Q3 2019 Earnings Call
That's a question during especially when you need to press star one on your telephone. Please be advised the state's conference is being recorded if your acquire any further systems. Please press star zero I would I like to hold it and the conference over to your speaker today Shantanu Workable director Investor Relations. Please go ahead.
Good morning, and thank you for joining us today to discuss Suncoke Energy's third quarter 2019 earnings.
With me today microscopy, President and Chief Executive Officer, and fear Basket, Senior Vice President and Chief Financial Officer.
Following management's prepared remarks, well open the call for Q any this conference call is being webcast live on the Investor Relations section upward web site and I'd be able to be open label laid out today.
If we don't get to your questions on the call yesterday, please feel free to reach outdoor 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.
Cautionary language regarding forward looking statements you know what I see the filings applied to the remarks, we make today.
These documents are available on our website.
Oh, sorry, consigned nations to non-GAAP financial measures discussed on today's call.
I'll now turn things over to Mike.
Thanks, Jonathan Good morning, and thank you all for joining us on todays call.
We have quite a few things to cover so, let's just get right into it.
I'd like to start with our logistics business and walk through some meaningful challenges we're experiencing.
Ingredients quarters, I've talked about the thermal coal export market and how it continues to face headwinds would week power demand increased Russia exports and an oversupply of LNG.
During the quarter that trend continued and was exasperated by significant deterioration in the business of our two largest customers were CMT.
As you know CMT is underpinned by two long term take or pay contracts each contract for 5 million tons of throughput or customers Murray energy Importunate energy account for the majority of see empties adjusted EBITDA.
I've been challenged by both market conditions and their respective capital structures.
The sharp decrease in coal export prices, coupled with declining domestic coal demand have negatively impacted Murray and foresight free cash flows and liquidity positions last week.
He filed for chapter 11 bankruptcy protection and foresight extended the Grace period prepayment on interest by another 60 days.
These developments have decreased the number of coal export tons that CMT handle during the quarter.
It is expected to handle for the balance of 2019, we now anticipate the throughput volumes for the full year at CMT will be approximately 6.5 million times 5 million of which will come from our coal export customer foresight energy.
Murray has not ship any meaningful volumes through CMT. During the first nine months of 2019 more made any payments under its take or pay agreement and we do not anticipate that it will ship any volumes or make any payments in the fourth quarter.
During the financial impact of Murray Energys Chapter 11 filing on our logistics business, we're lowering our consolidated EBITDA guidance down to 240 250 million in the previous guidance of 266 to 276 million all the strength of our core coke making operate.
And well somewhat mitigate the impact from the weakness at CMT. We felt it was prudent to update our guidance given the uncertainty of our CMT customers.
Notwithstanding these significant challenges we continue to believe in the potential of our C.M.T. business and are highly focused on exploring opportunities for ways. We can maximize their operations and diversify the products. We move in order to secure new customers an incremental volume through the facility.
Now turning to our financial performance during the quarter, we generated 66.7 million in adjusted EBITDA 197.1 million in adjusted EBITDA year to date.
These results reflect the strong performance of our domestic coke operations and the lower throughput volumes at convent Marine terminal.
But the out of our business or Coke operations are performing well and were on schedule to complete the final phase of Indiana Harbor rebuilds in the fourth quarter and expect the facility to be back a 1.2 million tons of nameplate capacity in 2020.
We have been extremely pleased with the results of our rebuilt dolphins today, we have executed the rebuild process with a methodical about full approach and the results at Indiana Harbor are a testament to the hard work of our team.
Looking at our year to date result, domestic Coke EBITDA is up over 18 million versus the prior year period, we're solidly on track to meet our full year guidance expectations at the top end of the range.
As we near the completion of our rebuild process. We anticipate our results will continue to benefit from the more efficient rebuilt off and as a major portion of the rebuild initiative is now behind us.
Well the issues with our CMT customers have presented us with significant challenges to work through will accelerate the initiatives we have undertaken to strengthen our business. In addition, the operational achievements, we have made improving efficiency to our fleet earlier. This year, we completed our simplification transaction shutting the founder.
Question for a more flexible structure from which we can pursue strategic growth initiatives and return capital to shareholders.
I will talk in more detail later to the progress we have made on our capital allocation priorities. This quarter was a strong one on this front.
In addition to our organic growth initiative at the Indiana Harbor, we've made significant improvement to our balance sheet strength would turn meaningful capital to our shareholders through our dividend and opportunistic share repurchases made during the quarter and established a new 100 million dollar share repurchase authorization with that I will turn it over to say to review our.
Third quarter earnings in detail right.
