SunCoke Energy, Inc. Q2 FY2024 Earnings Call

Good morning. Thank you all for attending the SunCoke Energy Second Quarter 2024 Earnings Call. My name is Brika, and I will be your moderator today. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I would now like to pass the conference over to your host, Shantanu Agrawal, VP Investor Relations at SunCoke Energy. Thank you. You may proceed, Shantanu.

Thanks, Brika. Good morning, and thank you for joining us this morning to discuss SunCoke Energy's second quarter 2024 results. With me today are Katherine Gates, 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 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. This morning, we announced SunCoke Energy's second quarter results. I want to share a few highlights before turning it over to Mark to discuss the results in detail. First, I would like to thank all of our employees for their contributions to our results. Our domestic coke plants continued to run at full capacity and our logistics terminals again had strong results, handling 6 million tons during the quarter. Through our collective efforts, we delivered consolidated adjusted EBITDA of $63.5 million during the quarter. This strong performance in the first half of the year positions us well to achieve the high end of our full year 2024 adjusted EBITDA guidance range. We also announced today that the Board of Directors approved a 20% increase in our quarterly dividend from $0.10 to $0.12 per share. The increase affects the next quarterly payment date of September 3, 2024. This increase reflects the confidence of our Board and management team in the strength and stability of our underlying core businesses. Our gross leverage remained below 2 times at approximately 1.93 times on a trailing 12-month adjusted EBITDA basis at the end of the quarter. We continue to focus on executing against our 2024 key initiatives and now expect to achieve the high end of our full year adjusted EBITDA guidance range of $240 million to $255 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. Our net income attributable to SunCoke was $0.25 per share in the second quarter of 2024, up $0.01 versus the prior year period. The increase was driven by lower depreciation, tax and net interest expense, which was mostly offset by lower sales volumes and pricing in our domestic coke segment. Consolidated adjusted EBITDA for the second quarter of 2024 was $63.5 million compared to record second quarter results in the prior year of $74 million. The decrease in adjusted EBITDA was primarily driven by lower blast coke sales volumes due to the timing of spot sales in the prior year quarter, lower coal-to-coke yields and lower API2 price adjustment benefit at CMT partially offset by higher transloading volumes at our domestic logistics terminals. Moving to Slide 5 to discuss our domestic coke business performance in detail. Second quarter domestic coke adjusted EBITDA was $57.9 million and coke sales volumes were 973,000 tons. While the domestic coke fleet continued to run at full capacity, the decrease in adjusted EBITDA as compared to the record prior year period was primarily driven by lower blast coke sales volumes due to the timing of spot blast coke sales in the prior year period. Lower coal-to-coke yields on our long-term take-or-pay contracts also impacted second quarter results. As we mentioned in our first quarter call, all spot blast and foundry coke sales are finalized for the full year. Our full year domestic coke sales ton guidance remains approximately 4.1 million tons and we are reaffirming our full year domestic coke adjusted EBITDA guidance of $238 million to $245 million. Now moving on to Slide 6 to discuss our logistics business. Our logistics business generated $12.2 million of adjusted EBITDA in the second quarter of 2024, compared to $11.7 million in the second quarter of 2023. The increase in adjusted EBITDA was primarily due to higher transloading volumes from our domestic terminals, partially offset by lower pricing at CMT due to limited API2 price adjustment benefit during the quarter. We expect some recovery of the API2 price adjustment benefit in the third quarter. Our terminals handled combined throughput volumes of approximately 6 million tons during the second quarter of 2024 as compared to 5.2 million tons during the same prior year period. Our domestic coke terminals handled 3.5 million tons in the second quarter of 2024 as compared to 2.8 million tons during the same prior year period, driven by new business. We are pleased with the strong results from our logistics segment in the first half of the year. We experienced very limited high water costs in the first and second quarters, which contributed to our favorable results. Additionally, our domestic terminals handled a total of 7.1 million tons, representing the best first half performance in terms of volume in the past five years. For the second half of the year, while we expect solid operating performance from the logistics segment to continue, we anticipate a modest decline in total logistics handling tons as compared to the first half. Our strong first half logistics performance coupled with our outlook for the remainder of the year positions us well to exceed logistics full year 2024 Adjusted EBITDA and volume guidance. Now turning to Slide 7 to discuss our liquidity position for Q2. SunCoke ended the second quarter with a cash balance of $81.9 million and a fully undrawn revolver of $350 million. Net cash used in operating activities was $9.3 million and was negatively impacted by the timing of approximately $68 million of cash receipts at quarter end. We expect operating cash flow to normalize over the remainder of the year, and we are reaffirming our full year operating cash flow guidance of $185 million to $200 million. We paid $8.4 million in dividends at the rate of $0.10 per share this quarter and spent $17.5 million on CapEx. In total, we ended the quarter with a strong liquidity position of $431.9 million. With that, I will turn it back over to Katherine.

