Q2 2020 SunCoke Energy Inc Earnings Call
<unk> that today's call is being recorded after the speakers presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone.
Require any further assistance. Please press star Zero I would now like turn the call over its your speakers Jay Shenton <unk> I'd Love Director of Investor Relations. Please go ahead.
[noise] good morning, and thank you for joining US today, that's got Suncoke Energy's second quarter, Tony Tony Arnie.
With me today, Mike repeat President and Chief Executive Officer, and favorites, 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 Upper website, an audio replay will be available later today.
If you don't get to your questions on the call today, please feel free to each outdoor investor relations team.
Before I turn things over to Mike, Let me remind you that media's remoxy Mick on today's call regarding future expectations constitute forward looking statements. The cautionary language regarding forward looking statements you know what I could see filing applied to the Remoxy make today.
These documents are available on our website as are reconciliations to non-GAAP financial measures discussed on todays call, but that's not on things over to Mike.
Thanks, Sean through good morning, and thank you for joining us on todays call.
Let me start on slide three with an update on are ongoing response to the coal that 19 pandemic.
As we discussed in our last call Suncoke has been designated at a central business and our facilities continue to operate safely.
Our employees are working diligently to serve our customers was essential products and services.
We continue to take all necessary measures to ensure the health and safety of our workforce and have implemented policies and procedures that follow the guidelines established by the C.D.C. Osha and local health and governmental authorities.
Our cold at 19 task force continually monitors and evaluate the evolving situation and responds and adjust as the environment changes.
As we move into the second half a year, we recognize that market conditions remain challenged.
In response, we have taken significant steps to support our customers on the short term.
Well simultaneously, providing long term stability for our stakeholders. Additionally, we're making investments to expand our product capabilities and diversifying into new markets.
On the customer side, we have addressed the lower demand environment.
All of our customers of idled or bank blast furnaces during the first half of 2020.
Well there has been modest recovery in demand steel capacity utilization remains low at approximately 59% and it is difficult to predict when demand will fully returned to normal levels.
In response to these unprecedented and uncertain times, we have partnered with our customers to address their near term cope needs. In 2020, we will reduce our production by approximately 550000 palms and now expect to produce approximately 3.750 million tons.
For the full year.
Substantially all of this reduction will occur in the second half of the year.
Mix change for these near term reductions we have extended several of our coal contracts as detailed on this slide.
Our business model is built on long term customer relationships and the actions we have taken not only address the near term contracts are approaching expiration, but also further strengthens our long term customer relationships and adds meaningful certainty and stability to our business.
As we temporarily ramped on production in 2020 and address market conditions on logistics services, we have taken several steps to reduce cost and optimize our operations.
The impact of these actions coupled with lower volumes.
Will result in a reduction of 2020 adjusted EBITDA of 40 to 50 million from our previous guidance. We now expect 2020, adjusted EBITDA to be between 190 million and 200 million.
We're also evaluating our cost structure to ensure we remain a low cost provider.
We are taking meaningful actions, including a reduction in our workforce, which while difficult during these unprecedented times well better positioned suncoke for the future.
We anticipate that these initiatives will result in permanent annual savings of approximately $10 million beginning in 2021.
Now before I turn it over to say I'm excited to talk about a new opportunities at Suncoke is pursuing.
Turning to slide four.
As mentioned on prior calls we've been looking at alternative co products, one of which is foundry Coke, we had been evaluating foundry coal market and developing our production capabilities over the past year.
After significant testing and continued development, we have now determine the weekend commercially produced himself on recall, we have recently successfully completed foundry coal trials with a number of potential customers and our efforts in this area our ongoing domestic demand for foundry Coke is approximately 600000 tons per year and.
Recent shutdowns of foundry coal producers, so forced boundaries so to imports as an alternative that domestic supply. We therefore believe this is an opportune time to enter the market and establish Suncoke has a long term reliable supplier of high quality foundry product.
Expansion into this market provides both industry and customer diversification there are more than 30 foundry coal customers across the country and numerous related industrial coal customers.
During the production upon Rico smaller sized coke no. One is a big not and stove. Coke is also produced MS utilized in other industrial applications, such as sugar beet and Rockwell production.
The production of foundry unrelated industrial cold helps address the current blast furnace Coke Mark an imbalance differences in the production process has the effect of replacing approximately two tons of blast furnace called.
For each time, a foundry co produced our initial target is to produce approximately 100000 tonnes a foundry told in 2021.
Importantly.
Our offerings are capable of producing this product with no direct investment.
