SunCoke Energy Inc (SXC) 2018 Q2 法說會逐字稿

Good morning. My name is Christine, and I'll be your conference operator today. At this time, I would like to welcome everyone to the SunCoke Energy, Inc. Second Quarter 2018 Earnings Conference Call. (Operator Instructions) Thank you. Andy Kellogg, Treasurer and Director of Investor Relations, you may begin your conference.

Good morning, and thank you for joining us this morning to discuss SunCoke Energy's second quarter 2018 earnings.

With me are Mike Rippey, President and Chief Executive Officer; and Fay West, Senior Vice President and Chief Financial Officer.

Following management's prepared remarks, we will open the call for Q&A. This conference call is being webcast live on our Investor Relations section of our website. A replay will be available there later today.

If we don't get to your questions on the call today, please feel free to reach out to our Investor Relations.

Before I turn things over to Mike, let me remind you that the various remarks we make on today's call regarding future expectations constitute forward-looking statements. 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 financial measures discussed on today's call.

With that, I'll now turn things over to Mike.

Thanks, Andy, and thank you all for joining this morning's call.

Before we review second quarter results, I wanted to provide a few brief thoughts on the overall market and where we see things for the balance of the year.

On our fourth quarter earnings call, I used the word cautiously optimistic to describe our feelings for the steel market with the focus on addressing import challenges resulting from global overcapacity that our customers continue to face. Since this time, the administration has imposed Section 232 tariffs with the goal of curbing steel imports into the United States. As we stand today, we have seen good demand for steel products, attractive hot roll pricing and an uptick in utilization rates. All of these allow our customers and the steel market as a whole be in a healthier position.

The HRC benchmark prices continued to rise from approximately $650 per short ton at the beginning of the year to approximately $900 today. We continue to see improving steel demand from the industrial, manufacturing and energy sectors with auto holding fairly steady. Utilization rates are still below 80%, but we have seen a positive trend in 2018 with rates increasing from 71% at the beginning of the year to 76% today with a potential for continued improvement as reduction in steel imports take hold.

With a more favorable long-term outlook, we've seen an increase in investment activity in the U.S. steel market. Most notably, our customer, U.S. Steel, has decided to restart both their A and B blast furnaces at the Granite City Works. While there's not a direct financial impact for us, we are encouraged with U.S. Steel's decision, and we'll continue to support our key customer with high-quality coke. With the restart of the Granite City Works, we believe the metallurgical coke market is generally more balanced, and any meaningful uptick in demand or coke battery closures may result in a coke short market.

On the coal side, export volumes have been robust on the back of strong API2 and Newcastle prices, which have both been approximately $100 per ton with a strong demand from Europe, Asia and the Mediterranean regions.

We anticipate volumes and pricing to remain at these levels through 2020 as indicated by the forward API2 price curve.

Our coal export customers have significantly increased their throughput tons at CMT to capture these attractive export opportunities.

In summary, we're in a good macro environment for both our coke and logistics businesses. We will continue to look forward to growth opportunities and maximize our operations to service our current and future customers' needs.

Moving on to the second quarter highlights.

At the halfway point of the year, we continue to make good progress toward achieving our 2018 objectives, and our second quarter performance and financial results demonstrate the progress we are making. We are pleased with the strong performance of our coke and logistics businesses during the quarter. The coke business generated solid increases in production across the fleet. Notably, we continue to see sustained positive performance with the rebuild ovens at our Indiana Harbor facility. In the rebuild project, we're off to a good start on the 2018 campaign. Through the second quarter, we've rebuilt 21 of the 67 total ovens, of which 16 were back operating at full production levels at the end of the second quarter with the remaining 5 currently being brought online.

We remain confident in our rebuild progress. The previously rebuilt ovens continue to perform as expected. This year's campaign remains on track, with the ovens scheduled for completion by the end of November.

Performance in our logistics segment has been strong. Convent Marine Terminal achieved its third consecutive quarter of record volumes with over 3.2 million tons of throughput in the second quarter. We continue to see strong demand from our customers as they leverage CMT's unique capabilities, and we expect that demand will continue in the second half of 2018. As such, we are increasing our 2018 CMT total throughput volumes to 11.5 million tons.

