SunCoke Energy, Inc. (SXC) on Q3 2021 Results - Earnings Call Transcript
Operator: Good morning. My name is David and I'll be your conference operator today. At this time I'd like to welcome everyone to the SunCoke Energy's Third Quarter 2021 Earnings Call. Today's conference is being recorded. All lines have been place on mute to prevent any background noise. After the speaker remarks, there will be a question-and-answer session. I would now turn the call over to speaker Shantanu Agrawal, Head of Investor Relations. You may begin your conference.
Shantanu Agrawal: Thanks, David. Good morning. And thank you for joining us this morning to discuss SunCoke Energy's third 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. 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 SCC 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 Mike.
Mike Rippey: Thanks, Shantanu. Good morning and thank you all for joining us today. I want to discuss a few highlights of our third 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. 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 delivered another solid quarter, despite the disruption caused by Hurricane Ida. For the third quarter of 2021, we delivered adjusted EBITDA of 73.9 million representing record third quarter performance. As I mentioned CMT operations were disrupted due to Hurricane Ida, but the terminal recovered quickly with only minor damage and minimal business disruption. The resilient nature of our operations and commitment to our employees was clearly visible through the speed at which CMT returned to normal operations. Operationally, our export and foundry coke initiatives continued to perform well as evident from our financial results. In addition, positive market dynamics are proving that our entry into these markets was timely. Our products are well received by customers, and we have established ourselves as reliable supplier of quality products in both markets. Our gross leverage stands at approximately 2.5 times on a trailing 12 month adjusted EBITDA basis. We are committed to continue paying down our revolver for the remainder of the year. Based on our year-to-date performance, and the expectation of continued strength in steel and coal markets, for the remainder of the year, we're well positioned to modestly exceed our full year 2021 adjusted EBITDA guidance of 255 million to 265 million. With that, I'll turn it over to Shantanu to review our third quarter earnings in detail. Shantanu?
Shantanu Agrawal: Thanks, Mike. Turning to Slide 4. Our third quarter net income attributable to a SXC was $0.27 per share up $0.30 versus the prior year period. The increase is primarily driven by the absence of supply relief provided to certain customers as part of the turndown agreements during the prior year period. Adjusted EBITDA came in at $73.9 million for the quarter, up 26.1 million from the prior year quarter. Our Coke operations continued to deliver strong performance and operate efficiently. Overall Coke operations were up 17.7 million over prior year period. Logistics segment was up 7.3 million quarter-over-quarter driven by higher throughput volumes, higher price and diversified product base at CMT. Turning to the domestic coke business summary on Slide 5. Third quarter adjusted EBITDA per turn was $62 on 1.56 million sales turns. The volumes were higher across the fleet as the prior year period was impacted by pandemic related turndowns. Our successful entry into export and foundry market is proving to be timely and when combined with full capacity utilization, we can see the positive impact on our profitability. We expect full year domestic Coke adjusted EBITDA are to come in modestly higher than the guidance range of 234 million to 238 million. There are planned outages as some of our domestic Coke facilities which will impact the volume and profitability of fourth quarter, but is included in the full year guidance. Moving to Slide 6, to discuss our Logistics business. The Logistics business generated $11.6 million have adjusted EBITDA during the third quarter of 2021 as compared to $4.3 million in the prior year period. The increase is driven by higher coal volumes, addition of iron ore as a product and higher price on coal handling, all at CMT. The coal handling contract includes a quarterly price adjustment, or a price kicker, which is based on the API2 price index, which benefitted Q3 results. We expect the benefit to continue in Q4 as well. As mentioned by Mike earlier, the impact of Hurricane Ida on CMT was limited and the facility came back to normal operating levels fairly quickly. The segment as a whole handled 4.9 million tons of throughput volumes during the quarter as compared to 3.3 million tons during the prior year period. Our full year guidance for Logistics volumes and adjusted EBITDA remains the same as provided in second quarter. Turning to Slide 7, to discuss our liquidity position in Q3. As you can see from the chart, we ended the third quarter with a cash balance of $54.6 million. In the third quarter cash flow from operating activities generated close to $79 million. We spent 18.4 million on CapEx during the quarter and paid dividends of 5 million at the rate of $0.06 per share. We lowered our debt by 51.7 million with the majority of the reduction coming in the form of pay down of our revolving credit facility. Our total debt balance stood at approximately 615 million at the end of third quarter and we expect to continue to pay down the revolver over the balance of the year. In total, we ended the quarter with a strong liquidity position of $291 million. With that, I'll turn it over to Mike.
