SunCoke Energy Inc (SXC) 2012 Q2 法說會逐字稿

Welcome to the second-quarter 2012 earnings conference call. My name is Leslie and I will be your operator for today's call. At this time all participants are in a listen only mode. Later we will conduct a question and answer session. Please note that this conference is being recorded. I will now turn the call over to Mr. Ryan Osterholm. Mr. Osterholm, you may begin.

Thank you, Leslie; good morning, everyone. Thank you for joining us on our second-quarter 2012 earnings conference call. With me are Fritz Henderson, our Chairman and Chief Executive Officer, and Mark Newman, our Senior Vice President and Chief Financial Officer. Following the remarks made by management the call will be open for Q&A.

This conference call is being webcast live on our Investor Relations section of our website at www.SunCoke.com. There will be a replay available on our website. If we don't get to your question during the call, please call our Investor Relations Department at 630-824-1907.

And before I turn the call over to Fritz, let me remind you that the various remarks we make about future expectations constitute forward-looking statements and the cautionary language regarding forward-looking statements in our SEC filings apply to the remarks on our call today. These documents are available on our website as are reconciliations of any non-GAAP measures discussed on this call. Now I will turn it over to Fritz.

Thanks, Ryan; good morning, everyone. On chart 2 we summarize earnings as well as adjusted EBITDA. Our second-quarter results were -- we had a strong quarter in the quarter in the Coke business -- driven by our Coke business. Adjusted EBITDA was up 74%. Middletown, Indiana Harbor and our Other Domestic Coke operations drove the quarter's performance.

The flat EPS, when you look at $0.32, is really driven by the changing corporate structure and capital structure and Mark will show you that later. But the EPS year over year isn't comparable, the adjusted EBITDA is.

On the coal side of our business, while we are down year to year we saw some sequential improvement in the business, both in terms of production cash costs, reject rates as well as adjusted EBITDA on a sequential basis. We finished the quarter with a strong liquidity position, we generated significant free cash flow and ended the quarter with $190 million of cash in a virtually undrawn revolver, driven largely by the solid earnings and the working capital unwind.

And then finally, today we are reaffirming our adjusted EBITDA guidance for the full year which we expect to be between $250 million and $280 million. And we're updating our guidance with respect to free cash flow; we now expect to be in excess of $100 million for the year.

Page 3, after our Board meeting last week we issued a release. Our Board did approve the formation of a Master limited partnership, or MLP, and moving forward with an IPO of that MLP. The expected assets in the structure, a portion of our interest in our Haverhill and our Middletown plants were the assets that were chosen.

SunCoke would be -- would own the general partner, would be the general partner. We would own the incentive distribution rights and we would own a portion of the partnership units, both subordinated -- the subordinated units for sure and then a portion of others potentially.

So as we structured the transaction our advisors that we work with confirmed that we could create an MLP; that Coke assets and specifically Coke income would be qualifying income; that our transaction and our plan does not jeopardize the tax-free nature of the spin. And we were mindful of, careful of and respectful of our bond indentures and our credit agreements as we structured the MLP.

Lastly, I would make the point that -- some questions from time to time about taxes and tax leakage. That was one of the considerations that we took into account as we structured the transaction to try to minimize tax leakage.

Timing, we expect -- we would not close any transaction sooner than the fourth quarter of 2012. In order to do that we're moving very quickly to file an S-1 and our target, if you will, is to file an S-1 in the month of August.

Proceeds, we would expect the proceeds at the SXC level to be used to pay down debt upstairs at the parent obviously as we would use it to pay down our debt. The fund expansion and other general corporate purposes -- we would not expect and we do not intend to use proceeds from the transaction to fund a dividend.

Obviously the dividend policy is a function of the Board of Directors -- is the purview of the Board of Directors, excuse me. But with respect to this transaction, there is no intention to use proceeds in this transaction to fund a dividend. At this point let me turn it over to Mark.

Thanks, Fritz. So turning to chart 4, Q2 saw us build on the great start we had in Q1. Revenue is up 22% primarily again on the results from our Middletown operations and our adjusted EBITDA increased 74% to $65.5 million, again driven by Middletown, continued improvement at Indiana Harbor. The rest of our Coke facilities ran well, in particular Granite City. And so overall we had very strong performance on the Coke side of our business.

