SunCoke Energy Inc (SXC) 2017 Q3 法說會逐字稿

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

Jonathan Lock, you may begin your conference.

Thanks, Chris. Good morning, everyone, and thank you for joining us to discuss SunCoke Energy's Third Quarter 2017 Earnings. With me are Fritz Henderson, our Chairman, President and Chief Executive Officer; and Fay West, Senior Vice President and Chief Financial Officer.

Following the prepared remarks, we will open the line for Q&A. This conference call is being webcast live on the Investor Relations section of our website, and a replay will be available on the site 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.

As we do every quarter, let me remind you that the various remarks we make on this call regarding future expectations constitute forward-looking statements. Cautionary language regarding the forward-looking statements and our SEC filings apply to the remarks we make today. These documents are available on our website as are reconciliations to any non-GAAP financial measures discussed on today's call.

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

Thanks, Jonathan, and let me add my thanks to all of you for joining us this morning. Before Fay takes you through the third quarter results in detail, I want to talk about SunCoke's progress through the first 9 months of the year and our progress against the goals for the year. We normally wind up our presentation by looking at our progress relative to our initiatives, we're changing up this morning and we're going to do that right up-front. Position to helping you, our investors, understand the priority, but I think also think about this chart as means of holding yourself accountable to the results. To that end, we're pleased with the company's performance against these initiatives through the third quarter of this year.

We've been operating our plants safely and efficiently while controlling cost to maximize profitability. We'll talk about new business at Convent in more detail prior to Q&A, I'm happy to report early wins in the organic growth front. We continue to expand and diversify our logistics offering and remain committed to increasing transloading volumes across our fleets. We're successfully executing our Indiana Harbor rebuild initiative and are well positioned to report full year Indiana Harbor results in line with our expectations for the year. We have some additional details on the '17 progress and performance later in the slide deck as well as some insights relative to 2018, so I'll hold my remarks until then.

During the quarter, we also purchased additional SXCP units, deploying capital towards the opportunity, which are confident creates the most value for SXC shareholders. And finally, as a result of our operating and financial performance year-to-date, we believe we're well positioned to deliver full year results at the top end of our adjusted EBITDA guidance range.

Now turning to Slide 4 and looking specifically at the third quarter. This was, in fact, the best operating quarter we've had in 3 years after adjusting for the timing impact related to Convent's recognition to deferred revenue, (inaudible) occurs, actually does occur in the fourth quarter each year.

Financially, we delivered strong adjusted EBITDA results. Operationally, we performed well across our facilities, including the oven rebuild campaign at the Harbor. The expansion of our product and customer mix at Convent continues. And once again, as we look through the full year, and based upon our performance to date, we think we're well positioned to achieve adjusted EBITDA top end of our guidance range for the year, in the range originally was $220 million to $235 million.

And now I'll turn it over to Fay to review our results.

Thank you, Fritz, and good morning, everyone. Turning to Slide 5. Our third quarter net income attributable to SXC was $11.6 million or $0.18 per share. EPS this quarter was up from the $0.10 in the prior year period despite the impact of higher interest expense and the absence of debt extinguishment gains.

As a reminder, we completed a comprehensive refinancing of SXCP's capital structure in May of this year, pushing debt maturities outside of many of our contract renewals.

Q3 adjusted EBITDA of $62.1 million was up 26% over the prior year. The performance in the third quarter was driven by strong operating performance across both our coke and our logistics businesses, which we have detailed in our adjusted EBITDA bridge on the next slide.

Our coke business performed well this quarter, the impact of the Indiana Harbor oven rebuild campaign were more than offset by strong operating results across the remaining coke plants.

Our domestic coke-making facilities benefited from favorably yield performance and lower allocated central cost, which were driven by our ongoing cost-reduction efforts. The timing of outage cost also favorably influenced our quarterly comparisons.

Coke results also benefited from incremental technology and licensing fees, resulting from our Q4 2016 result coke transaction, in which we announced ArcelorMittal's redemption of our preferred equity interest in that facility. As a result of the transaction, we expect to earn an incremental $5.1 million of technology and licensing fees annually through 2023.

Note that last year, we received the full $5.1 million benefit in the fourth quarter at the time of the transaction, where we began recognizing this ratably in 2017.

