Q2 2021 SunCoke Energy Inc Earnings Call

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Good day and thank you for standing by welcome to the Sun Coke Energy second quarter 2021 earnings call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question and at that time, you will need to press star 1 on your telephone please.

Their buys that today's conference is being recorded.

You require and further assistance. Please press star zero and I would now like to hand, the conference over to your speaker jumped to move Agra Wall. Please go ahead.

Thanks Cathy.

Good morning, and thank you for joining us this morning to discuss and Coke energy second quarter 2021 vessels with.

With me today is Mike Rippey, President and Chief Executive Officer.

Following managements prepared remarks, well open the call for Q&A.

And <unk> call is being webcast live on the Investor Relations section of our website and a replay will be available later today. If you don't get to your questions on the call today, Please feel free to reach out to our Investor Relations team.

I turn things over to Mike, Let me remind you that the various remarks, we make on todays call regarding future expectations constitute forward looking statements and of course.

Larry language regarding forward looking statements and RPT.

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 Mike.

Thanks, Andrew.

Everyone and thank you for joining us today.

And we wanted to discuss a few highlights of our second quarter results before turning it back from <unk>.

Who will review them and detail.

First I would like to thank all of our son called team.

<unk> for their continued commitment to our share goals working safely and efficiently to deliver high quality products and services to our customers.

And the coronavirus front, we continue to take all necessary measures to ensure the health and safety of our workforce.

We continue to strongly encourage all.

Please forget the COVID-19 vaccination as it gives the best protection against the virus, while also protecting families and coworkers.

Turning to our financial performance from the quarter.

We are pleased with how our team delivered across both the coke and logistics segments.

Making.

And <unk> continue to operate at full capacity.

While our logistics segment saw significant increases in volume.

For the second quarter of 2021, we delivered adjusted EBITDA of 68 million, a 15% improvement over Q2.2020.

<unk> opportunity and the second quarter, we also significantly strengthened our balance sheet with the execution of our debt refinancing transactions.

We retired the existing 7 and $1, 5% senior unsecured notes due in 2025 and issued new 4 and 7.8%.

Senior secured notes due in 2029. Additionally, we extended our revolving credit facility's maturity to June 2026 from August 2024.

These refinancings, both extend our maturity profile and lowers our debt cost significantly.

We will save.

SaaS of $17 million and interest on an annual basis as a result of these refinancing activities.

Operationally, our expert and foundry coke initiatives continue to perform well and we are seeing the positive impact and our financial results.

Our products are being well received and we.

Constrain our ability to reliably deliver quality products during a time when supply chain disruptions and delays have become all too common.

And we remain committed to future growth and these markets and we continue to see solid prospects and the years ahead.

Cmt's revitalization.

And <unk> also well underway aided by global strength and commodity markets.

We see continued improvement and both volumes and products and product mix handled at CMT contributed meaningfully to our financial results.

Based on our record first half performance and the expectation of continued.

And ranked and steel and coal markets and for the remainder of the year.

We are increasing our full year 2021, adjusted EBITDA guidance to 255 million to $265 million from your original guidance of $215 million to $230 million with them.

Net I'll turn it over to Sean to review, our second quarter earnings and details Ciampino.

Thanks, Mike turning to slide 4 our second quarter net loss attributable to FX feet was <unk> 11 per share down <unk> 19 versus the prior year period quarter.

Quarter earnings per share reflects a 27 and <unk>.

Back on debt extinguishment related charges in connection with debt refinancing adjust.

Adjusted EBITDA came in at $68 million for the quarter. The increase was primarily due to approximately $2.2 million tons up higher throughput volumes at our logistics segment turning to the adjusted EBITDA Bridge on slide 5.

Second quarter of 2021, adjusted EBITDA was higher by $9 million or 15% over the prior year period, our Coke operations again performed relative quarter and results were reasonably consistent with the second quarter of 2020. The majority of the period over period increase and adjusted EBITDA was driven by our logistics segment at CMT.

To see significant increases and the coal export and iron ore volumes.

With little change and corporate and other we ended second quarter at $68 million of edge.

Adjusted EBITDA, turning to slide 6 to discuss our liquidity position and Q2.

As you can see from the chart, we ended the second quarter with a cash balance.

And that's a $51.7 million the highlight of the quarter was our debt refinancing 3 financing transactions as mentioned by Mike earlier and.