Thanks, Mike and good morning, everyone turning to slide for our third quarter net loss attributable to SXC was $1.81 per share, reflecting $1.94 per share impairment related to charges. We took on our logistics goodwill and long lived assets its CMT.
Excluding these non cash charges adjusted net income attributable to SXC was 13 cents per share, which was down five cents versus third quarter 2018, mainly due to the absence of tax benefit recorded in the prior period.
From an adjusted EBITDA perspective, we finished the third quarter at $66.7 million.
<unk> point $7 million versus the third quarter 2018, the increase was due to higher volumes at Indiana Harbor and a decrease in the scope of outage work at granite city, but these favorable increases were mostly offset by lower throughput volumes at CMT.
Moving to the detailed adjusted EBITDA bridge on slide five.
As you can see consolidated adjusted EBITDA was up approximately <unk> point $7 million versus the prior year period as Mike mentioned, our Coke segment performed at a high level and delivered excellent results.
Oven rebuilds at Indiana Harbor, yielding higher production and an increase in operating efficiency.
The Coke segment also benefited this quarter from lower outage related costs. There was a major outage in the third quarter of last year to perform maintenance on the herceg, an S.G.D. unit at granite city.
As a reminder, the financial impact of planned outages are included in our full year guidance.
Planned outages generally result in incremental operating and maintenance costs, lower energy revenue and lower cope volume.
Timing and scope of outages beer year to year, which in turn effects year over year comparability in terms of our logistics business CMT throughput volumes continued to be impacted by lower <unk>, two and Newcastle pricing as well as demand for thermal coal in export markets and the liquidity challenges.
Faced by our customers outlined by Mike.
The M.T. handled only 1.3 million tonne this quarter as compared to 3.2 million tons. During the third quarter last year, which drove an 11.3 million dollar decrease in adjusted EBITDA.
After adding in favorable results in corporate and other mainly due to mark to market adjustments in deferred compensation, we finished the quarter with $66.7 million of adjusted EBITDA.
Looking at domestic Coke results in detail on slide six.
Third quarter adjusted EBITDA per ton was $57 on 1.059 million tons of production.
These results reflect an increase in coke production of over 20000 tons at granite city, and 17000 tons at Indiana Harbor quarter over quarter.
As discussed the increase in production at Indiana Harbor is mainly due to oven rebuild.
The increase in production at granite city quarter over quarter is due to fewer outage days in 29 team.
Energy production, an operating costs will also favorably impacted at granite city due to the aforementioned shorter outage.
I want to briefly elaborate on the Indiana Harbor oven rebuild project as evident from our results. The rebuilt our brands are performing well. The 2019 be battery rebuilt campaign is nearing completion and 40 out of the 57 up and have returned to service.
We're currently rebuilding the remaining 17 be battery oven and anticipate the final set of I've been coming back online in late November .
Based on performance today, we're well positioned to execute our full year 2019, Indiana Harbor guidance of $22 million of adjusted EBITDA and are on track to achieve the 1.2 million tons production level in 2020.
With solid performance through the first three quarters of the year, we expect to deliver results at the top end of our full year domestic coke adjusted EBITDA per ton guidance of 53 to $55 per ton.
Flipping to slide seven to discuss our logistics business.
The logistics business generated $9.6 million of adjusted EBITDA during the third quarter as compared to $21 million in the prior year period. The decrease in EBITDA was primarily due to the lower throughput volumes at CMT, which we have discussed at length.
Our domestic terminals were also impacted by softer demand this quarter handling approximately 3.4 million tons during the quarter versus 3.7 million in the prior year period.
M.T. contributed $7.4 million of adjusted EBITDA on approximately 1.3 million tons in the quarter volumes remain depressed based on current market conditions and as we look forward given the Ford pricing curve of the coal export market and liquidity challenges faced by our customers. We now anticipate that throughput volumes for.
The full year will be approximately six and a half million tons in 2019, with 5 million tons coming through foresight energy and the remaining one and a half million tons coming from other products.
As Mike mentioned Murray energy has not shipped any meaningful volumes through CMT. This year and we do not anticipate any additional volumes in the fourth quarter.
Based on the recent bankruptcy filing by Murray, we do not believe that the existing take or pay receivables are collectible nor do we believe that we will collect take or pay amount that would be earned in the fourth quarter.
As a result, we're lowering our full year 2019 logistics EBITDA guidance to be between 43 and $45 million versus the previous guidance of $73 million to $75 million. We also recorded a noncash impairment charge related to this as we previously discussed.
Our revised guidance includes $831 million to $33 million adjusted EBITDA contribution from CMT.