Or need for production downtime to transition into the foundry Coke market.
We are making capital investments of approximately $12 million on coal grinding material handling coke screening and laboratory equipment, all of which is necessary to meet market demands.
Given our cost efficient production process, we anticipate the payback for your period for these projects will be relatively short.
We'll provide additional details on found recall when we when we provide 2021 guidance early next year with that I'll turn it over to say to review, our second quarter earnings and diesel but.
Thanks, Mike and good morning, everyone moving onto second quarter performance.
As you can see on slide five diluted EPS was eight cents per share in the second quarter 2020, compared to three cents per share in the second quarter of 29 team.
Prior year period included cost associated with the simplification transaction, which is the main driver of to increase year over year.
Looking at adjusted EBITDA. This came in at $59 billion in the second quarter 2020 versus $63.1 million in the second quarter 2019.
Adjusted EBITDA from the Coke operations increased $4.2 million compared to the prior year.
Domestic sales volumes were approximately 54000 tons lower than the prior year due to customer turned down.
Volume shortfall was more than offset by lower operating costs and better cost recovery.
The adjusted EBITDA contribution from the logistics segment decreased approximately $9 million versus the second quarter of 2019.
Throughput volumes at CMT and the domestic terminals were approximately 2.7 million tons lower versus the prior year period.
Slide six bridges second quarter 2019, adjusted EBITDA to second quarter 2020 adjusted EBITDA.
Once again Coke operations were favorable by $4.2 million, driven by strong cost control and favorable cost recovery.
Logistics operations were lower $8.8 million quarter over quarter, mainly due to foresight and Murray bankruptcies.
Corporate and other was better by half a million dollars.
Moving on to the next slide you can see on the chart that our cash balance at the ended the quarter was approximately $81 million, which has a more normalized cash balance.
Our cash at the beginning of the quarter was artificially high because the company increased borrowing under its revolving credit facility by approximately $157 million in order to preserve financial flexibility, we no longer believe that enhance cash position if necessary and we have reduced the revolver borrowings.
In the quarter cash flow from operations generated $21.8 million, and we had capex of $14.1 million.
Additionally, we paid 86 cents per share dividend in the quarter, which was a use of cash of $5 million.
Today, we announced the declaration of the second quarter of dividends, we established a dividend at a rate that we believe a sustainable even during challenging market conditions.
And while this is a decision made by quarterly buying your board of directors. We believe we have ample liquidity to maintain this dividend.
At the ended the quarter on an LTM basis, our gross leverage was 3.3 times and our net leverage was 2.96 times.
The midpoint of our new adjusted EBITDA guidance range, our yearend net leverage would be 3.65 times, which is well within our leverage covenant.
Overtime as the market stabilizes, we intend to resume executing on our long term capital allocation priorities.
The primary focus on reducing gross leverage to three times or lower.
Slide eight detailed domestic coke operating performance and 2020 outlook.
We sold 977000 tons of Coke in the quarter.
Yes volumes for all facilities were impacted by the volume relief provided to our customers.
Despite these volume concessions, Indiana Harbor volumes were higher than the prior year period, which was expected given the increased volumes from the rebuilt.
Q2, 2020, adjusted EBITDA per ton with approximately $63 compared to $55 per ton in Q2 2019 with the per ton increase driven by favorable cost recovery and strong cost management.
Looking at domestic Coke on a full year basis, we now expect domestic coke to generate between 198 in $202 million of adjusted EBITDA in 2020 on 3.750 million tons of production.
This is approximately $45 million lower than our previous adjusted EBITDA guidance on production is estimated to be 550000 tons lower.
The decrease in volumes is offset partly by lower operating costs. Our plans have been diligent variabilized costs were possible by managing supplies and services.
Overtime contractor usage.
Optimizing capital work and various other effort.
Moving to slide nine which summarizes the logistics business in 2020 outlooks.
The pandemic has impacted demand on our logistics facilities the domestic terminals handle.
Million tons in Q2, 2020 versus 3.6 million tons in Q2, 2019, and 2.9 million ton in Q1 of 2020.
CMP volume comparisons to the prior year impacted by the bankruptcy or foresight energy, but were also impacted by dig global effects of the pandemic.
CMT had throughput volumes at 704000 time, which is lower than the first quarter and lower than our original guidance.
Yeah.
Logistics operations have also taken measures to reduce costs, including a sizable reduction in our workforce as well as lowering.
Well costs.
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So why don't I take it from here and.
Again, we'll.
But to be at the lower end of original guidance from a logistics segment at $17 million.
The next slide.
