SunCoke Energy Inc (SXC) 2016 Q1 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 SXC first quarter 2016 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. (Operator Instructions). Thank you. Steve Carlson, with the Investor Relations team, you may begin your conference.

Thank you Connor. Good morning, and thank you joining us to discuss SunCoke Energy's first quarter 2016 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 up 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. If we don't get to your questions on the call today, please feel free to reach out to our Investor Relations team.

Before I turn 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. 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 and any non-GAAP measures discussed on today's call. Now I will turn the call over to Fritz.

Thanks Steve. Thank you everyone for joining us this morning. Turning to slide two, I want to highlight some of the progress we made in the quarter. The first quarter was a solid quarter, in terms of both safety and environmental and operating performance across the coke and coal logistics fleet. That was accomplished in the face of a challenging environment. We were pleased with the stability and solid performance of our operations in the quarter, and as I look at it, a good start to the year, and keeps us on track to achieve our goals for 2016.

Looking specifically at Indiana Harbor, which is our single largest operating challenge across SunCoke, we did make progress particularly on the cost side, as part of a balanced approach to the plant in the quarter, and we continue to remain keenly focused on achieving operational plant stability, and I have some charts and more comments to make later in the presentation on that. From a capital allocation perspective we supported SXCP's repurchase of $53 million face value of senior notes in the quarter, putting them well on track to achieve the partnership's delevering objectives for 2016.

We did successfully divest the remaining elements of our coal mining business in the transaction, that simplifies our business structure, it also improves ongoing cash flow going forward. And finally with the first quarter behind us, we are affirming this morning our 2016 adjusted EBITDA guidance, as shown in the chart as $210 million to $235 million. On chart three, I want to highlight some of the actions we took in the quarter to support customers in a response to the industry landscape that we all face. We do continue to work with our customers, and support them, which is all the more important, given the evolving market conditions. For example, in the quarter we did agree with our customer reduced production at our Haverhill 2 plant, by 75,000 tons across the year. And we also agreed with our customer to back end load our deliveries at our Granite City facility through 2016.

Neither of these actions are expected to impact earnings from these facilities, nor consolidated debt to EBITDA guidance for the year, but they are good examples of how we can remain responsive and flexible to our customers needs, while preserving the voracity of our contracts, and the stability of our cash flow. Additionally as I mentioned earlier, we continue to support SXCP's delevering objectives. We did provide support for it in the first quarter in the form of a corporate cost holiday and an IDR give-back.

For the second quarter we have adjusted that support to provide it through a one-year payment deferral on both corporate costs and IDRs. And we will continue to evaluate capital allocation decisions on the partnership on a quarterly basis, based upon marketing conditions, of partnerships and the objectives we set out for ourselves in the year in terms of reducing leverage in a partnership. Finally as I mentioned, we were pleased with the ultimate resolution of our coal mining segment, transferring the remaining assets to Revelation Coal, and we continue to will work on diligently reducing costs going forwards. At this point I would like to turn it over to Fay.

Thank you Fritz. For the quarter, consolidated adjusted EBITDA of $53 million, was up by $0.1 million versus the prior year period. This was driven by the benefit of the CMT acquisition, and improved performance at our Indiana Harbor facility. From an EPS perspective, we recorded a loss per share of $0.06 in the first quarter, and that included a $10.7 million pretax asset impairment on our coal mining business, and higher noncontrolling interest. This is partially offset by a $20.4 million pretax gain, resulting from the partnership's debt repurchases.

Looking at adjusted EBITDA on the next slide, as you can see, the $6 million performance improvement that we had at Indiana Harbor was driven by lower costs and higher volumes. While we are encouraged by the headway we have made on spending, we still have a ways to go to achieve plant-wide stability. Fritz will go through Indiana Harbor results in more detail later on the call. Excluding Indiana Harbor, the remainder of the coke business was impacted by lost steam revenue, due to the restructuring of Haverhill Chemicals, and unfavorable volumes in FX at our Brazil coke operations. Additionally, there was $2.7 million of coal transportation costs that were shifted from coal mining to Jewell Coke, to reflect our transition to a 100% third-party purchase coal model. These shifted costs which will be about $10 million on an annual basis, will remain in our domestic coke segment going forward.

Moving on from coke, in 2015 we recognized a $4 million OPEB curtailment gain that did not recur in the current period. Furthermore savings from our 2015 staff reductions were offset by the pull forward of legal costs, and the mark to market impact of stock price changes on our deferred compensation expense. At coal logistics we were aided by the $13 million contribution from the convent facility, which inbounded 922,000 tons of coal in the first quarter. The first quarter volumes were a bit lower than expectations, and were largely driven by depressed API2 pricing, which persisted through the quarter. We have seen API2 pick up here in April, and have started to see volumes at the facility increase as well.

Turn together next slide we delivered first quarter adjusted EBITDA per ton of $54 on 991,000 tons of production. Our quarterly results were impacted by several factors which I covered on the previous slide, and included the shift of coal transportation costs from coal mining to Jewell Coke. Customer volume adjusted at Granite City and Haverhill, and our Indiana Harbor performance. And while the customer volume accommodation will not impact our full year consolidated adjusted EBITDA guidance, they will impact our domestic coke production outlook, as well as our adjusted EBITDA per ton.

