Q3 2021 SunCoke Energy Inc Earnings Call

Good morning, My name is David and I'll be your conference operator today at.

At this time I would like to welcome everyone to the Sun Coke Energy third quarter 2021 earnings call. Today's conference is being recorded all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

If you would like to ask a question during that time simply press. The number one followed by Star if you like to withdraw your question Press Star one once again I'll now turn the call over to <unk> Agarwal head of Investor Relations you May begin your conference.

Thanks, David.

Good morning, and thank you for joining us this morning to discuss <unk> Energy's third quarter 2021 results with me today is Mike Rippey, President and Chief Executive Officer.

Following management's prepared remarks, we'll open the call for Q&A. This conference call is being webcast live on the Investor Relations section of our website and a replay will be available later today. If you don't get to your questions on the call today, Please feel free to reach out to our Investor Relations team.

Before I turn things over to Mike, Let me remind you that the various remarks, we make on todays 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 a reconciliations to non-GAAP financial measures discussed on today's call with that I'll now turn things over to Mike. Thanks, Jonathan.

Good morning, and thank you all for joining us today I want to discuss a few highlights of our third quarter results before turning it back to Shannon, who will review them in detail.

I would like to thank all of our son called teammates for their continued commitment to our shared goals of working safely and efficiently to deliver high quality products and services to our customers.

Turning to our financial performance in the quarter.

We're pleased with how our teams delivered across both the coke and logistics segments.

Pulp, making operations continue to operate at full capacity.

In our logistics segment delivered another solid quarter, despite the disruption caused by hurricane Ida for.

For the third quarter of 2021, we delivered adjusted EBITDA of $73 9 million representing record third quarter performance.

As I mentioned CMT operations were disrupted due to hurricane Ida, but the terminal recovered quickly with only minor damage and minimal business disruption.

The resilient nature of our operations and commitment to our employees was clearly visible through the speed at which CMT returned to normal operations.

Operationally, our export and foundry Coke initiatives continued to perform well as evident from our financial results.

In addition positive market dynamics are.

Proving that our entry into these markets was timely our products are well received by customers and we have established ourselves as a reliable supplier.

Quality products in both markets.

Our gross leverage stands at approximately two five times on a trailing 12 month adjusted EBITDA basis, we're committed to continue paying down our revolver for the remainder of the year.

Based on our year to date performance and the expectation of continued strength in steel and coal markets for.

For the remainder of the year, we are well positioned to modestly exceed.

Our full year 2021, adjusted EBITDA guidance of $255 million to $265 million with that.

I'll turn it over to <unk> to review, our third quarter earnings in detail continent.

Thanks, Mike turning to slide four.

Our third quarter net income attributable to FX fee was 27 cents per share up 30 versus the prior year period. The increase is primarily driven by the absence of supply really provided to certain customers as part of the turndown agreements during the prior year period adjusted EBITDA came in at $73 9 million.

For the quarter up $26 1 million from the priority of the quarter, our Coke operations continued to deliver strong performance and operate efficiently.

Coke operations were up $17 7 million or what priority at period.

Logistics segments was up a logistics.

Segment was up $7 3 million quarter over quarter, driven by higher throughput volumes higher price and diversified product base at CMT.

Turning to the domestic Coke business summary on slide five.

Third quarter adjusted EBITDA per ton was $62 1.056 million sales tons.

The volumes, we had hired across the fleet as a priority at period was impacted by pandemic related to announce our Texas will entry to export and foundry market is proving to be timely and when combined with full capacity utilization. We can see the positive impact on our profitability. We expect full year domestic coke adjusted EBITDA to come in <unk>.

Higher than the guidance range up to $34 million due to a 38 million. There are planned outages at some of our domestic coke facilities, which will impact the volume and profitability of fourth quarter, but it is included in our full year guidance moving to slide six to discuss our logistics business.

The logistics business generated $11 6 million of adjusted EBITDA during the third quarter of 2021 as compared to $4 3 million in the prior year period.

