Q2 2022 SunCoke Energy Inc Earnings Call
Good morning, My name is Rob and I'll be your conference operator today.
At this time I would like to welcome everyone to the Sun Coke Energy second quarter 2022 earnings Conference call. 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 this time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question again press the star one.
Thank you Shannon you Aggarwal, Vice President Investor Relations you May begin your conference.
Thanks, Rob Good morning, and thank you for joining us this morning to discuss <unk> Energy's second quarter 2022 results with me today are Mike Rippey, President and Chief Executive Officer, and Mike Murray Senior Vice President and Chief Financial 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 I'll put a website and a replay will be ever labor later if.
If we 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.
On today's call with that I'll knock on things over to Mike.
Thanks, Sean.
And thank you all for joining us today.
Today, we announced Suncor Energy's second quarter results and before I turn it over to Mark.
Who will review the results in detail I want to discuss a few highlights.
I want to start by thanking all of our southern Coke employees for their commitment and contributions to our shared goals of working safely and efficiently to deliver high quality products and services to our customers.
Our export and foundry coke initiatives continue to perform well.
We are seeing the positive impact in our financial results.
In the logistics segment, we continue to see increased volumes at our domestic terminals.
CMT benefited from easing from the easing of coal supply and rail delivery issues with.
For the second quarter of 2022, we.
We delivered consolidated adjusted EBITDA of $71 $3 million.
Bind with the first quarter's results. This has been a record first half for Sun Coke.
The second quarter, we also announced the signing of a non binding letter of intent with U S steel.
Sets out the principal terms and conditions upon which sun Coke will acquire U S. Steel's granite city blast furnaces, and build a 2 million ton per year.
<unk> pig iron facility with a 10 year initial term.
This proposed project with significantly enhanced suncoast current footprint, allowing us to become a diversified supplier of coal and metallics for the steel industry.
Today, We also announced that our board of directors approved a 33% increase in our quarterly dividend from <unk> <unk> per share.
<unk> September one 2020 to.
The next quarterly payment date.
This meaningful increase demonstrates the boards and senior leaderships confidence and our continued progress and the stability of our underlying core businesses.
Recognizing both record first half performance and softening and export Coke market conditions for the second half of the year.
We are increasing our full year adjusted EBITDA guidance.
$270 million to $285 million from our original guidance of $240 million to $155 million.
With that I will turn it over to Mark to review, our second quarter earnings in detail Mark.
Thanks, Mike.
Turning to slide four.
The second quarter net income attributable to Sun Coke was 21 per share up 32 versus the prior year period.
Primarily driven by the absence of a 2007 cents per share impact of debt extinguishment related charges in connection with the refinancing in the second quarter of 2021.
Adjusted EBITDA for the second quarter 2022 came in at $71 3 million up $3 $3 million versus second quarter 2021. The increase was primarily driven by higher margins on export sales and the API two coal price adjustment benefit at CMT.
Partially offset by lower Coke sales volume due to product mix and timing of outages.
Turning to slide five to discuss our liquidity position for Q2.
As you can see from the chart. We ended the second quarter with a cash balance of approximately $63 million cash.
Cash flow from operating activities generated close to $44 million.
We spent approximately $21 million on capex during the quarter and our debt decreased by almost $31 million.
Also paid over $5 million in dividends at the rate of <unk> <unk> per share during the quarter.
In total we ended the quarter with a strong liquidity position of approximately $313 million.
As Mike mentioned, we announced a 33% increase in our quarterly dividend, which is consistent with our capital allocation strategy of continued strengthening of the balance sheet, along with rewarding our long term shareholders.
Now turning to slide six to discuss our domestic coke business performance and revised full year outlook.
Second quarter, adjusted EBITDA was $64 $3 million and we sold just over 1 million tons of coal.
The $2 $9 million increase in adjusted EBITDA as compared to same prior year period was mainly driven by higher margin on export Coke sales, partially offset by lower coal sales and production volume.
The period over period Coke production and sales was negatively impacted by the timing of planned outages at our coal plants as well as due to the change in mix between foundry and blast furnace Coke production.
As a reminder, foundry tons do not replace blast furnace tons on a ton per ton basis. For example, due to differences in the production process a single tonneau foundry Coke replaces approximately two tons of blast furnace coke.
Given our record first half performance, but also recognizing the softening export coal market conditions, we are increasing the domestic coke adjusted EBITDA guidance to $247 million to $255 million from original guidance of 229 to 200.
$35 million.
Coke sales volume guidance remains unchanged at approximately $4 1 million tonnes.
Turning to slide seven to discuss our logistics business.
The logistics business generated $12 5 million of adjusted EBITDA during the second quarter of 2022 as compared to $11 $4 million in the prior year period.
The increase in adjusted EBITDA was primarily due to the API two coal price adjustment benefit at CMT.
Our domestic terminal terminals handle higher volumes this quarter as compared to the same quarter last year margin was negatively impacted by higher fuel costs.
The segment handled five 8 million tons of throughput volumes during the quarter as compared to $5 1 million tonnes during the prior year period.
