Q1 2022 SunCoke Energy Inc Earnings Call

Good morning, My name is Chris and I'll be your conference operator today at this time I'd like to welcome everyone to the Sun Coke Energy first quarter 2022 earnings call.

All lines have been placed on mute to prevent any background noise.

After the Speakers' remarks, there'll be a question and answer session.

If he would like to ask a question. During this time simply press Star then the number one on your telephone keypad.

To withdraw your question. Please press star one again.

Thank you, Sean Tony Agra Wall, Vice President Finance and Investor Relations you may begin.

Okay.

Good morning, and thank you for joining us this morning to discuss and Cook Nrg's first quarter 2022 results with me today are Mike Rippey, President and Chief Executive Officer, and Mark Marine Coe Senior Vice President and Chief Financial Officer. Following managements prepared remarks, well open the call for Q&A. This conference call is being web.

<unk> 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.

Rationally language regarding forward looking statements.

<unk> filings apply to the remarks, we make today. These documents are available on our website as a reconciliation to non-GAAP financial measures discussed on today's call with that I'll now turn things over to Mike.

Thanks, Shannon good morning, and thank you all for joining us on today's call.

Today, we announced Suncor Energy's first quarter results and before I turn it over to Mark.

We'll review the results in detail I want to discuss a few highlights.

As always I want to start by thanking all of our Sun Coke employees for.

For their commitment and contributions to what was a record quarter for Sun Coke.

Our domestic Coke fleet delivered excellent results this quarter and the main driver behind these results is our continued success in the foundry and export coal markets.

Strong commodity markets and rising demand for our products provided a favorable backdrop for an excellent start to the year. Despite some challenges due to unusually wet winter weather.

We are pleased to have our operations continue to run at full capacity and look forward to a period of drier weather.

Logistics segment also continues to perform well with increased volumes from new customers at our domestic terminals and the API two price adjustment benefit at CMT during the quarter.

Also extended our coal handling contract at CMT through 2024, with a higher base rate and continued potential upside from the API two price adjustment provision.

Looking at our capital structure, we continue to pay our <unk> per share quarterly dividend and our gross leverage ratio stands at approximately two two times on a trailing 12 month adjusted EBITDA basis.

We will continue to pursue a balanced yet opportunistic approach to capital allocation.

Overall, our strong financial performance in the first quarter provides a solid foundation to build on for the balance of the year, we are well positioned to modestly exceed our consolidated full.

Full year 2022, adjusted EBITDA guidance of $240 million to $255 million.

With that I'll turn it over to Mark to review, our first quarter earnings in detail Mark.

Thanks, Mike.

Turning to slide four the first quarter net income attributable to Sun Coke was <unk> 35 per share up 15, <unk> versus the prior year period, primarily driven by export Coke sales.

Consolidated adjusted EBITDA for the first quarter 'twenty two.

$83 8 million up $13 2 million versus first quarter 2021.

The increase was driven by higher margin on export sales and the API two price adjustment benefit at CMT.

Turning to slide five to discuss our domestic coke business performance in detail.

First quarter, adjusted EBITDA was $76 million and we sold 962000 tons of Coke.

This period over period, adjusted EBITDA increase was driven by higher margin on export Coke sales, which included a onetime benefit of lower cost carryover coal from 2021.

Wetter than normal winter weather impacted coke production across the fleet during the first quarter.

Additionally, the period over period Coke production was impacted due to change in mix between foundry and blast furnace Coke production.

As a reminder, foundry tons do not replace blast furnace tonnes on a ton per ton basis. For example, due to differences in the production process a single ton of foundry Coke replaces approximately two tons of blast furnace coke.

On the backdrop of the first quarter performance, we now expect to modestly exceed the domestic coke adjusted EBITDA guidance range of $229 million to $235 million.

Turning to slide six to discuss our logistics business.

The logistics business generated $12 $6 million of adjusted EBITDA during the first quarter of 2022 as compared to $10 $9 million in the prior period.