As Fritz mentioned earlier, our coal results or lower year over year, but show sequential improvement. And then on corporate costs you will recall in Q2 of last year we had to move to our Lisle headquarters, so it was a quarter that was heavy on relocation expense, which was not repeated in the current quarter.

On an earnings per share basis we are at 32% -- $0.32 per share, flat to last year and, again, as we will cover later, reflects our standalone capital structure.

Turning to chart 5 we have the adjusted EBITDA bridge, which shows again the impact of Middletown. You will recall Middletown was favorable $11 million; on a year over year basis in Q1 that has increased to $14 million as we reduce cost at Middletown. We still have some yield issues that we are dealing with there, but nevertheless fairly strong year over year improvement related to Middletown.

Indiana Harbor again was favorable in the quarter driven by improvements on yield and operating and maintenance costs. And you will recall on a year over year basis our ownership in Indiana Harbor has increased with the purchase of GE's 19% stake in Q3 of last year.

There were no nonrecurring items in this quarter. We are showing the impact of a $1.2 million adjustment which was taken in Q2 last year which we have broken out separately. Overall, Indiana Harbor up $6.3 million year over year.

On the rest of the Coke business, as I mentioned, driven by favorable results primarily at Granite City and Jewell. Again mainly to do with yield and operating and maintenance costs at those facilities.

Coal mining negative $2.2 million; we will cover that in more detail later. And then finally corporate cost reflects primarily lower relocation costs. And of course, we don't have any Sunoco allocations this year, but that is somewhat offset by higher stock-based compensation costs.

On chart 6 we cover the EPS bridge. Again, if you look at the operating items, the first three bars, you will see we are up $0.38 per share again driven primarily by the results of our Coke business and then we are offset directly the same amount related to depreciation and amortization, that reflects the appreciation of our Middletown assets.

And then on the interest or financing costs, we have an interest expense associated with our standalone capital structure as well as last year you will recall we were earning interest income from Sunoco as part of their -- as part of being a division of Sunoco, which goes away this year.

And then finally on taxes, the higher amount really is reflective of our higher earnings. It's also reflective of the fact that last year in Q2 we had an Indiana State corporate income tax reduction which was favorable in the quarter.

Turning to our domestic Coke business summary on chart 7. This chart should be familiar to everyone who follows SunCoke. Again, on the left-hand side of the chart we show our production numbers and you will see that sequentially we are up at all of our plants from Q1 of this year. So our Coke business continues to run very well and we are almost at this point as 1.1 million tons on a quarterly basis.

If you look at the right-hand side of the chart what you will see is our EBITDA and our EBITDA per ton from our Domestic Coke business, again this is including Jewell Coke and our Other Domestic Coke facilities. And what you will see is a very meaningful increase in our EBITDA from $36 million to $62 million this year and an EBITDA per ton going from $39 per ton last year in Q2 2011 to $57 per ton in this quarter.

Again, we reminded those who follow us on -- in our Q1 call this year that we expect our domestic Coke portfolio to earn between $55 and $60 a ton. And so -- we are very pleased with this result, which is right in the middle of the range.

Interestingly in Q2 we believe we have room for improvement as we look at our Q2 results, we think there is further room for improvement in both yield and operating and maintenance costs at Indiana Harbor. As I mentioned earlier, we had some lower yields at Middletown versus expectations of about $1.5 million in Q2. And then finally, we have some additional legal costs in the quarter primarily related to some accruals we've taken related to NOVs Granite City and Haverhill, which are also included in these results.

Turning to chart 8, again this is a chart that we had in our Q1 earnings release. We feel very confidence of our $55 to $60 per ton adjusted EBITDA range for our Domestic Coke business. As we look to the second half of the year, we had some discussion on our last call about our sales outlook. I would say based on the current fairly negative sentiment in the steel industry, our view will be that we will be in the middle of the range between the 4.3 and the 4.4 -- 4.4 million tons in this year.

Again, as we look at individual quarters, they will be impacted by things like outages. We do plan to -- an outage at our Middletown or rather our Granite City facility later this year. But net-net our expectation is that the $55 to $60 represents a range that we should be able to achieve going forward in each quarter.

Turning to chart 9, we cover the pre-tax return on invested capital of our domestic Coke business. I will remind our listeners that our results prior to Q1 of 2012 exclude Middletown. So we basically are at 20% for our domestic Coke business which is really reflective of the improved earnings in the business as well as the additional allocated invested capital related to our Middletown investment starting in Q1.