Increase was driven by higher call volumes additional by I don't know, what as a product and higher price on call handling all at CMT. The coal handling contract includes a quarterly price adjustment at a price kick cricket, which is based on the API two price index, which benefited Q3 results.

Expect the benefit to continue in Q4 as well as mentioned by Mike earlier, the impact of Hurricane Ida on CMT was limited and the facility came back to normal operating levels fairly quickly that.

That segment as a whole handled $4 9 million tons up throughput volumes during the quarter as compared to $3 3 million tonnes during the prior year period.

Our full year guidance for logistics volumes and adjusted EBITDA remains the same as provided in the second quarter.

Turning to slide seven to discuss our liquidity position in Q3.

As you can see from the chart. We ended the third quarter with a cash balance of $54 $6 million in the third quarter cash flow from operating activities generated close to $79 million. We spent $18 4 million on capex during the quarter and paid dividends of $5 million at.

Our rate of <unk> <unk> per share, we lowered our debt by $51 7 million with the majority of the reduction coming in the farm a pay down of our revolving credit facility.

Our total debt balance stood at approximately $615 million at the end of third quarter, and we expect to continue to pay down the revolver or the balance of the year. In total we ended the quarter with a strong liquidity position of $291 million with that I'll turn it back to Mike.

Thanks, Shannon wrapping up on slide eight.

As always safety and operational performance is top of mind for our organization. We look to continue to perform safely while successfully executing against our operating and capital plan for the remainder of the year.

We are very pleased with the progress we've made so far in the new markets. We entered this year and we will continue to focus on further developing our customer base and participation in future years.

Our aim when we started 2021 was to run at full capacity, while introducing new products as we end the third quarter, we are fully booked for the balance of the year.

Activity working on filling the order book for next year.

On the logistics side, we have made good progress on revitalizing CMT the backdrop of positive market dynamics.

We will continue to build on this foundation for CMT as long term success on the capital allocation front, we will continue to work toward reducing our revolver for the balance of the year no longer term, we'll continually evaluate the capital needs of our business profitable growth opportunities and the need to reward our shareholders and we will make cash.

<unk> allocation decisions accordingly.

Finally based on our reliable performance of our operating segments and success of export in foundry products, we are well positioned to modestly exceed our adjusted EBITDA guidance of $255 million to $265 million for 2021.

With that let's go ahead and open it up for Q&A.

At this time I'd like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad and we'll pause for just a moment to compile the Q&A roster.

Yeah.

Okay.

Yes.

Yeah.

Okay.

And we will take our first question from Nathan Martin with the benchmark company.

Guys. Thanks for taking my questions and congrats on the quarter.

Thanks, David Thanks Nathan.

If I look at your domestic Coke segment updated EBITDA guidance, there again modestly exceed your prior range. This is combined with your expectation looks like with volumes and profitability to be a little bit lower due some outage work I guess first question is lower compared to what it is that quarter over quarter year over year and then also maybe just talk about some of the outage work being done.

And finally, it looks like you still expect to hit that $4 5 million ton of production guidance just want to make sure that's right.

Yep, that's all right and it's a quarter over quarter, the fourth quarter or we have scheduled a lot of the routine maintenance and capital work Oh, we like to complete during the year.

This year is working out where a lot of that work's going to occur during the fourth quarter.

Some of that's by design and some of it frankly is due to the pandemic and the challenges associated with gathering all the necessary.

Equipment that needs to be installed and refurbished and pulling together all the labor inputs to complete the capital work so it's been difficult to.

To do capital work throughout the year again because of.

The difficulty of obtaining materials.

Sorry labor input so a lot of that work is being pushed into the fourth quarter here.

Got it and Thats I guess like what.

Okay.

Selling that you're still probably going to be closer to that $90 million of capex for the full year.

Yes.

Okay.

Kind of we've never logistics.

Third quarter, a little bit weaker obviously I'm sure that was largely driven by hurricane Ida.

Again left your full year guidance of around 21, and a half million tons have changed that.

