Q4 2022 SunCoke Energy Inc Earnings Call
Good morning, My name is Rob and I will be your conference operator today at this time I would like to welcome everyone to the Sun Coke Energy fourth quarter 2022 earnings and 2023 guidance 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.
You'd 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.
Chance of New Agra Wall, Vice President Finance and Treasurer, you May begin your conference.
Thanks, Rob Good morning, and thank you for joining us this morning to discuss Uncork Energy's fourth quarter and full year 'twenty doing due to those as well as 2023 guidance with me today are Mike Rippey, Chief Executive Officer, Katherine Gates, President and Mark <unk>, Senior Vice President and Chief financial.
Following managements prepared remarks, well 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 are cautionary language regarding forward looking statements in our SEC filings apply to the remarks, we make today. These documents are available on our website.
You can find patients to non-GAAP financial measures discussed on today's call with that I'll now turn things over to Mike.
Thanks, Shannon and good morning, and thank you all for joining us today.
Let me start by recognizing the appointment of Kathryn gates as President of Sun Coke effective January 1st of this year.
Kathryn joined Sun Coke in early 2013, and has demonstrated excellent judgment and leadership in each of our various roles.
<unk> promotion to President recognizes her significant contributions at Sun Coke and I look forward to continuing to work together in her new role.
Catherine will review, our 2023 earnings guidance and key initiatives later in this presentation.
As we look back on 2022 I want to thank all of our Sun Coke employees for their contributions in achieving our 2022 objectives. The.
The dedication of our team is evident through our excellent safety record operational performance and financial results.
Slide three details the key objectives, we set out for 2022 and how we performed against these objectives we.
We exceeded the high end of our revised guidance range of $285 million delivering $297 7 million of adjusted EBITDA in 2022, a record for our company.
Additionally, we generated approximately $133 million.
Free cash flow, which was within our revised guidance range of $120 million to $135 million.
Our domestic coke business operated at full capacity, which allowed us to take advantage of strong export coal market conditions as well as increase our foundry market participation.
As announced in our previous earnings call. We are undertaking a capital project that will enable our jewell plant to produce 100% foundry coke.
This project, which is expected to be completed in the third quarter of this year will allow suncorp to further grow our participation in the foundry market.
Accordingly, the dual facility will not lose the flexibility to alternate between blast in foundry Coke production. After this project is completed.
We also made great progress on our capital allocation priorities in 2022.
We deployed free cash flow to reduce our gross debt by approximately $83 million. Additionally, we've returned almost $24 million to our shareholders, having increased our quarterly dividend from six to eight cents per share during 2022.
Which we anticipate will continue in 2023.
Lastly, we entered into a nonbinding letter of intent with U S steel to manufacture granulated pig iron.
We will continue developing this project in the coming year.
With that I'll turn it over to Mark to review, our fourth quarter and full year earnings in detail Mark.
Thanks, Mike.
Turning to slide four.
The fourth quarter net income attributable Sun Coke was <unk> 14 per share down <unk> <unk> versus the fourth quarter of 2021 due to lower export Coke contribution margins being partially offset by lower interest expense.
Our full year 2022, net income attributable Sun Coke was $1 19 per share up 67 cents versus the full year 2021, driven by our strong operating results the absence of debt refinancing related expenses and lower interest expense.
Consolidated adjusted EBITDA for the fourth quarter, 2022 was $58 9 million down $4 million versus the fourth quarter of 2021 the decrease.
This was mainly driven by lower contribution margin on export Coke sales, partially offset by higher volumes in the logistics segment and lower legacy liability expense at corporate.
On a full year basis, we delivered adjusted EBITDA of $297 7 million up $22 3 million versus the full year 2021.
Turning to slide five to discuss the year over year adjusted EBITDA variance in detail.
Our coke business delivered strong financial results, mainly driven by higher contribution margin on export Coke sales.
The domestic Coke segment delivered full year, adjusted EBITDA of $263 4 million well above our full year revised domestic coke guidance range.
Including Brazil, our Coke operations delivered adjusted EBITDA of $277 9 million.
The logistics segment adjusted EBITDA increased approximately $6 2 million year over year, driven by higher throughput volumes and higher pricing with.
With the backdrop of a strong commodity market logistics segment delivered full year adjusted EBITDA of $49 7 million.
Finally, our corporate and other expenses were higher by $1 2 million year over year, mainly due to higher employee related expenses, partially offset by lower noncash legacy liability expenses.