Overall for SunCoke we are showing a 17% pre-tax return, again which is reflective of our returns in our international Coke and our coal mining sector which were also very good in the quarter.

Turning to coal. Our coal results are down approximately $2 million to $9.3 million on a year over year basis. And really our coal business in this quarter reflects the fact that while our prices, our sales prices are up about $5 a ton year over year, it really is reflective of a more appreciable increase on our mid-vol met coal offset -- partially offset by a fairly significant decrease in the pricing that we get on our hi-vol coals which are primarily from our Harold Keene operations.

Our cash costs are up year over year. Interestingly, this cash cost increase of $11 per ton is also reflective of the change in mix in our business. Typically our mining of hi-vol coal at Harold Keene is affected by the use of our high wall mining, which is lower cost than our underground mining at Jewell. So this mix also accounts for a fairly significant portion of the $11 increase.

In fact, if you look at our Jewell cash costs in the quarter, in Q2 we were $143 versus $139 last year. So we are actually slightly up on our cash costs and our Jewell mining. But as Fritz mentioned at the beginning of the call, we are very pleased with the overall trend since Q1 and our cash costs were down from the $161 at Jewell that we incurred in Q1 of this year.

Also indicative of our mining performance is the overall reject grade which is at 66% again versus 68% in Q1 and 67% in Q2 of last year. As we exit 2012 we expect further reductions in cash costs and -- which will be applicable to our 2013 volumes.

And then finally, on our intent with respect to cash investment in our coal business this year, our expectation now is that our CapEx in coal this year will be approximately $35 million and on that basis we expect to be cash neutral in our coal business for 2012.

As Fritz mentioned at the beginning of the call, we had a very strong cash flow generation -- I'm now on chart 11 -- in Q2. We ended the quarter with $190 million in cash and a revolver which is virtually undrawn for a total liquidity of approximately $340 million. As you will notice, we had very strong operating results. We also had a favorable working capital unwind.

You will recall that in Q1 we had negative working capital of a very similar amount. So, on a year-to-date basis our working capital is about flat. And as we call out in the chart, our working capital favorability in the quarter is driven by favorable accounts receivable. We did actually receive our Brazilian dividend, which is accrued in Q4 and paid in Q2.

And then on our Coke business we had some trading between accounts receivable being favorable and inventory being unfavorable largely related to the timing of trains being received by Arcelor Mittal from both our Jewell Coke plant and our Haverhill One facility.

On accrued liabilities, that really reflects accruals for compensation, legal as well as sales discounts to our customers. On our interest payable you will recall that our bond interest is paid in Q1 and Q3, so we would expect that to unwind in Q3.

And then finally on inventory, we have been very focused on running our plants -- our Coke plants with minimal coal inventories and that is really helping our inventory results and that is offset by, again, a buildup in Coke inventory related to trains on the tracks to our customers.

And then finally, we do have a buildup in coal inventory in our coal mining as our mining -- our mining production exceeded sales in the quarter.

Finally on this chart I would say our first-half free cash flow generation was $66 million, we are now projecting that we will be in excess of $100 million for the year and really that comes from the fact that in our second half we expect earnings compared to the first have to be slightly better. But we are also projecting that our CapEx will be higher in the second half net-net we expect our full-year free cash flow generation to be north of $100 million. And so with that I will turn the call back to Fritz.

Thanks, Mark. Looking at again, this is a chart that we have used with investors, it's how we drive the business. How do we create value for our shareholders?

Operational excellence is the foundation from which everything is built and it's about maintaining focus on the discipline in our Coke and our coal mining operations, sustaining and enhancing top quartile safety performance and operating our plants safely, reliably in accordance with our environmental standards and our permits. And then leveraging our operating knowhow and technology to continuously improve yields and operating costs.

Growing the business, domestically we do continue to do work at the possible site in Kentucky to permit that location. The permitting work -- the work that is being done this year is largely engineering-related work to optimize our plant design and to create a design that is efficient and that would be compliant with future environmental standards.

And at the same time we are obviously looking at the site, but the resources -- there is no capital being spent, the resources are really focused on preparation and being prepared.

At the same time we are open to exploring opportunities to make strategic investments in existing capacity. And it's a strategy that -- it's our principle strategy for entering India and we do continue to do work on India, but we are open to those ideas outside of India, which could include the United States.