The increase in adjusted EBITDA was primarily due to the API two price adjustment benefit at CMT and higher volumes at our domestic terminals.

Our logistics business handled $5 2 million tonnes of throughput volumes during the quarter as compared to $5 3 million tonnes during the prior year period.

CMT handled approximately 600000 fewer tons versus the prior year period, mainly driven by coal supply and rail delivery issues.

Domestic terminal saw good uptick in volumes driven by increased demand of handling services from new customers.

During the first quarter 2022, we extended our take or pay coal handling agreement at CMT through 2024.

Take or pay volume for the contract is 4 million tons annually and the base rate was increased.

Contract continues to include the API two price adjustment provision, which provides good upside potential.

Similar to the Coke segment, we now expect to modestly exceed the logistics adjusted EBITDA guidance range of $34 million to $40 million with the volume guidance remaining unchanged.

Switching gears I would now like to talk about our liquidity position for Q1.

Let's turn to slide seven.

As you can see from the chart. We ended the first quarter with a cash balance of approximately $80 million.

Cash flow from operating activities generated close to $23 million. It was impacted by the timing of receivables increase in coal inventory and changes in coal payment terms.

We spent approximately $13 million on capex during the quarter.

And our debt increased by $14 million, mainly due to working capital requirements.

We also paid $5 million in dividends at the rate of six pence per share during the quarter.

In total we ended the quarter with a strong liquidity position of approximately $300 million.

With that I will turn it back to Mike Thanks, Mark.

Wrapping up on slide eight.

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

Our efforts will continue to focus on safely executing against our operating and capital plans.

We are pleased to see increased demand for our services and new customers at our domestic logistics terminals. The extension of the coal handling agreement at CMT amidst a positive commodity market backdrop provides a strong foundation to continue to further strengthen CMT.

As I mentioned at the beginning of this call. We are extremely pleased with our success in the foundry and export coal markets.

First quarter results are further proof that our entry into these markets was timely and opportunistic we continue to build customer relationships and are continuously looking to further increase market share sales into these markets allow our coal plants to run optimally at full utilization.

On the capital allocation front, we expect our deleveraging initiative to continue as we look to bring down our revolver balance further.

We are looking at growth opportunities, both organically and through M&A and as we have said before we will remain disciplined understanding.

But it is not in our shareholders' interest for the company to sacrifice long term value creation for short term marginal gains we continue to evaluate the capital needs of the business, our capital structure and the need to reward shareholders on a continuous basis, and we will make capital allocation decisions accordingly.

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As stated earlier continued strength in commodity markets combined with our excellent first quarter results leads us to project full year results to modestly exceed our adjusted EBITDA guidance of $240 million to $255 million.

We will provide further updates to the guidance as we have more clarity regarding the second half of the year in our next earnings call.

With that let's go ahead and open the call for Q&A.

At this time I would like to remind everyone. If you would like to ask a question. Please press Star then one on your telephone keypad.

Our first question is from Karl Blunden with Goldman Sachs. Your line is open.

Hi, good morning, Thanks, very much for the time.

Cost inflation has been.

Big topic of focus through earning season would be interested in your thoughts on what youre seeing in your business right now.

Both from an Opex standpoint, and then Capex, where its very encouraging that you reiterated your Capex guide there, but interested in how that plays out for the rest of the year. Thanks.

And it's a good question Karl Thanks.

On the Capex side, we talked.

And last year's earnings calls, particularly beginning.

In the second half of the year that we are experiencing unexpected inflation and some of the capital project work that we planned.

And as it relates then to 2022, we fully.

Put it into our forecast the expected impacts of inflation, so our capex plan for the year.

We anticipate the inflationary impacts so we continue to absorb.

The Opex side.

We indicated in our last earnings call that we saw the impacts of inflation affecting our business and have begun efforts to.

Offset where possible any inflationary impacts that.

We might see so we're working hard to offset these <unk>.