Our other terminals also witnessed solid demand, with service issues by Eastern rail carriers resulted in lower shipments that otherwise would have been attained during the quarter.

Lastly, we remain well positioned to achieve our full year 2018 adjusted EBITDA guidance target of $240 million to $255 million.

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

Thanks, Mike, and good morning, everyone.

Before reviewing the second quarter results, I would like to mention an event we experienced earlier this month, which although it did not impact this quarter, it will affect our third quarter results.

A fire occurred on our Pusher Charger Machine at Granite City, which resulted in approximately 10 days worth of lost production. The necessary repairs have been completed, and our facility is now back up and running. We will provide more details on this with our third quarter results, but the preliminary impact was considered in our full year guidance. And as Mike mentioned earlier, we remain well positioned to deliver adjusted EBITDA within our guidance range.

Turning back to our second quarter results on Slide 4. Our second quarter net income attributable to SXC was $4.2 million or $0.06 per share. EPS was up $0.44 from the prior year, primarily due to strong operating performance and the absence of approximately $12 million of debt extinguishment costs associated with the refinancing completed last year.

Q2 adjusted EBITDA of $67.3 million was up 42%, a significant increase over the prior year period. The increase in performance was driven by steady improvement at Indiana Harbor, significantly increased volumes at CMT and lower corporate costs.

Looking at our adjusted EBITDA bridge on Slide 5. We are encouraged with the strong performance in the second quarter. And as you could see, consolidated adjusted EBITDA is up close to $20 million over the prior year.

Our coke segment as a whole performed well this quarter. Indiana Harbor's second quarter adjusted EBITDA of $2.8 million is up $5.5 million versus the prior year period.

As Mike mentioned earlier, we continue to see healthy operating performance from the rebuilt ovens, including the 16 A-battery ovens that were completed and operating during the quarter. The improved performance drove both an increase in production and higher yields, which resulted in an approximately $3 million increase in adjusted EBITDA.

Additionally, Indiana Harbor received approximately $2 million in higher O&M reimbursement, mostly due to the contractual reset of the O&M cost-sharing mechanism with our customer. Excluding Indiana Harbor, the remainder of the coke business experienced various pluses and minuses, notably our domestic coke plants had an increase in volumes, higher coal-to-coke yields and higher energy revenue. Offsetting this were higher maintenance and operating costs in the current period, a portion of which were contemplated in our full year guidance.

Coke results also benefited from the timing and scope of planned outages. We did not have a major planned outage in the second quarter of 2018 as we did in the prior year period. For context, we typically perform routine boiler outages annually and turbine and FGD outages biannually at our facilities. Although we did complete FGD outages at both Middletown and Granite City during 2017, outage work in 2018 will include both a similar FGD outage at Haverhill as well as steam turbine outages at both Middletown and Haverhill, which did not occur in 2017. These outages are expected to impact both outage costs as well as energy sales compared with 2017.

On a full year basis, we do expect the impact of outages will be greater in 2018 as compared to the prior year, and this was contemplated when we provided our full year guidance earlier this year.

Our logistics business was up $9.7 million due mostly to record transloading volumes at CMT. CMT continues to benefit from attractive coal export dynamics with current API2 pricing of approximately $100 per ton, supporting healthy export margins for our customers.

When adding close to $1 million of favorable results in our Corporate and Other segment, we finished the second quarter with $67.3 million in adjusted EBITDA.

Looking at domestic coke results on Slide 6. Second quarter adjusted EBITDA per ton was $53 on nearly 1 million tons of production. These results reflect higher coke production and solid yield performance.

EBITDA per ton and production were also impacted by the previously discussed timing and scope of planned outages and higher maintenance and operating costs.

The biggest single increase of production versus the prior year comes from Indiana Harbor, and we continue to be encouraged by the performance of the rebuilt ovens. Indiana Harbor's production improved by 22,000 tons versus the prior year period. It's important to note that at the end of the second quarter, we have rebuilt approximately 1/3 of the A-battery. Our oven rebuild project will continue through the third and fourth quarter and will temporarily reduce production and increase expenses associated with demolishing costs. However, we remain on track to achieve our full year 2018 Indiana Harbor guidance.

