SunCoke Energy, Inc. (NYSE:SXC) Q1 2024 Earnings Call Transcript

SunCoke Energy, Inc. (NYSE:SXC) Q1 2024 Earnings Call Transcript May 1, 2024

SunCoke Energy, Inc. beats earnings expectations. Reported EPS is $0.23, expectations were $0.22. SXC isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, everyone, and welcome to the SunCoke Energy First Quarter 2024 Earnings Call. My name is Angela, and I will be coordinating your call today. [Operator Instructions] I will now hand you over to your host, Shantanu Agrawal, Vice President, Finance and Treasurer. Please go ahead.

Shantanu Agrawal: Thanks, Angela. Good morning and thank you for joining us this morning to discuss SunCoke Energy’s first quarter 2024 results. With me today are Mike Rippey, Chief Executive Officer; Katherine 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 do not 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 filings 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.

Katherine Gates: Thanks, Shantanu. Good morning and thank you for joining us on today’s call. Before we get started, I’d like to congratulate Mike Rippey on his previously announced retirement in two weeks. Mike’s leadership and contributions have been crucial to the success of SunCoke during his tenure. I’ve had the privilege of working closely with Mike over the past several years and look forward to having him as an adviser for the company. The entire SunCoke team wishes him the best in his retirement. Moving to first quarter results, I wanted to share a few highlights before turning it over to Mark to discuss the results in detail. First, I’d like to thank all of our SunCoke employees for their contributions to our very good first quarter results.

Our domestic coke plants continue to run at full capacity with strong operational performance. Our logistics terminals delivered excellent results, handling 5.5 million tons during the quarter. We saw higher volumes at our domestic terminals due in part to East Coast port congestion caused by the unfortunate incident in Baltimore, which favorably impacted results. Through our collective efforts, we delivered consolidated adjusted EBITDA of $67.9 million. From a balance sheet perspective, we ended the first quarter with a strong liquidity position of $470.1 million. Our gross leverage was approximately 1.86x on a trailing 12-month adjusted EBITDA basis at the end of the quarter. Looking ahead, we’re pleased to have all of our spot blast and foundry coke sales finalized for the full year.

With this strong start, we are well positioned to achieve our full year adjusted EBITDA guidance range of $240 million to $255 million. With that, I’ll turn it over to Mark to review our first quarter earnings in detail. Mark?

Mark Marinko: Thanks, Katherine. Turning to Slide 4. Net income attributable to SunCoke was $0.23 per share in the first quarter of 2024, up $0.04 versus the prior year period. Adjusted EBITDA for the first quarter 2024 was $67.9 million compared to $67.1 million in the first quarter 2023. The increase in adjusted EBITDA was primarily driven by higher blast coke sales volumes and higher volumes at our domestic logistics terminals, partially offset by lower volumes at CMT. Moving to Slide 5 to discuss our domestic coke business performance in detail. First quarter domestic coke adjusted EBITDA was $61.4 million and coke sales volumes were 996,000 tons. The domestic coke fleet continues to run at full capacity and the increase in adjusted EBITDA as compared to the prior year period was primarily driven by higher blast coke sales volumes.

Our full year domestic coke sales tons guidance remains approximately 4.1 million tons. As Katherine mentioned earlier, all spot blast and foundry coke sales are finalized for the full year. Given the strong performance this quarter from our domestic coke segment, we are well positioned to achieve full year domestic coke adjusted EBITDA within our guidance range of $238 million to $245 million. Now moving on to Slide 6 to discuss our logistics business. Our logistics business generated $13 million of adjusted EBITDA in the first quarter of 2024 compared to $13.5 million in the first quarter of 2023. The decrease in adjusted EBITDA was primarily due to lower throughput volumes at CMT, partially offset by higher volumes at our domestic terminals.

