SunCoke Energy Inc (SXC) 2015 Q4 法說會逐字稿

Good morning. My name is Connor and I will be your conference operator today. At this time, I would like to welcome everyone to the SunCoke Energy Q4 and full-year 2015 earnings conference call. (Operator Instructions). Thank you.

Kyle Bland, Director of Investor Relations, you may begin your conference.

Thanks, Connor, and good morning to everyone and thank you for joining us to discuss SunCoke Energy fourth-quarter and full-year 2015 earnings. With me are Fritz Henderson, our Chairman, President, and Chief Executive Officer, and Fay West, our Senior Vice President and Chief Financial Officer.

Following the remarks made by management, we will 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 for your convenience. If we don't get to your question on the call today, please feel free to reach out to our investor relations team.

Before I turn the call over to Fritz, let me remind you that the various remarks we make on today's call regarding future expectations constitute forward-looking statements and 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 are reconciliations to any non-GAAP measures discussed on today's call.

And with that, I will turn it over to Fritz.

Thank you, Kyle, and thank you all for joining the call this morning.

Before we dive into the fourth-quarter results, I would like to first reflect more broadly on 2015. Despite the challenges facing our steel and coal customers, our operations, excluding Indiana Harbor, and I will come back to Indiana Harbor, performed quite well from a safety, environmental, and operating standpoint, helping us finish the year within our revised guidance range.

As discussed in December at our investor day, we continue to focus our efforts at Indiana Harbor on stabilizing the operations and reducing operations and maintenance costs. Indiana Harbor was the driver of the miss to our original goals in 2015 and must be the primary operating focus in 2016, while holding the excellent levels of operating performance across the rest of our plants.

The first test of our progress will be executing year-over-year improvement through the winter season, carrying that momentum into the remainder of 2016.

Beyond our operating performance, we executed the drop-down of our Granite City facility and significantly expanded our coal logistics platform with the acquisition of the Convent Marine Terminal. Convent was off to a solid start and delivered $21 million of adjusted EBITDA in 2015, slightly in excess of the original goal we set for it at the time of the acquisition.

We made changes in 2015 to streamline the organization and reduce our corporate spend, helping to contribute towards the projected $13 million of corporate savings in fiscal 2016.

Finally, we executed our capital allocation strategy by returning a little over $60 million to shareholders in 2016 (sic - see Presentation page 2 - "2015") and began executing our delevering strategy at the Partnership in the fourth quarter by repurchasing nearly $50 million in senior notes in that quarter. We expect to continue delevering in 2016.

With all this said, our share price declined 82% in 2015, reflecting both the results of the Company and, importantly, the changes and the challenges being faced by our customers on the coke side of the business supporting steel customers and, particularly with the Convent Marine Terminal, the coal handling side of our business and the heightened risks in the environment as a result of those challenges.

This sets the backdrop for 2016 and I will have more to say about that at the end of the presentation. Now, I would like to turn it over to Fay.

Thanks, Fritz. For the quarter, consolidated adjusted EBITDA was $54.3 million and was up $2.4 million versus the prior year, mostly due to the benefit of the Convent acquisition, which contributed over $15 million to the period results. But this benefit was partially offset by the performance at Indiana Harbor, as well as lower coke sales.

For the full year, consolidated adjusted EBITDA was nearly $186 million and was in line with our revised guidance range of $180 million to $190 million. Adjusted EBITDA in 2015 reflects the $21 million contribution from Convent, but also reflects the performance at Indiana Harbor, the impact of the Haverhill Chemicals reorganization, as well as higher legacy costs.

Looking at EPS, we reported fourth-quarter earnings per share of $0.30, which reflects the operating items that I just discussed, as well as a gain on the extinguishment of debt driven by our delevering activities at SXCP.

If we turn to slide 4 and working from left to right on the chart, we identify the drivers of the year-over-year changes in adjusted EBITDA. Most notably, you can see the $10.1 million impact at Indiana Harbor, which was driven in part by lower yields and volumes. Also impacting results was an under-recovery of O&M, which was offset partly by lower nominal O&M spend.