Our coal logistics business was up $5.3 million or 73% due to increased volumes at CMT, which continued to benefit from attractive coal export market dynamics. And when adding favorable results in corporate and other segments, the third quarter finished at $62.1 million in adjusted EBITDA. Looking at domestic coke on the next slide. Third quarter adjusted EBITDA per ton was up significantly to $57 per ton, which you -- as you can see from this chart is the highest it's been in recent history. These results were driven by strong yield gains across the fleet, cost controls both at the plant and corporate level and the benefit from a portion of our 2017 outage cost falling outside of the third quarter.

As you may recall, we had a scheduled outage at our Granite City facility in Q2, and we are currently executing its scheduled outage at our Middletown facility here in Q4.

While the third quarter benefited from the timing of outages, we expect our total full year outage cost to be in line with expectations and flat through 2016. Through the 3 quarters, our coke segment remains well positioned to deliver adjusted EBITDA per ton at the high-end of our original guidance range of $46 to $49.

Turning to Indiana Harbor results, on Slide 8. Indiana Harbor results remain in line with expectations, and we are on track to report full year adjusted EBITDA and production in line with guidance. Through the third quarter, we successfully rebuilt 47 of the 58 total ovens within our 2017 rebuild campaign, of which 31 were operating at full production level by the end of Q3. The remaining 16 ovens are being brought back online throughout October. We are pleased with the progress of our 2017 rebuild campaign.

This year's campaign remains on budget and on schedule, with the remaining 11 rebuilds on track to be completed by the end of November. With the completion of this year's campaign, we will have rebuilt more than half of the facility. Rebuilt ovens are performing well, and we are seeing an increased charge weights and improved coking time, both of which contribute to higher production and a more stable operating environment.

While Fritz will have more to say about our IHO outlook in a few slides, the oven rebuilds we've completed over the last few years have positioned us to report significantly improved adjusted EBITDA results in 2018.

Looking at coal logistics, on Slide 9. Our logistics business generated $12.6 million of adjusted EBITDA during the third quarter, up 26% sequentially and 73% year-on-year. We've seen stabilization of coal transloading markets here in the U.S. and export margins remain healthy with a current API2 benchmark covering around $90 per ton. In total, logistics volume in the quarter were up 18% versus Q3 2016. Throughput at our KRT facility was largely in line sequentially and comparable with Q3 2016.

Volumes were impacted by mild summer weather, which dampens the thermal coal usage. However, CMT volumes more than doubled versus the prior year period to 1.8 million tons as our customers benefited from strong export market dynamics.

In total, CMT contributed $9.7 million to Q3 adjusted EBITDA, not including the $5.7 million of deferred revenue related to take or pay volume. Year-to-date, CMT deferred revenue totaled $14.5 million.

As a reminder, we recognized deferred revenue generated at CMT and take-or-pay ton when it is recognized as GAAP revenue, which occurs in the fourth quarter of each year.

Looking at liquidity on the next slide. In the quarter, strong operating performance coupled with working capital impacts, which also include the timing of interest payments, contributed to $74 million of operating cash flow. As we discussed in our Q2 call and as part of our debt refinancing activities, we repaid the CMT seller-financing in August using a combination of revolver borrowing and cash on hand. CapEx of $27 million during the quarter included $7 million related to the Granite City gas-sharing project, which remains in line with our full year guidance of $25 billion (sic) [$25 million]. It also includes $8 million of Indiana Harbor oven rebuild work, which also remains in line with our full year guidance of $20 million to $25 million. Additionally, ongoing CapEx is also in line with expectations. All in all, we ended with a cash balance of approximately $150 million and strong liquidity of more than $300 million.

Viewing our full year target -- full year guidance targets on Slide 11. As mentioned, we are well positioned to deliver full year 2017 adjusted EBITDA towards the top end of our guidance range of $220 million to $235 million. Based on results through the first 3 quarters, you can see from this chart that we expect a solid quarter in Q4. Q4 results will include the recognition of deferred revenue at CMT.

Looking at our capital priorities on Slide 12. During the quarter, we purchased 500,000 SXCP units for approximately $9 million. Since we began deploying cash towards SXCP unit purchases in May, we purchased 2.1 million total units, which we expect will generate more than $5 million of additional cash flow annually. We believe that purchasing SXCP units in the open market is the best use of SunCoke's cash as it provides a highly attractive risk-adjusted return and is an asset that we know and operate. We expect to acquire additional units in the open market in Q4 and will remain price disciplined through that process.

