SunCoke Energy Q2 2023 Earnings Call Transcript

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August 1, 2023

There are 6 speakers on the call.

Operator

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

Speaker 1

Thanks, Glenn. Good morning, and thank you for joining us this morning to discuss SunCoke Energy's Q2 2023 results. With me today are Mike Rippey, Chief Executive Officer, Catherine Gates, President and Mark Marinko, Senior Vice President and Chief Financial Officer. Following management's prepared remarks, We'll open the call for Q and A. This conference call is being webcast live on the Investor Relations section of our website and a replay will be available later today.

Speaker 1

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 Catherine, 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 our reconciliations to non GAAP financial measures discussed on today's call. With that, I'll now turn things over to Catherine.

Speaker 2

Thanks, Shantanu. Good morning, and thank you for joining us on today's call. Earlier today, we announced SunCoke Energy's 2nd 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.

Speaker 2

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 $74,000,000 a record for 2nd 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.

Speaker 2

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 We 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.

Speaker 2

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 $250,000,000 to $265,000,000 With that, I'll turn it over to Mark to review our 2nd quarter earnings in detail. Mark?

Speaker 3

Thanks, Catherine. Turning to Slide 4, net income attributable to SunCoke was $0.24 per share in the Q2 2023, up $0.03 versus the prior year period. Adjusted EBITDA for the Q2 of 2023 was $74,000,000 An increase of $2,700,000 from Q2 2022. The increase in adjusted EBITDA Was primarily driven by favorable cold 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.

Speaker 3

2nd quarter domestic coke adjusted EBITDA was $68,200,000 and coke sales volumes were 1,043,000 tons. The $3,900,000 increase in adjusted EBITDA as compared to the same prior year period It was driven by excellent operational performance. Our domestic coke plants achieved Higher coal to coke yields during the Q2. Our plants also realized higher coke sales volumes in the 2nd quarter Due to a coke shipment timing shift from the Q1, 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 $234,000,000 to $242,000,000 Now moving on to Slide 6 to discuss our logistics business.

Speaker 3

Our logistics business generated $11,700,000 of adjusted EBITDA And handled combined throughput volumes of approximately 5,200,000 tons during the Q2 of 2023, as compared to $12,500,000 5,800,000 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 Q2. While we anticipate continued volatile commodity market conditions, we expect to deliver logistics Full year adjusted EBITDA within our guidance range of $47,000,000 to $50,000,000 Now turning to Slide 7 to discuss Our liquidity position for Q2. SunCoke ended the quarter with a cash balance of approximately $78,000,000 Cash flow from operating activities generated approximately $69,000,000 We fully paid down our revolver balance of $35,000,000 during the quarter, spent $27,800,000 on CapEx and paid $7,200,000 in dividends at the rate of $0.08 per share.

Speaker 3

In total, we ended the quarter with a strong liquidity position of approximately $428,000,000 As Catherine 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 Catherine.

Speaker 2

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.

Speaker 2

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 the 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 $250,000,000 to $265,000,000 With that, let's go ahead and open up the call for Q and A.

Operator

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

Speaker 4

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

Speaker 2

Thanks, Lucas.

Speaker 4

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

Speaker 2

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

Operator

project. Got

Speaker 4

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?

Speaker 2

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

Speaker 4

Yes. Just kind of a rough range on an annual basis.

Speaker 1

Lucas, this is Shantanu. So on a combined basis, we have said that For the full year, roughly 650,000 tons of equivalent blast furnace coke is going into the combined spot blast furnace and foundry coke market. So that number still hasn't changed. And obviously, as we have Doug, before, we really don't break out a number between foundry coke and spot blast furnace coke for the commercial reasons. But Roughly, we have $4,200,000 of capacity, dollars 3,600,000 is contracted and $600,000 to $650,000,000 equivalent blast furnace is going into the foundry and export Spot, Glass Furnacequarket.

Operator

Okay.

Speaker 4

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

Speaker 1

So for the past couple of years in 2021, 2022, we did 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 we did in 2021 2022.

Speaker 2

Yes, Lucas, we really think about our merchant 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.

Speaker 4

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

Speaker 2

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

Speaker 1

I think it's driven by Lucas, just to explore on that. I mean, it's just driven by the coke Demand and supply balance, I think coming through COVID, there was huge inventory levels build up. And then as those inventory levels have Driven down, I think all the steel producers in North America are reassessing their coke situation, how much blast furnaces they want to run And things like that and that is what is causing this additional we call it additional demand within the North American region.

Speaker 2

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

Speaker 4

That's helpful. And is this additional demand translating into desire for Longer term contracts, so could we see that $3,600,000 number creep up? Or is there downside risk because Some glass furnace operators still look to growth in on the EAF side. How do you think about that 3.6 million contractual level over the coming years? Thank you.

Speaker 2

Well, I think I mean, We're certainly pleased with the contracted coke that we do have, and it provides us the steadiness of our cash And otherwise that you're seeing and you're seeing that come through here as we increase our dividend. But We certainly also benefited from our merchant Coke sales, and so we'll just continue to look for ways to most Profitably put our Coke out there into the market.

