SunCoke Energy, Inc. (SXC) on Q2 2021 Results - Earnings Call Transcript
Operator: 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.
Shantanu Agrawal: 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.
Mike Rippey: 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 lowers our debt cost significantly. We will save an 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.
Shantanu Agrawal: 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 second quarter.
Mike Rippey: 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. To revise 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.
Operator: Your first question is from Matthew Fields of Bank of America.
Matthew Fields: 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 pay down, we can 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?
Mike Rippey: Well, I think, Matthew, your math is usual as pretty spot on given the guidance that we’ve laid out.
Matthew Fields: 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 kind of what changes first capital allocation or the leverage target?
Mike Rippey: Well, here we might disagree with that. Our long articulated, and perhaps, not well-articulated target was 3 times or less. And perhaps, not emphasize fully enough 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 is 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.
Matthew Fields: All right. Thanks very much for that answer. We appreciate the emphasis on or less part. Very helpful and good luck on the rest of the year.
Mike Rippey: Thanks. Appreciate it.
Operator: The next question is from Lucas Pipes of B. Riley Securities.
Lucas Pipes: Thank you very much, and good morning, everyone, and congrats on the strong quarter and strong outlook for the year.
Mike Rippey: Thanks, Lucas.
Lucas Pipes: 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.
Mike Rippey: Lucas, it’s also great questions and we’re really not prepared today to talk about 2022. But you’re correct in talking about August of last year and we started to discuss the fact that we would enter the foundry and the export markets with around 400,000 tons to 450,000 tons to sell and we have indeed accomplished that. This year we’re running full and we’re selling those quantities into the export and foundry markets. That 450,000 tons grows to approximately 800,000 tons next year, given the renewals that we did with what was then ArcelorMittal.
Lucas Pipes: 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.
Mike Rippey: Good question, Lucas. Obviously, we’re very pleased with the performance. At CMT is -- I know you’ll remember only a few years ago CMT was more or less a captive facility to two customers. And those customers are -- went through bankruptcy and that was a blow to CMT. And the challenge then for our team was to reposition that asset into a merchant facility and had we been unable to successfully reposition the asset, we would have considered a sale of the asset, perhaps, to someone better positioned to bring about that revitalization and that was a challenge for our teams. And as you can see in our results they responded beautifully. They’ve been out working hard, knocking on doors and looking to enter new supply chains, which aren’t easy, it’s not easy to disrupt a supply chain that’s working well, so you have to have some patience. Notwithstanding migrations, they have exceeded our expectation, part of that, of course, goes to the strength in the global commodity markets and a little wind at the back never hurt anybody, API2 prices are quite elevated today by historic measures and if you look at the forward API2 curve, it remains elevated. So we’re quite encouraged with the prospects for CMT and the thermal side, as well as other commodities that we look to handle through the facility and with good success with iron ore and pet coke and we’re going to look to continue with those initiatives. So our singular focus now is to continue to build on the good success the team has had. Like I said, I couldn’t be more pleased with the work that they’ve done over the last 18 months to get this facility turned around and repositioned.
Lucas Pipes: 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?
Mike Rippey: 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 we get to 12 million tons, we’re not going to be satisfied, we’ll look to debottleneck and get to 15 million tons.
Lucas Pipes: Very good. I will leave it here. Thank you very much for all the color and best of luck.
Mike Rippey: Thanks.
Operator: Your next question is from Karl Blunden of Goldman Sachs.
Karl Blunden: Hi. Good morning. Thanks for the time. We’ve definitely built some flexibility on the balance sheet with the recent transaction and 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?
Mike Rippey: We would like to think so, Karl. It’s good question. I Appreciate it. We have and we continue to look for opportunities, adjacent opportunities, where we can provide value to our shareholders by delighting customers. And when I am talking about consumer products of this year, we’re talking about steel companies and related industries. So we’ll look for opportunities to build on our foundation and serving our customers and markets we know, with products that we know. We’ve got a very nice technology portfolio of the company that we would like to expand. You see the success of the foundry coke market, while that’s not M&A, it’s organic growth. But those are the kind of undertakings we look for, organic obviously first, because returns with organic growth are typically higher, because the CapEx requirement is typically not large compared to the acquisition cost of an asset. But we’re looking for good assets with good managements that are complementary to what we do. We’re quite disciplined. We haven’t done anything in my three and half years, not for lack of trying. But we’re very disciplined in our approach. And unless we see returns that are well in excess of our cost of capital, we simply won’t grow for the sake of growth. So we got a very disciplined approach here. We’re looking -- we just haven’t found anything as of this date that needs all of our criteria.