CMT also recognized limited API2 price adjustment benefit during the quarter. Our terminals handled combined throughput volumes of approximately 5.5 million tons during the first quarter of 2024 as compared to 5.3 million tons during the same prior year period. Our domestic terminals handled 3.6 million tons in Q1 2024, making it the best quarter in terms of volume for the domestic terminals in the past five years. The increase in volume was driven in part by the unfortunate bridge incident in Baltimore, which caused East Coast port congestion. We are pleased with the excellent results from our logistics segment in the first quarter and are well positioned to achieve our logistics full year 2024 adjusted EBITDA and volume guidance, which remain unchanged.

Now turning to Slide 7 to discuss our liquidity position for Q1. SunCoke ended the first quarter with a cash balance of $120.1 million. Cash flow from operating activities generated $10 million and was negatively impacted by the timing of working capital changes of approximately $50 million in the quarter. We expect this impact to reverse over the course of the year, and we are reaffirming full year operating cash flow guidance of $185 million to $200 million. We paid $9 million in dividends at the rate of $0.10 per share this quarter and spent $15.5 million on CapEx. In total, we ended the quarter with a strong liquidity position of $470.1 million. With that, I will turn it back over to Katherine.

Katherine Gates: Thanks, Mark. Wrapping up on Slide 8, as always, safety is our first priority, and we will continue to focus on strong safety and environmental performance, robust safety and environmental standards set SunCoke apart and are central to our reliable delivery of high-quality coke and logistics services. We remain focused on safely executing against our operating and capital plan for full utilization of our cokemaking assets. We also continue to concentrate our efforts on adding new business at our logistics terminals. And while we were able to finalize all of our spot, blast and foundry coke sales for the full year, we are still focused on future opportunities to broaden our customer base. As we have 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 will make capital allocation decisions accordingly. Finally, we are very pleased with the strong results in the first quarter and we expect to achieve our full year consolidated adjusted EBITDA guidance of $240 million to $255 million. With that, let’s go ahead and open up the call for Q&A.

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Q&A Session

Operator: Thank you, Katherine. [Operator Instructions] The first question is from Lucas Pipes with B. Riley Securities. Your line is open.

Lucas Pipes: Hey good morning everyone. How are you?

Katherine Gates: Good morning, Lucas.

Lucas Pipes: So, my first question is on kind of the longer-term outlook for the utilization rates. One of your customers recently commented on an earnings call about kind of the Middletown contract and their desire to replace that blast furnace with the DRI. And I saw you just renewed a maintenance contract with Fluor. So it seems like you have confidence in the long term need of your existing coke fleet. But if you could maybe comment on that and what your outlook is maybe, first, through the end of this decade and then maybe post 2032. I would really appreciate it. Thank you.

Katherine Gates: Sure. Thanks, Lucas. With respect to – I think you are referring to the Cliffs’ announcement for their Middletown works. And with respect to that, that announcement really has no impact on us. Our contract with Cliffs runs through the end of 2032. In terms of sort of the next decade, if you will, I mean, there is a long way to go until 2033. We are not going to speculate on the opportunities that are available to us in 2033 today. But what we have said before is that we have the newest coke-making assets, and we continue to make significant investments in them. We do that because we believe we’re best positioned to serve the blast furnaces long term.

Lucas Pipes: Got it. And so when you think about the upcoming more near-term contract renewals, I think, there is U.S. Steel at the end of this year then Cleveland-Cliffs, I think, it’s two contracts next year and then Algoma after that. Do you expect more of those tons to shift into either the foundry or merchant, or rather spot blast furnace coke market, or would you expect kind of your current proportion of contracted to spot volumes to stay roughly the same through the next two, three years?

Katherine Gates: Well, with respect to the Granite City coke contract, as we’ve said in the past, that coke contract is part of our GPI project and part of those negotiations. And with respect to our other contracts with other customers, we are always in dialogue with our customers, but we are not going to comment on any kind of contract discussions.

