Q1 2024 SunCoke Energy Inc Earnings Call

Participants

Shantanu Agrawal; Vice President - Finance, Treasurer; SunCoke Energy Inc

Katherine Gates; President, Director; SunCoke Energy Inc

Mark Marinko; Senior Vice President, Chief Financial Officer; SunCoke Energy Inc

Lucas Pipes; Analyst; B. Riley Securities

Nathan Martin; Analyst; Benchmark Company

Presentation

Operator

Thank you for your patience, everyone, to the SunCoke Energy First Quarter 2024 earnings call will begin shortly. During the presentation, you will have the opportunity to ask a question by pressing star, followed by one on your telephone keypad. The conference call will begin at 1130.
Good morning, everyone, and welcome to the SunCoke Energy First Quarter 2024 earnings call. My name is Angela, and I'll be coordinating your call today. During the presentation, you can register to ask a question by pressing star, followed by one on your telephone keypad. If you change your mind, please press star followed by team. 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 Robey, Chief Executive Officer, Catherine Gates, President, and Mark Marango, 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 sections of a section of our website and a replay will be available later today. If we do not get your questions on the call today, please feel free to reach out to our Investor Relations team.
Before I turn things over to Kathryn, let me remind you that 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.

Katherine Gates

With that, I'll now turn things over to Kathy and good morning and thank you for joining us on today's call. Before we get started, I'd like to congratulate Mike Reddy on its previously announced retirement and 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 Funko 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 continued 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 1.86 times on a trailing 12 12-month adjusted EBITDA basis at the end of the quarter.
Looking ahead, we're pleased to have all of our stop 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 to 255 million.
With that, I'll turn it over to Mark to review our first quarter earnings in detail. Mark's.

Mark Marinko

Thanks, Kerr. From Turning to slide 4, our net income attributable 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 glass 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 Catherine 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 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 API to 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 our full year operating cash flow guidance of 185 to 200 million. We paid 9 million in dividends at the rate of $0.1 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 Kathryn base.

Katherine Gates

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 that 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 last in foundry coke sales for the full year, we are still focused on future opportunities to broaden our 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'll make capital allocation decisions accordingly.
Finally, we're very pleased with the strong results in the first quarter, and we expect to achieve our full year consolidated adjusted EBITDA guidance of 240 to 255 million.
With that, let's go ahead and open up the call for Q&A.

Question and Answer Session

Operator

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

Lucas Pipes

Yes, and hey, good morning, everyone.
How are you?

Katherine Gates

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 it on an earnings call about some 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 through first two through the end of this decade and then maybe post 2032 I would really appreciate it.
Thank you.

Katherine Gates

Sure.
Thanks, Lou. I guess with respect to I think you're referring to the the Cliffs announcement for their Middletown Works and with respect to that, that announcement really has no impact on us on our contract with Cliffs runs through the end of 2032.
And in terms of sort of the next decade, if you will. I mean, there is there's a long way to go till 2033. We're not going to speculate on the opportunities that are available to us in 2033 today. But what we've said before is that we have the newest cokemaking 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, our renewals contract renewals, I think there is a U.S. deal at the end of this year than Cleveland Cliffs. I think it's two contracts next year. And then I'll go my after after that, do you expect more of those tons to shift into either the foundry or merchants that are 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 two through the next two to three years?

Katherine Gates

Well, with respect to the Granite City Coke contract, as we said in the past, that CO contract is part of our GPI. project and part of those negotiations. And with respect to our other contracts with other customers, we're always in dialogue with our customers, but we're not going to comment on any kind of contract discussions.

Lucas Pipes

Okay. But if if if Middletown were to be a DRI in order to convert to DRI in 2029, I guess Middletown coke would maybe backfill some of the harbor he'll have tons of. So should we expect that those contract renewals go are maybe shorter in nature than they've historically been it out?

Katherine Gates

Lucas, as I said before, I mean, we're not we've we're 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. No, that's that's that's that's appreciated. On on on the Granite City side, could you maybe update us on kind of what the what the most recent and update us in terms of in terms of your conversations with US Steel, obviously, while following the news and seems tricky, but I would appreciate your color on where that with the project expenses?

Katherine Gates

Sarah?
Well, with respect to the GPI. project, we are continuing to work with US 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 GUS. 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

And that's an ongoing project with US Steel and I'm not going to comment further on it.

Lucas Pipes

Okay. Okay. And order of magnitude is what sort of capital might we be looking at some similar cash flow conversion? So I'd be curious about kind of the cash component, but then also on 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, look at the EBITDA change, I mean, as we have said before, right? I mean, obviously, kind of as we when we announced this project, we said, like, you know, based on at that point of time, the project was kind of resumed. And that's how we are progressing right now is 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 our cash like no 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 borrowings.