Mike Rippey: Thank you, Shantanu. Wrapping up on Slide 8. As always, safety and operational performance is top of mind for our organization. We look to continue to perform safely while successfully executing against our operating and capital plan for the remainder of the year. We're very pleased with the progress we've made so far in the new markets we entered this year, and we will continue to focus on further developing our customer base and participation in future years. Our aim when we started 2021 was to run at full capacity while introducing new products. As we end the third quarter, we are fully booked for the balance of the year and we're actively working on filling the order book for next year. On the Logistics side, we have made good progress on revitalizing CMT with the backdrop of positive market dynamics. We will continue to build on this foundation for CMTs long-term success. On the capital allocation front, we'll continue to work toward reducing our revolver for the balance of the year. In the longer term we'll continually evaluate the capital needs of our business, profitable growth opportunities, and the need to reward our shareholders. And we'll make capital allocation decisions accordingly. Finally, based on reliable performance of our operating segments, and success of export and foundry products, we're well positioned to modestly exceed our adjusted EBITDA guidance of 255 million to 265 million for 2021. With that, let's go ahead and open it up for Q&A.
Operator: Okay, and we'll take our first question from Nathan Martin with The Benchmark Company.
Nathan Martin: Guys, thanks for taking my questions and congrats on the quarter.
Mike Rippey: Thanks, Nathan.
Shantanu Agrawal: Thanks, Nathan.
Nathan Martin: If I look at your domestic Coke segment, updated EBITDA guidance there, again, modestly exceed your prior range. This is combined with your expectation also for volumes and profitability be a little bit lower, due to some outage work. I guess first question is lower compared to what, is that quarter-over-quarter or year-over-year? And then also maybe just talk about some of the outage work being done. And then finally, it looks like you still expect to hit that 4.1 5 million ton of production guide, just want to make sure that's right. Thanks.
Mike Rippey: Yeah, that's all right. And it's quarter-over-quarter. The fourth quarter, we've scheduled a lot of the routine maintenance and capital work and we like to complete during the year. This year is working out where a lot of that work is going to occur during the fourth quarter. Some of that's by design and some of it frankly, is due to the pandemic and the challenge associated with gathering all the necessary equipment that needs to be installed and refurbished and pulling together all the labor inputs to complete the capital work. So it's been difficult to do capital work throughout the year again, because of the difficulty of obtaining materials and unnecessary labor inputs. So a lot of that work is being pushed into the fourth quarter here.
Nathan Martin: Got it and that's I guess, might what - gives you feeling that you're still probably going to be close to that 90 million of CapEx for the full year.
Mike Rippey: Yeah.
Nathan Martin: Okay. Then kind of moving over to Logistics. Third quarter a little bit weaker, obviously, I'm sure that was largely driven by Hurricane Ida. You guys again left your full year guidance of around 21.5 million tons unchanged. That would apply pretty big fourth quarter it looks like especially at CMT, maybe could you discuss what gives you the confidence that you can still hit that full year number?
Mike Rippey: Well, you touched on it. The disruption was related to Ida. Our facility was down for the better part of three weeks. And that related not to damage at the facility but rather that we were unable to run the facility because there was no electricity in the region. So we had to wait for electricity to be restored in the region. So we lost some volumes there. And good news is the teams were at the ready when power was restored. They were in. We repaired some of the minor damages and we're back operating within 48 hours of power being restored, so we look forward to a good fourth quarter down at CMT.
