SunCoke Energy Inc (SXC) 2023 Q4 法說會逐字稿

Hello, and welcome to today's SunCoke Energy fourth quarter 2023 earnings call. My name is Jordan, and I'll be coordinating your call today. (Operator Instructions) And now I'm going to hand over to Shantanu Agrawal, VP, Finance and Treasurer to begin. Shantanu, please go ahead.

Thanks, Jordan. Good morning, and thank you for joining us this morning to discuss SunCoke Energy's fourth quarter and full year 2023 results as well as 2024 guidance. With me today are Mike Rippey, Chief Executive Officer; Kathryn Gates, President, and Mark Marinko, Senior Vice President and Chief Financial Officer. Following management's prepared remarks, we'll 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 later today. 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 things over to Katherine, 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 filing apply to the remarks we make today. These documents are available on our website as are reconciliations to non-GAAP financial measures discussed on today's call.

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

Thanks, Shantanu. Good morning, thank you all for joining us today. Earlier today, we announced SunCoke Energy's fourth quarter results. Before I turn it over to Mark to review the results in detail, I want to share a few highlights from 2023. I want to start by thanking all of our SunCoke employees for their contributions in achieving our 2023 objectives. The dedication of our team is evident with our strong operational performance and our financial results.

Slide 3 lays out our key objectives for 2023 and how we performed against those objectives. We delivered consolidated adjusted EBITDA of $268.8 million, modestly exceeding the high end of our guidance range of $265 million. Strong domestic coke operational performance drove our results, while our logistics business faced headwinds due to challenging market conditions. We generated $138.9 million of free cash flow, exceeding the high end of our guidance range of $120 million.

We continue to build on the success of our foundry coke business with the completion of the foundry screener project in 2023. This investment improves our handling efficiency and allows us to continue growing our foundry market participation. Our plants ran full in 2023, and we were able to successfully sell all non-contracted tons into the foundry and spot blast coke markets.

We also extended our Indiana Harbor contract with Cleveland-Cliffs through September 2035, with key provisions similar to the prior agreement. The renewal of firms, our mutually-beneficial relationship with Cleveland Cliffs and positions Indiana Harbor well for the future. We also made great progress in our capital allocation priorities in 2023. We deployed free cash flow to reduce our gross debt by approximately $44 million, ending the year with a gross leverage ratio of 1.86 times on a last-12-months adjusted EBITDA basis.

We returned approximately $31 million to our shareholders, having increased our quarterly dividend from $0.08 per share to $0.10 per share during 2023. We expect the continuation of our quarterly dividend throughout 2024. And lastly, we continue to work on the development of the GPI project at Granite City. With that, I'll turn it over to Mark to review our fourth quarter and full year earnings in detail. Mark?

Thanks, Katherine. Turning to slide 4, the fourth quarter net income attributable SunCoke was $0.16 per share, up $0.02 versus the fourth quarter of 2022. Our full year 2023 net income attributable SunCoke was $0.68 per share, down $0.51 versus the full year 2022. Tax adjustments of $0.29 per share recorded in the third quarter of 2022 and the third quarter of 2023 impacted EPS, primarily due to tax law changes in the US and Brazil in both 2022 and 2023.

Excluding the impact of these adjustments, EPS was lower by $0.22 per share year over year, primarily driven by lower contribution margins on non-contracted blast coke sales. Consolidated adjusted EBITDA for the fourth quarter 2023 was $62.3 million, up $3.4 million versus the fourth quarter of 2022. The increase was primarily driven by higher coal-to-coke yields and favorable O&M recovery on long-term take-or-pay contracts from our domestic coke plants, partially offset by lower volumes at CMT and higher non-cash legacy liability expense at corporate.

On a full-year basis, we delivered adjusted EBITDA of $268.8 million, down $28.9 million versus record results of $297.7 million in 2022. The year-over-year decrease was primarily driven by lower contribution margins on non-contracted blast coke sales, lower volumes in logistics segments, and higher non-cash legacy liability expense, partially offset by higher coal-to-coke yields and lower employee-related costs.

Turning to slide 5 to discuss the year-over-year adjusted EBITDA variance in detail. Our domestic coke business operated at full capacity, but was impacted by lower contribution margins from non-contracted blast coke sales. This was partially offset by higher coal-to-coke yields on long-term take-or-pay contracts. The domestic coke segment delivered full year adjusted EBITDA of $247.8 million, modestly above our full year domestic coke guidance range.

Results from our Brazil Coke segment were impacted by the absence of technology fees, which expired at the end of 2022. Including Brazil, our coke operations delivered adjusted EBITDA of $256.9 million. The logistics segment adjusted EBITDA decreased by $5.4 million year over year, driven by lower throughput volumes at CMT as a result of weak commodity market conditions. The logistics segment delivered full year adjusted EBITDA of $44.3 million.