Slide 10.
Summarizes our 2020 revised guidance, we now expect adjusted EBITDA to be between 190, and 200 million. This incorporates all of the volume changes, we discussed as well as foundry development expenses and cost reduction activities. Our capital expenditures are estimated to be approximately 80 million.
Which now includes 12 million of capital for foundry Coke.
This amount was not contemplated in our original guidance.
We have reduced our free cash flow guidance based on revised adjusted EBITDA. We now anticipate the free cash flow will be between 36 and 52 million from 20 Twond.
Wrapping up on slide 11.
As we continue to operate and these extraordinary times, our first priority continues to be the safety and well being over our employees and contractors.
We will continue to do everything possible to ensure that they are well protected in April to perform their jobs with confidence we remain focused on our core business and how to best optimize our operations, including our logistics assets as we discussed earlier, we have made significant progress in reducing our cost structure.
Adding stability by working collaboratively with our customers to address both current market challenges and longer term supply needs.
We also continued to maintain our asset base to ensure that we're able to operate efficiently in the long term, even as operating levels may fluctuate in the near term.
We are proud of the investments we have made creating the highest quality assets in the industry, which we are committed to fully utilizing a month and maintaining.
Looking forward, we're developing a new business line and foundry Coke and are confident we will be successful and able to capture significant share in the domestic foundry market.
Finally, we are fully committed to the revised financial targets, we have put forward.
And we'll make every effort to ensure that they are achieved.
Before we end our prepared remarks, I would like to take this opportunity to thank all of our employees contractors and suppliers or working diligently during these difficult times to keep our business operating safely.
With that we can open up the call the Q1 I.
Thank you as a reminder, if you would like to ask your question. Please press Star then the number one on your telephone keypad.
Next question press, the pound or hockey.
Your first question comes from the line of Nick Your Mostek with Stifel.
Your line is open.
Good morning, Thanks for taking the questions.
The first one on the other foundry Coke business.
Can you give us a little details to which facility will be producing the savvy folks.
We'll be producing foundry told kind of our Georgia facility.
We would be able to produce that call out of other of our facilities, but Joel is well positioned the logistically to ER should be the most efficient producer so we'll be producing out of Joel.
Okay, and then in terms of thinking about the potential EBITDA per ton margin given that it seems like it needs to be in the.
Have been for double the amount of time.
Can we assume that the EBITDA margins are going to be materially higher than the existing operations as well.
As we indicated a it.
Approximately a two for one replacement ratio and while we're not providing 2021 guidance today.
We are saying that.
We expect to have a very quick payback on the 12 million dollar investment in capital. So the Oh the margin rather than think about it its per ton is better thought of as per unit of time. So oh, the margins are attractive on a time basis.
Given that.
So two for one replacement ratio.
Okay.
And then.
On the Haverhill contract.
Correct me, if I'm wrong, but the way that I read it is you ship tonnage to Arcelormittal and 2021, but then there's nothing beyond that is that accurate.
We have 800000 tons coming from both facilities and.
21 in 22 through 25, we anticipate shipping 400000 from Haverhill, but we have the flexibility should we want to to shift that production over to Haverhill.
So its its flexible as to where it can come from that's growing Haverhill and jewel of Thats correct.
Okay.
And then in terms of the volume decline to Arcelor.
Yeah. It does that indicate that they're doing something more material on their blast furnace side or how should we think about how their sourcing their coke that they're going to need to maintain production levels.
Well as it relates to their blast furnace side, that's certainly a better question for them I think the agreements that we reach are reflective of the current market circumstance as well as where we have clarity of a view in 21.
22 and beyond.
You shouldn't assume though that we're not in you know.
Almost a constant dialogue with our customers so.
You know our discussions with Arcelormittal and other customers are our ongoing with regard to that are longer term.
Requirements for cope.
Okay. All right. That's all I had thank you.
And again, if you'd like to ask a question. Please press Star then the number one on your telephone keypad.
Your next question comes from the line of Matthew Kathleen with Bank of America Securities Matthews. Your line is open.
Hey, guys. Thanks for taking my question and I apologize. This was just already answered I cut out for a bit but so it seems like you're attempting to replace the lost tons for me extended contracts with this foundry coke opportunity and stuff like that lower margin, what's the differential between that and your presumably.
Higher price Blacksburg contract times.
I don't want to leave an impression into lower margin at all Okay. We would we may know statement to that effect.
Okay got it thank you I'm.
Just stuck in a where do you think you need to get the balance sheet leverage wise over the next couple of years.