Moving to our other coke operations, fourth-quarter results reflect lower volumes versus the prior year, which we will discuss in detail shortly. Additionally, the coke segment results continue to reflect the previously disclosed reorganization of Haverhill Chemicals, as well as separation costs at our Jewell coke facility, which are in line with our original expectations.

As you can see on the chart, we achieved favorable year-over-year performance at our corporate, coal mining, and coal logistics segments. Convent also contributed $15.6 million to this year's results.

In total, our consolidated adjusted EBITDA for the fourth quarter of 2015 was $54.3 million versus $51.9 million in Q4 of 2014.

Looking to the full-year adjusted EBITDA bridge on page 5, the primary driver of the year-over-year results continues to be our performance at Indiana Harbor. Results were primarily impacted by two factors. First, volumes were approximately 35,000 tons lower than the prior year, reflecting the operating challenges we faced throughout 2015.

Volumes were further impacted by our oven rebuild initiative. During the second half of 2015, we took out a total of 48 ovens out of service for approximately 30 days to complete each rebuild.

The second factor is due to cost under-recovery. This year-over-year impact is largely driven by a change in the O&M reimbursement mechanism in our contract, which went from an annually budgeted rate in 2014 to a fixed reimbursement rate per ton beginning in 2015. This O&M under-recovery more than offset the $12 million reduction in nominal costs we achieved versus the prior year.

As an aside, our O&M reimbursement mechanism will revert back to an annually negotiated budget beginning in 2018 and will continue in this fashion through the end of the contract.

Moving on from Indiana Harbor, our other coke assets were impacted by the previously disclosed reorganization of the Haverhill Chemicals facility and the separation costs at our Jewell coke facility. Results also reflect a strong performance at our Brazil coke operations due to higher volumes, which -- higher volumes where we generated $22.4 million of adjusted EBITDA, up $3.5 million from 2014.

Our corporate segment was impacted by higher legacy costs on a year-over-year basis, driven by nonrecurring, non-cash items, as well as some one-time M&A and severance cost.

And finally, in addition to the $21 million contribution from Convent, our domestic coal logistics operations were up $3.1 million compared with 2014. Lower annual volumes were more than offset by higher value-added services and lower O&M.

Moving to our domestic coke performance on slide 6, full-year adjusted EBITDA per ton was $51, which was in line with our revised guidance of $50 to $55 per ton and reflects sales volumes at contract maximums for all plants, except for Indiana Harbor.

Fourth-quarter performance of $45 per ton was impacted by two factors. The first was the timing of expenses and, second, the timing of sales volumes. Both of these factors were considered when we provided our revised guidance range.

As compared to Q3, Q4 adjusted EBITDA per ton was impacted by the timing of certain operating costs at Jewell coke. Additionally, sales volumes were down about 30,000 tons versus Q3 of 2015. In Q4, we pulled back production, as well as sales volumes, so that we would not exceed contract maximum levels on a full-year basis.

Moving to a comparison of fourth-quarter 2015 to fourth-quarter 2014, adjusted EBITDA in the current-year quarter was impacted by a number of factors, including the impact of the Haverhill Chemicals reorganization, O&M under-recovery at Indiana Harbor, and Jewell separation costs. Lower sales volumes also impacted comparisons between these two periods.

Volumes decreased approximately 90,000 tons versus the fourth quarter of 2014. This decrease was due to 20,000-ton shortfall at Indiana Harbor; roughly half of this was attributable to our oven rebuild initiative. This decrease was also due to the absence of spot sales, as well as the absence of sales to our existing customers above contract maximums.

Again, despite the timing of expenses and sales volumes during Q4, full-year 2015 adjusted EBITDA per ton finished in line with our guidance and we delivered full-year volumes at contract maximum levels. Looking forward, we have confidence in the long-term performance of our domestic coke fleet as a whole and continue to expect to deliver full-year domestic coke adjusted EBITDA of $50 to $55 in 2016.

Turning to slide 7, our liquidity position remains strong and we continue to actively manage our balance sheet in order to preserve our flexibility. We ended the quarter with approximately $123 million of cash and $155 million of combined revolver availability. Looking at cash flow for the quarter, strong operating cash flow was offset by CapEx of nearly $25 million -- or was offset by capital expenditures and nearly $25 million of cash allocated to equity holders. We exit the year well positioned with more than $275 million of total combined liquidity.