So this is something that is -- as our thinking has evolved certainly over the last three to six months our conclusion is we should be open to looking at that as well.

And finally, in terms of optimizing the assets, and our structure and the assets in the structure of our business, we have talked in the past about what we wanted to do, what we were evaluating -- on Coke MLP. And at this point our focus is on executing the plan that we have outlined.

And on coal it's about optimizing our operations and investments and enhancing our long-term strategic flexibility in the coal business. So as we think about the quarter, we think we've made progress in each of these areas, the ones on operations and on optimizing the assets, if you will, are readily apparent. I think hopefully with the numbers and the announcements from the Board meeting and there's a lot of work -- continues in the Company on the growth side of the business.

Updating guidance on page 13. We've covered this before, there are no changes in the guidance other than CapEx and free cash flow where we now expect our CapEx and investments to be approximately $85 million and free cash flow to be in excess of $100 million. There is no other change in the guidance for 2012. At this point we are ready for questions.

(Operator Instructions). Andre Benjamin, Goldman Sachs.

Two questions here. First, knowing there is a lot of detail that will come from the filing of the S-1, at a high level could you potentially discuss why you chose to contribute parts of Haverhill and Middletown facility versus some of the others to the Coke MLP? Why are you only doing a portion of it? And then thoughts around the potential to contribute remaining facilities as well as some of the growth projects like Kentucky going forward?

I think, Andre, we will be better able to address that when we file the S-1. But we felt that Haverhill and Middletown for a number of reasons allowed us to thread the needle, if you will, as we were looking at the various different structuring considerations. These were the two optimum assets, we'll go into what the possible interests are in those, in other words what portion that we would take public. But that really is a discussion that we should have when the S-1 is filed.

At this point we don't have any plans to do any further transactions other than this. And we are focused -- 100% of our attention on this, getting an S-1 filed. And as I said, if we meet the target August deadline for filing an S-1 we wouldn't anticipate actually doing the first deal until the end of this year. So 100% of our attention is focused on this initial transaction.

Thank you. And I guess on the coal side. I know you talked a little bit about some of the efforts to improve costs there. But could you be a little more I guess granular on maybe the extent to which you think you can maybe get costs down by the end of the year and maybe into next year?

And then I know a lot of the strategic thought around the business was around at least keeping it cash flow neutral given the cost performance versus recent declines in met prices, how are you thinking about growth maybe in the next couple years?

So, I would just compliment you on your use of the granular pun. As we look at our performance in our coal business, the focus has been on cash cost, both managing the numerator and then improving the reject rate. And one of the more encouraging things we saw in the second quarter is we finally bent the curve on reject rate.

We saw a 66% reject rate in the quarter, 68% was very high in the first quarter which was a big driver of our high cash costs in the first quarter were also down year to year.

And so the focus, Andre, has been on -- if you look at the numerator, I'll call it the cost side rather than the production side, we are optimizing the mines, we are at closing down some of our higher cost mines, we are displacing contractors with our existing employees, we've taken some measures to reduce over time cost, a number of transportation costs and a lot of things that were driving the numerator higher as we went into late last year, early this year.

So there's a lot of focus on the numerator, if you will, on the cash cost. The denominator I think in part is driven by the actions we are taken in mine planning. We have now -- as we said after the first quarter, we have moved away from our expansion plans so now we have a reasonable balance of mines where we are basically exiting or in retreat versus those where we are growing.

We are taking a lot of measures at the mine face to improve our cutting skills and our capabilities. As our red hat miners have become trained and we've deployed them we see continued opportunities to improve our performance at the mine face. We have also been doing work in the prep plant in order to improve our yields from our prep plant.

And so as we think about the twofold measures that drive operating cost, if you will, it's about managing that numerator down and more productively producing clean coal from the rock where -- from the gross tons that we are mining. And that is really driven by being efficient at the mine face as well as in the prep plant. And we are encouraged to see in the second quarter the 66% but we don't think we are done at that level by any means.

So the second part of your question, obviously met prices have fallen. We are largely sold through the rest of this year at this point. So the focus -- our focus has been how do we continue to drive down costs through the rest of this year to try to address what we might face in 2013.