Thanks, Mark. Wrapping up on Slide 8. As always, safety is our first priority, and we will continue to focus on strong safety and environmental performance. Robust safety and environmental standards set SunCoke apart and are central to our reliable delivery of high-quality coke and logistics services. We remain focused on safely executing against our operating and capital plan for full utilization of our coke-making assets. We also continue to focus on adding new business at our logistics terminals. We are pleased with the results of our efforts so far, with new business largely driving the highest first half volumes at our domestic terminals in the last five years. And while we were able to finalize all of our spot blast and foundry coke sales for the full year, we continue to pursue future opportunities to broaden our customer base. As we've demonstrated in the past, we will pursue a balanced yet opportunistic approach to capital allocation. From a growth perspective, we continue to work on developing the Granite City GPI project. The 20% quarterly dividend increase aligns with our capital allocation goal of rewarding long-term shareholders and reflects the strength and stability of our business. We continuously evaluate the capital needs of the business, our capital structure and the need to reward our shareholders, and will make capital allocation decisions accordingly. Finally, we are very pleased with the strong results in the first half of the year, and coupled with our outlook for the balance of the year, we now expect to achieve full year consolidated adjusted EBITDA at the high end of our guidance range of $240 million to $255 million. With that, let's go ahead and open up the call for Q&A.

Thank you. We will now begin the question and answer session. Your first question comes from Lucas Pipes with B. Riley Securities. You may proceed.

Thank you very much, operator. Good morning, everyone. My first question is in regards to the recent...

Good morning, Lucas.

My first question is in regards to the recent announcement from your largest customer on an acquisition in Canada. Obviously, it still has to close, but I wondered how you expect this deal impacting your future coke sales to this customer, especially in light of the June 2025 contract expiration? Thank you very much.

Thanks, Lucas. When we look at the Stelco acquisition, we don't see any change in supply or demand as far as coke in the North American market and therefore, no change in the overall coke balance.

Got it. So, in terms of any displacement from Canada coming into Cleveland, for example, you wouldn't expect that?

What I said was that there's no change in the overall coke balance. We don't know what Cliffs will decide to do. But if the assumption in your question is that Cliffs would use Stelco's excess coke instead of Stelco selling that coke to another customer, from our perspective we would see the customer that Stelco was selling to as an opportunity to potentially pursue. Since there is no change in the macro supply and demand, we would do what we've always done, which is to aim to run full and sell out. We would look to sell our coke to that potential customer, other customers in the North American market for our spot blast coke sales, foundry coke sales, or, of course, the seaborne market.

That is very helpful. I appreciate that clarity. A quick follow-up on the logistics side. First, did you see any benefit from the Baltimore outage in terms of volumes getting rerouted down to the Gulf? And then a major Illinois basin producer commented earlier this week that sulfur discounts are a bit higher than they have been, so I wonder what you expect for Q3 and Q4 in terms of volumes through CMT? Thank you very much.

Sure. With respect to the unfortunate incident in Baltimore, we did benefit from that incident in the first half, and we talked about that in our first quarter call. When you see us talk about having a softer second half, that's really due to the higher volumes that we saw in the first half that aren't getting replicated in the second half.

Thank you. Could you speak to the market?

Yes. From an Illinois Basin coal perspective, if you look at the API2 futures pricing, that has stabilized quite a bit after a really volatile 2023 and early 2024. From a volumes or demand perspective going through our terminals, we are not seeing a huge change from the first half to the second half. So that's basically what our expectation is for the second half of the year right now.