Overall, we are very pleased with the performance across all segments, resulting in a historic year for the company.
Turning to slide six to discuss capital deployment in 2022.
We generated very strong operating cash flow of approximately $209 million, which allowed us to make good progress on our capital deployment initiatives.
Capital expenditures of $75 5 million during the year were slightly below our guidance of approximately $80 million.
We also reduced our gross debt outstanding by approximately $83 million in 2022.
Year over year, we brought down our gross leverage ratio from two <unk> to wait times to 183 times, we expect to continue to Delever in 2023, and reduce our outstanding revolver balance.
We returned capital to our shareholders in the form of our common dividend in 2022, which was a use of approximately $24 million of cash as mentioned by Mike We increased our dividend by 33% that is from <unk> <unk> per share during the third quarter of 2022.
In total we ended 2022 with a cash balance of approximately $90 million and strong liquidity of approximately $405 million setting the stage for continued progress against our capital allocation priorities in 2023.
Now I would like to turn it over to Catherine to review our guidance expectations for 2023 Katherine.
Thanks, Mark and good morning, everyone. We expect adjusted EBITDA to be between 250 and 265 million this year.
Domestic coke adjusted EBITDA is expected to be lower by $20 million to $30 million driven primarily by our expectation of lower price realization on export sales due to market conditions.
We expect to continue to run our coke facilities at full capacity and to continue increasing our participation in the foundry market.
Brazil Coke adjusted EBITDA will be lower by $5 million to $6 million due to the expiration of the technology from our prior transaction.
In 2016, Arcelormittal, Brazil with deemed suncoast equity interest in the Brazil Coke facility for $41 million cash consideration.
Some coke also received approximately $5 million and technology fees annually for years 2017 to 2022 as part of that redemption transaction.
As a reminder, the Brazil Coke facility is owned by Arcelormittal, Brazil, and Sanco provides the operating and technological services pursuant to an operating agreement.
Turning to the logistics segment, we expect adjusted EBITDA to be flat to lower by $3 million in 2023, we anticipate similar volumes at CMT year over year, but with normalized high water costs that could impact profitability year over year.
Lastly, we expect our corporate and other segment expense could be higher by approximately $6 million to $9 million driven by normalized noncash legacy liability expenses.
Moving on to slide nine to discuss the Coke segment in detail.
In 2023, we estimate our domestic coke adjusted EBITDA to be between 234 and $242 million with sales of approximately 4 million tons of contract boundary in export coal.
We expect to run the domestic fleet at full capacity.
Proximately $3 6 million tons are contracted under long term take or pay agreements in 2023.
We anticipate selling the remaining 650000 furnace equivalent tonnes in the foundry and export Coke markets.
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 ton of foundry Coke, where places approximately two tons of blast furnace coke.
The order book for foundry Coke is solid and export sales for the first quarter of 2023 had been finalized.
While we expect to continue running at full capacity the lower year over year. Adjusted EBITDA is primarily due to lower price realizations on export Coke sales based on current and future expected market conditions.
The export Coke market is experiencing significant price volatility and that is factored into our guidance.
Moving to slide 10 to discuss logistics in more detail.
2020 re logistics adjusted EBITDA is estimated to be between 47 and $50 million.
This estimate is based on normalized high water costs at CMT, which we did not experience in 2022.
Our outlook also considers the current expectations for thermal coal export volumes from the Gulf Coast the price realizations based on the API two forward curve.
We anticipate volumes to be similar year over year at CMT projecting approximately $5 7 million tons of coal to be exported and approximately $4 3 million tons of non call throughput such as iron ore pet Coke and other products.
We anticipate logistics adjusted EBITDA to be slightly lower to flat year over year, mainly driven by the expectation of more normalized high water costs in 2023.
Light 2021 2022 with another unusual year at CMT from a high water perspective.
We incurred no high water costs during 2021 or 2022, but anticipate a more normalized weather pattern, resulting in high water costs at CMT in 2023.
Overall, we anticipate another strong year for our logistics segment.
Moving to the 'twenty two 'twenty three guidance summary on slide 11.
This slide provides a historical view of actual performance across several metrics as well as a summary of our 2023 guidance.
Once again, we expect adjusted EBITDA to be between 250 and $265 million.
Our coke business is expected to run at full capacity, but with lower price realizations on export Coke sales.
We expect 2023 logistics performance to be similar to 2022.
We anticipate our capex requirements in 2023 to be approximately $95 million, which includes the foundry coke expansion projects.