I would say obviously I don't know what prices are going to be in 2013, but if you were to look at it today, if we were to sell our mid-vol met coal today it would probably be about 140, so we know we have work to go in order to try to drive our cash cost down in order to try to address that and remain cash flow neutral. At this point we are confident we can be cash flow neutral in the business in 2012.

And all of our efforts are to spend the rest of this year operating our mines safely, productively and driving down our cash cost to try to stay that way in 2013. But I really can't comment on 2013 at this point just because we, frankly, haven't finalized our plan. All of our efforts are about driving down the reject rate, managing the numerator and getting our cash cost per ton down.

Thank you.

Brett Levy, Jefferies.

I don't know if I'm trying to get too specific here, but if you take the approximate portion of the approximate two ventures -- the Middletown venture and the Haverhill venture that you are trying to sell, is there kind of like a run rate EBITDA of the entity that you are spinning off and we can figure out what multiple to put on that? But I'm just trying to get sort of bigger than a breadbox/smaller than the Empire State building kind of proceeds on this thing.

Well, the breadbox will be apparent when we file the S-1. So I think I'm going to have to hold my answer on that until we file the S-1.

All right. And then obviously you are going to pay down some debt with that. Can you talk about as you look at your expansion projects and you look at what you are doing with the spin-off, is there kind of a target leverage you want to stay within as you continue to seek international and domestic growth opportunities?

I would say we are comfortable with our leverage today. And the intention of the transaction -- we don't want to increase our leverage. So I mean I would say as we think about use of proceeds we have -- obviously I'm limited in what I can say until we file an S-1, but our objective is to through any transaction not increase our leverage. So that is what I would say at this point.

I do think that the transaction, if we are successful in achieving it, would be a very cost effective way for us to finance our growth. But our intention would not be to have the transaction result in an increase in leverage on a consolidated basis.

Okay, thanks very much, guys.

Dave Katz, JPMorgan.

Congratulations on a good quarter. With regard to the transaction, understanding that there are certain things you can say, but more looking at the SunCoke level right now. When you say pay down the debt and you're comfortable with your leverage are you indicating that the debt pay down might not be permanent? That you might refinance thereafter?

No, we are not saying that, David. I think what we're saying -- pay down debt, the logical place obviously is a pay down term loan, the term loan B. And that is not subsequently drawable. So we don't have any plans to do anything beyond that at this point.

Okay. And then with regard to Middletown, I mean you obviously had strong results there in this quarter. Was I correct in hearing you and saying that because of the yield issues that you might see greater production there in subsequent quarters?

We produced $14 million of adjusted EBITDA in the quarter. That included about $1.5 million of largely yield related shortfalls where we think we can do better. The level of production actually in the quarter though was quite strong. So in other words, if we got better yet we could actually use less coal but produce the same level of production.

So I think in the end the $1.5 million is really driven by opportunities that we have to continue to improve yields in Middletown. But there is also some small amount of cost that we can continue to address and I put that into the category of continuous improvement.

Okay, thank you.

Paul Cheng, Barclays.

Several quick questions. Looking at your second quarter, I suppose that based on what you guys talk about Middletown means that the current profit per ton in the second quarter is not going -- is not a baseline yet, you should be able to do better. So what kind of -- how much is the improvement we should assume?

We think 55 to 60 in the Coke business is the range in which we are going to operate. We obviously operate at $57 in the quarter. We do think we have improvement opportunities in Middletown and Indiana Harbor. On the other hand I would say in the quarter we actually operated above maximum at a couple of our plants. So we had a really strong performance at a couple of other plants, the sustainability of which is -- obviously our intention is to sustain it.

But that's the reason why, Paul, we think that 55 to 60 is a good range. And obviously our objective is to optimize our assets and produce as high -- as efficiently as we can to be at the top end of that range. But, I'm not at this point in a position to say we are going to go above it.

I see. What is -- did you have any start up cost deal remaining in the second quarter related to Middletown, and how much is that?

I would say it's about $1.5 million (multiple speakers).

$1.5 million? Should we assume there is no longer going to have any start up (inaudible) in the third quarter, that you are already fully the start up?

Yes, I mean, I would say, by the way, the $1.5 million isn't really a start up cost, it's really, as we think about it, it is opportunities for us to continue to optimize yield. And I think our opportunities continue as we go into the third quarter. But I think at this point the plant is started up and there aren't any more start up costs.

So the $1.5 million is not really the actual expense related to start up, it's just the loss in the (inaudible) in a sense?