Moving to the liquidity bridge on slide seven, we ended the quarter with approximately $102 million in cash, and $123 million of combined revolver availability. Looking at cash flow for the quarter solid operating cash flow was offset by spending on capital expenditures, distributions to SXCP public unit holders, and nearly $33 million of cash used to repurchase debt at SXCP.

Additionally in the quarter we issued nearly $31 million in letters of credit to our surety and insurance providers, as collateral for our black long workers comp reclamation and other guarantee obligations. These outstanding letters of credit reduce the borrowing availability under our credit facilities. As part of our coal mine divesture we expect approximately $10 million of these letters of credit will be relieved upon full transfer of our coal mining reclamation liabilities to Revelation Energy. Even with these additional LOC requirements, we remain well-positioned with more than $225 million of total combined liquidity. Let's turn it back over to Fritz.

PJ looks at it in more detail at Indiana Harbor's performance. I think as we look at it, we were encouraged by some progress we saw in the quarter. The focus continues to be on stabilizing the plant operations. Looking on the left hand side is what we outlined late last year at our Investor Day. If you start with production we were up 16,000 tons versus the first quarter of 2015, and up even more versus the first quarter of 2014. What I would say is that we were well prepared for winter this year, and we had a milder winter, and that helped us. I would say that we didn't achieve all of the goals we set in terms of stability of production in the quarter, but nonetheless, we were improved, and this is an area that continues to be a focus for us through the rest of the year.

Second point I would make is we said we would evaluate and analyze results to maximize the value of the capital deployed, particularly as we rebuilt ovens. I will have some more detail on that on a subsequent chart. But we did see continued stability and improved oven performance from the ovens that we did rebuild. And we expect now to increase the number of ovens we did rebuilt in 2016, relative to what we had outlined at the beginning of the year, based upon the continuous consistent performance of the ovens that have been rebuilt already.

And finally we did outline an overall balanced approach to the plant, both in terms of production, capital, and O&M costs. Here through good cross functional work we did achieve cost reductions. We expected to achieve about $5 million in reductions in 2016, and as you can see, we are well ahead of that pace in 2016 through the first quarter, but I remind you that the timing of actual O&M spend is oftentimes driven by specific projects, and for example, the oven rebuild project and the expense associated with that would be later in the year. Nonetheless we were pleased with the performance from a cost perspective, and we continue to look for and explore further cost savings.

Sitting here today we feel that we are comfortable with affirming our guidance at the Indiana Harbor plant between $3 million and $13 million of adjusted EBITDA. I would say reasonable starts to the year for the plant, that really continues to be our most significant operating challenge across the fleet. Page nine, it looks at the ovens that have been rebuilt. I showed this chart in December. It doesn't look a lot different today, four months later. That's exactly the objective.

If you look at the D battery ovens, one of four batteries we have, the left hand side where the oven performance, both in terms of charge weights and coking times, pre-rebuild, and the far right shows status as of March 31st of those ovens. I would say two things. One, they continue to perform consistently in terms of both charge weights and coking times, at levels improved relative to certainly the charge weights as well as the coking times, to what they had before. Second, they are very consistent with where they were in December, and that's something that we were really looking for, before we actually commissioned more oven rebuilds this year. Again, it reinforces our view that this is a sustainable way to improve the performances of the ovens in the plant.

And the third thing I would say about the ovens that have been rebuilt is that when you do have upsets or disruptions at the plant, and we did experience some of those in the first quarter, these ovens recover better. So what you can see is, you can reduce charge weights, you can stay within coking times, and you can bring those ovens back more quickly. We did experience a number of disruptions which happened at this plant. It happened at all of our plants, but this plant particularly in the first quarter. Less so than we had in the first quarter than last year, but nonetheless, when you have them, the ovens that have not been rebuilt recover more slowly. You get a benefit when you rebuild ovens, both in terms of charge weights and coking times, and then they recover better when you do have, experience disruptions at the plant.

Wrapping it up on page 10, our priorities are consistent relative to what we said coming into the year. We need to remain flexible and responsive to the challenges that our customers face, and that the industry faces, while leveraging our unique value proposition. Second pillar of our priorities for 2016 was to stabilize the Indiana Harbor coke making operations, and improve the production and the profitability of that plant, through executing oven rebuilds, and managing in a balanced way operations, maintenance cost, and capital. As we look at conditions in the industry, before I move off of this chart, I would say relative to where we came in the year, we have seen some improvement through the first quarter. We have seen steel pricing for example both globally as well as domestically increase, with US hot rolled coil prices recently eclipsing $500 a ton, for the first time since early 2015. You have seen imports year-over-year decline, but nonetheless the industry is still being very significantly affected by unfair trade and import levels.