Lowered guidance, mainly reflects a portion of revenue contributed by Murray deemed as non collectible.
Turning to slide eight and our liquidity position for Q3.
As you can see on the chart. We ended the third quarter with a cash balance of approximately $94 million cash flow from operating activities generated close to $85 million due to strong operating performance the timing of cash receipts and lower inventory balances.
We spent $28.4 million on capex in the quarter, which included approximately $11 million on Indiana Harbor oven rebuild work full year Capex is estimated to be between 110 and $120 million unchanged from our previous guidance.
During the quarter, we used $46.6 million cash extinguish $50 million face value SXCP known within the average bond repurchase the price of 93.4 cents on the dollar.
By the ended the quarter on an LTM basis, we achieved our leverage ratio target of three times gross debt to EBITDA.
We also used $13.2 million to repurchase approximately 2.1 million shares and an average price a $6.38 during the quarter.
Additionally, we refinanced our revolving credit facilities during the quarter, which lowered our interest rate increased debt capacity and extended the maturity date in total we ended the quarter with a strong liquidity position of approximately $338 million before I turn it back over to Mike I want to highlight that we are also low.
During or full year operating cash flow guidance to 150 $260 million, which reflects changes in EBITDA guidance due to the financial challenges of our coal export customers Mike.
Thank you pay.
Slide nine lays out our capital allocation of framework and priorities. Despite the challenges within our logistics said.
We have aggressively pursued a balanced yet opportunistic approach to capital allocation.
Since the announcement of our simplification transaction, we have reiterated multiple times that management is committed utilizing suncoke.
Sure on cash flow in the most advantageous and value enhancing manner for our shareholders.
Our capital allocation progress this quarter displays the financial flexibility, we have built within the company.
Creating value for shareholders is the goal of our management team on board and our solid cash flows allowed us to return meaningful capital to shareholders through share repurchase plan initiated in early August through November 1st we have repurchased approximately 3.8 million shares at an average price of $6 in Tucson.
Yes.
In addition to the share repurchases made during the quarter, our board authorized a new $100 million for future share repurchases, which we expect to execute opportunistically as the market dictates balanced against the capital needs of our business.
As indicated during the last earnings call. Our board of directors declared a dividend of six cents per share will be paid on December the second.
Towards our goal of improving our leverage position Weve extinguished a total of $58 million of that year to date, which includes repurchasing $50 million face value of SXCP 2025 senior notes at a discount.
We have no reached our intended long term gross leverage target of three times this quarter going forward. Our goal is to maintain or improve this leverage ratio, while balancing our other capital allocation priorities.
And finally, we continue to pursue organic growth opportunities such as the Indiana Harbor oven rebuilds, which have a very high return on capital we are keeping a keen eye on the M&A space, but as we've said on every prior occasions, we will remain disciplined.
Our actions this quarter demonstrate our commitment to creating value for shareholders through a disciplined and opportunistic approach to capital allocation, we will continue to find ways.
Well leverage the flexibility we have and.
Opportunistically, creating value for our shareholders, while balancing the needs of the business, Let's review our revised guidance on slide 10.
We are lowering the consolidated adjusted EBITDA guidance down to 240 to 250 million from the previous guidance of 266 to 276 million Theres no change to Capex or co production guidance, we're now expecting to deliver at the top end.
The domestic coke adjusted EBITDA per ton guidance of 53 to $55 per tonne. The coal export customer bankruptcy also impacts are operating cash flow guidance lowering it down to 150 to 160 million versus the previous guidance of 176 to 100.
91 million.
Cash tax guidance remains unchanged.
Moving on to slide 11 to wrap up.
To summarize we remain confident in the progress we have made the strength of our core businesses and the strong and flexible foundation, we have worked hard to build in our new simplified structure.
Through our strong foundation, we have the ability to navigate the challenges facing our CMT business, while improving operational efficiency in our coke business and exploring new avenues to leverage our core competencies across the organization.
Finally, our focus remains on generating meaningful long term value for our shareholders. Our cash flow is strong and provides us significant flexibility to invest in our business.
Manage our debt position and return capital to shareholders too attractive dividend and opportunistic share repurchases with that we can open up the call for Q1 day.
Thank you at this time I would like to remind everyone to feel like that's a question. Please press star one we'll pause for just a moment to compiled acuity roster.
Your first question comes from Matt.
With Jefferies. Your line is open.
Hi, good morning, Thanks for taking my questions.
Just on the updated guidance.
Roughly 25 million dollar reduction to your full year.
EBITDA guidance seems to be 100% Murray related so is there any foresight impact from a.