Additionally, we are focused on efficiently managing our $80 million of CapEx including both the Granite City gas-sharing project as well as our Indiana Harbor oven rebuild.

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

Thanks, Fay. Turning to the next slide, 13, regarding Convent. We acquired the Convent Marine Terminal in late 2015. A large part of our strategic rationale was that we were acquiring the strategically located facility with unique capabilities. And importantly, it was also sizable opportunity to grow volumes and earnings. One of our strategic priorities since that acquisition has been fund the services we offer, the products we transload and the customers we serve through our Convent Marine Terminal. To that end, our business development team has been working very hard to bring new volumes to the terminal. Today, we have few new wins we'd like to share, which bodes to our original acquisition thesis.

In the third quarter, we took our first delivery of aggregate or crushed stone from an oceangoing vessel in the ground storage under a multiyear contract with firm use commitments that we first mentioned in our second quarter earnings call.

As you may know, Convent is located in the heart of chemical plant development linked to the shale gas boom. Construction activity in the quarter between the New Orleans and Baton Rouge is accelerating. In Convent, our transloads an important raw material for infrastructure development. Another product we have been targeting is petcoke. We believe that the infrastructure at Convent provides a number of unique advantages to refiners for the shipment of petcoke, and they have been working alongside our railroad partners to win new business. We recently successfully unloaded the first test train of petcoke from 2 separate refinery customers at Convent and are excited about additional petcoke volumes in the fourth quarter and beyond.

Together, we expect these new business wins to contribute between $1 million to $2 million to our logistics adjusted EBITDA in 2017. And while these wins represent a nice start in effective down payment toward our goal to generate $5 million to $10 million of incremental EBITDA within 2 years of Convent, I believe there even more -- more important signals to the market that we're ready, willing and, most importantly, able to expand our footprint in the lower Mississippi.

So now on next Chart 14, looking ahead, we're excited about the additional growth prospects at Convent. In the near term, we're targeting further coal export volumes, additional refinery partners and higher volumes with petcoke.

Another potential dry-bulk material, similar to our new aggregates business. In addition, we have a small toehold in this liquids market and we'll look to leverage our existing infrastructure on land we have for the potential expansion of site to grow this business.

Longer term, we're busy adding barge and loading capabilities in order to expand our reach into new and existing product categories, provides multiple options for our customers. This capability will make an already world-class operation at Convent into what we believe is the most attractive terminal -- one of the most attractive terminals, excuse me, on the river for both bulk and liquid shipments.

We're encouraged by the progress we've made and look forward to updating you on more wins in future calls.

Switching gears, now I'd like to turn my attention to the Indiana Harbor on Slide 16. Fay touched on it already with respect to the results for the quarter. On Slide 16, as you can see in this chart, Indiana Harbor is made up of 4 equal sets of oven groupings known as batteries. A, B, C and D, each with 67 ovens. It equates to 268 ovens throughout the facility. We divide the plant into 2 distinct sides: the A/B side, with 1 set of mechanical ovens and the C/D side, with another set of mechanical ovens. We began this multiyear turnaround effort focusing first on the C/D side of the facility. We started in 2015 with an initial set of 48 rebuilt oven and based on the learning from these rebuilds, we designed a process which we feel is robust, cost-effective and scalable across the facility. Based on our learnings and experience, we've recently increased the scope of this year's campaign to cover an even larger number of rebuilds. 58 ovens in total, 5 more than originally anticipated at the beginning of the year, something we will review with in the second quarter of this year.

As Fay previously mentioned, we remain on schedule and on budget with our rebuild work through the third quarter, and we'll have rebuilt 144 total ovens or more than half of facility by year-end, total includes the entire C/D side of the facility.

To date, the results of these ovens rebuilds have been encouraging, and we feel confident in our rebuild designs and implementation techniques. As we've detailed in the past, nonrebuild ovens continue to degrade over time, often at an accelerating rate. This comprehensive rebuild campaign stops the degradation and returns rebuild ovens back to standard performance on the 2 most critical measures: charge weight and coking time.