It imply a pretty big fourth quarter, it looks like especially at CMT, maybe could you discuss what gives you the confidence that you can still hit that full year number.

Well you you touched on it the disruption was related to either.

Our facility was down for the better part of three weeks and that related not to damage at the facility, but rather that we are we are unable to to run the facility because there was no electricity in the region. So we had to wait for electricity to be restored in the region. So we lost some volumes there and the good news is the team.

We're at the ready when power was restored they were and we repaired some of the minor damage. We're back operating within 48 hours of power being restored. So we look forward to a good fourth quarter down at CMT.

Okay, Yeah, because theyre just looking again, if you kind of hit that full year CMT guidance of around 11 million tonnes with supply.

Over 3 million tons in the fourth quarter. So you're confident you can kind of get to that number more or less.

We're confident with the guidance, we've given yes, I mean, I think I think just take I mean, it should be at around that 3 million ton number you know Q4, obviously.

Now with the API two pricing being so strong they are seeing good volume. So we feel confident with our guidance.

Perfect very helpful guys, and then sharpening you just brought up one thing I want to touch on two that price kicker that you mentioned in the third quarter.

<unk> still expect should probably character to the fourth quarter.

Could you guys, let us know maybe what API two prices required eject that kicker is this something that could also continue into 2022 and beyond assuming it stays above that required level.

It certainly could continue into 'twenty two.

To answer your first question. The answer is we don't share any of the details with regard to our contract. So I'm unable to answer that question or perhaps better said unwilling to answer that question.

Got it no worries and then maybe the last one two I'll just try and see.

Again kind of go back real quickly the domestic Coke segment fully sold out this year.

Last quarter, you mentioned, you still have about 800000 tons for to sell for 'twenty two.

Any comments or updates there.

No as we said we're a we're working hard at selling our our volumes for 'twenty two as we speak today.

'twenty one is straight out now.

Got it appreciate the comments and best of luck in the fourth quarter guys.

Thanks, Thanks Nina.

And as a reminder, ladies and gentlemen to ask a question Thats Star one on your telephone keypad will pause for a moment.

Okay.

Okay.

And we will take our next question from Josh <unk>.

<unk> with credit Suisse management.

Hey, guys. Congrats on the quarter just one quick one for me, maybe not quick but I guess commentary from one of your big customers in their earnings call last week.

And to the clear intention to continue to reduce their met coal needs I guess on the back of that and the recent purchase of scrap vertical integration play how do you react to that.

Pretty vocal intention to continue reducing that.

That met coal need.

Yes.

This before.

The comments not a new one we actually applaud it.

And the reason we do that is.

To the extent by adding alternative fuel sources to a blast furnace it doesn't much matter, whether it's D. R. I a H.

H B I D.

<unk> coal or natural gas or fuel all of those additions.

Correctly reduce the need for coke and the furnace, but what it also does is require the coke that is in the furnace.

We've ever higher quality.

Coke has too.

Primary our values and our furnace one as a source of fuel the others to support the burden in the furnace so as to allow the chemical reactions to occur.

When you.

Think about these other substitute materials they have no value in terms of burden support in the furnace. So that requires the coke that's in the furnace to be of a higher quality and as we've discussed for many years now.

Natural output of our processes to produce a coke or very high CSR. So its very strong coke, which lends itself to this ability to substitute so.

As.

Coke more generally as replacement of furnace, the need for higher quality coal to actually increases and where the producer of that high quality Coke. So it's perfectly fine with us.

That our customers are looking to reduce their <unk> footprint by injecting.

Other forms of metal.

Energy to the furnace, so we're perfectly okay.

Got it Super helpful. Thanks, guys and congrats again.

Mhm.

And as a reminder, ladies and gentlemen press star one if you would like to ask a question.

And next we'll go to gamma the saga with Factset.

Okay.

Sure.

This might be Lucas pipes that dialed in with the fact that number can you hear me all right.

We can hear you Lukas.

Alright.

Yes.

Good morning, and good job on the quarter.