CMT handled similar volume as compared to same prior year period.
The coal supply and rail delivery issues, which impacted CMT over the last couple of quarters seem to be easing off and that is visible via the uptick in volume as compared to Q4, 2021 and Q1 2022.
Our domestic terminals handled approximately 700000 tons more than the same prior year period, driven by increased demand of handling services from new customers.
Given our strong first half performance first half 2022 results in an optimistic outlook for the balance of the year, we are increasing our logistics full year adjusted EBIT guide guidance range to $48 million to $52 million.
Turning to slide eight which summarizes our revised 2022 guidance.
We now expect consolidated adjusted EBITDA to be between 270 and $285 million as compared to our original guidance of $240 million to $255 million. This incorporates updated profitability expectations from export sales in the Coke segment and the.
A continuation of the API two coal price adjustment benefit at CMT in the logistics segment through the second half of the year.
Our capital expenditures guidance is unchanged at approximately $80 million.
Our free cash flow guidance now stands at $120 million to $135 million as compared to original guidance of $110 million to $125 million.
We now expect higher than originally anticipated working capital draw due to an increase in coal inventory values and a change in coal payment terms.
With that I will turn it back over to Mike.
Thanks Mark.
Wrapping up on slide nine.
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 continued growth in demand for services and new customers and our logistics terminals.
And based on current projections, we expect a solid second half for our logistics facilities as.
As I mentioned in the beginning of this call. We're extremely pleased with the success in the foundry and export coal markets. While foundry is a stable market with limited commodity price risks similar to our contractual less furnace coke sales.
Export coal market is much more volatile.
We realize the benefit of lower coal cost and export sales during the first half of the year, but now expect a softening of export markets in the second half.
Which is factored into our revised guidance importantly sales into these markets allow our coal plants to run optimally at full capacity.
We continued to make progress on our capital allocation strategy during the quarter from a growth perspective, we continue to work towards an agreement with U S steel on the granite city GPI manufacturing opportunity.
Additionally, our board of directors.
Cleared a meaningful increase in our quarterly dividend.
Finally on the debt front, we expect our deleveraging initiatives to continue as we look to further bring down our revolver balance.
As we have done in the past.
We continue to evaluate the capital needs of our business.
Our capital structure and the commitment to reward shareholders on a continuous basis, and we will make capital allocation decisions accordingly.
Finally, based on the reliability and performance of our operating segments, while factoring in export market conditions in the second half we look to achieve our revised adjusted EBITDA guidance of $270 million to $285 million for 2022.
With that let's go ahead and open the call for Q&A.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
Our first question comes from the line of Lucas pipes from B Riley Security. Your line is open.
Thank you very much operator, and good morning, everyone.
Good job on the quarter and raising the guidance.
Mike and team I first wanted to ask about.
The granite city deal and.
<unk>.
How should we think about.
The commodity risks you might peak right historically Sun Coke.
Pass through costs locked in the margin is that the sort of structure, we would be looking to at granite city as well. Thank you.
Lucas Thanks.
Asked an excellent question as always but.
And I hope you can appreciate this and I'm sure. There's other questions regarding the investment we're anticipating.
At granite city, but it's premature at this point.
While we are still evaluating the opportunity to comment beyond which we've already publicly done.
It should go without saying that we're very excited about the opportunity we believe this supply chain.
Bringing.
U S steel's iron ore pellets down combined with.
Our coke, which we currently manufacture at granite city converted into a GPI and Unutilized Eas segment has an extremely strong supply chain and that's really what our company looks to do is to profitably and sort of ourselves into the supply chains and I think it probably goes without saying we see this as a.
A win win for both ourselves and U S steel and a win for our company as a win for our shareholders. So as we've said now for many years.
We're very selective and disciplined in our approach and we expect that.
If we were to consummate. This transaction then it will be a profitable growth opportunity for many years to come for our shareholders, but again.
I appreciate.
Perhaps a little frustration, but this is all we can say at this time Lucas.
Yes.
That's how things go.
Understand.
You mentioned.
Okay.
There are still a few things to iron out like.
Thank you just sounded like if we close to exactly what happened with that.
Major items.
That are still kind of up.
Up for negotiation of that need to be settled before this transaction could close.
Theres, a principle agreement between ourselves and U S steel.
<unk>.
Things that we still need to learn about the overall viability of the project.
One can imagine that with capital costs will of course be one of those things and it's in the presence of the public announcement that we both made so we can better determine what capital commitment will be to complete the investments necessary to produce this product so.
We're now actively in the presence of our.
Public statement looking to to ascertain and fullness whats required to make this a truly beneficial undertaking.
Yeah.
Okay.
That's helpful. Thanks, Thank you, Mike and Tim.
Really quickly.
Second theme is.
Coke sales mix in 'twenty 'twenty three between domestic blast furnace coke export.
Andre at blast furnace, Coke, and then foundry coke domestically, but whats roughly the split of the market should we anticipate any major changes too.
To yourselves book in 2023, Thank you very much.