Lucas Pipes: Okay. But if Middletown were to convert to DRI in – were to convert to DRI 2029, I guess, Middletown coke would maybe backfill some of the Haverhill tons. So, should we expect that those contract renewals go maybe shorter in nature than they’ve historically been?

Katherine Gates: Lucas, as I said before, I mean, we are not going to comment on our contract discussions with our customers, and we’re not going to speculate. So I really can’t – I can’t help you more than that.

Lucas Pipes: Okay. That’s appreciated. On the Granite City side, could you maybe update us on kind of what the most recent update us in terms of your conversations with U.S. Steel, obviously, we’re all following the news and seems tricky, but I would appreciate your color on where the project stands today.

Katherine Gates: Sure. Well, with respect to the GPI project, we are continuing to work with U.S. Steel on the GPI project. We are doing the detailed engineering for what would be a first-of-its-kind project right now. And so we’ll continue to work with U.S. Steel on the GPI project, and we would look forward to working with Nippon in the future.

Lucas Pipes: Got it. Any sort of timing when that detailed engineering might be completed?

Katherine Gates: That’s an ongoing project with U.S. Steel, and I’m not going to comment further on it.

Lucas Pipes: Okay. Okay. And order of magnitude if – what sort of capital might we be looking at? I assume there are costs for conversion. So I’d be curious about kind of the cash component, but then also any sort of reclamation liabilities that might be assumed would be very helpful to understand what the capital commitments might be? Thank you.

Shantanu Agrawal: Hey Lucas, yes, this is Shantanu. I mean, as we have said before, right, I mean, obviously, kind of as when we announced this project, we said like based on – at that point of time, the project was kind of assumed, and that’s how we are progressing right now is it’s going to be a thinking about from a cash CapEx perspective, it’s two years of our free cash flows plus some revolver borrowing, right? And that still is the case as we move forward with this project. So we haven’t really given out cash like a specific number, but that’s kind of the order of magnitude is roughly you can think about it as two years of our free cash flows plus some revolver borrowing.

Lucas Pipes: That is very helpful. I appreciate all the color. I’ll turn it over for now. Thank you.

Shantanu Agrawal: Thank you.

Katherine Gates: Thanks, Lucas.

Operator: Thank you. [Operator Instructions] The next question is from Nathan Martin with Benchmark. Your line is open.

Nathan Martin: Thanks, operator. Good morning, everyone. Congrats on the first quarter results, and Mike congratulations on your retirement, best of luck.

Mike Rippey: Much appreciated. Thanks.

Nathan Martin: Maybe moving over to Logistics segment for a second, multi-year highs, tons handled there, I think that’s mainly logistics ex-CMT. You guys mentioned in your prepared remarks, a lot of that was driven by increased shipments due to the outage at Baltimore. No update to your logistics volume guidance, it didn’t look like. So is the expectation that tons kind of come down in subsequent quarters as Baltimore reopens? Or is there a possibility you exceed that original guidance if current levels kind of remain elevated?

Shantanu Agrawal: Thanks, Nathan. I mean, yes, as we said, Q1 from a domestic terminals perspective was one of the – was the best quarter in the last five years, right? So it was definitely an exceptional quarter as we have seen, right, like you saw the last year, the logistics business could be quite volatile, right? So I mean, as we sit here today, what we’re looking at the market, we are affirming our guidance if the market kind of remain up and down and weak, that’s what we expect. But if we see a pickup in the out year – later half of the year, we can pick up more volumes, and you will see that in the results. But as we sit here today, what we are seeing we confirm our guidance, and we stick with the $30 million to $35 million of logistics EBITDA.

Nathan Martin: Appreciate that, Shantanu. I guess just thinking the Baltimore port looks like the main deep draft terminals and that’s scheduled or targeted to be reopened until the end of May. It would just make some sense; maybe you still think you’ll have some benefit here in the second quarter?

Shantanu Agrawal: Not much. I mean, we saw kind of some pickup at the start, like when it happened. And then we saw some in Q2, but it’s really not driving the results that much as we sit here today.