SunCoke Energy Inc (SXC) 2017 Q2 法說會逐字稿

Good morning. My name is Tischan, and I will be your conference operator today. At this time, I would like to welcome everyone to the SunCoke Energy, SXC, Second Quarter 2017 Earnings Conference Call. (Operator Instructions) Thank you.

I would now like to turn the call over to Kyle Bland, Director of Finance and Investor Relations. The floor is yours.

Thanks, Tischan. Good morning, and thank you for joining us to discus SunCoke Energy's second quarter 2017 earnings. With me today 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 there 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 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.

With that, I'll turn it over to Fritz.

Thanks, Kyle, and thank you all for joining the call this morning. Before I hand it over to Fay to review the results in detail, I want to highlight a few things from the second quarter. First, our assets continue to perform in line with expectations and did so again here in the second quarter despite working through a scheduled major outage here at Granite City plant. And we've also commenced in the quarter our 2017 rebuild campaign in Indiana Harbor.

On the Indiana Harbor rebuild project, we're off to a good start in the -- on the 2017 campaign. We currently have 12 ovens already completed back in service and another 31 ovens at various stages in the process, but out of service today. In total -- first before I get to that, in parallel, we are -- also commenced in the second quarter implementing improvement in the 48 2015 rebuild ovens to incorporate lessons learned to-date, and we expect all of those ovens, including the rebuild ovens, to be completed by the end of November.

Just to give you a sense of what's happening at the plant and that really commenced in the second quarter, the 53 -- we had intended this year to rebuild 53 ovens. Given the encouraging results we've seen and our ability to execute, we've increased that slightly from 53 to 58 ovens. With buffer ovens, which we take offline -- when we rebuild an oven, we take the adjoining ovens offline in the block. That would include -- we would take our 58 ovens out of service to rebuild 75. And then, we're also repairing 48 additional ovens in the year. So we're impacting production on almost 50% of the ovens in the plant in 2017, and a significant amount of that work has begun in earnest in the second quarter. We're encouraged, but it has had an effect, and you'll see the effect once they go through the number on production relative to Indiana Harbor's production in the quarter.

Beyond Indiana Harbor and looking at the Coal Logistics business, we see increased volume year-over-year in the Coal Logistics business, primarily at Convent, which delivered over 1.8 million tons of inbound volume throughout the quarter. We successfully completed the refinancing of our capital structure at SXCP by extending both the revolving credit facilities at SXCP and SXC in the quarter, and we priced a new 8-year senior note offering at the partnership. This provides the business with ample flexibility to execute our growth and capital allocation priorities respectively.

From a capital allocation perspective, we have repurchased 1.6 million SXCP units for approximately $27 million to date, and we'll continue to prioritize the capital allocation decisions to earn the highest returns for SXC shareholders. And lastly, with half of 2017 in the books, we're well positioned to achieve our fiscal year 2017 adjusted EBITDA target of between $220 million and $235 million.

Turning to Slide 4. In the quarter, as I mentioned, we did successfully refinance the capital structure at the partnership. We completed an 8-year $630 million unsecured note offering and used the proceeds to reduce our revolver borrowings and repay all of the partnership's term loan and senior notes tranche due in 2020. Both the revolving credit facilities -- both revolving credit facilities at SXC and SXCP were restructured. In total, $385 million of commitments from our banking group, $100 million at SXC and $285 million at SXCP.

In total, we increased the weighted average maturity of our debt structure by over 4 years to nearly 7 years remaining on the new debt. And importantly, our new structure provides us with the flexibility to execute our growth, operating and capital allocation priorities going forward.

Now I'll turn it over to Fay to review our second quarter performance.

Thank you, Fritz, and good morning, everyone. Turning to Slide 5. Quarterly EPS loss of $0.38 per share was down $0.31 versus the prior-year period. The year-over-year impact of debt extinguishment on EPS is $0.24. Last year, we had a small gain from our buyback activities. And this year, we had a $20.2 million debt extinguishment cost related to the refinancing activities completed in the quarter.

From an adjusted EBITDA perspective, we finished the second quarter in line with expectations at $47.5 million, up $1 million versus 2016, as higher coal logistics volumes were offset by the planned outage at Granite City and the impact of oven rebuilds at Indiana Harbor.

Turning to Slide 6 and taking a look at our adjusted EBITDA bridge, Indiana Harbor's second quarter adjusted EBITDA loss of $2.7 million was down $4.7 million versus the prior-year period, reflecting continued degradation of the nonbuilt ovens as well as lower volumes and higher operating and maintenance spend related to the commencement of our 2017 oven rebuild campaign. As a note, there were no oven rebuilds in the second quarter of 2016.

After 6 months, Indiana Harbor remains on track to achieve its full year 2017 adjusted EBITDA guidance target. Excluding Indiana Harbor, the remainder of the coke business on balance performed as expected with various pluses and minuses across the fleet. Notably, the plant's major outage at Granite City, which lowered energy sales by $2.5 million and also increased O&M year-over-year was offset by favorable contracted coal prices at Jewell and increased technology and licensing fees at Brazil coke.

