SunCoke Energy Inc (SXC) 2016 Q4 法說會逐字稿

Good morning. My name is Rachel and I will be your conference operator today. At this time I would like to welcome everyone to the SXC fourth quarter 2016 earnings 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. (Operator Instructions).

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

Thank you, Rachel. Good morning and thank you for joining us to discuss SunCoke Energy's fourth quarter and full year 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 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 a few weeks. 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 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 the 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.

Now I will turn the call over to Fritz.

Thanks, Kyle, and thank you all for joining us this morning. Before we jump into the materials, I wanted to touch briefly on the simplification transaction. Process is running its course as expected. The Conflicts Committee has hired legal and financial advisors has gotten input from SXCP unit holders and conducting its diligence. We continue to gather SunCoke Energy shareholder feedback and appreciate the prospectus that many of you have shared with us.

We remain confident in the strategic and financial merits of the transaction, but we will remain price disciplined through the negotiation. Obviously, even that we are engaged in active discussions with the committee, we won't be commenting on anything beyond the scope of these materials today. As mentioned on SXCP's call earlier this morning, SXCP's intend to maintain its existing distribution policy during the evaluation period of process.

And finally, the final qualifying income regulations which are now in effect only strengthen our conviction. The simplification transaction is the right thing to do to achieve the long-term value creation for all SunCoke shareholders. Again, those negotiation with the committee remain ongoing and private, I won't be saying anything further on the topic beyond what's on the chart.

Turning to Slide 4, slide would reflect on accomplishments in 2016. First, we delivered on our commitment to shareholders by achieving our financial guidance targets and operating the business within those targets that we laid out earlier this year, which made it possible the significant reduced consolidated debt outstanding [tune of about] $145 million in a consolidated basis.

We divested our coal business earlier in 2016 and we are ahead of schedule on our run rate cash flow saving. On the operation side specifically, we continue to be pleased with the overall safety and operating performance of our coke and logistic assets and we are able to achieve record results at our Middletown facility. Additionally, we are pleased to have finalized to commissioning our new ship loader at Convent and we're continuing our pursuit of further incremental business which spiked in 2017.

And finally, we made meaningful strides to our operating cost reductions at Indiana Harbor and continue to implement our holistic oven rebuild approach for facility. However, when you look at the numbers where we have work ahead, we remain committed to driving long-term performance in Indiana Harbor.

With that, I'd like to turn it over to Fay to review our fourth quarter and 2016 results.

Thanks, Fritz and good morning. Turning to slide 4, you can see that quarterly EPS of $0.26 per share was down $0.04 versus the prior year period. This is driven by lower taxes and a larger quarterly 2015 gain on debt extinguishment. Similarly, full year EPS for 2016 was $0.22, and is up $0.66 over the prior year. Current year benefited from $25 million of gains on debt extinguishment as well as the lapping of impairment and pension plan termination charges in 2015.

Consolidated adjusted EBITDA for the fourth quarter was $77.3 million, and is up over $20 million due primarily to the recognition of deferred revenue at Convent on take or pay tons. This revenue is included in adjusted EBITDA when recognized for gas purposes which occurs in the fourth quarter of each year. As Fritz mentioned we were able to deliver full year consolidated adjusted EBITDA within our guidance range finishing the year $217 million, up $31.6 million year-over-year.

Turning to slide 6 and taking a deeper look at the Q4 adjusted EBITDA results. Indiana Harbor which is in the midst of their oven rebuild initiative down $9.5 million compared to 2015 due in part to lower volumes. Also impacting the quarter were the take or pay payments to Lake terminal for 2016 coal handling services which is an in and out on an SXC consolidated basis

Excluding Indiana Harbor, the remainder of the coke business was impacted by an unexpected turbine failure at our Haverhill facility. This resulted in repair costs as well as lost energy revenue, which was partially offset by business interruption insurance proceeds. The turbine has been repaired and it came back on line in mid-January.

The quarterly results also reflect the Brazil related transaction we announced in the quarter. As a reminder on Brazil, ArcelorMittal redeemed SunCoke's indirectly held preferred and common equity interest for $41 million of cash which eliminated the annual dividend.

The quarterly results also reflect the Brazil related transaction we announced in the quarter. As a reminder on Brazil, ArcelorMittal redeemed SunCoke's indirectly held preferred and common equity interest for $41 million of cash which eliminated the annual dividend. Also as part of the this transaction we expanded the patent portfolio at the facility in exchange for an incremental $5.1 million in licensing fees each year through 2023. Net Coal Logistics to $24.2 million improvement is driven primarily by the recognition of deferred revenue at CMT.