And with a meaningful extensions on debt and majority will also benefit from significant cash interest savings and excess of $17 million on an annual basis and the second quarter cash flow from.

Continuing activity has generated close to $40 million.

We spent $13.6 million on capex during the quarter and paid dividends of $5 million at a rate of <unk> <unk> per share, we paid $10.5 million as transaction fees for the issuance of new senior secured notes and extension of better volume.

We also paid $22 million at premium to call. The 2025 senior notes as part of the refinancing transaction.

Total debt balance increased by $9 million for the quarter and stood at approximately $667 million at the end of second quarter on an LTM adjusted EBITDA basis, our gross.

<unk> leverage ratio is just under 3 times and we expect additional deleveraging to continue over the balance of the year in total we ended the quarter with a strong liquidity position of that proximity and $237 million.

Now moving to slide 7 to discuss our domestic book business performance and revised full year outlook.

Secondly, adjusted EBITDA per ton second sorry, second quarter adjusted EBITDA per ton was $58 on 1.063 million and sales staff. Our domestic Coke fleet continues to run at full capacity and our product and both expert and foundry Coke markets are relative seat.

Based on the performance during the first half.

Of the year and expectations for the remainder of 2021, we are increasing the domestic coke adjusted EBITDA guidance to 234 to <unk> $38 million from original guidance of $2.19 to $2.24 million. We are also projecting coke production to be higher by 50000 tons from the original guidance as a reminder.

And the coal production guidance includes all 3 products contracted glass furnace book export book and foundry book moving to slide 8 to discuss our logistics business.

The logistics business generated $11.4 million of adjusted EBITDA during the second quarter, and what kind of 'twenty, 1 as compared to $3 million and.

And prior year period, the increase and adjusted EBITDA is primarily due to higher throughput volumes at CMT. The segment the segment as a whole handled $500 million pipe and 1 million tons of throughput volumes during the quarter as compared to $2.9 million tonnes. During the prior year period, CMT handled $1.9 million more tons.

Versus the prior year period, mainly driven by higher coal exports and the addition of iron ore revenue product increased global demand strong API to index pricing and elevated natural gas pricing and Europe continue to spud and U S. Thermal coal exports given our strong first half 2021 renewals and looking.

At the API 2 forward curve, we would now expect to deliver full year logistics adjusted EBITDA and the range of 45% to $48 million as compared to original guidance of 20% to $25 million, we anticipate handling approximately 7.5 million tons of coal along with approximately $3.5 million tons.

Other products that CMV for the full year 2021.

Volume guidance.

And our domestic core betterment and remains unchanged.

Approximately $10.5 million tons, turning to slide 9 which summarizes our revised 2021 guidance.

We now expect consolidated adjusted EBITDA.

<unk> to be between $2, 55, and $2.65 million as compared to our original guidance of $215 million to $30 million. This incorporates increased profitability expectation from exports foundry sales and the Coke segment and higher volumes at CMT and the logistics segment, our capital expenditures are.

The estimated to be approximately $90 million as compared to the origin of guidance of $80 million with inflationary pressures being the main driver for the increase our revised free cash flow guidance stands at $85 million to $100 million with a increase and adjusted EBITDA, mostly offset by the 2025 senior notes quarter premium.

And now at the issuance cost.

With that I'll turn it over to Mike.

Thank you Jonathan.

Moving up on slide 10.

As always safety and operational performance is top of mind for our organization.

And we look to continue to point to perform safely while successfully executing against our operating.

And then capital plan for the remainder of the year.

And when the second quarter.

We are fully sold out for 2021 and are running at capacity.

Our order book is full for this year, we will continue to focus on further developing our customer base and partners.

Station and export and foundry.

<unk> markets for future years.

Made good progress on revitalizing CMT during the first half of the year.

Based on our projections.

And second half should surpass the first we will continue to build on this foundation for <unk> long term success.

As I mentioned earlier, we significantly.

<unk> and our balance sheet during the quarter with the execution of the debt refinancings.

Our revised debt structure aligns well with our business model and capital allocation priorities for the remainder of the year, we will continue to work towards reducing our debt balance and the longer term, we will continually evaluate.

And the strength of capital needs of our business, our capital structure and the need to reward shareholders.

And we will make capital allocation decisions accordingly.

Finally, based on the reliability and performance of our operating segments.

Book to achieve our adjusted EBITDA guidance of 255.

And <unk> to $265 million for 2021 book.

Debt, let's go ahead and open the call for Q&A.