Finally, our corporate and other expenses were higher by $2.5 million year over year, mainly due to higher non-cash legacy liability expenses, which were partially offset by lower employee-related expenses.

Turning to slide 6 to discuss capital deployment in 2023. We generated very strong operating cash flow of $249 million during 2023, partially driven by the timing of favorable working capital changes, which allowed us to make good progress on our capital deployment initiatives.

Capital expenditures came in at $109.2 million, which was above our guidance, mainly due to the timing of certain projects. We expect to see an offset in 2024, which is why our CapEx guidance of $75 million to $80 million is lower than our normal run rate. We reduced gross debt outstanding by $43.8 million in 2023, with no outstanding balance on our revolver at year end.

During 2023, we also returned capital to our shareholders in the form of a $0.36 per share annual dividend, which was a use of approximately $31 million of cash. As mentioned by Katherine, we increased our dividend by 25%. That is from $0.08 to $0.10 per share during the third quarter of 2023.

In total, we ended 2023 with a cash balance of $140.1 million and strong liquidity of approximately $490 million, setting the stage for continued progress against our capital allocation priorities in 2024. Now we'd like to turn to our guidance expectations for 2024.

We expect consolidated adjusted EBITDA to be between $240 million and $255 million in 2024. Domestic coke adjusted EBITDA is expected to be lower by $3 million to $10 million, driven primarily by our expectation of lower coal-to-coke yield value on contracted blast coke sales due to lower coal pricing. We expect to continue running our coke fleet at full capacity.

Brazil coke adjusted EBITDA will be flat to better by $1 million. As a reminder, the Brazil coke facility is owned by ArcelorMittal Brasil and SunCoke provides the operating and technological services pursuant to an operating agreement.

Logistics adjusted EBITDA is expected to be lower by $9 million to $14 million in 2024. We anticipate lower volume and pricing at CMT year over year, driven by weak commodity markets.

Lastly, we expect our corporate and other segment expense to be higher by approximately $3 million to $5 million, driven by normalized non-cash legacy liability expenses.

Moving on to slide 9 to discuss the domestic coke segment in detail. In 2024, we expect our Domestic Coke adjusted EBITDA to be between $238 million and $245 million, with sales of approximately 4.1 million tons, which includes contract, foundry, and spot blast spoke. We expect to continue running the full domestic coke fleet at full capacity. Approximately 3.6 million tons are contracted under long-term take-or-pay agreements in 2024. We anticipate selling the remaining 650,000 furnace equivalent tons in the foundry and spot coke markets.

As a reminder, foundry tons do not replace blast furnace tons on a ton-per-ton basis. For example, due to differences in the production processed a single ton of foundry coke replaces approximately two tons of blast furnace coke. The order books for foundry and spot blast Coke are solid with a substantial portion of our 2024 sales finalized.

While we expect to continue running at full capacity, the lower year-over-year adjusted EBITDA is primarily due to lower coal-to-coke yield value on our long-term take-or-pay contracts due to lower coal pricing.

Moving to slide 10 to discuss logistics in more detail. 2024 logistics adjusted EBITDA is estimated to be between $30 million and $35 million. This estimate is driven by significantly weaker market conditions at CMT. Our outlook considers the low expectations for thermal coal export volumes from the Gulf Coast as a result of tepid demand due to mild weather, lower cost gas imports, and ample coal inventory in Europe.

We also expect the lower API2 price adjustment benefit as compared to 2023, which is factored into our guidance. We anticipate approximately 4.1 million tons of coal to be exported through CMT and approximately 3.8 million tons of non-coal throughput such as iron ore, pet coke, and other products.

Moving to the 2024 guidance summary on Slide 11. Once again, we expect consolidated adjusted EBITDA to be between $240 million and $255 million. Our domestic coke business expected to run at full capacity but with lower coal-to-coke yields value on contracted coke sales due to lower coal pricing. We expect to face significant headwinds due to weak commodity markets and logistics segment impacting both volumes and pricing.

As indicated earlier, we anticipate our CapEx requirements in 2024 to be between $75 million and $80 million, which is lower than our normal annual run rate. We expect 2024 operating cash flow to be between $185 million and $200 million, driven by the reversal of favorable working capital build in 2023. Our free cash flow is expected to be between $105 million and $125 million.

With that, I'll turn it back over to Katherine.

Thanks, Mark. Wrapping up on Slide 12. As always, safety is our first priority and will continue to focus on strong safety and environmental performance in 2024. Robust safety and environmental standards set SunCoke apart and are central to our reliable delivery of high quality coke and logistics services.

