SunCoke Energy, Inc. Q1 FY2022 Earnings Call

Good morning. My name is Chris, and I’ll be your conference operator today. At this time, I’d like to welcome everyone to the SunCoke Energy’s First Quarter 2022 Earnings 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. Thank you. Shantanu Agrawal, Vice President Finance and Investor Relations. You may begin.

Good morning, and thank you for joining us this morning to discuss SunCoke Energy’s first quarter 2022 results. With me today are Mike Rippey, President and Chief Executive Officer; and Mark Marinko, Senior Vice President and Chief Financial 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 well as 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, and thank you all for joining us on today’s call. Today, we announced SunCoke Energy’s first quarter results. And before I turn it over to Mark, who will review the results in detail, I want to discuss a few highlights. As always, I want to start by thanking all of our SunCoke employees for their commitment and contributions, which marked a record quarter for SunCoke. Our Domestic Coke fleet delivered excellent results this quarter and the main driver behind these results is our continued success in the foundry and export coke markets. Strong commodity markets and rising demand for our products provided a favorable backdrop for an excellent start to the year, despite some challenges due to unusually wet winter weather. We are pleased to have our operations continue to run at full capacity and look forward to a period of dry weather. Our Logistics segment continues to perform well, with increased volumes from new customers at our domestic terminals and the API2 price adjustment benefit at CMT. During the quarter, we also extended our coal handling contract at CMT through 2024 with a higher base rate and continued potential upside from the API2 price adjustment provision. Looking at our capital structure, we continue to pay our $0.06 per share quarterly dividend and our gross leverage ratio stands at approximately 2.2 times on a trailing 12-month adjusted EBITDA basis. We will continue to pursue a balanced yet opportunistic approach to capital allocation. Overall, our strong financial performance in the first quarter provides a solid foundation to build on for the balance of the year. We are well positioned to modestly exceed our consolidated full year 2022 adjusted EBITDA guidance of $240 million to $255 million. With that, I’ll turn it over to Mark to review our first quarter earnings in detail.

Thanks, Mike. Turning to Slide 4, the first quarter net income attributable to SunCoke was $0.35 per share, up $0.15 versus the prior year period, primarily driven by export coke sales. Consolidated adjusted EBITDA for the first quarter 2022 was $83.8 million, up $13.2 million versus first quarter 2021. The increase was driven by the higher margin on export sales and the API2 price adjustment benefit at CMT. Turning to Slide 5 to discuss our Domestic Coke business performance in detail. First quarter adjusted EBITDA was $76 million, and we sold 962,000 tons of coke. This period over period adjusted EBITDA increase was driven by the higher margin on export coke sales, which included a one-time benefit of lower cost carryover coal from 2021. Wetter than normal winter weather impacted coke production across the fleet during the first quarter. Additionally, the period over period coke production was impacted due to changes in mix between foundry and blast furnace coke production. As a reminder, foundry tons do not replace blast furnace tons on a ton-for-ton basis. For example, due to differences in the production process, a single ton of foundry coke replaces approximately two tons of blast furnace coke. On the backdrop of the first-quarter performance, we now expect to modestly exceed the domestic coke adjusted EBITDA guidance range of $229 million to $235 million. Turning to Slide 6 to discuss our Logistics business. The Logistics business generated $12.6 million of adjusted EBITDA during the first quarter of 2022 as compared to $10.9 million in the prior year period. The increase in adjusted EBITDA was primarily due to the API2 price adjustment benefit at CMT and higher volumes at our domestic terminals. Our Logistics business handled 5.2 million tons of throughput volumes during the quarter as compared to 5.3 million tons during the prior year period. CMT handled approximately 600,000 fewer tons versus the prior year period, mainly driven by coal supply and rail delivery issues. Domestic terminals saw a good uptick in volumes, driven by increased demand for handling services from new customers. During the first quarter 2022, we extended our take-or-pay coal handling agreement at CMT through 2024. The take-or-pay volume for the contract is 4 million tons annually, and the base rate was increased. The contract continues to include the API2 price adjustment provision, which provides good upside potential. Similar to the coke segment, we now expect to modestly exceed the Logistics adjusted EBITDA guidance range of $34 million to $40 million, with the volume guidance remaining unchanged. Switching gears, I would now like to talk about our liquidity position for Q1. As you can see from the chart, we ended the first quarter with a cash balance of approximately $80 million. Cash flow from operating activities generated close to $23 million; it was impacted by the timing of receivables, an increase in coal inventory, and changes in coal payment terms. We spent approximately $13 million on CapEx during the quarter, and our debt increased by $14 million, mainly due to working capital requirements. We also paid $5 million in dividends at the rate of $0.06 per share during the quarter. In total, we ended the quarter with a strong liquidity position of approximately $300 million. With that, I will turn it back to Mike.