At this time in order to ask a question you will need to press star 1 on your telephone keypad again and that is style..1 we'll pause for just a moment to compile the Q&A roster.

And your first question is from Matthew fields from Bank of America.

Uh huh.

Congrats on great execution, and the founder of <unk>.

<unk> market and the logistics market and with the successful refinancing.

Okay.

I just want to sort of.

Touch on the debt reduction comments, you made towards the end of your prepared remark.

Given the free cash flow guidance of 85 to 100, I think they've had.

Already about $70 million and free cash flow this year so <unk>.

15% to 30 left.

After dividends of about $5 million to $20 million less for kind of debt paydown.

Is that the.

Revolver pay down debt, we can expect to see over the back half.

<unk> that come from more of that.

And of have and the Hopper.

What's the kind of growth debt number that we can we can look to see <unk>.

<unk> from June 30 day and of the year.

And I think Matthew your math as usual is pretty spot on given the guidance that we've laid out.

Or is that and then.

Granted that were not going to be at so much debt reduction from here to the end of the year, you've obviously done a good amount.

And the first half, but at guidance the newly revised higher guidance youre kind of well below.

Your historical leverage target.

And so.

I guess.

And the question is kind of what changes first capital allocation or the leverage target.

Well here and we might disagree a bit or.

Long articulated and perhaps not well articulated target was 3 times or less and.

Perhaps not emphasize fully enough.

Or less part where.

We are delighted to be just below 3 times as we finished the second quarter.

The <unk> part becomes something that I need to emphasize more so for the time.

I am being our focus as we've said is to continue to pay down debt get below that 3 times.

And in the years ahead, we will we'll talk more about.

Capital allocation recognizing fully the need to.

To reward shareholders to continue to invest in our facilities to maintain them at the high level that they are today and.

And have a prudent debt.

Level as well.

Thank you very much for that and so we appreciate the the emphasis on me or less part.

Very helpful and good luck from the rest of the year.

Thanks I appreciate it.

The next question is from Lucas pipes from B Riley severity.

Thank you very much and good morning, everyone and.

Congrats on a strong quarter and strong outlooks for the year.

Okay.

And in Florida.

Mike.

I wanted to touch a bit on.

The minimum customer commitments.

And next year I mean, this is something we've been talking about for really the past.

Alright months.

I think it was last August that you disclosed.

Additional information there and so im wondering kind of what's your outlook here and there continues to be a lot of talk about.

Carbon reduction goals from the industry and and I would appreciate if you could share.

Share your thoughts about 1 on.

And now 2022 minimum commitments, but then also longer term how you see cycle positioned on that front. Thank you very much.

And we'll get those are great questions.

And we're really not prepared today to talk about 2022, but you are correct and talking about August of last year, and we started to discuss.

Just the fact that we would.

And are the foundry and the export markets with around 400 to 450000 tons to sell and we are indeed accomplish that this year, we're running full and we're selling those quantities into the export and foundry markets.

Net.

And.

450 growth of approximately 800 net.

Next year, given the renewals that we did with with what was then arcelormittal.

Given the strength of our markets and we see today.

Were well received and the markets and should be able to to continue to sell successfully into those those.

Markets notwithstanding the fact that.

Things may change.

And that's out.

Kind of when you think about 'twenty, 1 and 'twenty 2 and.

What was required of us to sell out and of the foundry and export markets that that's where that stacks up.

You mentioned car.

Carbon and Thats a much.

Near term.

Question people committed themselves to.

And the extreme be carbon neutral by 2050.

And we of course support initiatives to reduce the carbon footprint, that's associated with making the steel I'd.

I'd remind you that.

Yeah.

Lauren urban footprint compared to the rest of the world is very very favorable weather year, comparing against European Steelmakers or Asian, Steelmakers, we clearly as a country.

The best carbon footprint.

Today, and I look to see that continue to improve we play a role and that of course and.

And through all of it.

Replay is and.

And we emphasize this we reliably produce a very high quality coal and.

And the nature of our coal, but the quality of our call and the strength of our code.

Allows.

And for better burden and support and you might find and lesser Cogs and when you can support the burden and the blast furnace.

And that allows for the increased usage of substitute fuels, whether it'd be natural gas or HDI.

And as our customers look to reduce their carbon footprint and now <unk>.

<unk> the use of other fuels and their furnaces, we stand ready to support them.

Again with our high quality.