On the coal logistics side of our business, Foresight has put forth the framework to resolve the ongoing dispute with our creditors, we view that as constructive, but it is a work in process. As Fay mentioned, API2 has rebounded a bit here in April, and we have seen production at our coal, at our convent terminal pick up in the second quarter. And while things are, as I look at the environment, certainly improve relative to where they were in late last year, and at the beginning of this year, I think we need to remain both vigilant, flexible and responsive, because of the still significant number of challenges we face in the industry.

So wrapping it up, what is it about? It is about delivering an operations excellence. I have already talked about the priorities at Indiana Harbor. The rest of the fleet if you look at stability of operations and cost management, and I would really point out for example on the logistics side of the business, we experienced lower volumes in the quarter, we had good disciplined cost management across our logistics fleet. Then the rest of the coke fleet did benefit from a milder winter. Because our plants do operate outdoors, but nonetheless when I look at Granite City, Middletown, Haverhill and Jewell, they really got off to a good start. Our Brazilian operation is down year-over-year, but frankly it is lapping what could only be considered a superb first quarter 2015. We felt our Brazilian operations were right on track as they started the year, and it is about delivering our goals for 2016. As I said based upon the first quarter we are affirming our 2016 consolidated adjusted EBITDA guidance, and we continue to execute the risk management and delevering strategy at the MLP. With that, we will open it up for questions. Thank you.

(Operator Instructions). We will pause to compile the Q&A roster. (Operator Instructions). Your first question comes from the line of Lucas Pipes with FBR and Company.

Good morning everybody.

Good morning Lucas.

Fritz, in your prepared remarks you were going through the corporate holiday, the corporate overhead cost holiday, and the IDR give-back. But you were addressing it pretty quickly. Could you remind us what is the latest status of these programs? And then from there I have a few follow-up questions. Thank you.

Sure. What we did in the first quarter, the support that was provided at MLP was done through a corporate cost holiday, on the corporate cost allocation, and then the IDR give-back basically foregoing our IDRs in the first quarter. In the second quarter we revised that approach to provide one-year payment terms, Lucas, for both of those. So we will continue to provide support, but do so in a modified way in the second quarter, and then we will continue to evaluate beyond the second quarter on a quarterly basis.

Got it. Should I think about essentially SXCP is going to be paying back the capital to SXC in the future? Is that the right way to think about that modification?

Yes.

Okay. Very good. Thank you. And then just a quick update in terms of what you're seeing from your customers. Are you getting inquired for maybe increasing coke demand, i.e., coke production, in response to these improving market conditions? What is your dialogue right now with your customers?

Stability would be the way I would say the dialogue, I would say our customers are basically running their assets well, but I would say obviously we have two plants that we serve, both Granite City and Ashland, that the blast furnaces are at this point temporarily idled. I think both US steel and AK steel run the rest of their facilities, are running the rest of their facilities at high levels of utilization. I wouldn't say we have seen any marked poll for more coke. I would also say that we haven't seen any marked push back against coke. In other words, the adjustments we made in the first quarter to support our customers that are doing the job. I would note that we talked about hot rolled coil prices, and when I look at what has happened on Platts with the prices, net coke actually, it has increased sharply. We just have to see what happens with the utilization rates. But I would say sitting here today, I feel okay about stability.

That's very good to hear. I will jump back in the queue, but thank you for all that detail and good luck.

Thank you.

(Operator Instructions). Your next question comes from the line of Dean Graves with Eaton Vance. Your line is open.

Hi, Fritz and Fay. I wanted to follow-up on the prior question, with respect to the sponsor support. I'm trying to clarify, is the first quarter support then was that non reimbursable, and now this is a fresh sort of one through the first quarter of 2017, sorry?

2017. Correct.

And then that one year would be reimbursable?

Yes.

Okay, thank you for that clarification.

Your next question comes from the line of Lee McMillan with Clarkson. Your line is open.

Hi everyone. Thank you for taking my questions. I just had two questions on the domestic coke guidance. Can you elaborate a little bit on what is responsible on the decline EBITDA per ton guidance? It seems to be a mix of the Jewell coal transport impact, and then maybe the customer accommodations? And then I am also wondering where that gets made up, so that full year guidance didn't have to be lowered, or is it just that the range was wide enough that it can accommodate what I think is maybe like an $8 million shift? Thanks.

Once again the customer accommodations do not make, do not impact our full year consolidated adjusted EBITDA guidance. That remains the same. But we did lower our adjusted EBITDA per ton guidance, and it reflects two things. The first is the shift of $10 million roughly from coal mining to domestic coke. That's related to the transportation coast of procuring coal from third parties, as well as the per ton calculation is also impacted by the production decrease at Haverhill 2. That's expected to be about 75,000 tons lower. That's what is driving the per ton calculation.

The reclassification has zero effect on consolidated adjusted EBITDA, but it does lower your coke adjusted EBITDA for that segment, as well as per ton.

Right.

Okay. Thank you.

You are welcome.

There are no further questions at this time. I will turn the call back over to Mr. Henderson for closing remarks.

Thank you very much again for joining us this morning, for your interest and for your investment in SunCoke Energy. We will talk next quarter. Thank you, good bye.

This concludes the conference call. You may now disconnect.