Baked into that guidance change.
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As has foresight continued to pay its its take or pays.
They have and.
You're correct. The the updated guidance reflects substantially on the merger situation.
Okay, and then so I guess big picture question as we try to think about 2020.
Obviously.
Impact.
Potentially some additional impact.
Foresight goes down a similar path.
And then I think on the Coke side, hopefully you'll have some acceleration or some improvement Indiana Harbor.
Anyway for us to think about the net of those three sort of large moving parts around EBITDA for 2020.
Matt It's a it's premature really for us to be providing any kind of guidance for 2020, we will do that so when we announce our fourth quarter results.
The comments you make are appropriate we've continued to.
Experience excellent results from the rebuild of into the Harbor works, we expect to complete that rebuild project here in late November this year and have the.
The full capability of 1.2 million pounds available to our customer next year. So that's a good positive for us in the one that we've.
Talked about at some length in the past.
I mean situation is the the changing circumstances CMT with regard to both.
Marine potentially phelps, so as that situation, which is quite fluid evolves, we'll all will reflect that in our guidance for all for 2023 appropriate time.
Okay, and then on capital allocation. Thanks for the detail on a I guess, just as I think about priorities.
From a debt perspective, you said that you'll maintain.
She's then you'll look to maintain or even improve that three times gross leverage based on the 240 to 50 million of EBITDA guidance.
Assuming youre able to maintain that and 2020.
That would imply that.
I want to take.
Some additional debt to get down to sort of three times growth. So would that be a priority over share buybacks would you look to achieve and maintain that gross leverage target before you were aggressive with buying back shares.
Matt as quick question. It has been a priority of our company too.
I get to the three times and perhaps below on it remains sell so Uh huh.
Having an appropriate level of debt for our company.
As a priority has been a priority will remain a priority.
Your point about if our EBITDA were to be Twofifty next year, that's your number not mine.
We would expect.
To maintain our our debt ratio three times.
As you suggest that would require us to pay down additional debt.
Yeah. Okay. One last one for me just just I'm just on the Coke side.
Obviously theres questions out there around some of the more near term contract maturities.
I think you've got some coming up with with our slower sooner than later any.
Are those conversations that that you're having currently any any a high level insight as to when we might expect some news on those near term maturities.
Oh, the maturities you refer to our at the end of a 2020 and.
As you might well expect we've begun discussions with our customer and beyond that we can't comment.
Okay. Thanks I appreciate it.
Sure.
Your next question comes from Matthew Fields with Bank of America. Your line is open.
Hey, guys was.
Just for for housekeeping purposes can you give us the effect of currency on the on the Brazil Coke segment.
It's very nominal in so I think it I think on an annual basis, it's less than a couple hundred thousand dollar completely amateur yes.
Okay, great. Thank you.
And then on the.
Reduction front following on Matts question, if kind of you know we're looking at the two 2020, where Murray and foresight or are meaningfully less.
To your results based on potentially new.
New contract struck as a result of restructuring.
You know do you think of 3.0 times.
As is still the bogey with meaningful meaningfully less coal exposure.
And does that still require you to buyback or reduce debt like like you know you said you would still going at that three times target.
Some three times as the toward.
It's been a will be.
Okay, Great and then obviously good you did a good amount of bond repurchase in the quarter 93 with bonds in the.
Low to mid Eightys at this point is that something youd expect to accelerate or work continue.
Well look to maintain the a leverage ratio three times in the most cost effective manner available to us.
Okay, Great and then just trying to triangulate cash flow for 2020, although it's still early.
You know based on your 19, Capex guidance, and we kind of exclude Indiana Harbor in some gas sharing is is 65 to seven D.
You see kind of a base sort of maintenance capex level for Suncoke.
I think that's the right number over a period of time, so $65 million to $75 million ongoing maintenance capex.
You may have depending on specific projects.
And a year, where your higher in a year, where your lower we will be given kind of fulsome guidance on both EBITDA as well as Capex in January February timeframe for 2020, but if you know if you wanted to use that as a rough estimate over you know I think you know a number of years. That's that's that's that's a good number.
Okay, Great. That's a that's it for me thanks very much.
Thank you.
Your next question comes from Mark Levin with Seaport. Your line is open.
Great. Thanks, My questions were asked and answered thanks very much thanks Mark.
Your next question comes from Lucas pipes with B. Riley Your line is open.
Hey, good morning, everyone.
Good morning warning.
So with the implied EBITDA.
Guidance.
For Q4 in the logistics business.
Beliefs around $10 million.
With that be kind of a combination of felt and then the river terminals or.
I am I misreading something there.