Turning to slide 8, we give a brief summary of our 2015 performance and our 2016 outlook. And as you could see on that chart, our 2015 results were in line with our revised guidance across our key metrics. As we communicated at investor day, our 2016 consolidated adjusted EBITDA guidance range of $210 million to $235 million reflects the full-year benefit of the Convent acquisition, improvement at Indiana Harbor, and lower corporate costs.

We have also closely evaluated our capital spending and, as you can see, we expect to reduce our CapEx to approximately $45 million in 2016.

I will now turn the call back over to Fritz.

Thanks, Fay.

Wrapping up on chart 9, wrapping up on our 2016 priorities, the team remains focused on managing through the current challenges in the industry environment, while delivering against our operational and financial targets. Our top focus strategically is to anticipate, adapt, and respond as an organization to the challenges our customers face going forward, and to a significant extent, it is about being flexible and maintaining flexibility and financial flexibility to be able to either anticipate or respond in the event that one or more of these challenges were to result in events and/or issues that our customers might face more broadly.

We will also remain committed entirely on stabilizing the Indiana Harbor operations and delivering against our track record of operational excellence across the remaining coke and coal logistics fleet.

And last, we are committed to achieving our 2016 guidance and executing our delevering strategy to fortify our financial foundation and position SunCoke and SunCoke Energy Partners for the long term.

With that, let's turn it over to Q&A.

(Operator Instructions). Pavan Hoskote, Goldman Sachs.

Thanks for the very detailed update last month. I really have just one question here. So at your investor day, you expressed confidence in Illinois Basin coal exports through your terminal, despite the weak coal markets. Since then, we have seen about three weeks of very weak US coal production data. There are also still some unresolved corporate issues at one of your key customers at that terminal.

So in light of all this, can you give us your updated thoughts on the sensitivity of EBITDA from your Convent Marine Terminal?

When we set our targets for 2016, we set it based upon a 6.5 million rate, our utilization rate, which is about 65% of the capacity of the Convent Marine Terminal, so we already tried to be reasonably conservative in terms of looking at the volumes that we would see.

We set a range for the Convent Marine Terminal of $50 million to $55 million of adjusted EBITDA, which we think is a reasonable range for the Convent terminal, reflecting both the performance of the business, the nature of our contract, and the risks that our customers face. We still feel that's a reasonable range.

Great, thank you.

Paul Luther, Bank of America Merrill Lynch.

It is PT from BAML. I just wanted to follow up a couple of questions on that Convent Marine Terminal. Can you remind us what the take-or-pay volumes are with the two primary customers there? And then, can you give us -- I think you updated us on Q3. Can you give us a Q4 update on how coal was delivered in the quarter versus the take-or-pay volumes?

So I will let Fay take the second question. The first question is a pretty simple one. It is $5 million each with our two customers, that's how the take-or-pay works.

And interestingly, in 2015 one of those two customers actually operated -- was operating in excess of contract max -- excuse me, of the take-or-pay volumes, excuse me. Through the date of the acquisition, they ended up the year in excess of take-or-pay volumes, so, Fay, you want to talk about the volumes themselves?

Yes, during the fourth quarter, Convent transloaded about 1.4 million tons and had about 1 million of pay tons in the quarter.

Great, thanks. And then on the corporate cost holiday and IDR holiday, I said -- you said in the past you would reevaluate that quarterly. What are the sorts of things that you're considering when reevaluating? I guess to be more specific, what would make you consider canceling that holiday?

So PT, as we think about it, I talked about this explicitly in the SXCP call earlier this morning, the overarching objective at the Partnership is to deliver at least $60 million of excess cash flow to delever the balance sheet. And as we think about the corporate cost holiday going forward, we think it is an integrated set of decisions that starts with looking at how is the business performing, so obviously we need to say how are we performing as a business.

The second thing you need to look at is what is happening in the environment with respect to our customers, both the risks they face, and if any of those risks actually results in an event that might be realized, we have to be able to factor that into our thinking.