To support if there was sort of a reduced level of EBITDA and cash flow based on sort of be different you know the change in contracts.
Well as we set our long term goal continues to be three times and we'll.
For toward that.
I think cap allocation for 2020 is relatively spoken for and our guidance and it will remain a priority in the years ahead to to reduce that that so as we talk about 2021 early next year will.
Provide further guidance as to what might be expected in the 2021 period, but we'll continue to look to reduce that to the three times number.
Okay, great. Thank you and just lastly, any progress on any any asset sales you know terminals et cetera.
No no it's really not the time to be looking it asset sales of any type, but you know the ER.
Pandemic is taken a temporary toll on not just the U.S. industrial sector, but the global economy. So our focus currently is too as Weve talked this morning, reduce our cost to the extent possible recognizing the lower volume levels Weve taken you know.
A lot of variable cost out of our particularly our logistics.
Side, where even in the presence of these very very low volumes, we've been able to maintain positive EBITDA as well as looking.
On a more permanent basis, our cost structure and that's the $10 million so for permanent savings, which began in 2021. So our focus now is.
To generate the the 190 to 200 of EBITDA.
In 2020, given the greatly reduced volumes on both the logistics and the Coke side and.
Be as efficient as we can as we've said many times CMT as a very very efficient.
Terminal, but with very low volumes, it's hard to demonstrate the the real value for that asset.
Literally.
If.
An opportunity at an attractive unfair price were to to be brought to us Weve entertainment.
Okay, great. Thank you. Thank you so much for taking the questions.
Your next question comes from the line of Lucas pipes with B. Riley SBR Lucas Your line is open.
Hey, good good morning like in the first off congratulations on picking up this call coal without any operator system.
Quite impressive.
And speak picking up taking picking things up obviously with the Arcelor mittal contract.
And now it's meant this morning lot of questions around bear and it appears a little bit like.
Now glass half full glass half empty type of situation, how would you describe it and and how we get cut him how do we get the class all the wasteful. Thank you very much perspective on this.
Thanks for your good questions Lucas.
We we tend to see the glass already is a more than half full we're pleased to have been able to support our customers. This year, we're pleased with the outcome of having 800000 tons Oh.
Business from Arcelormittal next year. In addition to the 1.2 million tons that comes out of the Harbor works, but we are we continue to to work with customers as I said the Industrys currently operating at 59% of capacity, we don't know I don't think anyone knows when.
The industrial fully recover but when it does will be there with our efficient facilities to serve a so.
In the meantime, we again focus on our cost.
The.
The addition of foundry to our customer mix as I said, we're targeting 100000 next year that replaces 200000 tons of but blast furnace coke so.
We've got 800000, plus if you.
Use the two for one replacement ratio you've got 200000.
The equivalent of foundry going out next year, we're not stopping at 100 and foundry there should be no impression of that it's a 600000 ton market.
And we.
We are going to to look to achieve significant market share in that.
That space, we didn't enter this market with the idea of 100000 tons of a foundry cells that saw.
An initial.
Estimate our first year on the business trials with potential customers have gone very very well. So we are we looked good success in in foundry. So.
We're going to pursue foundry hard.
And we're in again dialogue with our our blast furnace customers as their markets.
Continue to recover so.
That's the focus.
Very helpful. Mike I appreciate that and two to two quick question one on from foundry Coke why now.
If you are something that.
That has allowed us to kind of go.
Make more sense now than in years prior and then separately at very impressive coke margin per tonne during the second quarter.
Can you can you expand on what's been behind that and is this a margin that's sustainable as we look at into 2021 and beyond Thank you very much for your perspective.
Sure.
No we're not going to start to previewed 2021 in this call, but you know the teams have been working very hard and I'm very proud of the efforts that.
All of our co producing assets have turned them. This year weve looked to variabilize, our cost where we can.
Given the lower.
Volume levels, and we're attacking our our fixed or structural cost as well so I'm very very.
Please with the cost discipline that.
Everyone's been able to evidence this year.
Theres no reason to.
I think that we can maintain that kind of disciplined certain cost will come back because that are variable but.
No we're not doing anything to.
To take any risks with regard to a long term reliability of our assets. So we're not in any way starving an asset you can do that in.
In the short term you can cut back on our NIM and save some costs that that's not what's going on here. So we're not sacrificing our future.
To generate these kind of a margins today.
First question on the foundry side why now it's really Lucas it goes back over a year.
We saw.
Over a year ago that certain of the foundry producers domestic producers were shutting down we saw foundry customers looking to import so we started to.
Take a very serious a.