As a reminder, charge weight is the volume of coal loaded into each oven and then coking time is the time the oven takes to convert that coal into coke. When a coke plant is operating well, the charge weights are consistent and cycle times are both stable, and it's also consistent.

Therefore, production is relatively constant. In measuring IHO's oven performance, we focus on 5 cycle windows at a time or approximately 10 days of performance, both before and after rebuilds are completed.

Looking back at our 2017 and prior campaigns, we've experienced a significant improvement on both charge weight and coking times in rebuilt ovens, which has yield production increases of over 50% on the rebuilt ovens versus the previous degraded ovens. Given these campaign -- given these results, we're planning to execute ovens rebuilds across all 67 ovens in the A battery in 2018.

2018 oven campaign will be our largest undertaking since launching the rebuild initiative in late '15. But we have the knowledge and the resources to execute on our plan. Based on our experiences and understanding of the A battery conditions, we believe that we can execute these rebuilds at a comfortable cost of this year's target of approximately $500,000 per ovens.

As it's been the case this year, approximately 80% of our estimated 2018 spend will be capital and the remaining 20% (inaudible) spend.

Turning to the next chart. Looking further into our Indiana Harbor outlook on Slide 17, once the 67 ovens from our 2018 campaign are completed, we will have addressed 75% of the plant in Indiana Harbor, threefold of its battery, A, C and D will be entirely rebuilt and fully operational. The last oven battery, D battery, is the most operationally challenged battery of the plant and has been. The healing and sowing of the facility has had a larger relative impact on D batteries compared to our other 3 batteries, and it's contributed to its historical operating challenges.

With that said, we did rebuild 10 D battery ovens in 2016 and just finished up in 2017, 5 within that time and their results to date have met our expectations as charge weights and coking times have returned performance. Consistent with our approach over the last few years, we intend to monitor the performance of the 10 B battery ovens rebuilds as low from remaining nonrebuilt oven in D battery.

As we progress through 2018, we will formulate a plan based on the economic return of rebuilding all, none or a portion of the remaining 57 ovens. To the expected economic returns to put further rebuilds, we anticipate the remaining work would likely cost more though. Our estimate is approximately $750,000 per oven, based upon the conditions we see today in the B battery.

As we are doing this quarter, we intend to provide regular updates on the progress for the 2017 rebuild campaign, and we'll also share additional information on our B-battery rebuild assessment as it comes to (inaudible).

Turning now to our Indiana Harbor performance outlook for 2018. From an adjusted EBITDA perspective, we expect Indiana Harbor will return to profitability in 2018, driven by the full year benefit of 2017 oven rebuild campaign and including new ovens we've rebuilt in 2015 and '16. Including the impact from our 2018 rebuild campaign in the A battery, which I just covered, we anticipate full year production of between 900,000, 950,000 tons at the plant.

In 2017, Indiana Harbor also returned to a budgeted O&M cost-sharing mechanism. For the last 3 years, the plant has operated with a fixed O&M reimbursement rate per ton, on which SunCoke has been under recovery.

Returning to a budgeted O&M process, if the plant's 1.22 million ton nameplate capacity level.

For 2018 and the duration of the contract will have a benefit on the plant's overall profitability. Thus when combined with the improved performance of the C and D battery ovens, which will have been entirely rebuilt entering next year.

We're still working through the specific details of the O&M reset as well as the overall budget in the Indiana Harbor with our customer ArcelorMittal, and therefore we do not have a specific '18 -- 2018 financial target to provide at this time. We do expect to provide full 2018 guidance for the Harbor; along with all of our other plants in the company in the normal course of our fourth quarter 2017 earnings call.

Again, we're committed to making this project a success for ourselves, for our customers, our shareholders and the surrounding community.

As part of that, we will continue to update investors on a regular basis going forward.

Finally, I'd to point out. Once the 2018 campaign is completed, we expect that the 211 total rebuild ovens should have the capability to produce between 950,000 and 975,000 tons going forward.

Wrapping up before opening the call for Q&A. As you've heard this morning, we've made progress against our commitments for 2017 and are well positioned to deliver strong full year financial results on top of our guidance range.

