SunCoke Energy, Inc. Q2 FY2023 Earnings Call

Ladies and gentlemen, welcome to the SunCoke Energy Second Quarter 2023 Earnings Call. My name is Glenn, and I will be the operator for today's call. I will now hand you over to your host, Shantanu Agrawal, VP, Finance and Treasurer, to begin.

Thanks, Glenn. Good morning, and thank you for joining us this morning to discuss SunCoke Energy's second quarter 2023 results. With me today are Mike Rippey, Chief Executive Officer; Katherine Gates, President; 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 do not 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 Katherine, 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 applies to the remarks we make today. These documents are available on our website, as are reconciliations to non-GAAP financial measures discussed on today's call. With that, I'll now turn things over to Katherine.

Thanks, Shantanu. Good morning, and thank you for joining us on today's call. Earlier today, we announced SunCoke Energy's second quarter results. I want to discuss a few highlights before turning it over to Mark to review the results in detail. I'd like to start by thanking all of our SunCoke employees for their contributions to our record second quarter results. Our domestic coke plants ran at full capacity and delivered excellent results for the quarter. Our logistics terminals were impacted by weaker commodity market conditions, but still delivered solid results. Through our collective efforts, we delivered consolidated adjusted EBITDA of $74 million, a record for second quarter performance. We also announced today that the Board of Directors of SunCoke approved a 25% increase in our quarterly dividend from $0.08 to $0.10 per share. The increase is effective on September 1, 2023, the next quarterly payment. This meaningful increase demonstrates the Board's and management's confidence in our continued progress and the strength and stability of our underlying core businesses. Our foundry coke business continues to perform well with the foundry coke expansion project recently completed on time and on budget. This project allows SunCoke to continue to grow our market participation without losing the flexibility to alternate between blast and foundry coke production. Our order book for non-contracted blast furnace coke is solid, with substantially all of our non-contracted blast coke sales finalized for the full year. From a leverage perspective, we ended the quarter with our gross leverage ratio at approximately 1.79 times on a trailing 12-month adjusted EBITDA basis. Finally, as we continue to execute against our 2023 objectives, we are well positioned to achieve the high end of our full year adjusted EBITDA guidance range of $250 million to $265 million. With that, I'll turn it over to Mark to review our second quarter earnings in detail. Mark?

Thanks, Katherine. Turning to Slide 4. Net income attributable to SunCoke was $0.24 per share in the second quarter of 2023, up $0.03 versus the prior year period. Adjusted EBITDA for the second quarter 2023 was $74 million, an increase of $2.7 million from second quarter 2022. The increase in adjusted EBITDA was primarily driven by favorable coal-to-coke yields and higher coke sales volumes due to timing, partially offset by lower contribution margin on non-contracted blast coke sales and lower volumes in our Logistics segment. Moving to Slide 5 to discuss our Domestic Coke business performance in detail. Second quarter Domestic Coke adjusted EBITDA was $68.2 million, and coke sales volumes were 1,043,000 tons. The $3.9 million increase in adjusted EBITDA as compared to the same prior year period was driven by excellent operational performance. Our domestic coke plants achieved higher coal-to-coke yields during the second quarter. Our plants also realized higher coke sales volumes in the second quarter due to a coke shipment timing shift from the first quarter. These operational achievements were partially offset by the lower contribution margin that we anticipated on our non-contracted blast coke sales. The domestic coke fleet continues to operate at full capacity, and substantially all non-contracted blast furnace coke sales are finalized for the full year. Given our strong performance during the first half of the year, we are well positioned to deliver Domestic Coke adjusted EBITDA on the high end of our guidance range of $234 million to $242 million. Now moving on to Slide 6 to discuss our Logistics business. Our Logistics business generated $11.7 million of adjusted EBITDA and handled combined throughput volumes of approximately 5.2 million tons during the second quarter of 2023 as compared to $12.5 million and 5.8 million tons, respectively, during the same prior year period. The decrease in adjusted EBITDA was primarily due to the lower throughput volumes that resulted from the weaker commodity market conditions. Thermal coal pricing continued to decline, but CMT benefited from the full API2 price adjustment during the second quarter. While we anticipate continued volatile commodity market conditions, we expect to deliver Logistics full year adjusted EBITDA within our guidance range of $47 million to $50 million. Now turning to Slide 7 to discuss our liquidity position for Q2. SunCoke ended the quarter with a cash balance of approximately $78 million. Cash flow from operating activities generated approximately $69 million. We fully paid down our revolver balance of $35 million during the quarter, spent $27.8 million on CapEx and paid $7.2 million in dividends at the rate of $0.08 per share. In total, we ended the quarter with a strong liquidity position of approximately $428 million. As Katherine mentioned, we announced a 25% increase in our quarterly dividend. This increase is consistent with one of our key capital allocation priorities, which is rewarding our long-term shareholders. With that, I will turn it back over to Katherine.