Our Coal Logistics business was up $4.6 million, due primarily to the increased volumes at CMT, which continued to benefit from attractive coal export market dynamics. And when adding the $1.3 million as favorable results in our corporate and other segments, the second quarter finished with $47.5 million in adjusted EBITDA.

Looking at Domestic Coke. First quarter adjusted EBITDA per ton was $46 on 950,000 tons of production. These results reflect the impact of lower production and higher cost at Indiana Harbor and the major planned outage at Granite City.

Just for some contest and depending on each plants configuration, we have annual boiler outages and biannual turbine and FGD outages at our facilities. These outages, which are either classified as major or minor depending on the scope of work, result in incremental O&M spend and reduce coke and energy production.

At Granite City, in addition to our normal boiler outage, we had a major FGD outage that lasted 28 days. This resulted in decreased energy-related revenue and higher cost in the quarter. This work was anticipated as part of our 2017 guidance, and we completed the work in line with our expectation.

At Indiana Harbor, as Fritz mentioned, the 2017 rebuild campaign is underway and off to a good start. We remain encouraged by the sustained operating performance from our 2015 and 2016 oven rebuilds. And with the progress and performance to date, we expect to complete an additional 5 ovens in 2017, pushing the total to 58 for this year's campaign. We expect to provide a performance update on the 2017 project as well as review our plan for 2018 rebuilds during our third quarter earnings call.

Looking at Slide 8. Second quarter adjusted EBITDA in our logistics segment was up $10 million -- was $10 million, up $4.6 million versus 2016. Volumes in the quarter were up year-over-year, with approximately 3.3 million tons at our domestic logistics facilities and 1.8 million tons at Convent. On the domestic coal logistics side, we continue to see improvement year-over-year driven by strong cost control and higher volume. At Convent, we continue to see increased throughput driven by improved export economics.

In the quarter, CMT earned $7.2 million of adjusted EBITDA, which included nearly 200,000 tons of merchant volumes. These results do not include $5.5 million of deferred revenue recognized during the quarter. We recently secured a small new piece of business with an aggregates customer at Convent. The customer will be leveraging our recently added barge unloading equipment, and we expect to begin shipments here in the third quarter.

Looking at liquidity in Q2. As you could see, we ended the quarter with a consolidated cash balance of $137 million, which reflects the impact of our debt refinancing as well as $25 million of SXCP unit purchases. In total, we have $390 million of combined liquidity at the end of the quarter and expect to use approximately $100 million of the SXCP revolver to repay the CMT's seller-financing in August.

Looking at our guidance on Slide 10. As mentioned, our 2017 adjusted EBITDA guidance remains unchanged at $220 million to $235 million. And while we have added incremental oven rebuilds at Indiana Harbor, we expect to rebalance our priorities to stay within our consolidated CapEx guidance of $80 million for 2017.

Our operating cash flow and cash tax guidance have been refined to reflect the impact of our debt refinancing transaction completed this quarter. The change is due entirely to the timing of interest payments of the new 2025 notes versus the old 2020 notes. We repaid the 2020 notes and the related interest in May. And interest on the 2025 notes is paid in June and December.

Looking at the next slide. At SXC, we began executing against our SXC unit repurchase authorization and have acquired 1.6 million units to date with $27 million in cash, increasing our ownership of SXCP to over 57%. We continue to evaluate the most attractive uses of cash for SXC shareholders and believe that purchasing SXCP units in the open market is the best use of SunCoke's cash as it provides highly accretive risk-adjusted returns through its cash yield and tax synergies and as an asset we know and operate.

With this, we received board authorization for an additional $50 million of SXC unit purchases, pushing the total remaining authorization outstanding to $73 million. We expect to continue to acquire units in the open market, but will remain price-disciplined. And in addition to managing our $80 million CapEx plan, we will continue the pursuit of small organic projects or acquisitions along the steel and logistics value chain in order to expand our capabilities and earnings power in an accretive manner for shareholders.

Thanks, Fay. And wrapping it up on Slide 12. We, in 2017, remain focused on operational execution to maximize the capabilities and performance of our coke and logistics assets. At Indiana Harbor specifically, we continue to maintain a measured pace on our 2017 rebuild campaign in order to maximize long-term sustainable performance and profitability of the facility.

On capital allocation, we continue to prioritize capital deployment in the most accretive manner for SXC shareholders, and we've gotten a good start with respect to our SXCP unit repurchase program.

And finally, we will again be focused on delivering on our commitments to shareholders and achieving our full year financial targets and remain on track to do so after a strong first -- strong start in the first half of 2017.

With that, we want to open it up for questions.

(Operator Instructions) And your first question does come from the line of Adam Gui with Mangrove.

