next question is from Karl Blunden of Goldman Sachs.

Hi. Good morning. Thanks for the time. We’ve definitely built some flexibility on the balance sheet with the recent transaction and it looks like cash flow is coming in a bit stronger than your prior expectations. When you take a look at the M&A environment, is there opportunity for you to play a role in that?

We appreciate the question, Karl. We are actively seeking opportunities around us where we can add value for our shareholders by delighting customers. This year, we are focusing on consumer products related to the steel industry. We aim to build on our foundation by serving our existing customers in familiar markets with products we understand. Our technology portfolio is strong, and we hope to expand it further. The success we’re seeing in the foundry coke market exemplifies our preference for organic growth, which typically yields higher returns with lower capital expenditures compared to acquisition costs. Nonetheless, we are on the lookout for quality assets with strong management that align with our operations. We maintain a disciplined approach and haven’t made any acquisitions in my three and a half years here, despite our efforts. We won't pursue growth unless the anticipated returns significantly exceed our cost of capital. Thus, we have a carefully measured strategy and, as of now, we haven’t identified any opportunities that satisfy all of our criteria.

But when you look at valuations available in the market today, could M&A deleveraging after synergies?

Could be a lot of things. Well, I’ll just leave it at that. We’ll not start to predict the future.

It sounds good. We’ve spoken about success on kind of the commercial and revenue side. When you think about cost inflation and managing that through the footprint, are there areas of concern or how are you managing the business today?

We are experiencing some inflation, as Shantanu mentioned regarding capital. Labor is currently tighter than historical levels, and the way to gauge labor in a tight market is through supply and demand dynamics. Additionally, we are facing material cost inflation, with prices for hot bands reaching $1,800 a ton compared to $500 a ton not too long ago. We need to manage these costs by maximizing efficiency in how we use our inputs. On the operational side, we primarily deal with coal, which is a pass-through cost to our customers, and labor for converting coal to coke and maintaining our facilities. Labor-related inflation has been significant. While our contracts allow us to pass on some of these increases to customers, we still strive to improve our efficiency. For instance, in our maintenance activities, we aim to extend the intervals between outages, reducing the need for labor and materials. We are also focusing on deploying automation, increasing yields, and boosting throughputs. We have projected an increase of 50,000 tons of coke for the remainder of the year without requiring additional labor. Therefore, by improving our output efficiency, we can counterbalance the rising inflation costs. There are many strategies an industrial company can utilize to mitigate potential structural shifts in the inflation landscape. There is ongoing discussion about whether the current inflation is temporary or structural, and while I won't speculate on the economists' views from the Fed, I do sense that there may be some structural inflation present in the economy now.

Okay. Thanks a lot, Mike. Appreciate it.

Yeah.

Your next question is from Nathan Martin of The Benchmark Company.

Yeah. Thanks. Good morning, everybody, and congrats on the quarter and the debt refinancing.

Thanks, Nathan.

My broader questions have mostly been answered at this stage. I just have a quick modeling question. Perhaps I missed it in the release, but could you provide us with the breakdown in volumes at CMT between coal and other products?

You mean the throughput…

7.5 for coal and 3.5 for other.

No. In the quarter, Mike, I am sorry.

In this quarter, I will have to look at it.

That’s right.

Okay. Got it. Perfect. Appreciate that. Really that’s all I had left, guys. I appreciate the time and best of luck for the second half.

Thanks.

Thank you.

And your next question is from Josh Taykowski of Credit Suisse.

Hey, guys. Thanks for taking the question. Just had one for me, most of mine have been answered. But I was wondering if you could maybe just talk through the sequential slight margin pressures that you saw in Q2 versus Q1. I guess more specifically the sequential decline in EBITDA per ton on the domestic side, as well as the margin differential in your Brazil Coke?

Josh, it’s really kind of what I would think of on the one hand there is noise. We have a little more outage work going on in the second quarter than the first. As we discussed in the first it was really an exceptional quarter where almost nothing went wrong. So it’s relatively quarter-over-quarter the same results. You got some seasonality, some outage work, so timing for lack of a better word. And then Brazil, I think we earned the bonus in the second quarter and a little more throughput there. Is that right, Shantanu?

It's not really a margin issue. It's more about the amount of coke tons produced and sold. The EBITDA was fairly consistent. The difference comes from the timing of the tons sold, which resulted in a higher dollar per ton in the first quarter compared to the second. So, it's not fundamentally a margin concern.

Got it. That’s helpful. Thanks, guys. Appreciate it. Congrats again.

Yeah.

And there are no further questions at this time. I would turn the call back over to Shantanu.

Okay. Thanks, Kathy. And again thank you all for joining us this morning and for your continued interest in SunCoke. Look forward to talking soon.

Thank you.

Ladies and gentlemen, this concludes today’s conference call. You may now disconnect.