Now that the third quarter is the books, our focus shifts to closing up the year strongly. Let's take a moment here to acknowledge our people, our success to the direct function to the efforts of 1,200 men and women here at the SunCoke family. So I'd like to take this opportunity to thank all the team members for their efforts. We're proud of the progress we've made, moving our business model through a tough market in 2000 -- late 2015 and 2016 and coming up stronger and more resilient as a result. We're encouraged by what we've achieved thus far and because of our collective efforts and the company is well positioned for longer term success.

With that, I'd like to open up the call for questions.

(Operator Instructions) Your first question comes from Lee McMillan with Clarksons Platou.

Thanks for the helpful update on Indiana Harbor. I'm sorry, I'm not sure I caught everything though. I think I heard you say that the remaining D batteries would be $700,000 an oven instead of $500,000. Is that right?

$750,000, that's our estimate to date. I mean, the level of degradation that we've seen would suggest there's certainly going to be a higher cost than our experience to date on the other batteries.

Okay. So it's -- this state of the batteries themselves, not some sort of like escalating external cost?

No, no. It's just the -- much more extensive level of repair.

Okay. Okay. Understood. Fay?

I was just going to say, the 2018 rebuilds are going to be at the same cost level as what we would experience here in 2017. So just about $500,000, that's for 2018 and I just wanted to (inaudible).

Okay. Yes, I got that. And then the remaining D batteries, if you do them, okay. And then a question on the cokemaking side. The -- you're still making customers seem to have an unusually high amount of maintenance planned during the fourth quarter. I was just curious if you've received any sort of indication that maybe their requirements would be lower or if there might be any sort of impact on your fourth quarter?

No. Not at this point, Lee.

(Operator Instructions) Your next question comes from Lucas Pipes of FBR & Company.

Ted Beachley here, for Lucas Pipes. So my first question, in 2018, can you remind us of what the build schedule looked like for battery A? I mean, like is it going to be front-loaded or lumpy in anyway? And secondly, sorry go ahead.

Go ahead, I'm sorry.

I was just going to say secondly, and this is kind of a different question. If it is economical, when could we expect the rebuild of battery B to be in full force? Like, do we have to wait for battery A unit free decide in first quarter '18 that we were going to build out all of battery B?

So one step at a time. We would expect to commence similar to what we did this year, actually. We would expect to commence depending on whether the 2018 activities in March of next year, where we would likely start the cool down. We're not -- we don't plan, we didn't in 2000 -- tried not to in 2017 do any work in January, February. But we've barely ended up actually finishing the 2016 campaign this year. So we're trying to leave January and February without activities. We commenced the work in March, and then we would complete the work by end of November. And that's pretty similar to what we've done this year. And then you would do it progressively through the year. So now, your second question. We -- we're not planning to do any more than the 67 in 2018. That frankly, we've got our hands full getting that done, we're quite confident we'll get that done. But what we'll able to do in 2018 is monitor the 10 ovens we've rebuilt on D battery. Continue to monitor the performance of the remaining B battery ovens throughout the year. We are producing, we will be producing from that battery throughout the year. And then make a call as we get into the spring and summer probably next year as to whether or not we want to rebuild all portion or none of that remaining -- the remaining 57 ovens.

Okay. Yes, sounds great. And then my second question is, is the cost-sharing agreement at Indiana Harbor going to change from 2017 to 2018? And if so, how does this look in combination with the refurbishment program going on?

So we outlined in our 10-K disclosure last year. What happens is that the way cost-sharing mechanism works effective 1/1/18, we will go back to a budgeted O&M share with our customer. That budgeted O&M share is based upon the plant's 1.22 million ton name plate. So we're still under recovered because we're not producing 1.22 million ton, because it's basically O&M divided by 1.22 million ton. But the level of under recovery is less. And what we've been experienced with the fixed number and us continuing to run less than the name plate capacity. In the actual number is a function of what the O&M spend is. And ultimately, that hasn't been finalized yet with our customer. But if we just use the 2016 O&M, which we articulated in the K, the estimated cost -- the estimated differential will be approximately $15 million. But the actual number would depend on what our actually O&M spend is.

There are no further questions at this time. I'll return the call to our presenters.

Okay. Again, thanks very much for your interest and your investment in SunCoke. And look forward to talking with you subsequently as our Investor Relations team hits the road and we talk about the business. And we'll brief you next time with the fourth quarter results. Thank you.

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