It's Nathaniel, on for Adam, again. It sounds like you have increased your rebuilding activity at Indiana Harbor. Could you help us understand what the incremental expense is associated with that? And how much of that goes through CapEx as opposed to how much goes through your income statement?

Sure, Nathaniel. So first thing I would say is that we've been encouraged by the beginning of our 2017 program as well as by the performance of the 2016 ovens that were rebuild. With that, we decided to expand the scope in 2017 from 53 to 58. That would increase capital spending slightly -- excuse me, it will increase capital spending at the Harbor, but obviously, as Fay mentioned, will -- we intend to stay within our $80 million approximate estimate for capital spending across the company. With respect to the capital associated with the additional 5, the way you should think about it is you've got about $400,000 of capital and $100,000 is expensed per oven. That's a good general rule, or $500,000 in total. The ovens can differ slightly based upon their level of degradation, but on average, that's about what it is.

Do you also incur incremental expense associated with taking the adjacent ovens out of service?

That's -- it obviously affects production, but I wouldn't call it expense, but it does affect production for sure, because you do have -- we've -- what we've been doing -- and one of the batteries has been moving down. So in this particular case, every time we take a block of ovens out of service, you do take 2 other ovens out of production that surround that block. In the particular case that I'm talking about here, we've had very low levels of production in that particular battery. So -- but I think in general, as I mentioned early on, when we take a block of ovens out, there's always 2 ovens around it that come down at the same time. Not expense, but it does affect production and profitability.

Right. Okay. So by moving your rebuild activity from 53 to 58 and also adding in the 48 additional ovens that you're doing additional refurbishment on, how much does production get affected in 2017 and -- relative to your original production thoughts? And then how much is the EBITDA affected?

So first thing is, as Fay mentioned, we do expect to be able to operate the plant in line with our targets for this year of about $13 million adjusted EBITDA loss. Production will be approximately 850,000 tons. We came into the year, we thought it could be close to 900,000 tons. What we saw in the first quarter itself was because of the work that carried over from '16 into the first quarter of '17, we saw lower production in the first quarter, but through good cost control at the plant -- away -- I mean, one, we've been executing the oven rebuild program aggressively in line with our targets, but we've had good cost control at the plant. We've been able to make up the loss production and stay within our targets for EBITDA.

(Operator Instructions) Your next question comes from the line of Lucas Pipes with FBR & Co.

I also wanted to ask a few questions on oven rebuilds. Could you just give us a reminder, and you may have mentioned this earlier, in terms of how many more ovens in total would have to be rebuilt? And do you still intend to rebuild -- do you intend to rebuild all of the ovens at Indiana Harbor? And at what time approximately would you say that Indiana Harbor process completed?

So there's 268 ovens at Indiana Harbor. When we complete the work this year, we will have rebuilt 144 of them. So we'll be at 54% of the plant. We haven't articulated our goals for next year. As Fay mentioned in her comments, we will do that at the conclusion of the third quarter when we can update investors on both the performance of the 2017 rebuilds, but also what our game plan in for 2018. But you can expect another substantive investment next year in oven rebuilds at Indiana Harbor. With respect to profitability, we do anticipate from an adjusted EBITDA perspective that we would be profitable next year, with both the continued improved performance of oven rebuilds as well as the contract reset, which affects -- which is effective 1/1/18. And our goal is through that rebuild activity and continued aggressive cost control at the plant is to have a long-term sustainable level of profitability and cash flow from the plant respectively. Beyond that, I'm going to reserve my comments regarding our future plans till we get to the third quarter.

Got it. Okay. That's helpful. Maybe a follow-up question on Granite City. There's been some talking in the industry regarding the U.S. Steel plant there, and I wondered kind of what's the current status. Where is Granite City currently shipping? And have you been contacted in regards to maybe go back to the original arrangement there regarding the coke supply from that oven? And then thirdly, what would be the upside in terms of Granite City? I assume it's not running at full capacity right now.

Well, first thing I would say is that our Granite City plant, we obviously had the major outage in the second quarter, which was planned. But our Granite City plant has been shipping its coke to another one of U.S. Steel's blast furnaces in that last year, continues this year. The plant is expected to operate in accordance with its normal contract term. U.S. Steel was asked on their call about what might happen to the Granite City plant, you would have seen the comments about that. We would be encouraged if they were to bring back 1 or more -- 1 or 2 of those blast furnaces. But we don't make that call, they do. But I would say -- in terms of upside of Granite City -- I mean, the plant generally operates at or around contract maximum. So we have been able to run our plants above contract maximum from time to time in the future -- excuse me, in the past based upon demand, but I wouldn't necessarily view that as a significant upside profitability. It would just -- it would simply be -- we'd like to be able to run the plant full out. But today, we run it pretty much contract max anyway.

And I currently don't see any further questions over the phone. I'll turn the call back over to the presenters.

Okay. Again, thank you very much for both your interest and your investment in SunCoke Energy. Thank you.

And this concludes today's conference call. You may now disconnect.