Yes, that's a good way to put it.

Do you have a target for your -- I know that you guys are talking about that you're going to see improvement in your cooperation unit costs. And do you have a target that you can share in the second half this year and also in 2013?

Well, we didn't include the adjusted EBITDA guidance chart this month. But when you look at this quarter, but if you look back at the first quarter, we did show what we were targeting in terms of profitability improvements in both coal and Coke. And in order to deliver that we need to drive sequentially better performance in the 3Q and the 4Q versus the 1Q and the 2Q. Mark, is there something you want to add to that?

Yes, so in Q1 what we said, and we didn't include that chart in the deck because nothing changed here. We said our coal results would be better on a year-over-year basis by $5 million to $15 million. And if you look at our adjusted EBITDA for coal last year it was about $35 million which would suggest that we think the range on coal for this year is approximately $40 million to $50 million and we earned $16 million if you include Q1 and Q2 year to date, which would suggest that we expect the second half of this year to be better than the first half.

Okay. And that is all driven by the cost reduction?

Well, it's in part driven by cost reduction and part -- I mean pricing -- on mid-vol our pricing is pretty much locked in from last fall. I would say we have got the revenue side I think in -- reasonably in hand. The issue is just getting our costs down.

I'm trying to understand that when you say that the (inaudible) has started seeing improvement. Is that because that you stopped working through the soft spot in your mine and the quality of the mine getting better or is really more on the initiative that you are taken on how you (inaudible) and all of the other operation?

I would say it is three things. It's obviously mine planning, in other words modulating between growth and just being efficient. So in part it is that. In part it is what we are doing at the mine face to improve efficiency and having our miners more and more trained and more and more experienced. And then lastly, improving the efficiency of our prep plant, it's really all three.

Okay, thank you. I just wanted to make a final comment. I understand that one of you guys is using the adjusted EBITDA measurement, but I think given the size of the Company for most of the investors that if we don't use the adjusted EBITDA and just have a simple EBITDA based on what is your reported results in the financial earning that may be appreciated by most of the investors. Thank you.

Okay.

Mathew Barnett, Jet Capital.

Congratulations on a great quarter and MLP. I just had a couple questions just to clarify. You had indicated that the MLP, you are 100% focused on that initial transaction. I just want to be clear that what -- your expectation is that other assets will move into the MLP over time. And then could you also just speak to your exposure to AK Steel and why you are comfortable there? And those are my two questions, thanks.

So, there is no plan at this point to do further drop downs. That doesn't mean we are (inaudible) from doing it, we just have no plan today, we are focused on getting the initial transaction done. And given all the things we have to get done, I mean I think that is the right focus.

So AK, obviously AK Steel is a great customer, they are a customer of Middletown and half the volume in Haverhill. I can't speak for Jim's results obviously, they came out earlier this week. We will have more to say about that when we file the S-1 is what I think I should say this morning as to how to address it. But we certainly felt comfortable moving forward with these two assets and frankly we felt comfortable with AK as a customer.

Okay. And then your commentary just on the strategic investments and I guess other plants, those would allow you potentially to kind to expand your customer base?

Yes, I mean it's about -- as you look at it, our growth has historically been building greenfield sites. And as we looked at the strategy that we are looking at for India we thought, which is really to buy an existing business and work on that basis, we felt that that was -- frankly, not only was it a good strategy for India, we actually think it's a reasonable strategy for us to consider here as we look at possible ways to grow whether it is that customers maybe reducing their vertical integration over time.

Obviously this would take us into by-product Coke making because we are the only ones that run a heat recovery operation here in the US. But we just think that given our capabilities we would be able to do that and capable of doing that and open to doing it.

Great, thank you very much.

Garrett Nelson, BB&T Capital Markets.

Congrats on the MLP decision. It is very refreshing to see an actual value creating event as opposed to some of the value destroying events we have seen over the last couple years in terms of ill-timed acquisitions. So a big part of the MLP equation is the distribution coverage ratio. I just wanted to ask what distribution coverage ratio you would be comfortable targeting for the interest in the two facilities you plan on dropping down into the MLP initially?

Garrett, unfortunately I'm not going to be able answer your question on that this morning. We will have more to say about that after we file our S-1.

Okay. I mean have you thought about just looking at all of the entire domestic Coke business, keeping in mind the take or pay contracts, your customer concentration and the cyclicality of the steel industry, what a target distribution coverage ratio might look like?