In 2024, we will continue to focus our efforts on adding new customers and products at CMT. as well as further broadening our foundry and spot blast coke customer base. As we've demonstrated in the past, we will pursue a balanced yet opportunistic approach to capital allocation.

From a growth perspective, we continue to work on developing the Granite City GPI project. We continuously evaluate the capital needs of the business, our capital structure, and the need to reward our shareholders. And we will make capital allocation decisions accordingly.

Looking beyond 2024, we see SunCoke being well positioned for long-term success. We believe that coke supply will continue to exist in the market as many assets are under-invested and significantly aging. Suncoke has the newest coke-making facilities in North America with the leading technology. We continue to invest in our facilities to ensure that they are safe, efficient, reliable, and environmentally-compliant. The strong operational performance that comes from these investments provides us with the basis to grow and diversify our customer and product base.

With that, let's go ahead and open up the call for Q&A. Thank you.

(Operator Instructions) Lucas Pipes, B. Riley Securities.

Thank you very much, operator, and good morning, everyone. My first question is on the balance sheet. Can you remind us, what are your net debt target? And ultimately, what is the goal? Is it to get to net debt zero? Some of your peers in the industry have done that. You look to build sufficient cash buffer to kind of pay off the debt, kind of as you generate the cash or create greater balance to take out the maturity when it comes to, or are you ultimately looking to refinance it? I would appreciate your color on that. Thank you.

Yes, Lucas, this is Shantanu. I can take that question. Our long-term target, it has been always a gross leverage of three times or lower, and that still remains the target, right. Right now. We are in a position that we are well below that target, and we are very happy with that. But that's kind of our long-term target.

And as we have discussed before, we have this GPI project that we are working on, which will potentially require -- which will be potentially funded from our cash flow than some borrowing on the revolver. And that's kind of what we have in our kind of -- in front of us to make sure that we are within the target there.

I guess it'd be helpful to understand how much lower than three times you might consider going. For this year 2024, how should we think about uses of excess cash? You're generating free cash flow. You have a dividend. What happens to the cash above and beyond that? Thank you.

Yes, sure, Lucas. I mean, the way to think about is that once -- if we sign this GPI project and this project goes ahead and we start spending capital on that, we expect our leverage to go back to three times or so, right? So the cash flow, but that we're going to be generating in 2024, is an anticipation to save this project and spend on this project.

Okay. Have -- are you in discussions with the potential new owners of Granite City? Let's start there.

Yes. So Lucas, this is Katherine. We are working with US Steel now on the GPI project, and we look forward to working with Nippon in the future.

And is it reasonable to expect that you could conclude a deal prior to the sale of US Steel to Nippon Steel closing? What do you think, that deal needs to close first before you can close the kind of deal, and if at all?

Yes, Lucas. What I would say is we're just continuing to work with US Steel now. And that's really what our focus is on the GPI project and we welcome working with Nippon. But we can continue to work with US Steel on the project now.

I appreciate it. I'll turn it over. Thank you.

(Operator Instructions) Nathan Marfin, The Benchmark Company.

Thanks, operator. Good morning, everyone. Congratulations on full year '23 results and thanks for taking my questions. Maybe just a quick follow on to Lucas's Granite City line of questioning. The other piece to consider Granite City's contract I believe expires at the end of this year. So does that maybe put a little bit more pressure or speed up the process at all as far as coming to a decision ahead of that contract expired?

Thanks, Nathan. The coke contract is actually part of our discussion with US Steel on the GPI project.

Fair and as expected. So the question was, does that speed up the process, do you think? I mean, can those things be mutually exclusive? Like, could you extend that contract and still not come to an agreement on the GPI project?

Well, we're certainly continuing to work with US Steel and that the coke contract is part of that. I mean, we would expect as part of the GPI project that the coke plant would continue to supply the coke needed for GPI and run throughout the time that the project is being developed and constructed.

Right, and I think you said obviously the goal would be to extend that contract maybe for another 10 years post completion of the project assuming that that --

Absolutely, we would --

-- move forward eventually, yeah.

Exactly. You would envision that that coke contract would be coterminous with any GPI agreement.

Okay, got it. Maybe moving to the logistics business, you guys mentioned in your prepared remarks and figures on the slide deck as well obviously about some pressures on the export coal front that you expect to lead to coal shipments being down this year at CMT. First, I think you still have a take or pay there. How many tons of that is true?

And then second, it also looks like guidance implies a year-over-year decline in the other product shipments from CMT as well, is that right? And then maybe, could you update us on some of those initiatives you have going to increase shipments of some of those other products? I think you mentioned that a little in your closing remarks, Katherine.