Inflationary increases we see it.

Brilliant and everything we do most notably though for our company call as the.

The most important.

Driver of our operating costs.

There as you know we have pass throughs or all of our contractual accounts and as we know work.

Particularly in the export markets, we look to closely match.

Our coal price in our coal sourcing decisions with our sales into the export market. So as not to have any undue exposure to.

Inflation in the commodity markets principally call.

Okay makes sense and then.

You are forecasting now higher EBITDA for the year, plus higher free cash flow and you discussed M&A and organic growth opportunities I didn't hear much discussion around <unk>.

Shareholder returns.

Change in dividend or shareholder repurchase so should we take that too.

To me that the focus is going to be on balance sheet strengthening for now and then.

Perhaps the discussion to have at a later time or is there room for some of that.

As we've indicated our focus is to continue to delever the balance sheet and the work there is.

As on the revolver and as always the board continuously evaluate opportunities to return to shareholder whether that be an increase to the dividend or some other form but that's that's for out ahead. Our focus right now is on deleveraging.

Thanks, Mike appreciate it.

Our next question is from Nathan Martin with the Benchmark Company. Your line is open.

Hey, good morning, everyone. Congrats on the record quarter. Thanks for taking my questions.

Again record start to the year it looks like domestic coke adjusted EBITDA per ton was 79 blocks statistics shipments higher than I had expected, especially given some rail delays congrats.

Congrats on extending the take or pay.

If you had to prices looking like they should remain elevated at least for a while.

What's going on and what's the.

Russia, Ukraine conflict. So I guess is there something out there that you guys are seeing over the next three quarters.

Officially raising your full year EBITDA guidance or maybe what do you need to see over the next quarter to make you comfortable enough to raise that guidance. Thanks.

Yes, Nathan Thank you and those are all good questions. As we indicated we will review the guidance at the end of the second quarter, we have uncertainty and you touched on a particularly as it relates to the global markets and our our sales into those markets yet sport coat.

So we'll have more clarity as we end the second quarter and enter the third as it relates to principally export sales for the back half of the year. So we will address the full year guidance again at the end of the second quarter, we have more clarity into the back half export activities.

And then maybe just kind of a clarification question.

Adjusted EBITDA per ton on domestic coke side of $79 was there something driving that higher number I think I heard some mention of hope so.

Rollover Tung Chung fourth quarter to first quarter that affect that number at all.

It did theres two things there and Thats. The success, we've had in the export market and then as you properly.

Point out we benefited.

From having some coal carryover from 'twenty, one into 'twenty, two and when you think about that kind of onetime benefit it was slightly in excess of $10 million in the quarter.

Okay. That's very helpful. I appreciate that and then maybe just going back the transportation first second.

Can we maybe get your updated thoughts there on rail transportation logistics, if things kind of improve somewhat as we've gone throughout the first few months of this quarter and what Youre seeing there and then any update on the labor side of things, which is something I think we touched on last quarter as well.

Yes, yes, the logistics or supply chain issues.

Have I always hesitate to say resolve themselves fully because no similar to that I say that all wish I hadn't but certainly.

From what we were experiencing early in the first quarter things are quite a bit improved.

No I don't know that I fully understand your question on labor.

I think you had mentioned before last quarter that maybe there were some higher labor costs going on.

Your contract workers.

It's still the case or are you seeing that as far as inflationary pressures are concerned that you touched on it earlier.

No no not particularly so we're seeing general wage inflation that others are in and the economy nothing.

Specific to some coke there.

Got it.

I'll leave it there I appreciate the time information best of luck.

Sure. Thanks Nathan.

Again, Please press star one if you'd like to ask a question.

It appears that we have no further questions at this time I'll turn the call over to Mike Rippey for any closing remarks.

Again, thank you all for joining us on the call. This morning.

As always we look forward to your continued interest in Sun Coke and all the things we're doing here. So I appreciate your time and interest 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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