Nathan Martin: Okay, yeah, because just looking again, if you kind of hit that full year CMT guidance of around 11 million tons would apply and roll over 3 million tons in the fourth quarter, so you're confident you can kind of get to that number more or less?
Mike Rippey: Yeah, we're confident with the guidance we've given.
Shantanu Agrawal: Yeah, I mean, I think you just take - I mean, it should be around that 3 million ton number. Q4, obviously, kind of with the API2 pricing being so strong, they're seeing good volumes. So we feel confident with our guidance.
Nathan Martin: Perfect, very helpful, guys. And then Shantanu, you just brought up one thing I want to touch on to that price kicker, as you mentioned in the third quarter, that you still expect probably carry through the fourth quarter. Could you guys let us know maybe what API2 price is required to get that kicker? And is this something that could also continue into 2022 and beyond, assuming it stays above that required level?
Mike Rippey: Yeah. It certainly could continue into '22. To answer your first question, the answer is we don't share any of the details with regard to our contract. So I am unable to answer that question. Or perhaps better said unwilling to answer that question.
Nathan Martin: Got it Mike. No, worries. And then maybe the last one, too. I'll just try and see. Again, kind of going back real quick at the domestic Coke segment, fully sold out this year. Last quarter, you mentioned you sold about 800,000 tons to sell for '22. Any comments or updates there?
Mike Rippey: No, as we said, we're working hard at selling our volumes for '22 as we speak today. '21 is sold out now.
Nathan Martin: Got it. Appreciate the comments and best of luck in the fourth quarter, guys.
Mike Rippey: Thanks.
Shantanu Agrawal: Thanks, Nathan.
Operator: Okay. And we'll take our next question from Josh Taykowski with Credit Suisse Management.
Josh Taykowski: Hey, guys, congrats on the quarter. Just one quick one for me. Maybe not quick, but I guess commentary from one of your big customers in their earnings call last week, pointed to the clear intention to continue to reduce their met coal needs. I guess on the back of that and their recent purchase of some scrap vertical integration play, how do you react to that and pretty vocal intention to continue reducing that met coal need.
Mike Rippey: Yeah. We've addressed this before. The comment is not a new one. We actually applaud it. And the reason we do that is to the extent by adding alternative fuel sources to a blast furnace, it doesn't much matter whether it's DRI, HBI, PCI pulverized coal or natural gas or fuel. All of those additions correctly reduce the need for coke in the furnace, but what it also does is require the coke that is in the furnace to be of ever higher quality. Coke has two primary values in a furnace, one is a source of fuel the other is to support the burden in the furnace so as to allow the chemical reactions to occur. When you think about these other substitute materials, they have no value in terms of burden support in the furnace so that requires the coke that's in the furnace to be of a higher quality and as we've discussed for many years now, the natural output of our process is to produce a coke a very high CSR, so it's very strong coke which lends itself to this ability to substitute. So as coke more generally is replaced in a furnace the need for higher quality cokes actually increases and we're the producer of that high quality coke. So it's perfectly fine with us that our customers are looking to reduce their CO2 footprint by injecting other forms of metal and energy to the furnace, so we're perfectly okay.
Josh Taykowski: Got it, super helpful. Thanks guys and congrats again.
Operator: And next we'll go to Gemma Masaga with FactSet
Lucas Pipes: This might be Lucas Pipes. I dialed in with the FactSet number can you hear me all right.
Mike Rippey: We can hear you Lucas.
Lucas Pipes: Alright. Well, good morning and good job on the quarter. So first, I wanted to ask a clarifying question from Nathan earlier. The order book for 2022, where do you stand today and how quickly do you expect to be fully booked. And first the question is on the coke side, but then of course on the CMT side would also be curious how your order book is shaping up there. Thank you very much.