Quality Coke score, which we believe to be unmatched here domestically and perhaps globally and as well, we look to maintain our leading environmental technology, which and the coke making process itself is the best in class score. So we encourage the <unk>.

The reduction and the carbon footprint and all of those discussions.

And keep price today, we think we're well positioned to participate.

Okay.

Terrific really really helpful.

And Mike for that detail.

Second question, turning over to you and logistics business, obviously, a remarkable recovery and and.

Seaborne coal prices in particular and.

And.

And then as you look at how this how this business is positioned today.

You raised guidance if their interest for longer term arrangements again.

And there were discussions in the past about possibly.

Selling TMT.

And so okay is that something that you would consider here and there.

Maybe they're more interested parties as well so I appreciate it.

More comprehensive discussion off.

Of the market and then also the strategic outlook.

For CMT, Thank you very much.

Good question Lucas obviously were.

We're very pleased with the performance at CMT is I know Youll remember only a few years ago CMP was more or less a captive facility to 2 customers and those customers went through bankruptcy and that was a blow to CMT and the challenge then.

For our team was too.

Isn't that asset and to a merchant facility and how do we have been unable to successfully reposition the asset we would've considered per sale of the asset perhaps to someone and better positioned to bring about debt revitalization and that was a challenge for our teams.

A replay and as you can see and our results they've responded beautifully they've been out working hard and knocking on doors and.

Looking to enter new supply chains, which aren't easy.

It's not easy to disrupt our supply chain thats working well. So you have to have some patients.

Notwithstanding migrations they've.

And we have exceeded.

Our expectation part of that of course posed to the strength and the global commodity markets and a little wind at the back never heard anybody.

API 2 prices are quite elevated today by historic measures and if you look at before and API to curve that remains elevated.

We're quite encouraged with the prospects for CMT and the thermal side as well as other commodities that we look to handle through the facility and had good success with iron ore and pet Coke and we're going to look to continue with those initiatives. So our singular focus now is to.

To continue to build.

<unk> had success. The team has had like I said I couldnt be more pleased with the work that they've done over the last 18 months to get this.

Facility turnaround and repositioned.

Very helpful and Mike and a quick follow up on that and I think about $7.5 million tons of coal $3.5 million tons of <unk>.

<unk>.

On the guidance.

Does that compare to the nameplate capacity and.

And so is there kind of.

And the room to the to the top 2 maybe increased volumes further given the strong market backdrop.

And there's a little more room Lucas Thats a great question.

I'd like to see us perhaps.

A little longer term handle and 15 million tons through there.

We've made some debottlenecking investments.

At the facility to allow for that to happen.

We were.

We're going to be happy with 11, this year and May.

<unk> 12 is an all time record for us I don't go bad debt.

Some of the folks that were around London talking about 12 million ton years and.

And we get the 12, we're not going to be satisfied, we'll look to debottleneck and depth of <unk>.

Very good I'll leave it here. Thank you very much for the color and best of luck.

Thanks.

Yeah.

Your next question is from Karl Blunden of Goldman Sachs.

Hi, good morning, Thanks for the time.

And definitely built from flexibility and our balance sheet with the recent.

Our recent transaction and it looks like cash flow is coming and a bit stronger than your prior expectations.

And when you take a look at the.

The M&A.

Environment is there opportunity for you to play a role.

And that.

We'd like to think so Karl and good question I appreciate it.

Yes.

We have and we continue to look for opportunities adjacent opportunities.

And we can provide.

<unk>.

To our shareholders.

Delighting customers and we're not talking about consumer products companies here, we're talking about steel companies and related industry. So.

And we'll look for opportunities to build on our foundation and serving our customers and markets. We know with products that we know we've got a very nice technology.

Slowly and what the company that we'd like to expand.

See.

The success of the foundry Coke market and while that's not M&A and its organic growth, but those are the kind of undertakings, we look for organic obviously.

Because returns with organic growth are typically higher because of the capex.

<unk> requirement is typically not large compared to the acquisition cost of and asset, but we're looking for good assets with good managements that are complementary.

To what we do.

And we're quite disciplined.

We haven't done anything and my 3 and a half years not for lack of trying but we're.

And we're very disciplined and our approach and unless we see returns that are well in excess of our cost of capital. We are we simply wont grow for the sake of growth so kind of a very disciplined approach share.

We're looking.

We just haven't found anything as of this date that meets all of our criteria.

And.

And when you look at valuations available and the market today.