Thanks, Mark. Wrapping up on Slide 8. As always, safety and operational performance is top of mind for our organization. Our efforts will continue to focus on safely executing against our operating and capital plans. We are pleased to see increased demand for our services and new customers at our domestic logistics terminals. The extension of the coal handling agreement at CMT, along with the positive commodity market backdrop, provides a strong foundation to continue to further strengthen CMT. As I mentioned at the beginning of this call, we’re extremely pleased with our success in the foundry and export coke markets. The first quarter results are further proof that our entry into these markets was timely and opportunistic. We continue to build customer relationships and are continuously looking to further increase market share. Sales into these markets allow our coal plants to run optimally at full utilization. On the capital allocation front, we expect our deleveraging initiatives to continue as we look to bring down our revolver balance further. We’re looking at growth opportunities both organically and through mergers and acquisitions. And as we have said before, we will remain disciplined, understanding that it is not in our shareholders' interest for the company to sacrifice long-term value creation for short-term marginal gains. We continue to evaluate the capital needs of the business, our capital structure, and the need to reward shareholders on a continuous basis and will make capital allocation decisions accordingly. Finally, as I stated earlier, continued strength in commodity markets combined with our excellent first quarter results leads us to project full-year results to modestly exceed our adjusted EBITDA guidance of $240 million to $255 million. We will provide further updates to the guidance, as we have more clarity regarding the second half of the year in our next earnings call. With that, let’s go ahead and open the call for Q&A.

Our first question is from Karl Blunden with Goldman Sachs. Your line is open.

Hi, good morning. Thanks very much for the time. Cost inflation has been a big topic of focus through earnings season. I’d be interested in your thoughts on what you’re seeing in your business right now, both from an OpEx standpoint? And then CapEx, where – it’s very encouraging that you reiterated your CapEx guide. They’re interested in how that plays out for the rest of the year? Thanks.

That’s a good question, Karl. Thanks. On the CapEx side, we talked in last year’s earnings calls, particularly beginning in the second half of the year, that we were experiencing unexpected inflation in some of the capital project work that we planned. And as it relates to 2022, we fully accounted for the expected impacts of inflation in our forecast. So our CapEx plan for the year anticipates the inflationary impacts that we continue to absorb. On the OpEx side, we indicated in our last earnings call that we saw the impacts of inflation affecting our business and began efforts to offset where possible any inflationary impacts that we might see. So we’re working hard to offset these inflationary increases. We see it affecting everything we do, most notably coal, which is the most important driver of our operating costs. As you know, we have pass-throughs for all of our contractual accounts. And as we now work, particularly in the export markets, we look to closely match our coal prices and our coal sourcing decisions with our sales into the export market to avoid any undue exposure to inflation in the commodity markets, principally coal.

Excellent. Makes sense. And then, you’re forecasting now higher EBITDA for the year by higher free cash flow, and you discuss some M&A and organic growth opportunities. I didn’t hear much discussion around shareholder returns, either cash dividends or shareholder repurchases. Should we take that to mean that the focus is going to be on balance sheet strengthening for now and that’s perhaps a discussion to have at a later time? Or is there room for some of that?

As we’ve indicated, our focus is to continue to deleverage the balance sheet; the work there is on the revolver. As always, the board continuously evaluates opportunities to return to shareholders, whether that be increasing the dividend or some other form, but that’s the route ahead. Our focus right now is on deleveraging.

Okay. Thanks, Mike. Appreciate it.

Our next question is from Nathan Martin with The Benchmark Company. Your line is open.

Hey, good morning, everyone. Congrats on the record quarter. Thanks for taking my questions. Again, record start to the year it looks like Domestic Coke adjusted EBITDA per ton was $79, logistics shipments higher than I’d expected especially given some real delays. Congrats on extended take-or-pay. API2 prices looking like they should remain elevated at least for a while given what’s going on with the Russia-Ukraine conflict. So, I guess there’s something out there that you guys are seeing over the next three quarters that is detaching from officially raising your full-year EBITDA guidance, or maybe what do you need to see over the next quarter to feel comfortable enough to raise that guidance? Thanks.

Yeah, Nathan, thank you. Those are all good questions. As we indicated, we’ll review the guidance at the end of the second quarter. We have uncertainty, particularly as it relates to global markets and our sales into those markets, especially export coke sales, and we expect more clarity as we end the second quarter and enter the third as it relates to principally export sales for the back half of the year. So we’ll address the full-year guidance again at the end of the second quarter when we have more clarity into the back half export activities.

And then maybe just kind of a clarification question like the adjusted EBITDA per ton on the Domestic Coke side was $79. Was there something driving that higher number? I think I heard some mention of what we were trying to understand from fourth quarter to first quarter net effect that number at all?

Yeah, it did. There are two things there. The success we’ve had in the export market, and then as you properly point out, we benefited from having some coal carryover from 2021 into 2022, and when you think about that kind of one-time benefit, it was slightly in excess of $10 million in the quarter.

Okay. That’s very helpful. I appreciate that. And then maybe just going back to transportation for a second. Can we maybe get your updated thoughts there on rail transportation, logistics, if things have improved somewhat as we’ve gone throughout the first few months of this quarter, and what you’re seeing there? And then maybe any update on the labor side of things, which is something that we touched on last quarter as well?

Yeah. The logistics supply chain issues have – I always hesitate to say resolve themselves fully, because no sooner that I say that, I wish I hadn’t. But certainly, from what we’re experiencing early in the first quarter, things are quite a bit improved. I don’t know what you meant by your question on labor.

I think you had mentioned before last quarter that maybe there are some higher labor costs going on with contract workers. Is that still the case? Are you seeing that as far as inflationary pressures are concerned as you touched on earlier?

No, not particularly. So we’re seeing general wage inflation that others are observing in the economy, but nothing specific to SunCoke there.

Got it. I’ll leave it there. Appreciate your information. Best of luck.

Sure. Thanks, Nathan.

It appears that we have no further questions at this time. I’ll turn the call over to Mike Rippey for any closing remarks.

Again, thank you all for joining us on the call this morning. And as always, we look forward to your continued interest in SunCoke and all the things we’re doing here. So I appreciate your time and interest. Have a good day.

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