Speaker 4

Thank you. I appreciate that. And then My recollection is that most of the coke spot sales are out of JUUL. Do I remember that right or has maybe something shifted within your portfolio? Thank you.

Speaker 1

Lucas, I mean, JUUL 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 From JUUL. So Havill and JUUL kind of act as our combined spot coke, including foundry and then spot blast furnace.

Speaker 4

Okay. Okay. And that's helpful. And if you Is it down through the Gulf or off the East Coast? It's down through the Gulf.

Speaker 4

Typically. Yes. Got it. Okay. Yes, a breakdown would be super helpful, just kind of a rough Breakdown of export volumes.

Speaker 4

I appreciate you don't want to give exact numbers, but a rough breakdown would be very helpful on the export side. The $650,000,000 is obviously a big number and if it's

Speaker 1

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

Speaker 4

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

Speaker 2

Thanks, Lucas.

Operator

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

Speaker 5

Thanks, operator. Good morning, everyone. Congrats on the quarter. Thanks for taking my questions. Maybe I'll start let's see.

Speaker 5

All foundry coke sales for the year finalized, substantially all non contracted Coke sales finalized for the full year as well now. I understand full half to go, but At least to me, you appear well on your way to potentially exceed full year adjusted EBITDA guidance, not just hit the high end. So maybe just Curious, is there something that kept you from raising guidance at this point? Are there any potential headwinds you've seen in the second half? I think, Catherine, you mentioned some volatile market conditions.

Speaker 5

Maybe You could elaborate on that. Thanks.

Speaker 2

Yes, absolutely, Nathan, and appreciate the question. As I did The commodity markets are weaker and certainly more volatile. And I would actually say that that's not just for our logistics volumes, but it's actually for price as well on the remaining uncontracted blast coke merchant tons. So we have to keep that in mind. I expect that we'll have some benefit actually from the API 2 price adjustment in the second half, but we're not going See that at the same level that we saw at the first half of the year.

Speaker 2

And as you saw on the slides, our corporate Costs were actually lower in the second quarter. So we expect those to be higher. This was all timing, so we expect them to be higher in the second half. And frankly, Nathan, the 2nd quarter was a record for us. It was we had exceptional performance.

Speaker 2

We couldn't be more pleased with that, but we really can't forecast based on record performance. So we'll have more clarity at the end of the Q3 and we'll certainly reassess at that time, but those are some of the factors driving our

Speaker 5

I appreciate that, Catherine. And I apologize if I missed it. You just mentioned logistics Volumes, did you guys provide any updated sales guidance for the Logistics segment?

Speaker 1

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

Speaker 5

Okay. Shafter, I think it was 22,000,000 tons kind of overall, and I think the split was remind me, I think it was something like 12,000,000 Ex CMT, so $10,000,000 at CMT?

Speaker 4

Yes. I think you're right.

Speaker 5

Okay. And maybe just you mentioned the comment on API2 benefit, Catherine. I guess you said the benefit probably will be down sequentially based on where we see averages so far. Is that true? And then It would be great to get some color on what you guys are seeing from an export coal standpoint from your coal partners given that decline?

Speaker 5

Thanks.

Speaker 2

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 Q3, 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 3rd quarter, but certainly not at the level that we were in, in the first half. And as we know and as we I 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.

Speaker 5

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

Speaker 1

Nathan, I mean, I think you're talking about the coal. I think Catherine was talking about the export market of the metallurgical coke. On the coal side, yes, I mean, we have seen a slight drop off in the volumes similar to the pricing and volume go hand in hand together. So there is a drop off in volume, but given that we are guiding to our volume guidance being unchanged, We feel that there's not going to be a significant drop off, but definitely seeing a little bit of softening in the second half, both in volume and pricing.

Speaker 5

Got it. Good afternoon. That was obviously what I was looking for there by confirming that And 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.

Speaker 5

You guys completed the Foundry Cove expansion project at JUUL on time, on budget, so congratulations there. Are there any other projects on the horizon for 2024 or beyond? Just trying to think about potential for growth CapEx On top of maintenance, which I think you guys previously pegged at around $80,000,000 $85,000,000 if that still holds true. Thank you.

Speaker 2

Right. So beyond our regular maintenance CapEx, really the growth CapEx that we're contemplating is for the GPI project. If we're able to move forward with that And as you know, we are still working with U. S. Steel on that.

Speaker 2

So that's what we contemplate out ahead for purposes of growth

Speaker 5

Got it. And so obviously, absent that, do you still feel comfortable in that $80,000,000 to 85,000,000 Maintenance level, does that still hold true?

Speaker 2

Exactly right, yes.

Operator

Okay, perfect.

Speaker 5

All right. Well, I appreciate all those comments, guys. I'll leave it there, and best of luck in the second half.

Speaker 2

All right. Thank you.

Operator

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

Speaker 2

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

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Earnings Conference Call
SunCoke Energy Q2 2023
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