Third, as we think about typically the corporate cost holiday, it is about generating $60 million of coverage, and so as we think about it, the level of distribution at the SC MLP and the level of corporate cost holiday provided by the parent are an integrated -- it is an integrated decision. So, it is about generating the -- at least the $60 million of coverage.

The last point we would look at, obviously, is we would be looking at our progress toward our delevering goals. If we see even more attractive opportunities to delever, then we could very well -- we can very well take actions that would generate more coverage at the MLP.

Now, obviously, you can do that through the corporate cost holiday or you can do that through distributions, and so that's why the decisions are going to be made quarterly.

Got it. Thanks for explaining. That makes sense.

And then last one, if I may, can you just give us maybe a refresh on the coal mining operations and further rationalization? I was looking at slide 20 and it mentioned $5 million of nonrecurring coal rationalization costs. I just wanted to see if there was something new there.

No, there is nothing new there. It is pretty much what we outlined in our investor day in December and it really involves further rationalization and closure of mines.

Okay, great. All right, thanks very much, Fritz and Fay.

Pavel Kaganas, Newtyn.

I just have one question on the delevering and the bond buybacks. I know you had bought an extensive amount in Q4 at around $0.75, and the presentation guides to an average of $0.70 throughout 2016, and then just looking at where they are trading year to date, the prices seem very attractive. So I am wondering why you haven't been buying back the bonds in January so far.

We have been blacked out pending the call, actually, today, because we hadn't been able to actually provide actual results relative to the guidance we provided in December; we weren't permitted to.

Got it. It's just because of that. Okay.

Yes.

Thank you.

Frank Rango, Purchase Capital Management.

With regards to the Convent, so I was looking back at the way you structured the acquisition, and I think part of the consideration was, of course, units and part of it was earnout, if I remember correctly. And with the bonds of Murray and Foresight trading at such distress levels, it just gives rise to the question that should those entities file, how would that affect the earnout that you have with them? Would that be an offsetting claim in their bankruptcy or how would that work?

Frank, the earnout, the agreement to purchase Convent was with Raven, actually, which is Chris Cline's organization. The contracts are with FELP and Murray, but the earnout provision is part of the contract with Cline and Raven, so they are different, actually. They are not (multiple speakers) -- it is not part of the executory contract.

Okay, so is there any -- but if the two counterparties that you have for the coal, if they were to declare bankruptcy, so you'd have -- you would still be on the hook for that earnout to Raven? Is that the bottom line?

We would be unlikely to generate additional volumes above the $10 million, and I guess what I would say is yes. If to the extent that we generate additional unrelated businesses to those two customers, which is what largely -- I mean, the earnout was related to both volumes -- it is actually related to volumes above 10 million tons, so if volumes fell precipitously as a result of one of those customers having an event, then we wouldn't be over 10 million tons and there wouldn't be any earnout.

Yes, okay, got it. All right, thank you very much.

Lucas Pipes, FBR Capital Markets.

This is Derek Hernandez on for Lucas. I just wanted to ask a quick question with regards to the Indiana Harbor outlook. I know this is not updated from the December, but we were just wondering if there was any outlook in terms of the potential EBITDA growth over the year or if it is a flat line across.

Derek, welcome. No changes to what we identified in December. And if you look back at December, we did identify an improvement year over year. No changes to that today, and as I said in my comments, your first evaluation of that it is going to be how did we perform in the first quarter relative to winter periods in the first quarter of 2015 and 2014, and so the focus today is really about executing much, much better sequentially, as well as year over year in the winter.

I see, I see. Well, very good. Thank you very much.

Garrett Nelson, BB&T Capital Markets.

I know that weather has impacted your Q1 coke volumes in the past. How has weather impacted your operations so far, if it all, and is it safe to assume that your Q1 production and sales will probably be a bit weaker than the final three quarters?

So let me just talk about the year. We do anticipate running the plant for the year at contract maximums. We did, as Fay mentioned, ramp down our production in the fourth quarter in order to stay within contract maxes. So you could see lower -- a small level of lower volumes in the first quarter, but across the year we would anticipate being at contract max.