Yeah. That's that's all in I and so you know our CMT guidance on a full year basis is what we're estimating between 31 and $33 million and a full year. So guidance for C.M.T. is in the fourth quarter's between five and $7 million.
And so and the balance then to get to that that full year number.
Lucas is gonna be from the river terminals.
Very helpful. Thank you and and in terms of felt do you have a receivables balance.
So oh itself has been shipping and tons to the facility all year as we stand today, they're continuing to move product here in the fourth quarter and they are current on their receivables.
Very helpful. Thank you for that.
And then just kind of longer term I'm thinking about CMP.
Mary made some comments about the.
Economics of exports and their filing.
How do you think about CMT I'm kind of beyond the current volatility, whereas its place in the golf, where do you see market rate.
Any sort of color comments on the long term out for this asset would be very much appreciate it. Thanks.
C M T is.
You know is.
Very low cost facility.
Very highly automated it's unique in many ways with its ability to receive rail very far down the river as well as it's a barge capabilities. So the asset itself. While we believe is a low cost a.
Provider down in the the region.
You want you allude to Lucas I think is the.
The challenging conditions that traditional customers find themselves with apiay to prices being down in.
The mid Fiftys and as we've said in the past numbers above 70.
Really provide.
Better opportunities for our producers so it's it's a very challenging environment.
Right now and it's most an evidence with the bankruptcy usually she most notably for US Murray this year so.
Notwithstanding the fact that were a low cost provider.
So very challenging market for exporters of coal into the.
International marketplace right now.
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With the how easily could this capacity be allocated towards other commodities.
Well, that's the challenge, obviously that we face today.
Over the past few years, we'd been incrementally building.
Our business down there that's in the presence of.
10 million tons of contracted take or pay business for the coal customers.
No.
With the filing of Murray, we have a substantial ability to go out into the marketplace and until that capacity, that's going to via our focus now that.
That obligation is present to us as we've said in the past.
You supply chains are quite sticky.
And they'll remain so so we've got our work to do.
We will do our work, but it's not.
Like flipping a light switch the we simply replace these volumes on short notice, it's going to take a significant effort on our part to replace these volumes.
As you can well imagine we're already about that process, but it's going to take time.
Yes, that's very helpful. Thank you Mike for that commentary and then.
Just following up on some of the earlier comments regarding.
At debt repurchases leverage ratios sure share buyback, obviously all connected.
When when could you maybe describe.
Opportunistic in a little bit more detailed you have as certain.
We expect you haven't expectation around how much capital you will be for example, returning by year end or a month, we kind of run rate and in terms of to share buybacks like how do we think about the share repurchase authorization the size of it.
How quickly do you anticipate execute against that thank you.
We can't comment.
On that point Lucas.
Really the board authorized a new program with the expectation that we would complete the existing programs. So through November we given.
The exact numbers of repurchase so we've done I believe the the number and somebody can help me if I screwed up is $23 million of repurchases through November 1st.
We have approximately 14 to go up.
16 to go relative to the existing program so.
Well, we have a program that continues.
And we didn't authorized $100 million New program, if we Didnt think we would exhaust the existing program.
And I wish I would just.
Sorry, I had okay.
Okay.
I was just gonna say and so you know and we're not that we can't be terribly prescriptive and how we're going to execute that but yeah. We need to just remember that we've established a dividend.
You know, we put something in place that was sustainable.
And we believe you know and the board will go through this kind of process isn't normally does to establish a different but that is something that is that is.
Sustainable for our company and even in light of kind of the situation that we find ourselves then what CMT. We also were really kind of clear on and our desire to maintain that three times leverage target.
Right and so you know and we'll have more information as we develop our 2020 plan as we develop our 2020 free cash flows and and and you know a capex, but clearly the maintenance at the dividend. The you know maintaining our leverage ratio at three times and then executing against this.
Repurchases Opportunistically, if those are our priorities and that will be some some fluidity to that.
Okay. That's very helpful. I appreciate all of this and best of luck.
Thanks Lucas.
Your next question comes through Matthew Fields with Bank of America. Your line is open.
Oh, Hey, sorry for the follow up I appreciate the color unless the share repurchases through November one have you repurchased any bonds.
Through November one as well.
What we disclose what we purchased.
Okay. So nothing subsequent to quarter ends.
Correct.
Okay. Thanks very much.
That's all the time that we have for questions with that I turn the call back to the presenters for any closing remarks.
With that I'd like to thank all of you for joining us on our call this morning and.
As always we appreciate your continued interest in Suncoke and talking to you. So thanks again.
This concludes today's conference call.
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