Thanks, Mark. Wrapping up on Slide 8. As always, safety, environmental and operational performance are top priorities for our company. We remain focused on safely executing against our operating and capital plan for full utilization of our coke making assets. As I said earlier, our foundry coke business continues to perform well. Our expansion project was completed on time and on budget and allows us to grow our market participation while maintaining flexibility to make either blast or foundry coke. We continued to make progress on our capital allocation strategy during the quarter with a meaningful increase in our quarterly dividend. We continuously evaluate the capital needs of the business, our capital structure and rewarding long-term shareholders, and we'll make capital allocation decisions accordingly. Finally, based on the reliability and performance of our operating segments, while also factoring in volatile market conditions, we look to achieve the high end of our full year adjusted EBITDA guidance of $250 million to $265 million. With that, let's go ahead and open up the call for Q&A.

Thank you. We have our first question comes from Lucas Pipes from B. Riley Securities. Lucas, your line is now open.

Thank you very much, operator. Good morning, everyone and congrats on a good quarter.

Thanks, Lucas.

I wanted to start the first question with the capital return announcement you made, you increasing the dividend. And how do you think about buybacks? From a tax perspective, buybacks could be a lot more efficient. So I’m wondering where buybacks could factor into your capital return framework from here. Thank you very much.

Well, thanks, Lucas. As you know, we consider all options when we're making capital allocation decisions. And as we've said, we look to reward our long-term shareholders. We really determined that a dividend increase was the best way to do that at this time and given the steadiness of our cash flows and recognizing and taking into full account the GPI project.

Got it. Okay. I appreciate that. Then on the export side, can you remind us roughly what amount of volumes go into the coke export business?

Well, Lucas, as you know, we don't discuss the specifics. Sorry, Lucas. Go ahead.

Yeah, just kind of a rough range on an annual basis.

So on a combined basis, we have indicated that for the full year, approximately 650,000 tons of equivalent blast furnace coke is entering the combined spot blast furnace and foundry coke market. That figure remains consistent. As previously mentioned, we do not disclose the specific breakdown between foundry coke and spot blast furnace coke for commercial reasons. Overall, we have a capacity of 4.2 million, with 3.6 million contracted, and 600,000 to 650,000 equivalent blast furnace tons are going to the foundry and export spot blast furnace coke market.

Okay. All right. And geographically, where would exports typically be going? Kind of what's the rough geographic breakdown of the coke export business?

So for the past couple of years, in '21-'22, we did the majority of the export coke market going into Europe and South America and these locations. But in 2023, we did some shipments to South America. And as we talked about in the last quarter, we are seeing more of a demand from North American coke users, which could be our domestic purchasers, as well as into Canada. So the market is changing a little bit in 2023 as compared to what it did in '21 and '22.

Yeah, Lucas. We really think about our merchants' blast coke on really as an uncontracted basis, but to really look at where we can find the most profit, whether it's seaborne or North American. So that's really where we are today, as Shantanu said.

Very helpful. So the increased demand in North America, anything you could point to us, what has been driving that? Is that Canada or domestic?

I would just say that we're certainly seeing interest in both, I think it's fair to say.

I think it's driven by the coke demand and supply balance. Coming out of COVID, there were significant inventory levels built up. As those inventory levels have decreased, all the steel producers in North America are reevaluating their coke needs and how much they want to operate their blast furnaces. This reassessment is what is leading to the increased demand in the North American region.

And I think, Lucas, as you know, we've seen over the last year and a half, a significant amount of coke supply come off the market. So that factors into this as well.

That's helpful. And is this additional demand translating into desire for longer-term contracts? So could we see that 3.6 million number creep up or is there downside risk? Because some blast furnace operators still look to growth on the EAS side. How do you think about that 3.6 million contractual level over the coming years? Thank you.

We are definitely satisfied with our contracted coke, as it ensures a steady cash flow that is reflected in our increased dividend. Additionally, we have gained from our merchant coke sales. We will continue to seek the most profitable opportunities to sell our coke in the market.

Thank you. I appreciate that. My understanding is that most of the coke spot sales come from Jewell. Is that correct, or has there been a change in your portfolio? Thank you.

Lucas, I mean, Jewell is where we are producing most of the foundry. The spot sales are coming mostly out of Haverhill and a little bit of combination, a little bit extra from Jewell. So Haverhill and Jewell kind of act as our combined spot coke, including foundry and then spot blast furnace.

Okay. That's helpful. If you export, is it down through the Gulf or off the East Coast?