Our corporate legacy and other segments benefited from lower legacy costs and lower professional services spend which was offset by mark to market adjustments and -- mark to market adjustments and deferred board compensation that is driven by the change in SXC share price. Finally, we continue to benefit from the divestiture of our coal mining business and realized $4.6 million in cost savings as a result.

Flipping to the full year adjusted EBITDA bridge on slide 7. You can see that despite challenging market conditions, we ended the year at $217 million, up $31.6 million from 2015. Indiana harbor was up $4.2 million as lower volumes and yield were more than offset by favorable O&M spending.

Excluding Indiana Harbor the remainder of the coke business impacted by several items some of which were anticipated in our guidance and some that were not. As expected coke results reflect lower yield gains due to lower coal prices. We also anticipated lower energy revenue due to the increased scope of planned outages in 2016.

Also impacting results were the fourth quarter turbine failure that I just discussed. The transfer of costs from coal mining to Jewell coke so just a segment bucketing item and the change in our Brazil structure outlined on the previous slide which we think was an attractive transaction.

Moving on from Coke, Coal logistics was up $25.9 million as the full year contribution from our Convent facility was offset slightly by lower volumes at KRT. Corporate legacy and other improved $15.2 million, primarily due to the lapping of a non cash pension termination charge and lower spending. And lastly, we realize the $7.4 million in savings from the divestiture of our coal mining business well ahead of our 2016 target.

Turning to our Domestic Coke results on slide 8, fourth quarter adjusted EBITDA per ton was $38 million on approximately 964,000 tons of production. The results reflect the impact of the turbine failure at Haverhill as well as lower production and higher costs at Indiana Harbor due to the oven rebuild initiative.

The fourth quarter IHO rebuild schedule encompassed 38 ovens and we have of those ovens back up and online. with the remaining eight ovens set to come back up online by mid February. While we are very early we are pleased with the initial operating performance of this set of rebuilds.

Full year adjusted EBITDA per ton finished in line with the guidance of $49 per ton on 3.95 million tons of production. Excluding the impact of the Haverhhill turbine failure as well as the costs associated with the Indiana Harbor oven rebuild our coke making operations would have generated adjusted EBITDA per ton of approximately $51 for the full year 2016.

Focusing on coal logistics performance on the next slide in the quarter we had sequentially higher coal logistics volumes across-the-board with approximately 4 million-tons at KRT and Lake terminal and 1.7 million-tons at Convent. On the Domestic coal side we continue to see increased volumes supported by improved fundamentals in the coal space including increasing natural gas prices and cold weather in the fourth quarter. At Convent we earned $51 million of adjusted EBITDA in 2016 on 4.5 million tons of through put which included 200,000 tons for our new merchant domestic thermal coal customer, more than double our expectation as we entered the quarter.

Moving on so slide 10. As we look at capital deployed in 2016, we generated very strong operating cash flow of over $219 million in the year which was driven by solid operating performance as well as lower inventories and the impact of lower coal prices that benefited our working capital position. We have put that cash flow towards value enhancing actions including divesting our coal mining business, targeting investment at our operating facilities and significantly delivering our balance sheet throughout the year. With that, I will turn it back to Fritz.

Thanks, Fay. And wrapping up 2016, the challenging year in many respects but I'm proud of what the team was able to accomplish despite the significant head winds facing our steel and coal customers, particularly in the first half of the year. We weren't perfect but we delivered on a number of our critical objectives including meeting or exceeding our headline adjusted EBITDA and operating cash flow guidance particularly in the operating cash flow side-- at a capricious time. Second, reducing debt at the combined enterprise level by over $145 million. And leaving apparent actually in a net cash position at the end of the year. And finally, --- completing the Haverhill 1gas sharing project and finally commissioning our new ship loader and securing new merchant business at our Convent terminals.

While we have work to do at Indiana Harbor and we did miss our adjusted EBITDA and production guidance targets at that facility we are committed to furthering our holistic oven rebuild approach to more ovens in 2017 with the goal of stabilized performance in driving long-term profitability at the Indiana Harbor plant.

Turning to slide 13. And looking at 2017 now. Our full year 2017 consolidated adjusted EBITDA guidance is $220 million to $235 million representing a $10 million improvement at the mid point versus 2016 actuals. Domestic coke expected to be down $5 million to $10 million compared to 2016 driven principally by the impact of additional oven rebuilds at Indiana Harbor.