Review of our ability to profitably produce this product in a very reliable very consistent way.
Meet customer demand so.
Goes back a while.
Oh.
We also.
Of course here the same things you do about.
Blast furnace participation market share in the future and we thought it advisable to develop into another markets. So weve put a lot of work into this.
Clearly no one could have foresaw the pandemic in the effects.
On demand in the.
Domestic.
Still segments or the timing was.
Not motivated by the current challenges with the market faces, but.
Quarterly.
It's fortuitous that.
It all came together with regard to us proving out the ability to produce in this time period. So it's.
It's really not a new idea here.
Suncoke, but rather it's something we've been working on like a safer for over a year. So it's not new.
And the value of participating to market the ideas diversification of marketing customer are new to us either.
Very good to hear Mike and teen really appreciate efforts and continue best of luck. Thank thank.
Thanks, Lucas Thank you.
Your final question comes from the line of Matthew Standard Schaffer with miserable financial Matthews. Your line is open.
Hi, a couple of quick questions what percentage of the foundry Coke market right now is supplied by imports.
I think this year is probably the 150000 ton range still quarter.
Aren't 50, a quarter of it so so.
Who do you I guess I guess, how do you expect to take market share.
Otherwise domestically if you want to grow beyond that 100 Kay.
There are other larger is currently planned or are you have to actually go out.
Take customers in a competitive situations.
Well, our focus is to be long term reliable supplier no different than what we have with our.
Integrated customers, if we make a quality product and we do sell reliably and more cost efficient market share will naturally come to us.
Customers, whether it's a.
Steel customers whether it's.
I don't recall customers they look for diversity in their supply base for a variety of good reasons and will stand ready to.
To really be a preeminent supplier.
We've made the investments so we've got.
Good balance sheet, we have the ability to commit ourselves to this market for the long term no different than the.
The integrated.
Blast furnace market, so we're going to earn our way, but again producing a reliable.
Hi, quality co product and the cost efficient manner.
Okay.
And then on the the topic of the Arcelormittal extensions what does the cost structure look like at Jewel and Haverhill now with the new volume levels are these are these levels.
Can you make enough money that it makes sense to continue to invest in these assets given the high fixed cost well high capital intensity of the.
Of the the business.
Well.
The answer in the short answer is yes.
We have the newest.
Coke oven fleet in North America.
Thats an advantage for us we're a low cost producer and we're not going to star ourselves out of that leading position.
Typically your Arnhem capital is in on the 65 70 million dollar range and.
We expect to build a continued to invest and maintain the integrity of our assets, even though volumes are are off.
Here this year and we have some work to do to to fulfill our facilities Oh. It ahead, we'll do that from a.
A good asset position not at the churn asset position.
So the expectation is not a the expectations is going to try to fill out that the jewel and Haverhill.
Demand portfolio, rather than reduced capacity, 100% correct.
Okay.
Okay, and so I guess back to the same sort of question about the foundry Coke.
Where does that demand come from do you think in that the environment. We're in currently I knew that you guys are have the best assets, but I also know that you know.
A large customers choosing to to not commit to buying coke from from you guys at that kind of level.
Three years from now.
Well the foundry market like all markets New US is currently off a bit right. We expect we expected to.
To recover foundry is.
It's not like blast furnaces, there's a lot of our sub markets within the foundry market Theres over 30.
Customers. So we're currently working to develop relationships there everything from a.
Ductile iron pipe producers to people make mantle covers.
Crankshafts and.
Engine blocks for trucks, there's there's just a variety of uses and we expect that industrial America will in time recover.
Right I guess, it's I guess question are you planning to sell.
Are you planning to drive the volumes on the blast furnace Coke back up.
Beyond the 400000, agile and have or Hillary look insulet, primarily with foundry.
Well.
Which the market doesn't seem to going up sport that I guess I'm just trying to figure out that the whole here created by the new contract is pretty large a couple of years out I'm, just trying to figure out what the components or fill out.
Well it will be again, both with our traditional.
Yes furnace customers as well as our continued success in foundry.
For example.
You assumed.
50% of the.
Foundry market as 300000 tons, which is 600000 tons of all blast furnace coke.
Okay.
Alright.
Thank you.
Yep. Thanks Matthew.
This concludes our question answer session I will now turn the call back over to Mike repeat for closing remarks.
Thank you and thank you all for joining us on the call. This morning, and your continued interest in Suncoke and we'll look forward if not enable currently to to visit in person now certainly.
Take your causes.
The period unfold. So thanks, again and have a good day.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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