We continue to monitor the performance of the 10 rebuilt ovens on B battery and will determine if we rebuild all, none or a portion of this battery later this year. We will communicate our 2019 plans when a final determination has been made.

Overall, we are on track to achieve our full year domestic coke per ton and our production guidance.

Flipping to Slide 7 to discuss our logistics business. Logistics business generated $19.7 million of adjusted EBITDA during the second quarter, up 45% sequentially and 97% year-over-year.

Our domestic logistics terminals experienced steady growth in throughput volumes, up over 400,000 tons as compared to the prior year period. In the quarter, KRT volumes were impacted by congestion on U.S. railways and railcar availability. We anticipate that throughput volumes at our facility will increase in the second half of the year as domestic utility customers look to rebuild thermal coal inventories and as rail issues improve.

At Convent, we operated the second quarter at near run rate capacity, over 3.2 million tons, which included approximately 300,000 tons of merchant volumes.

CMT contributed $16.7 million of adjusted EBITDA, up $9.5 million. River conditions returned to normal during the middle of the second quarter, and we don't anticipate any additional weather-related costs for the balance of the year, but we did record $1.1 million of high water cost this quarter.

At the end of Q2, we do not have any deferred revenue related to our coal export customers as they have shipped slightly over their annual contractual obligations to date. Any deferred revenue related to our coal customers is recognized typically in the fourth quarter if throughput tons are below our 10 million ton contract.

Given Convent's strong start, we are increasing 2018's CMT total throughput volumes to 11.5 million tons from our revised guidance of 10 million to 10.5 million tons in 2018. We anticipate 10 million tons from our base take-or-pay customers, up from the previous guidance of 8.5 million to 9 million tons and are maintaining our guidance of an incremental 1.5 million merchant tons in 2018.

As a reminder, there is limited adjusted EBITDA pickup from the increased base volumes due to the nature of our 10 million ton take-or-pay contracts.

We remain solidly on track to achieve our adjusted EBITDA guidance of $71 million to $76 million for 2018.

Turning to Slide 8 and our liquidity position for Q2. In the quarter, cash flow from operating activities was $28 million. Strong operating performance was partially offset by the timing of interest payments. In the second quarter, SXCP paid interest on its senior notes of approximately $26 million.

CapEx was $28 million during the quarter, which included approximately $10 million related to the Granite City gas-sharing project and approximately $9 million of Indiana Harbor oven rebuild work.

We anticipate elevated CapEx spend in the back half of the year due to continued work on Indiana Harbor oven rebuilds and the gas-sharing project. We remain in line with our full year CapEx plan of approximately $95 million in 2018.

In the second half of the year, we anticipate SXCP will start to reduce debt by paying down its revolving credit facility. We maintain our focus on strengthening SXCP's balance sheet and are targeting a 3.5x debt-to-EBITDA ratio or lower and building a cash balance to more normalized levels by the end of 2019.

In total, we ended the quarter with $143 million of consolidated cash and over $370 million of combined liquidity and are on track to meet our operating cash flow guidance.

With that, I will now turn it back over to Mike.

Thanks, Fay.

Wrapping up on Slide 9, we remain focused on operational execution, maximizing the capabilities and performance of our coke and logistics assets and ensuring successful completion of this year's oven rebuild campaign at Indiana Harbor. We continue to focus on leveraging CMT's unique capabilities to secure incremental business. And finally, we are continuously focused on executing on our commitments to shareholders, meeting our full year 2018 financial targets and remain on track to do so midway through the year.

With that, we can now open it up for Q&A.

(Operator Instructions)

This is Mike. I'm not hearing any questions. I'd like to thank everyone that's on the call for your interest and your investment in SunCoke Energy. And to the extent you may have a questions later on, please feel free to reach out and talk to our Investor Relations team. They'd be happy to provide any answers. So again, hearing no questions, I'm going to thank everybody for your participation, and we'll talk to you again in the third quarter. Thank you.

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