Very helpful. Thank you. And then congratulations on the dividend increase. That is great to see. Katherine, any read-through to future growth? Or would you say this is more of a reflection of solid results to date, and it doesn't really change your priorities if it comes to Granite City pig iron, for example? Would appreciate your thoughts on that. Thank you.

We continue to work with U.S. Steel on the GPI project. That work is ongoing and our engineering work is still in progress. There has been no change in our focus with respect to the GPI project as our number one growth focus and growth opportunity. The fundamentals of that project are very strong. While it has taken a long time, the fundamentals—low-cost iron ore, availability of the blast furnace, the location of our coke plant, and the ability to send that high-quality GPI to Big River—are difficult to replicate in the market. We continue to strongly believe in the fundamentals of that project and we continue to work on it with U.S. Steel. The increase in our dividend, now the third consecutive year of an increase, fully reflects the GPI project with respect to the ability to increase that dividend. We'll continue to focus on capital allocation that rewards our long-term shareholders.

Katherine, I appreciate all the color today. Thank you very much. And to you and the team, best of luck.

Thank you. Your next question comes from Nathan Martin with Benchmark Co. You may proceed.

Thanks, operator. Good morning, everyone.

Good morning, Nathan.

Good morning.

Let's stick with the logistics for a second here. A big pickup, obviously, quarter-over-quarter at CMT in particular. It sounds like that was likely material other than coal. Can you talk about some of the new business you guys have secured there and how you see that playing out going forward?

Nathan, we're seeing new business at our domestic terminals. CMT continues to run well, but the significant new business is at our domestic terminals. This is not the Baltimore bridge business we saw in the first half; this is actual new business coming in. We can't talk about specific customers, but this is at our domestic terminals and is why you're seeing such high volumes for those terminals—the highest we've had in the last five years.

Okay. So then the increase you're saying at CMT quarter-over-quarter was really just picking up some shipments that were diverted away from Baltimore?

That's correct. We also had slightly higher volumes from a timing basis than expected in the first half.

Nate, we did not get any benefit at CMT from the Baltimore incident. The benefit from Baltimore was at the domestic terminals. If you compare Q2 2023 to Q2 2024, there's roughly a 130,000 ton pickup at CMT, which is pretty normal. If you are comparing Q1 2024 to Q2 2024, the second quarter for CMT was much better than the first quarter. When we gave our 2024 guidance, we were coming into the year with a very soft market, which was factored into our original guidance. Q1 came in a little softer, but we saw a pickup in Q2, and that's what you can see in the volume. The majority of the new business pickup in EBITDA and the reason behind the increase in guidance is coming from the domestic logistics terminals.

Okay, got it. So you still feel like CMT is going to normalize somewhere around maybe 2 million tons plus or minus per quarter, that kind of run rate then?

Yes, that's kind of what's factored in the guidance. For CMT, our full year guidance was 4.1 million tons for coal and 3.8 million tons for other products. We said we are going to exceed the volumes overall, but for CMT the guidance on those volumes remains unchanged. The majority of the pickup is coming through the domestic terminals.

Okay, got it. That's helpful. And then maybe just shifting over to the domestic coke business quickly. You guys mentioned last quarter some planned outages here in the second half. Is that still the case? And how do you expect that to impact EBITDA per ton and sales in the second half versus what you saw in the first half? Historically sales remain fairly consistent, but it would be great to get your thoughts.

The expectation, as we are reaffirming our guidance for $238 million to $245 million, remains the same. This year, the timing of sales and production have aligned really well. Unlike Q2 of 2023, which was a record quarter mostly driven by the timing of shipments, for 2024 our sales and production are pretty well aligned. We did mention that we have some outages in the second half of the year, which is factored in. Sequentially, Q4 has traditionally been our weakest quarter with production due to outages and winter preparation, and we expect a similar pattern this year.

Okay. Typical seasonality. I appreciate that, Shantanu. I'll leave it there. Best of luck to you guys in the second half.

Thanks.

Thanks, Nathan.

Thank you. We have no current questions. We have no questions registered. So I would like to hand it back to Katherine Gates, President and CEO of SunCoke Energy for some final remarks.

Thank you all again for joining us this morning and for your continued interest in SunCoke. Let's continue to work safely and create value for all of our stakeholders.

Thank you all for joining the SunCoke Energy second quarter 2024 earnings call. You may now disconnect from the call, and please enjoy the rest of your day.