We've thought a lot about that in working with our advisors. And at this point I can't really go in more until we actually file the S-1. But obviously if you look at the key considerations, that is one of the key considerations.

All right, thanks very much.

Sam Dubinsky, Wells Fargo.

Just a couple quick follow-up questions. When exactly are your coal contracts renegotiated for 2013? And is anything locked in yet for next year?

We generally negotiate or around October, maybe early November, and nothing is locked in yet.

Okay. And then can you give an update on Indiana Harbor renegotiations with Mittal? Are talks going favorably?

I would say talks are moving along. We've got ourselves, Arcelor Mittal and [Cook Energy] teams assigned, working through issues, nothing really new to report. I would say we are encouraged by the progress. There's just a lot of things going on at Indiana Harbor and there's a few things gone on at Arcelor Mittal as you go into the fall. So I would say stay tuned. But we are encouraged by the tone of the discussions and being able to reach a reasonable outcome.

I would say the other thing is in -- we at this point feel like we've got good -- gotten our hands around the capital requirements associated with Indiana Harbor and supporting the extension, about $50 million is -- and that is unchanged from our first quarter. But we also are getting a better handle on what we think we need to do environmentally with respect to our side of the plant.

So we are using this time to refine our capital requirements and get more and more comfortable with what we think we might need to spend to address the NOV that we expect that we have at the facility. So I think we are using the time productively.

Okay, also what are your thoughts on labor renegotiations at Arcelor Mittal and US steel? I know the industry doesn't see a high likelihood of a strike, but what are your steel customer saying at this point? And are they prepared to build Coke inventory even if they may not necessarily need the product at that moment? Have you had those types of discussions or it seems unlikely in general?

I think the practical answer is we have had discussions with them and I think what they told this is exactly what they've said publicly, they think that the chance of that is unlikely. But we stay in dialogue with them.

In terms of building Coke, we are now in the area of speculation. I think in general our customers, particularly Arcelor Mittal obviously which is in some ways in the lead I guess, they are really on trying to get a competitive contract and that is certainly something where we all have an interest.

Okay, great. Thanks, much appreciate it.

Ian Zaffino, Oppenheimer.

As far as the MLP and what you are doing there, how does your acquisition strategy change now that you have decided to drop a couple assets into an MLP?

Well, as we think about it going forward obviously the MLP is about improving our cost of capital, lowering our cost of capital and creating better flexibility for us, which means that we can be even more competitive. So we think of it as an excellent structure for us to use in the future to the extent that we were to contemplate acquisition.

Okay, so India is on track and I guess the Kentucky plant is on track sort of, is that what we are supposed to read from that comment?

No, I'm sorry. India would have nothing to do with it, but I would say that any future growth that we would have in the US is a possibility. So -- but I would say in terms of the Kentucky plant we are much more focused on finalizing the design, creating the option to permit, but we are not going to commit capital toward that until we have at least a portion of -- a reasonably large portion of that plant spoken for in terms of volume. And we don't have that today. So we are not going to jump at that until we actually have a portion of the plant sold or if we don't we will go slow on it.

And then the strategy in India remains unchanged?

Right, yes. I mean it is about doing an acquisition of a portion of a business and I think there has been frankly a lot of things going on in India. And what we have seen since the cessation of our discussions with Global Coke is we have seen several opportunities arise that we're seriously considering and hopefully we will have more to say here as we go into the fall.

But the strategy is the same -- acquire a portion of the business, very likely have a partner with us, and go to market through that asset and then over time build the business with a partner.

Okay. And then on to Indiana Harbor. If you could actually strike a contract, would you then drop it into an MLP or are there other factors there that wouldn't permit that?

We have no plan to drop any other assets into an MLP today. I would say Indiana Harbor -- if you look at structure of SunCoke today, Indiana Harbor has a minority investor, right, [DT] is our investor in that site. Indiana Harbor is not a restricted subsidiary and for lots of reasons, including those two, which probably if you were going to think about it that would necessarily be the ideal one to do.

But I would say our focus in Indiana Harbor is really about remediating the site, making the capital in order to support the long-term extension and coming to a reasonable agreement with Arcelor Mittal.

Okay, perfect. Thank you.

Richard Garchitorena, Credit Suisse.

So first question on the cut in the CapEx, was that from coal basically?