Our free cash flow is expected to be between 105 and $120 million after taking into account cash interest cash taxes capital expenditures and working capital changes.
Now turning over to slide 12 to discuss our 2023 key initiatives.
As always safety is our first priority and we will continue to focus on strong safety and environmental performance in 2023.
Operational excellence will drive our operating and capital plan achievements.
We will continue to pursue opportunities to optimize our assets specifically as it relates to foundry and export Coke.
As mentioned earlier in the call. We are pleased with our increased participation in the foundry Coke market and our focus in 2023 will be on completing the foundry Coke expansion project at our dual facility.
This will enable us to continue to grow our market participation and provides further diversification.
As we demonstrated in the past we will continue to pursue a balanced yet opportunistic approach to capital allocation.
We expect our deleveraging initiatives to continue in 2023, as we look to bring down our revolver balance further.
From a growth perspective, we will work on developing the granite city GPI project.
We continue to evaluate the capital needs of the business, our capital structure and the need to reward our shareholders and we will make capital allocation decisions accordingly.
Looking beyond 2023, we believe that Sun Coke is well positioned for long term success.
We believe that Coke supply will continue to exit the market as many assets are under invested in significantly aging.
Sun Coke has the youngest domestic coke, making facilities in North America with the leading technology.
We will continue to invest in our facilities to ensure that they operate safely efficiently and without standing environmental performance.
We will continue to take advantage of our facilities in their performance by taking additional steps towards diversifying both our customer and product base.
In 2023, we see good potential to further build on the strength of our core coke, making and logistics businesses can meet our financial targets and create value for shareholders.
With that let's go ahead and open up 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.
Your first question comes from the line of Lucas pipes from B Riley Securities. Your line is open.
Thank you very much operator, and good morning, everyone.
Nice results and this leads me to my first question.
You're providing.
Solid guidance for next year kind of from EBITDA down to cash flow, but what stands in the way here significantly higher capital returns to shareholders. Thank you very much for your color on that.
Lucas I appreciate your.
Comments, and though we don't think anything stands in the way of our continued progress.
Our balance sheet is in great shape as we've indicated.
In the past, we expected to Delever significantly we've done that we've positioned ourselves very well to grow.
Our focus with regard to growth now as the GPI facility at granite City, we continue to work and developing a project and our coke, making assets continue to run full we've been able to.
Some away from the contractual market into the export market as well as our success in foundry, we've repositioned CMT towards throwing off very very high levels of return operating.
Okay.
Not yet capacity, but pretty darn close to it so.
There are incremental opportunities to grow our participation down at <unk>.
CMT, but the challenge for US is to keep doing the good things, we're doing in generating cash and deploying it to.
We grow to the benefit of our shareholders.
That's helpful. Thank you.
Maybe to turn to the balance sheet on this note what is <unk>.
What is your long term debt.
Gross or net target.
We said we wanted to be under three times, we've successfully brought it down under three times, we have had great progress $83 million this year.
And we're going to continue to work and we've still got a little bit left and revolver, we will pull it down and again that leaves us very well positioned.
Or growth.
That leaves our balance sheet in really good shape to weather any storms, we might see out ahead, we have to remind ourselves that this is in fact, a cyclical business. So we're not going to lever up and.
And we have the ability to continue to reward shareholders as we did last year when we raised the.
Dividend by 33%.
I appreciate that and then in terms of the capital for 2020, Capex spending capital spending for 2023 can you provide the breakdown between sustaining capital and growth capital.
Thanks Lucas.
In terms of the capital for 2023, we don't give out.
Specific.
Capital on projects itself, but as you know as you can see in the in the capital number that reflects the growth expansion project for foundry at Jewell and that is built into our $95 million number.
And.
Order of magnitude, maybe $10 million to $20 million would that be the right Zip code.
That that would be and that gives you a good sense going forward. When we think about our sort of ongoing maintenance capex to continue to invest in our facilities. You can think about that you know around $80 million to $85 million.
That's that's very helpful. I appreciate the color I have more questions, but I'll turn it over for now thank you and best of luck. Thanks.
Thanks Lucas.
And again, if you'd like to ask a question press star one on your telephone keypad. 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.
Kathryn Congrats on the recent appointment.
Thanks Nathan.
Youre welcome you guys talked about how again expected lower realizations on export sales are likely to drive down EBITDA per ton domestic coke segment. This year.
Can we maybe get your thoughts on possible cadence of that pricing over the next four quarters and as you pointed out <unk> export Coke sales have already been finalized. So this is an example, and there are some market weaker now than you expected to get better in the second half or any color there would be great. Thank you.