We also assume the Middletown performance comes back to more historical run rate levels from the record levels experienced in 2016. In the favorable column we expect to see higher yield gains from higher coal prices. Favorable Jewell contracted coal prices versus 2015 and the lapping of certain 2016 items highlighted on the chart. Coal logistics is expected to be up $3 million to $8 million driven by higher volumes at KRT and Convent and corporate, legacy and other which will include in 2017 our historical coal mining operating segment will be $10 million to $15 million favorable to the prior year and reflects the benefits of the full year savings of coal mining divestiture, the lapping of certain 2016 costs and finally the benefits from the cost rationalization exercise we completed in the year and will be discussed in more detail later in the presentation by Fay.

Turning to slide 14 and looking at the harbor. We expect to continue our holistic oven rebuild program in 2017 with another 53 ovens on the schedule. Including the 86 ovens completed in 2015 and 2016 this will push our total to over 50% of the total oven population completed by the end of 2017. Our consolidated guidance for the year assumes Indiana Harbor generates approximately a $13 million adjusted EBITDA loss on 900,000 tons of production. Expense portion of the 2017 oven rebuilds as well as costs to apply the comprehensive lessons learned from 2016 back into the 2015 rebuild have been incorporated into that guidance.

As we move forward in Indiana Harbor we continue to take an analytical approach to the holistic rebuild to ensure value added returns. We expect to continue the oven rebuild work in 2018 and remain focused on returning the Indiana Harbor to profitability in 2018 in part driven by oven performance,--in part by plant cost performance and finally the contract with (inaudible) resets as of January1, 2018. I will turn it over to Fay to go through the segment guidance.

I will turn it over to Fay to go through the segment guidance.

Thanks, Fritz. Turning to slide 15. In 2017 we expect Domestic Coke adjusted EBITDA excluding Indiana Harbor of $197 million to $202 million. This is driven by similar operating performance as compared to 2016 including over 100% asset utilization, steady coke yields of around 70% and production of between 3.025 million tons to 3.05 million tons. As noted on the chart we again expect to deliver 75,000 tons below contract max to AKS Steel out of our Haverhill facility. We will receive take or pay payments to keep SunCoke economically whole.

Flipping to the next slide, 2017 adjusted EBITDA guidance for coal logistics is $67 million to $72 million. At KRT we expect the strengthening domestic coal fundamentals we saw in the back half of 2016 to continue into 2017 helping drive higher volumes through our docks. At Convent we anticipate attractive coal export economics will drive increased volumes. Our guidance assumes 8 million tons of throughput between our two take or pay coal customers.

We have also assumed 500,000 tons of merchant volume running through this facility in 2017. As we continue our pursuit of new business in 2017 we expect to add barge unloading capabilities at Convent in order to expand the product offerings and broaden the list of potential future customers.

Turning to slide 17, in 2016 we partnered with experts at A.T. Kearney to help champion a full review of all of our operational sourcing and administrative processes. The Board and management review encompassed all aspects of the business. Each plant and corporate function was bench marked on cost and staffing levels and organizational design changes were analyzed to ensure proper burden for all activities.

As a result of this project, we identified approximately $10 million dollars in total savings which we expect to drive about $7 million in annual EBITDA benefits beginning in 2017. While cost discipline has always been a focus at SunCoke the third-party review helped validate and enhance many of our existing operational practices and optimize staffing levels. We are pleased to achieve these savings going forward as a more streamlined organization.

Looking at our corporate, legacy and other segment on slide 18. The cost rationalization project will help to continue the trend of cost reductions at corporate and we expect about $60 million of controllable corporate costs 2017, $25 million below our spending level in 2013. We are now operating our corporate segment which includes not only legal, accounting and administrative personnel, but also centralized engineering, technology, coal procurement and commercial team with 80 people. Down significantly from the 168 people we had in 2013.

Walking down from corporate expense to segment adjusted EBITDA we expect a $10 million to $15 million improvement in 2017 versus 2016 which includes $4 million of savings from the full year benefit of the coal mining divestiture. Beginning in 2017 our historical coal mining segment will be rolled into our corporate legacy and other segment to reflect that our divestiture -- to reflect our divestiture of that business in 2016.

Turning to our 2017 capital plan. We expect to spend $80 million in 2017 as increased oven rebuilds at Indiana Harbor and the implementation of gas-sharing technology at our Granite City facility are driving higher capital requirements. Similar to the installations we completed at Haverhill one and two over the past two years we expect that the Granite City gas sharing project will significantly reduce the amount of venting at the facility and will cost around $50 million in total between 2017 and 2018. We expect our ongoing capital excluding the additional ovens at Indiana Harbor to be roughly flat year-over-year.