M&A be deleveraging after synergies.

It could be a lot of things, let's just leave it at that and start.

The future.

It sounds good.

Yes.

Spoken about success on and kind of the commercial and revenue side win.

And you think about cost inflation and managing that create a footprint and other areas of concern or how do you manage against that business today.

Well, we're seeing some inflation as Sean indicated in his remarks on the capital side.

Clearly.

Labor is tighter than what it has been historically and the way you attract labor and a tight market as you pay it moderates the simple math of supply and demand and Theres materials cost inflation, we see hot bands at $800 a ton and we're not so long ago, there were $500 a ton so theres theres material cost inflation.

And as well.

We have to.

To manage that by being as efficient as we can with the utilization.

And of those inputs on the.

Operating front.

We only really have.

2 components coal, which is a pass through.

To our customers and and the labor that we use to convert that coal to coke and the labor that we used to maintain our facilities.

Yeah.

And the remarkable inflation there yet as you know the take or pay nature of our contracts allows for some.

Some of that that increase to be.

And to our customers but.

And we don't just because we can pass it on.

Take that is.

Per reason not to continue to look to be ever more efficient so.

And all of our activities and also doing maintenance for example, we look to extend the time between outages. So there's less need for outages and therefore.

Therefore, less need for our labor and materials.

We look to deploy automation to the extent, we can we look to increase our yields we look to increase our throughput and we guided 50000 tons up.

For the balance of the year on coal and there is no requirement for additional labor with debt 50000 tons.

So to the extent, we can be more efficient with our output.

And Theres no labor components, so youre offsetting the cost close and inflationary cost increases by generating more throughput. So there's.

There's lots of levers and industrial company and can pull to try to offset what may be some structural.

It is an inflationary environment and there's a lot of debate out there about whether this is transitory inflation or if it's structural.

I don't want to second guess, the economist and the fed but it certainly feels to me anyway that there is a little bit of structural inflation and the economy now okay.

Okay. Thanks, a lot and Mike appreciate it.

Chain.

And once again to ask a question and you may need to press star 1 on your telephone keypad and then that is star..1. Your next question is from Nathan Martin of Benchmark Coffee company.

Yes, thanks, good morning, everybody and congrats on the quarter and the debt refinancing.

Yes, my bigger picture questions have mostly been addressed at this point. So just really a quick modeling question and.

And maybe I missed it earlier, but can you guys give us the breakdown and volumes at CMT between coal and other products.

You mean.

And.

754 call and 3.5 for other.

And the quarter Michael sorry.

And the Florida I would have to look at it.

Yes.

And.

And that's been and chairman and you guys did about and it was too.

And Chinese coal and the first quarter and 750000 of other I was curious what that might look like from Q2, it's Tim and Eric.

Second quarter as well that's right.

Okay got it perfect I appreciate that.

And really really that's that's.

And then all I had left guidance I appreciate your time and best of luck in second half.

Thanks, Thank you.

And your next question is from Josh Makowski of Credit Suisse.

Hey, guys. Thanks for taking the question just had had 1 from me most of mine have been answered but was wondering if you could.

Maybe just talk through the sequential.

Good point.

Slight margin pressures that you saw and QQ versus once you I guess more specifically.

The sequential decline in and EBITDA per ton and the domestic side as well.

And margin differential and.

And your Brazil Coke.

Yes, it is really.

No.

And what I would think of on the 1 hand and noise.

A little more outage work going on and the second quarter and the first as we discussed and the first it was really an exceptional.

Quarter were almost nothing went wrong so.

And it's relatively quarter.

And quarter.

The same results.

Got some seasonality from outage works or timing for lack of a better word and in Brazil, I think we earn the bonus and the second quarter and a little more throughput there is that right Jonathan.

And really not a margin question I think it's more of and denominated debt.

Tons.

And over it we've been sold I mean, I think that the numerator.

EBITDA was more or less the same it's just the timing of the tons being sold and that leads to the dollars per ton being higher in Q1 versus Q2.

Drilling out of a margin question.

Got it that's helpful. Thanks, guys I appreciate.

And congrats again.

Yes.

And there are no further questions at this time I will turn the call back over to Sean from you.

Okay. Thanks, Cathie and again, thank you all for joining US this morning and per your continued interest and some coke look forward to talking soon.

Thank you.

Ladies and gentlemen. This concludes today's conference call you may now disconnect.

Yeah.

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