Sure. Thanks Nathan.
Think as we as we look over the full course of 2023.
We expect to see some improvement in the market as we move further into 2023, so the back half is looking.
Better for us than as we sit here in first quarter and second quarter.
Great very helpful. Katherine.
Maybe a quick question on CMT and it looks like you guys got into kind of flat volumes overall about five 7 million tons of coal exports for this year curious how does that compare to full year 'twenty to even just directionally would be helpful. And then there was a.
Pullback in API two prices, we've seen around $145 a metric tons a day or so are you still receiving that price kicker on those tons.
Thanks, So in terms of the volumes were really were really flat year over year I'm satisfied with the designs, but really it's flat year over year and when we look at our API too.
We are very comfortable with the guidance that we have builds in the price adjustment for the full year and with where we are today, we're very comfortable with that guidance on the API two pricing.
Okay.
So are you receiving that kicker today or no or is that incorporated in your guidance that you're comfortable with.
We are receiving the kicker today and the guidance incorporates the anticipation of receiving it for the full year.
Perfect very helpful. Thank you.
Maybe just just one final question on a segment doesn't get much attention. I think you described this a little bit in your prepared remarks, but the Brazil Coke segment again, you go kind of down 5% to $6 million on the EBITDA side.
Exploration of those technology fees.
Is there any opportunity to to get there.
Some of that EBITDA back over the next few years or.
Going from 15 million of EBITDA, plus or minus from 'twenty two to around let's call. It 10 this year.
$10 million kind of a good run rate to think about going forward.
It is Nathan that really is the run rate going forward. This was an expected drop and based on the structure of of Brazil, We don't take any risk on the capital our operating side and when we anticipate collecting that 10 million.
Going forward.
Got it and maybe just one final one just I'm going to try and any updates you can share.
On the granite city opportunity.
I appreciate the I'm going to try but I may I may disappoint, you bet Nathan but we are in discussions with with U S steel and we're continuing to assess the capital and the other project requirements.
As I expected catheter, but I wanted to throw that out there.
Now I'll provide real hard for you sorry Nathan.
All right I'll leave it there best of luck in 'twenty three.
Yes.
And we have a follow up question from the line of Lucas pipes from B Riley Securities. Your line is open.
Thank you very much operator.
I wanted to ask a few more questions on granite city. So I appreciate Nathan soften in the ground.
That score.
Is there is there a time by which you would like to conclude the analysis.
Well Lucas I. Appreciate the question I think we are this is a complex project. It takes time, we're going to take the time that it takes two.
To get the project right.
And in terms of.
The aspects that are still under.
Analysis today is it.
Could you comment on that.
Where are you spending most of the time and the due diligence today.
We're really focused on the capital.
That is that is the primary focus is the capital requirements for the project.
And Thats on an ongoing that's essentially like the amount of capital you would have to put into the facility to convert it to pig iron facility.
Exactly right exactly right.
Okay, that's very helpful.
I appreciate that.
In terms of cap back to capital returns.
Okay.
Would it be would it be fair to assume that part of.
The current capital return policies is contingent upon a decision on granite city or is that maybe.
A step too far thank you.
Sure absolutely no I think that's it I think thats.
That's really that's right in the sense of right now we are really focused on preserving our cash for the GPI project.
Got it very very helpful. Thank you and do you have a minimum liquidity target can you remind us.
We really don't.
As Mike said before I mean.
I can I can dig that Lukas I mean, basically what we have left on the revolver kind of that's kind of our target too.
Get that off the like get that paid down that's what Mike said and then we'll go from there.
As we've said in the past Lucas three times is the high watermark for us So we're not going above that and as we indicated with regard to the GPI project, we fully expect to fund that.
Cash flow from operations and perhaps some very modest borrowings under our revolver, but we have very very significant liquidity and we don't expect to have to go into that and if we do at all it'll be in a very modest way on the revolver. So.
We're in good shape, all the way around.
Very helpful.
Yeah to the entire team. Thank you. Thank you for that and again best of luck.
And there are no good I guess.
And there are no further questions at this time Ms. Katherine Gates I turn the call back over to you for some final closing comments.
Alright, well. Thank you all again for joining us this morning.
Those of you who are attending the BMO conference coming up here I look forward to meeting with you in person and thank you for your continued interest and Sanco.
This concludes today's conference call. Thank you for your participation you may now disconnect.
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