Slide 20 we summarize our 2017 guidance. As we have covered throughout this presentation we expect 2017 adjusted EBITDA to be between $220 million and $235 million. We expect operating cash flow to come down year-over-year primarily due to higher coal prices impacting working capital.

Before turning the call back over to Fritz I want to touch briefly on liquidity and capital allocation plans on slide 21. We expect to generate solid cash flow at the parent level in 2017 driven by cash distributions from SXCP, reimbursement of the IDR and corporate cost deferral we granted to the partnership in 2016 and the receipt of the final installment from ArcelorMittal related to the Brazil equity interest. At this point, any capital allocation decisions at the SXC level are on hold pending the ongoing negotiations around the Simplification Transaction. As previously indicated when the Simplification Transaction is completed we intend to recommend a $0.25 annual dividend at the SXC level. .

With that, I will hand it back to you, Fritz

Thanks, Fay. Wrapping up with slide 22 as you just heard In 2017 we are going to remain focused on operational execution. Maximizing the capabilities and performance of coke and logistics assets and ensuring execution on further oven rebuilds at Indiana Harbor. We continue to make progress with the conference committee on the proposed Simplification Transaction but we do remain-- as I said before price disciplined in that regard. Targeting a potential closing of the transaction in mid 2017 if we are able to reach agreement with the conference facility. We will be focused on executing on our commitments to shareholders by achieving our full year financial targets that we laid out today. With, that I would like to open it up for Q&A.

(Operator Instructions).

Your first question comes from (inaudible)

I am wondering when you think the iphone P is going to come out because I'm a really big fan of apple.

Good morning. This is Fritz Henderson. You are on the SunCoke Energy conference call and I don't know anything about the iphone 7.

Do you know what number is for apple?

No, I don't. I'm sorry.

Oh, sorry. My bad.

No problem.

Your next question comes from the line of Adam Gui with Mangrove your line is open.

Hey Fritz, good morning. Thanks for taking our call.

Good morning, Adam.

I wanted to confirm my understanding of something you said earlier which is that you are targeting Indiana Harbor profitability in 2018. Is that correct?

Yes.

Got it. And are you able to put a range around what sort of profitability you might expect in 2018?

Not today, Adam. As we finalize the work in 2017 and develop our targets for 2018 that is when I would like to lay those numbers out.

Got it, okay. Can you help us understand or put a frame of reference around sort of the bridge from negative $13 million of EBITDA to some sort of profitability, how much of that is from the oven rebuilds and improved performance and how much of that is from the (inaudible) contract reset?

I would say it will be a combination of three things. One, we do anticipate as we have over half the ovens rebuilt in the plant at that point that production levels should rebound from the 900,000 tons. Second, we do continue to be focused on cost discipline. One of the things mentioned in the 2017 guidance is we are incorporating the lessons learned in from our 2016 rebuilds back to the 2015 rebuilds. We are going to spend about $5 million in that regard associated with actually making those changes in the 2015 rebuilds in their entirely in 2017, that would not carry over into 2018. That is a second swing factor and then the third swing factor would be the middle contract which comes back to developing budget-related O&M reimbursement if the facility contracted volume levels.

Got it. Okay. Thank you. That's very helpful. I have another question if you are willing to take it.

Sure.

I noticed in the year-over-year bridge -- I notice in the year-over-year bridge or EBITDA performance, 2016 was a little bit lower than 2015 due in part to $3.6 million or $3.5 million of reduced met yield profitability.

Fay, do you want to handle that one?

Yes, so you are bridging 2015 to 2016?

Yeah.

And so coal prices-- that is just a function of coal prices. And when we put out our guidance in 2015 we had anticipated that we would achieve lower -- benefit from the -- the benefit from the coal to coke yield would be lower based on coal pricing in 2015 as compared to coal pricing in 2016.

In your 2017 budget are you budgeting for getting all that $3.5 million or $3.6 million back or what is your assumption on coal pricing in 2017?

Correct. So as coal prices have increased our 2017 guidance includes the benefit of those -- of the coke yields of those higher prices.

We think coal prices should be up $18. They are up $18 year-over-year and I think on chart -- let me look at the coal profitability chart. But, the benefit of the higher coal price has been factored into the guidance for 2017.

Correct.

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

Good morning, everybody. Takes for taking my question.

Good morning.