Thats a great question.
Lucas and we're starting now to look into.
2023 opportunities, there's not really any change between our contractual business the more traditional coal business. So we've been involved in.
And between the export and foundries so no change on the contractual side no meaningful change.
What we're exploring is the continued opportunity to grow our foundry business and we've had good success.
To date, we expect those opportunities to continue for our company are our customers are.
Very appreciative of the quality of our product reliability of supply and the value we bring them. So as we start to look into 'twenty three one could imagine a continued growth in the.
The foundry market.
Now would come at the expense of some export sales.
Yes.
And your next question comes from the line of Nathan Martin from the Benchmark Company. Your line is open.
Hey, good morning, everyone. Thanks for taking my questions.
Hey, Lucas kind of hit on the granite city opportunity. So I'll leave that alone for now maybe if I think about a couple of modeling questions.
If I'm looking at the domestic coke business.
Adjusted EBITDA per ton was $75 in the first quarter $64 in the second quarter.
Obviously, you did raise your full year guidance of 60 to $62 per ton, but that would seem to imply a pretty decent falloff in the second half first am I thinking about that correctly.
So what's behind the expected decline or could that range and that would still be a little bit conservative I would appreciate any thoughts. Thanks.
It's an excellent question Nathan clearly in the first quarter, we benefited as we indicated in our first quarter call.
By the presence of lower coal costs going into what was a rising export markets. So that was a nice tailwind in the first quarter and.
In the second quarter, we didn't experience that.
Benefit of the reduced coal prices and what we see now as we go into the back half of the year as some softening in export coal market opportunities. So the change.
In the second half is.
<unk> of the deceleration in the availability of price in the.
Export markets. So that's a good question and I hope that's a helpful answer.
Got it I appreciate that I was figuring it was probably mainly due to your earlier comments on a cellphone and export markets.
Okay, and then maybe next shifting gears to CMT, specifically on the coal side of things.
Second how expecting around six 6 million tons for the full year.
As I recall is at the lower end of your initial guidance.
You mentioned in your prepared remarks that coal supply and logistics have both started to ease or improve and obviously, we know export thermal coal prices remain extremely elevated so just hoping that maybe a little more color there why buy shipments maybe aren't quite as high as I would've expected them to play out. Thanks.
Well, you're right we had some catching up to do in the second quarter because there were.
Disruptions in supply in the first so that was a nice catch up quarter and now we're seeing.
Perhaps more normal run rate in the back half the capacity is there and the facility. If the demand is there and supply is there we will take full advantage of it but youre, 100% correct and acknowledging that global thermal demands remain quite high.
Pricing is favorable to us with regard to.
The.
Additional price, we pick up over over certain levels of international pricing API too.
Mike just real quick on that last part with the API two kicker any comments on.
Hey, Eric Eric a tiered structure do you benefit even more with some of these record prices, we've seen or any color you provide.
There would be great.
We don't provide insight into that contract beyond what we've already said, which is above certain levels. There is that price kicker you mentioned.
I appreciate that had to ask Im sure sure yes.
I'm. So glad you did ask approves or paying attention, but I hope you can appreciate our answer.
I do I do think so.
I'll leave it there guys again I appreciate the time and best of luck in the second half.
Thanks appreciate it.
Your next question comes from the line of Karl Blunden from Goldman Sachs. Your line is open.
Hi, Mike Mark Thanks for the time, congrats on the strong results and guidance raise.
I appreciate it a lot is still being explored for granite city and you mentioned that.
I Wonder if you could.
I'll go into some some of the timing considerations.
Assuming you proceed.
Is there a sense of when you might have needed to fund the project and then the types of the sources of capital that you might consider based on.
Utility we've seen in the market recently.
It's a good question Carl.
We said on the past and I think it remains the case after we've completed our discussion and reached agreement we expect the construction period of about two years prior to startup.
That's kind of the <unk>.
<unk> for Ya man with regard to capital needs, we would expect to.
Fund this project out of.
Our cash flows from operations and perhaps some borrowing under our revolvers.
Okay. That's helpful.
As we assess the capex needs for the rest of the business in 'twenty three 'twenty four or is there some kind of directional thoughts you can provide relative to how you've been running in 2022.
I think this year is a fairly representative year, where we're talking about $80 million of course, we're working hard now to <unk>.
Manage the negative effects of.
Inflation not only in Capex, but also on our operating expenses so.
Kind of.
Quantum of work do you think in that same range of $80 million and as we come out with guidance in 'twenty three we'll factor in not only specific projects, but also inflationary impacts so we might experience beyond what we currently have.
Helpful. Thanks for the time.
Yes, Thanks Paul.
And there are no further questions at this time, Mr. Mike <unk> I turn the call back over to you for some closing remarks.
Hey.
Once again, thank you all for joining us on the call. This morning, and your continued interest in Suncor look forward to.
We're talking out ahead in the future. Thanks, again and have a great day.
This concludes today's conference call. Thank you for your participation you may now disconnect.
Please wait the conference will begin shortly.
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