Mike Rippey: Good questions Lucas. On the coke front, we're in active discussions now. We have sold a few cargos into 2022. The sales that we make during 2022, and we're not prepared to address them fully today may take the form of annual contract commitments, they may take the form of quarterly commitments, or they may more simply be a cargo at a time. And that's what we did for all of 2021. Basically, cargo commitments or quarterly commitments. And what then is required of us is to be active in the market, to know the market to be present and to be booking at the appropriate time. So we didn't enter 2021 full, we just said that we expect it to be full. And indeed, we've been full. But we were selling cargos here in 2021, filling out the fourth quarter, as recently as September. So we won't enter 2022 in a sold out position. That's not our intention, but rather to be well positioned to sell out throughout all 2022. So we booked a few cargos. We're in active discussions. And there's no reason as we sit here today to think that we won't be able to run full in 2022. Your question about CMT, we're relatively far down the road in terms of repositioning the assets, the volumes are way up from where they were. Doesn't mean we're not looking for more tonnage we are, but - and we're not going to give you 2022 guidance today, but volume levels not dissimilar to what we're experiencing today would be an expectation for 2022.
Lucas Pipes: That's, that's very helpful. Second topic I wanted to touch on was this current coke price environment. Highest prices that I've ever seen. And I wanted to ask what implications this has for your business? One, does it lead to margin expansion in your regular way coke business? Two, there may be - does it maybe make the contracting that you just touched on, more difficult would really appreciate in what ways the current price coke environment is impacting your business?
Mike Rippey: Well, for the most part, coal prices are a pass through for our company. So the impact of higher or lower coal prices isn't material to us. It does though, require, as our company's approach to the markets changed over the past few years. And now I'm referring to some of our export and foundry activities, an amount of education on our part with our customers, because they don't purchase under these long-term take or pay multiyear contracts. We have to go out and basically re-price every year. So we have to talk to them about the fact that coal prices, met coal prices have risen substantially. And I'm probably a little older than you, Lucas. And they're the highest I've ever seen too. But they are what they are. We procure our coal prices at very competitive rates, and we're going to pass those changes and inputs onto the market. So it does require time with our customers and explanation, understanding. And we've been socializing, if you will, the fact that coal prices are changing in a rather dramatic way and the full expectation is, we'll be passing those most increased so on. And I might add, that when coal prices come down and years ahead, which they may certainly from these levels, we won't benefit from that either. Rather, we'd pass that decrease onto a marketplace and we don't compete on coal price. We compete on the quality of our products and the effectiveness and efficiency with which we convert coal to coke and there we're very, very strong, so we like our place in the market.
Lucas Pipes: Thank you, Mike. A quick follow up question, in years prior, I recall, maybe tens of millions of dollars of fluctuations due to changes in coal prices and I think it has to do with your efficient conversion from coal to coke and some of these benefits being shared between you and your customer. Does that mechanisms still hold today and if so, is the ballpark of tens of millions of dollars accurate or the right kind of zip code?
Mike Rippey: We do have a benefit or debt from it year-over-year as relates to yield, but it doesn't turn into tens of millions of dollars.
Shantanu Agrawal: Yeah. And Lucas, I mean, obviously, like, kind of depending upon what kind of contract there is, right. And if we are doing more, as Mike mentioned cargo by cargo, I think it will depend more on what kind of contracts we have, though. Yes, but there is yield impact, as Mike said, of increasing coal prices, but it's not to that magnitude. And obviously, kind of like when we provide the 2022 guidance, we'll kind of obviously, once our coal prices are finalized, and we have kind of good understanding of where the volumes are going, we'll provide that information.
Lucas Pipes: Okay, I appreciate it. Thank you very much, and best of luck.
Mike Rippey: Thanks.
Shantanu Agrawal: Thanks.
Operator: And we'll take our next question from phone numbers 646-855-6199 from Matthew Kay. Okay.