So first I wanted to ask a clarifying question from Nathan earlier.

The order book for 2022, where do you stand today and how quickly do you expect to be fully booked and first question is on the Coke side, but then of course on the CMT side would also be curious how your order book is shaping up thank you very much.

Yes, good questions Lucas on the coal front, we're in active discussions now we have sold or <unk>.

Few cargoes into 2022.

The sales that we make during 2022 and we're not prepared to address some fully today.

May take the form of annual <unk>.

Contract commitments, they may take the form of quarterly commitments or they may more simply.

B a cargo at a time.

That's what we did for all of 2021 basically.

Cargo commitments or quarterly commitments.

And what then is required of us is to be active in the market to know the market to be present and to be booking at the appropriate time. So we didnt enter 2021 fall. We just said that we expect it to be full and indeed, we've been full.

But we were selling cargos here in 2021 filling out the fourth quarter as recently as September. So we won't enter 2022 in a sold out position. That's that's not our intention, but rather to be well positioned to sell out throughout all of 2022. So we booked a few cargoes werent active.

Discussions and there's no reason as we sit here today to think that we won't be able to run full in 2022.

Your question about CMT.

Sure.

Relatively far down the road in terms of.

Repositioning the asset the volumes are are way up from from where they were.

It doesn't mean, we're not looking for more tonnage we are but.

And we're not going to get in 2022 guidance today, but.

Volume levels, not dissimilar to what we're experiencing today would be an expectation for 2022.

That's that's very helpful.

Yeah.

Second second topic I wanted to touch on was.

This current gold price environment David.

Highest prices that I've ever seen and I wanted to ask what implications. This has for your business one.

Does it lead to margin expansion in your Coke regular way Coke business too there.

There may be.

Does it maybe make the contracting that you just touched on with difficult would really appreciate in what ways. The current bill.

Price environment is impacting your business.

Well for the most part.

Coal price surpass through for our company, so the impact of higher or lower.

Coal prices isn't material to us it does though require.

As our company's approach to the market has changed over the past few years non referring to.

Some of our export and foundry activities on amount of education on our part.

With our customers.

Because they don't purchase under these long term take or pay multiyear contracts, we have to go out and basically reprice every year. So we have to talk to them about.

The fact that.

Coal prices met coal prices have risen substantially.

And I'm, probably a little older than new logos and they're the highest I've ever seen too, but they are what they are.

We procure.

Our coal prices at very competitive rates and where.

We're going to pass those those changes and inputs onto onto the market. So it does require.

Time with our customers.

Explanation of understanding.

And we've been.

Socializing.

If you will.

The fact that coal prices.

Our changing and rather dramatic way and that our full expectation is we'll be passing those increases along what I might add that when coal prices come down in years ahead, which they may certainly from these levels.

We won't benefit from that either rather we passed that decrease onto our marketplace. We don't we don't compete on coal price we compete on the quality of our product.

The effectiveness and efficiency with which we convert coal to Coke and there were very very strong so we like our place in the market.

Thank you Mike.

Quick follow up question on <unk>.

In years prior I recall, maybe tens of millions of dollars of fluctuations.

Due to changes in coal prices and I think it has to do with.

Efficient conversion.

Some coal to coke and in some of these benefits being shared between you and your customer.

Okay.

Is it does that mechanism still still hold today and if so is it ballpark of tens of millions of dollars.

Accurate or the right kind of Zip code.

But we do have a benefit or detriment year over year as it relates to yield, but it doesn't turn into tens of millions of dollars yes.

Lukas I mean, obviously like kind of depending upon what kind of contract there is bright and we are.

If we are doing more as Mike mentioned cargo by cargo I think it will depend more on what kind of contracts, we have though yes, but that is yield impact as Mike said.

Increasing coal prices.

But it's not to that magnitude and obviously like kind of when we provide that 'twenty. One 'twenty two guidance will kind of obviously one side of our coal prices are finalized and we have kind of a good understanding of where the volumes are going we will provide that information.

Okay.

Appreciate it thank you very much and best of luck.