It's down through the Gulf.

Typically?

Yes.

Got it. Okay. Yeah, a breakdown would be super helpful, just kind of a rough breakdown of export volumes. I appreciate you don't want to give exact numbers, but a rough breakdown would be very helpful on the export side. The 650 is obviously a good number. And if it's...

Yeah. I understand on that, Lucas. But again, due to the commercial reasons, we have talked about foundry markets being so small. There are not a lot of players there. So if we break down one, the other one becomes very apparent. So I understand your concern. But at this point in time, it's very difficult for us to do that.

All right. I appreciate the color and yeah, keep up the good work.

Thanks, Lucas.

Thank you. We have our next question comes from Nathan Martin from The Benchmark Company. Nathan, your line is now open.

Thanks, operator. Good morning, everyone. Congrats on the quarter. Thanks for taking my questions.

Thanks, Nathan.

Maybe I'll start by saying that all foundry coke sales for the year have been finalized, and substantially all noncontracted coke sales for the full year are also finalized. I understand there's still half the year to go, but it seems to me that you are on track to potentially exceed your full year adjusted EBITDA guidance, not just the guidance at this point. Are there any potential challenges you foresee in the second half? Katherine, you mentioned some volatile market conditions; could you elaborate on that? Thanks.

Yes, Nathan, thank you for your question. As I mentioned, the commodity markets are currently weaker and more volatile. This situation impacts not only our logistics volumes but also the price for the remaining uncontracted blast coke merchant tons. It's important to consider this. I do expect some benefit from the API2 price adjustment in the second half, but it won't be at the same level as the first half of the year. As indicated on the slide, our corporate costs were lower in the second quarter; however, we anticipate those costs to rise in the second half due to timing factors. The second quarter was a record for us with exceptional performance, which we are very pleased with, but we cannot base our forecasts on such record performance. We will have more clarity after the third quarter and will reassess the situation then. These are some of the factors influencing our guidance.

Okay. I appreciate that, Katherine. And I apologize if I missed it. You just mentioned Logistics volumes. Did you guys provide any updated sales guidance for the Logistics segment?

Nathan, the guidance for Logistics volumes are unchanged at this point.

Okay. Shantanu, I believe it was 22 million tons overall, and I think the split was around 12 million excluding CMT, so 10 million excluding CMT?

Yes, I think you're right.

Okay. You mentioned a comment on API2 benefit, Katherine. You indicated that the benefit will likely decline sequentially based on our current averages. Is that correct? Also, I'd appreciate it if you could share some insights on what you’re observing from an export coal perspective with your coal partners, especially considering the decline. Thanks.

Oh, sure, Nathan. So yes, what I said was that we've seen the API2 prices kind of fall during the quarter. But when we look to the third quarter, we won't see that same benefit that we saw in the first half, but we also don't expect that to just completely drop off. So there'll be some benefit for us in the third quarter, but certainly not at the level that we were in the first half. And as we know and as we took into account with our guidance, the export markets, they are weak right now and they are volatile. And so we fully took that into account in saying that we would be at the high end of our guidance range.

Okay. So export markets for coal specifically are weak is what you're saying or just logistics in general?

Hey, Nathan. I think you're referring to coal, and Katherine was discussing the export market for metallurgical coke. On the coal side, we have observed a slight decrease in volumes, which aligns with pricing trends. While there is a drop in volume, our volume guidance remains unchanged, so we don't anticipate a significant decline, although we are noticing some softening in both volume and pricing in the second half.

Got it, Shantanu. And that was obviously what I was looking for there by confirming that you have not changed your full year logistics shipment guidance in the face of maybe some weakness we're seeing right now. Okay. Perfect. And then maybe just one last one. You guys completed the foundry coke expansion project at Jewell on time, on budget. So congratulations there. Are there any other projects on the horizon for '24 or beyond? Just trying to think about potential for growth CapEx on top of maintenance, which I think you guys previously pegged at around $80 million, $85 million, if that does still hold true. Thank you.

Right. So beyond our regular maintenance CapEx, the growth CapEx that we're contemplating is for the GPI project, if we're able to move forward with that project. And we are still working with U.S. Steel on that. So that's what we contemplate out ahead for purposes of growth CapEx.

Got it. And so obviously, absent that, you still feel comfortable in that $80 million to $85 million kind of maintenance level. Does that still hold true?

We are exactly right, yes.

Okay. Perfect. Appreciate all those comments, guys. I’ll leave it there and best of luck in the second half.

All right. Thank you.

Thank you, Nathan. We have no further questions on the line. I will now hand back to Katherine Gates, President of SunCoke Energy, for closing remarks.

Thank you all for joining us today, and thank you for your interest in SunCoke.

Thank you. Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.