Mark, why don't you go ahead?

Actually I think it is a realization that six months into the year we are at roughly $21 million. So I would say we had talked about $40 million in coal for the year, in Q1 that is down to $35 million and the rest of our reduction really is a recognition that our operating CapEx is a little lower on our Coke business this year.

And then we have -- we will be focused I would say in the second half on starting to work in earnest at Indiana Harbor, we will see a pickup in spending there. We are getting very close to the NOV settlement at Granite City and Haverhill so there is potential for CapEx to be spent here in the second half as well. So I think it's just a recognition as to where we are on a year-to-date basis and what we have in front of us.

Just one follow-up, I know you talked about closing some mines on the coal side and you maintain your guidance of 1.6. When should we expect maybe a further rationalization -- we have seen in lot of cuts in the industry and obviously met coal prices are weak. So I guess when you look at the business in the second half and into next year when do you think you'll make a decision on further ratcheting down the I guess production?

Well, I think as we looked at the steps that we began to take earlier this year to drive down cash costs, we don't think we are where this plan can take us. In other words we have more we can do. Obviously we will, as we look at the current environment over the next several months we might take further actions.

But right now I think our focus is on executing the plan. We have one mine, one of our higher cost mines that we are going to basically idle, redeploy people into other mines, we are in effect doing that. And then we will have to see. I mean, I think we want to do that one and then in the event that things continue to stay really soft or get softer we could do more. But at this point it's about executing the plan that we've got on the table and it can improve us from where we are today.

Okay, thank you.

Jason Brocious, KeyBanc Capital Markets.

Just a couple quick ones. I noticed that the volumes in your Brazilian -- in the Brazilian Coke battery fell off pretty precipitously quarter over quarter and year over year. I was just wondering was that at the request of Arcelor Mittal or were there some operational issues?

No at the request of Arcelor Mittal. I mean the situation of the Brazilian steel industry is -- it's pretty challenging. But we obviously -- the customer owns the site, they basically -- and we run it for them. But the reduction in production was market driven, not our own issues.

Will that affect the 4Q dividend payout at all?

I wouldn't expect it, no.

Okay, so it should still look something like $10 million or so?

Depends on where the real is at any given point in time, but I think last year it was $9.5 million.

Yes, it's about $9.5 million.

All right. And on Middletown, I think you guys did run rate EBITDA and 1Q of 15.5 and you called out $1.5 million in start-up costs. I mean so was this quarter over quarter? Was that -- did you guys take a bit of a ding on the yield, 1Q to 2Q?

No let me -- I will have Mark take you through both the 1Q and the 2Q because the numbers you decided where the 2Q. So Mark, why don't you go through the 1Q/2Q analysis.

So in Q1 our results were up $11 million year over year because we had no production last year in Q1. And I think what we said in Q1 was there was about $4 million of quote/unquote start-up and other yield related costs. In this quarter we are at $14 million and what we say is we have about -- we have identified about $1.5 million of further yield improvements that are possible. So it would just that we think we can get to $15.5 million prospectively on Middletown.

Okay, that was quoting the wrong numbers, I apologize. And just a housekeeping thing. I think you've got a couple of tax credits that are ready to expire, I think the upcoming one is Haverhill. What type of impact should we expect to see on your rate and -- on your rate going forward?

So, yes, the Haverhill field tax credits did run out in Q2, what we have done for our full-year tax rate is average those out for the full year. So we are still projecting, I think our effective tax rate in Q2 was about 23% and we are projecting that for the full year it will be between 20% to 24%, probably towards the higher end of that range.

Okay, so that's not -- there is no step up then?

No, that has been averaged in for the full year.

Okay, I am all set then. Thanks, guys.

Devon (inaudible), Bank of America.

I apologize, I thought I withdrew from the queue. My questions were asked. Thank you.

Lucas Pipes, Brean Murray.

Hello, this is [Derek Hernandez] for Lucas Pipes. I actually just wanted to say that you guys did have a wonderful quarter and we look forward to more of the same. The majority of our questions were asked. So, thank you again.

All right, thank you very much. You could be a pinch-hitter any time.

Thank you.

I don't think we have any more questions.

I show no further questions at this time.

So I'll just wrap it up. Thanks very much for your interest. I think Ryan mentioned if there's any further follow-up questions to contact Investor Relations and we will talk to you soon. Thank you.

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.