I had a little bit more on Indiana Harbor. Looking at the trajectory of where production has gone over the last couple quarters and then the $900,000 for 2017, I'm just curious how you are thinking about a ramp back up to get to that level from the 200,000 in December. Should we assume that Q4 was the low point and ran from here or more back end loaded towards the end of 2017?

No, Q4 is the low point because if you look at the harbor Q4 results we had all of the ovens out pretty much throughout that quarter in addition to obviously the performance of the ovens that had been rebuilt, they pretty much stayed the same. So, what we anticipate in 2017 is a couple of things. One, we are obviously going to be doing more ovens but our game plan at this point, is do them more (inaudible) through the year rather than in one quarter. You would be seeing it in each quarter but the fourth quarter of 2016 would be a low point.

Okay, got it. And then for the $13 million EBITDA loss guidance for 2017 there, I didn't see the actual for 2016. Was that in the presentation?

Fay? It was, actually.

Okay.

So we say it is $4.2 million lower than the prior year.

Favorable.

Favorable versus the prior year. A loss of around $3 million.

Okay. And then last one, I think you said that the Haverhill turbine came back up in mid-January. Should we assume any Q1 impact or no?

I would say small but I think the impact is largely behind us at this point.

Okay. Great, thanks.

Thanks.

Your next question comes from the line of Lucas Pipes with FBR & Co. Your line is open.

Good morning again. I have a higher level question. On slide 15 you show the Domestic Coke production. And it shows a modest decline going back to 2013-2014 when the range excluding Indiana Harbor appeared closer to 3.2 million tons -- and including Indiana Harbor I thought-- if historically SunCoke on a consolidated basis being a producer of roughly 4.3 million tons or so. I was wondering what accounts for this decline? There seems to be much healthier sentiment surrounding the steel market. What would it take to get back to 3.2 million tons and hopefully on a consolidated basis pushing that 4.3? Thank you.

As Fay outlined in the chart in 2016 we did turn down for AK Steel of about-- 75,000 tons the (inaudible) were adjusted to make us whole. Our guidance for 2017 has been done on a carryover basis. We assumed a similar arrangement would be made. I would say with respect to AK production-- the Ashland facility remains idle. When you look at the sentiment around respectively, what might happen with our customers, it's true. I mean there is certainly a better overall sentiment with respect to the outlook for steel demand and production therefore respectively, but if you look at the actual operating rates, Lucas, today, I mean they're pretty much similar to what we've been running at in the third and fourth quarter of 2016 and we've developed our guidance basically assuming that we're to continue.

Got it. Okay. And I mean SunCoke capacity has been coming out of the market over the last couple years. How would you assess SunCoke's opportunity to take for the market share?

So, capacity has been coming out. One of the things we are going to watch very carefully through the year and not just 2017 but into 2018 is what happens a aggregate steel demand and operating rates in the blast furnaces themselves. As I look at --as I look at the environment today if you say what is your ability to improve share or take share, if operating rates stay where they are today obviously we have to see what happens with other capacity. But, we feel good about our contract renewals that come up in 2020 at both the Jewell and Haverhill facility. But I would say your opportunity to grow share from here if operating rates stay where they are is modest. If we see an uptick in operating rates from things like infrastructure builds, not only make us even more optimistic about the contract renewals but we do have as you can see on the chart, we have 100,000 to 200,000 tons of additional capacity we can bring online from the facilities that you see on page 15. We would be very pleased to the be able to ramp our plants back up.

All right thank you very much.

You're welcome.

(Operator Instructions). Your next question comes from Phil Gibbs with KeyBanc. Your line is open.

Good morning, Fritz, how are you?

Good, Phil, how about you?

Doing well. A question on the coal prices up $18 a ton year-over-year in 2017, is that the implied input cost upside for your Coke business which is largely tolling or the implied coal pricing in your coal sales?

On the tolling side. We don't sell any coal any longer.

Okay. And the rebuilds at Indiana Harbor did any of that have to do with ArcelorMittal's decision to restart one of the blast furnaces in the fall or did you have that in the plans prior to that?

It has been the plan. We -- we will be encouraged if we see additional blast furnace production come on stream. But the rebuilt plant has really been something we have been focused on over the last several years and the 53 that we have outlined for 2017-- has been there for us for some time.

Thanks very much.

You're welcome.

We have no further questions at this time. I turn the call back over to the presenters.

Thank you. Thanks for everybody joining. I must say it is the first time I have taken a phone call on the iphone 7 so that was an interesting question. But appreciate everybody from SunCoke both analysts and investors joining us for the call and for your investment in SunCoke. Thank you.

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