Thanks. Thanks.

We'll take our next question from phone number 6468556 199 lots of Kay.

Yeah.

Hi, This is Matt fields.

I wanted to you touched on the comments about using less coke.

From your customers and I appreciate the comments.

Dollars.

Sort of move behind that but also kind of I think as <unk>.

Cole as steel companies aimed to be sort of more ESG friendly.

To the extent that they can in the United States.

What do you think the impact is on on your business.

Do you think that that kind of the decision to use internal coke resources, which are probably a lot older and maybe more.

Difficult to report emissions wise versus suncoast kind of newer cleaner coke.

We will make a difference as these steel companies kind of decide sort of optimal mix going forward.

Yes, you really touch on it Matt and that's why we believe we're very well positioned for.

Uh huh.

A more ESG centric future where.

Properly steel companies aluminum producers whomever it might be.

Focused on our carbon footprint and as they do that and they look to reduce and we talked about it earlier the substitution.

Hei for example into a blast furnace as opposed to Coke, we think we're well positioned we're well positioned because of the age of our fleet and the environmental footprint of our fleet. We are the Mac standard so with the newest fleet. We're also environmentally the most friendly fleet, we're very efficient so.

It's still kind of a max.

Macroeconomics are one on one that we all took when you look at <unk>.

Client demand curves you don't want to be in that right quadrant of the supply curve you don't want to be the high cost inefficient producer.

We sit in a very nice place on that supply curve in the left corner, where we're very efficient we're very new we're well invested in or spending $90 million. This year on capital and we expect to continue at that level, we're going to maintain these facilities in good environmental stud theyre going to remain efficient and well positioned to serve the market.

So as there might be less demand for coke in the future.

The place you don't want to be again as submit that writer most corner and we're nowhere close to being in that corner.

Really seen it evidenced here in the last few years Matt.

Entered into the foundry market.

Foundry market didn't grow.

Demand for foundry coax remained relatively flat, but supply left in why does supply leave while it was the high cost polluting.

Producers have lost the older foundry facilities.

You've seen a few announcements like that now on the integrated side with.

Some announced closures at both of our main customers.

As they're faced with capital decisions in investing in very old facilities, they're making the right decisions. They are investing their money is closer to their customers and another.

In other parts of their business, which we applaud so we stand ready to serve them.

We will help them in their journey to reduce our carbon footprints.

Thanks, Thanks for that perspective.

And my next questions on the free cash flow side it seems like your.

Kind of already at your 2021 guidance for free cash flow.

Maybe a touch above maybe a touch below but.

They're already with the kind of implied jump up in Capex for the fourth quarter.

Hit that $90 million guidance, it seems like free cash flow will be a use.

In the fourth quarter.

And it seems like.

Just kind of want to reconcile the commentary you made earlier about continuing to pay down revolver balance in the fourth quarter. Despite what seems like will be a free cash flow use.

Yes, I mean, I think there's a little bit I mean, obviously, depending upon where the guidance comments since we said that it could be modestly higher so I think there could be a little bit off higher cash flow generation based on where our ebay dot com then so whatever excess cash that we have we'll kind of it'll go towards that evolve at Sn.

Actually that's what that comment means.

Did you think fourth quarter will be a positive free cash flow quarter.

Little bit, yes, probably I mean, it depends on you know what where EBITDA comes in and kind of obviously capex should come in at 90, and then what ends up on the call, but achieving rate obviously as we move on to a big Delta change in the coal pricing there could be an all depending upon what call budget as we have it could be a little bit positive.

Okay, great. Thanks, very much and good luck on the rest of the year.

Thanks.

And that does conclude today's question and answer session I will now turn the call back over to Mike Rippey for any additional comments or closing remarks.

Again, thank you all for joining us this morning, and as always your continued interest in Sun Coke we are.

Look forward to continuing those discussions.

In the months and years ahead. So thanks again, and we'll talk soon.

And this concludes today's conference call you may now disconnect.

Please wait the conference will begin shortly.

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