SunCoke Energy, Inc. (NYSE:SXC) Q2 2023 Earnings Call Transcript

SunCoke Energy, Inc. (NYSE:SXC) Q2 2023 Earnings Call Transcript August 1, 2023

SunCoke Energy, Inc. beats earnings expectations. Reported EPS is $0.21, expectations were $0.19.

Operator: 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. [Operator Instructions] I will now hand you over to your host, Shantanu Agrawal, VP, Finance and Treasurer, to begin.

Shantanu Agrawal: 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 apply 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.

Katherine Gates: 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?

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Mark Marinko: 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 noncontracted 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.

Katherine Gates: 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.

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Q&A Session

Operator: Thank you. [Operator Instructions] We have our first question comes from Lucas Pipes from B. Riley Securities. Luca, your line is now open.

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

Katherine Gates: Thanks, Lucas.

Lucas Pipes: 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 wondering where buybacks could factor into your capital return framework from here. Thank you very much.

Katherine Gates: 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.

Lucas Pipes: 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?

Katherine Gates: Well, Lucas, as you know, we don’t discuss the specifics — sorry, Lucas. Go ahead.

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

Shantanu Agrawal: 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, we — as we have talked 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 4.2 million of capacity. 3.6 million is contracted, and 600,000 to 650,000 equivalent blast furnace is going into the foundry and export spot blast furnace coke market.

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

Shantanu Agrawal: So for the past couple of years, in ’21-’22, 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 it did in ’21 and ’22.

Katherine Gates: 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.

Lucas Pipes: 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?

Katherine Gates: I would just say that we’re certainly seeing interest in both, I think it’s fair to say.

Shantanu Agrawal: 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 built 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.