So now let me deal with your question on weather. If you think about weather in 2014, it affected virtually all of our plants. Think about the winter of 2015, the rest of our plants did a much better job. Indiana Harbor continued to struggle.

I think with respect to 2016, so far I would say -- first of all, the weather has been more benign. We don't have any plants in Manhattan or Boston or Washington, DC, so the weather has been, I think, more favorable for us so far.

Second, we have had -- we had moisture issues in a number of plants from rain, particularly in and around our Granite City plant, but I would call that business as usual. And so, I think we'll have to see what our results are in the first quarter, but I think I am encouraged by the work the team has done to be able to operate our plants safely, productively, and efficiently in winter.

Okay, that's great. And how should we be thinking about domestic coke production by facility in 2016 versus 2015? I know you're guiding for your total coke production to be about flat -- flattish at 4.1 million tons, and I think you talked about Indiana Harbor being higher, but maybe if you could just provide a bridge, just help us a little bit in thinking about your production by facility that you're expecting.

So, I would say Indiana Harbor, we guided to 1.050 million tons for 2016 and that would be versus 975,000 tons where we ended roughly in 2015, so that's up 75,000 tons. We did guide -- I will have Fay talk to you about where we stood at the rest of our plants.

I think what we have seen with our customers, we have introduced some higher volatile material coal blends into our 2016 blends and whenever you have higher VM in your blends, you are going to have lower volumes across because you're going to have more volatile materials in the coal. But, Fay, you want to just talk more specifically?

Yes, so at Indiana Harbor, we did guide to about a 75,000-ton increase year over year, but at our other domestic coke facilities, we are planning our production at contract max for 2016 and we are anticipating no kind of spot sales. So it should be relatively flat at our other facilities.

Adjusted for VM.

Adjusted for VM.

Got it. Okay, that's helpful. And then, could you remind us what percentage of SunCoke's total revenue that U.S. Steel and AK Steel accounted for last year? Do you have those numbers?

I can put it in tons, which is probably the most relevant way to think about it. We were from Granite City, which is the only facility that we support U.S. Steel at, about -- not quite 700,000 tons. 660,000 was the final number for the year.

And then with respect to AK Steel, we support them from Haverhill and Middletown, and those two facilities would be somewhere between 1.15 and 1.2 (multiple speakers) so.

1.2.

Yes, 1.2 is the total, thanks.

Got it, okay. Thanks very much.

Melissa Tan, RW Pressprich.

Thanks for taking my question. Just regarding your capital allocation strategy, earlier you mentioned that because of blackout period you were not able to buy back some bonds, but just looking at your goals to get down to leverage under four times and looking at your available free cash flow, how would you balance that with the dividend on the partnership side?

Melissa, I would refer back to the comments I made earlier in the call. As we look at what we want to do on the partnership side of the business, we want to generate at least $60 million of cash coverage in order to delever -- I emphasize the word at least. If we do $60 million, we feel like we will land within our targeted ranges of leverage, but we will evaluate that on a quarterly basis.

And specifically to your question on the distribution, as I mentioned earlier in the call we will look at the levers that we can pull at the partnership, whether it is through distributions or whether it is through corporate cost holidays, in order to ensure that we delever at least to that extent.

Okay, thank you. And just a second one, just regarding to your contract with the U.S. Steel with the fact that they are currently idling Granite City. Are they still consuming the coke for other facilities?

We produced the contract max at Granite City in 2015. U.S. Steel does have inventory of coke, and so your specific question is were they consuming it and I think the answer to that is no. It is basically it has been produced in the inventory.

As to we're working with U.S. Steel, as we would with any other customer, to make sure that coke we would produce or that is in their inventory, and that inventory, by the way, can be ours or theirs, is ultimately consumed in other blast furnaces. But I don't have anything specific I can talk about here this morning.

Okay, that's great. Thank you.

(Operator Instructions). There are no further questions at this time. I will turn the call back over to the presenters.

All right. Again, thanks very much for joining the call here this morning and thanks for both your interest and investment in SunCoke Energy.

This concludes today's conference call. You may now disconnect.