Yes, I mean so we do have a take or pay at CMT with our customer for coal, which is 4 million tons. So we're going to be handling a little bit in excess -- our guidance contemplates handling a little bit in excess of that minimum take or pay. On the other product side, you know, the guidance is a little bit lower than last year, but not significantly lower.

So you know, obviously, as Katherine mentioned in her prepared remarks, one of our initiatives for this year is to continue to look for opportunities at CMT and continue to look for other products, additional products at CMT. And that's what we are going to focus on this year.

Appreciate that, Shantanu. And just to confirm, is this the last year for the take-or-pay on the coal side of the business?

The contract can be extended and Javeline is obviously a customer of ours and we're in continuous dialogue with them.

Okay. Got it. Thank you, Katherine. And then maybe just one more on the domestic coke size of the business. You mentioned 3.6 million tons contracted already for this year, remaining going into the foundry and then the spot market. I think it would be helpful to get some more color from you guys on the health of both the foundry and even the export coke market today and just how you see that shaping up for the for the rest of 2024.

Yes, absolutely. So we're sold out for the first quarter on our spot coke sales. And as we've said, we finalized a substantial portion of the foundry and the blast sales. We expect to run full as we have in the past, but we have to remember that the seaborne markets don't contract a year out. So there's obviously -- we expect to sell out, but we're just going to be doing that in due course. And then on the foundry, the foundry markets are strong, and those sales are substantially finalized for 2024. So we feel good looking out ahead.

Alright, great. I appreciate the comments. Thanks for your time. I'll leave it there, and the best of luck in '24.

Thank you.

Lucas Pipes, B. Riley Securities.

Thank you again, operator, thank you for taking my follow-on question. Sorry if I missed it, but what is the amount of coke business that is not fixed or committed at this point?

It's 650,000 tons, Lucas. It's the same as last year. Right? And we've mentioned and it's the mix, the whole -- that's a 650,000 blast coke equivalent. And that's what we are selling into that foundry and spot blast coke market.

Got it. And that's equivalent, so that's some amount of foundry, some amount of blast, and I guess you take the foundry times to to make it equivalent. And so the way to think about it, yes, those tons would be kind of open to price movements starting Q2 than through the rest of the year.

The spot piece is foundry sales -- the way it works is more or less, as Katherine said, we have finalized the sales of the foundry coke throughout the year. And the price for those are fixed at the start of the year. It's the spot side which can fluctuate on the pricing Q2 and beyond.

And is that also 650,000 tons, or is that a different number?

No, no, no. The total of foundry and spot blast is 650,000 tons.

And what is the amount subject to spot price variation?

That is -- again, going back to what we said before, Lucas, we do not -- are not in a position to disclose the differential between the foundry and the spot blast coke because of the small nature of both the foundry and the spot blast coke market. But you can think about it, like out of the 650,000 there is a portion of foundry and there's a portion of spot. So the amount is not significant.

Okay. So a couple of hundred thousand tons is probably the right way to think about it. That's subject to price pressure.

Not -- I cannot comment on that.

And put differently, have you purchased, have you committed a price for all the coal to convert into this coke? Are you locked in on the site?

No, no, Lucas, we haven't. Since we started doing this spot blast sales, we have aligned our coal purchases to go with the spot blast sales, right. Spot blast sales don't sell out more than three to six months in advance. We try to tie our coal purchases with that. Now obviously, we are doing a mix of spot and foundry, so we have to think about that. But we haven't fully bought our 2024 coal needs because there's some sales of spot blast coke outstanding in the later half of the year.

Got it. Got it. So essentially, if you would try to match that up in real time on the supply side --

Exactly.

Got it. Okay. That's helpful. And then -- thank you very much, Shantanu. In In terms of the Granite City deliberations, on the Nippon Steel, US Steel deal announcement, there's been a lot of coverage regarding the union and commitments to workers across the island. When you think about the labor impact of Granite City and the on the pig iron conversion project, what's your message on that? I would appreciate your thoughts. Thank you.

The message there is that the Granite City GPI project is something where we would look forward to working with the union. We're working with US Steel now. We work well with the United Steelworkers. As you know, most of our plants are unionized with the steelworkers. We work well with them and we look forward to working with them on thia GTI project.

Has the union taken a position on this conversion?

They have not.

Okay. All right. Well, I appreciate the color. And to you and the whole team, best of luck. Thank you.

Thank you.

We have no further questions on the lines. With that, I'll hand back to Katherine Gates, President.

I want to thank everyone for joining us today, and again, thanks to the SunCoke team for their hard work. We're looking forward in 2024, and we see great potential to meet our financial targets and to create value for our stakeholders. So thank you.

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.