Karl Blunden: But when you look at valuations available in the market today, could M&A deleveraging after synergies?
Mike Rippey: Could be a lot of things. Well, I’ll just leave it at that. We’ll not start to predict the future.
Karl Blunden: 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?
Mike Rippey: Well, we’re seeing some inflation, as Shantanu indicated in his remarks on the capital side. Clearly, labors tighter than what it has been historically and the way you track labor in a tight market as you pay, it’s more or less a simple math of supply and demand. And there is material cost inflation. We see hot bands at $1,800 a ton. We’re not so long ago, there were $500 a ton. So, there is material cost inflation as well. We have to manage that by being as efficient as we can with the utilization of those inputs. On the operating front, we only really have two components, coal, which is a pass-through to our customers and the labor that we use to convert that coal to coke and the labor that we used to maintain our facilities. It’s been remarkable inflation there yet. As you know the take or pay nature of our contracts allows for some of that increase to be passed on to our customers. But we don’t -- just because we can pass it on take that as a reason not to continue to look to be ever more efficient. So in all of our activities we’re doing maintenance, for example, we look to extend the time between outages, so there’s less need for outages and therefore less need for our labor and materials. We look to deploy automation to the extent we can. We look to increase our yields. We look to increase our throughputs. We guided 50,000 tons up for the balance of the year on Coke and there is no requirement for additional labor with that 50,000 tons. So to the extent we can be more efficient with our output. There is no labor component. So you’re offsetting the cost, those inflationary cost increases by generating more throughputs. So there’s lots of levers and industrial company can pull to try to offset what maybe some structural changes in the inflationary environment. There’s a lot of debate out there about whether this is transitory inflation or if it’s structural. I don’t want to second guess the economists from the fed. But it certainly feels to me anyway that there is a little bit of structural inflation in the economy now.
Karl Blunden: Okay. Thanks a lot, Mike. Appreciate it.
Mike Rippey: Yeah.
Operator: Your next question is from Nathan Martin of The Benchmark Company.
Nathan Martin: Yeah. Thanks. Good morning, everybody, and congrats on the quarter and the debt refinancing.
Mike Rippey: Thanks, Nathan.
Nathan Martin: Yeah. My bigger picture questions have -- most have been addressed at this point. So just really a quick modeling question. Maybe I missed in the release, but can you guys give us the breakdown in volumes at CMT between coal and other products?
Shantanu Agrawal: You mean the …
Mike Rippey: 7.5 for coal and 3.5 for other.
Nathan Martin: No. In the quarter, Mike, I am sorry.
Shantanu Agrawal: In this quarter, I will have to look at it.
Nathan Martin: I think, Shantanu, you guys did about maybe was 2.1 million tons of coal in the first quarter and you sound like just outlook other. I was just curious what that might look like in Q2 and full year?
Shantanu Agrawal: It’s similar in the second quarter as well.
Mike Rippey: That’s right.
Nathan Martin: 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.
Mike Rippey: Thanks.
Shantanu Agrawal: Thank you.
Operator: And your next question is from Josh Taykowski of Credit Suisse.
Josh Taykowski: 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 2Q versus 1Q. 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?
Mike Rippey: 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?
Shantanu Agrawal: Yeah. I mean it’s really not a margin question. I think it’s more of a denominator that coke tons produced and sold. I mean I think that the numerator -- the EBITDA was more or less the same. It’s just the timing of the tons being sold and that leads to the dollar per ton being higher in Q1 versus Q2. It’s really not of a margin question.
Josh Taykowski: Got it. That’s helpful. Thanks, guys. Appreciate it. Congrats again.
Mike Rippey: Yeah.
Operator: And there are no further questions at this time. I would turn the call back over to Shantanu.
Mike Rippey: 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.
Shantanu Agrawal: Thank you.
Operator: Ladies and gentlemen, this concludes today’s conference call. You may now disconnect.