Matt Fields: Hi, this is Matt Fields. I wanted to - you touched on the comments about using less coke from your customers. And I appreciate the kind of dollars and cents sort of move behind that, but also kind of I think is as coal - as steel companies aim to be sort of more ESG friendly, to the extent that they can in the United States, what do you think the impact is on your business? Do you think that that kind of the decision to use internal coke resources, which are probably a lot older, and maybe more difficult to report emissions wise versus SunCoke's, kind of newer, cleaner coke, will make a difference as these steel companies kind of decide sort of their optimum mix going forward?
Mike Rippey: Yeah, you really touched on it, Matt. And that's why we believe we're very well positioned for a more ESG centric future where properly steel companies, aluminum producers, whomever it might be, are focused on their carbon footprint. And as they do that and they look to reduce, and we talked about it earlier, the substitution of HBI, for example, into a blast furnace, as opposed to coke. We think we're well positioned. We're well positioned because of the age of our fleet and the environmental footprint of our fleet. So we are the max standard. So we're the newest fleet. We're also environmentally, the most friendly fleet and we're very efficient. So it's the old kind of macroeconomics, one-to-one that we all took. When you look at supply and demand curves, you don't want to be in that right quadrant of the supply curve, you don't want to be the high cost inefficient producer. We sit in a very nice place on that supply curve in the left corner where we're very efficient, we're very new, we're well invested, spending $90 million this year on capital and we expect to continue at that level. We're going to maintain these facilities and good environmental stead, they're going to remain efficient and well positioned to serve the market. So as there might be less demand for coke in the future. The place you don't want to be again is Matt, that righter most corner nor close to being in that corner. And you really seen it evidenced here in the last few years, Matt. We've entered into the foundry market. The foundry market didn't grow. Demand for foundry cokes remained relatively flat, but supply left and why does supply leave? Well, it was the high cost polluting producers that left the older foundry facilities. And you've seen a few announcements like that now on the integrated side with some announced closures at both of our main customers. And as they're faced with capital decisions and investing in very old facilities, they're making the right decisions. They're investing their monies closer to their customers and in other parts of their business, which we applaud. So we stand ready to serve them and we'll help them in their journey to reduce their carbon footprints.
Matt Fields: Thanks for that perspective. My next question is on the on the free cash flow side. It seems like you're kind of already at your 2021 guidance for free cash flow, maybe a touch above maybe a touch below. But the kind of they're already, with the kind of implied jump up in CapEx for the fourth quarter to hit that 90 million guidance, it seems like free cash flow will be a use in the fourth quarter. And it seems like you - I just kind of want to reconcile the commentary you made earlier about continuing to pay down revolver balance in the fourth quarter, despite what seems like will be a free cash flow use. Thanks.
Shantanu Agrawal: Yeah, I mean, I think there's a little bit, I mean, obviously, depending upon where the guidance come in, since we said that it could be modestly higher. So I think there could be a little bit of higher cash flow generation based on where our EBITDA comes in. So whatever excess cash that we have will kind of - it will go towards the revolver essentially, that's what that common means.
Matt Fields: Do you think fourth quarter will be a positive free cash flow quarter?
Shantanu Agrawal: A little bit. Yeah, probably. I mean, depends on where EBITDA comes in and kind of, obviously, CapEx should come in at 90. And then what ends up on the coal purchasing, right, obviously, as we move on to a big delta change in the coal pricing, they could be - depending upon what coal purchase we have, it could be a little bit positive.
Matt Fields: Okay, great. Thanks very much, and good luck on the rest of the year.
Mike Rippey: Thanks.
Operator: And that does conclude today's question-and-answer session. I'll now turn the call back over to Mike Rippey for any additional comments or closing remarks.
Mike Rippey: Good. Again, thank you all for joining us this morning and as always, your continued interest in SunCoke. We look forward to continuing this discussions in the months and years ahead. So thanks again and we'll talk soon.
Operator: And this concludes today's conference call. You may now disconnect.