Lucas Pipes

That is very helpful. I appreciate all the color out. I'll turn it over for now.

Operator

(Operator Instructions) Nathan Martin, Benchmark.

Nathan Martin

Thanks, operator. Good morning, everyone. Congrats on the first quarter results. And Mike, congratulations on your retirement. Best of luck there.

Mark Marinko

Much appreciated.
Thanks.

Nathan Martin

And maybe moving over to the Logistics segment for a second multiyear highs, tons handled there. I think that's mainly logistics.
XCMPI. You guys mentioned in your prepared remarks, a lot of that was driven by increased shipments due to the outage at Baltimore, there's 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 banks made.

Shantanu Agrawal

And I mean, yes, as we said, you know, Q. one from a domestic terminals perspective was one of the best was the best quarter in last five years, right? So it was definitely an exceptional quarter as we've seen rightly, you saw 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. You know that the market kind of remain up and down and weak, and that's what we expect. But we see a pickup in the out year a later half of the year that we can 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 to 35 million of Logistics EBITDA.

Nathan Martin

Appreciate that shot. And then I guess just thinking of the Baltimore port, looks like the main deep draft terminals not scheduled or targeted to be reopened until the end of May. It would just make some sense. Maybe do you still think you'll have some benefit here in the second quarter?

Shantanu Agrawal

Not not much. I mean, you know, 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.

Nathan Martin

Okay, that's fair. And then maybe specifically at GNT., you guys talked about the weak commodity markets, weak coal exports. I'm just curious, did you hit your coal take-or-pay minimum during the first quarter from a volume perspective, maybe remind us, is that looked at on a quarterly basis or is that annual?
I think it's 4 million tons annually, and then we'll just get your thoughts on how you view export coal demand here over the next few quarters and how you expect your API two price adjustment to trend to maybe for use this first quarter result as a baseline and so on the take-or-pay finance or take-or-pay, Nate.

Shantanu Agrawal

And so I mean, obviously, we you can see we don't while I cannot call done separately that all CMD did 1.8 million tonnes, which is kind of pretty much in line and what kind of our expectation was and we do expect to hit the take-or-pay minimum a point for the full year for this year. Again, you know, going back to kind of what the expectation for the volumes and the price of the I do is I mean, if you look at the futures, APA do look pretty decent, right? I mean, it's kind of come back from the lows, but it can move pretty quickly. As we have seen in the past, Ray, like kind of it can move 10, 2030 bucks in a matter of couple of days. And there is some our profitably. As you know, we derive from that. So it's hard to predict right now what we have put in the guidance, I think we feel pretty good about it in the long run outlook of the CMP, our terminal remains pretty attractive. And that's why we really like having this terminal and has as in the past, it has performed really well and we continue to believe in this terminal.

Nathan Martin

And should that change your view on maybe just shifting over to the domestic coke segment real quickly, our EBITDA per ton looks like it came in above your full year guidance range. Maybe can you talk about the drivers behind that outperformance?

Shantanu Agrawal

And so, you know, Q1 normally is one of the quarters where we don't have a lot of outages. We are just coming out of the winter, just trying to, you know, kind of get back our facility to run really well in Q2 and Q3 and this quarter, except the first first couple of weeks of January, the weather weather was pretty good as well, and it helped us kind of going to perform really well on top of that, we talk about, you know, kind of higher blast book sales volume in Q1, and that is that is actually a timing of that. And that is that but Bart glass, coke sales volume timing where it was unusually front of front loaded in Q1 versus the previous year. So that helped our Q1 to be really, really good in terms of domestic coke performance for the rest of the year. I think as we reaffirm our coke, the coke domestic coke EBITDA guidance up to 38 up to 48 it kind of tells you that we expect to run kind of as expected as we announced and when we gave out our guidance initially and we kind of are on track on track to meet that guidance.
Okay.

Nathan Martin

Appreciate that color. Just make sure I follow it correctly. You said the spot last coke sales volumes were kind of front loaded, so more in the first quarter than maybe typical. So if that's true.
And how do we think about maybe the mix, the sales mix in 2Q, 3Q, 4Q again, as you allude to the adjusted EBITDA per ton is going to need to come down, obviously just to within your full year guidance. But is there is there any kind of additional planned maintenance in any given quarter that could pressure EBITDA per ton maybe in 3Q or 4Q, just for instance, or any sales mix or headwind tailwind, which we should be thinking about?

Shantanu Agrawal

No, I mean, there's obviously, as I mentioned, there was no outages in Q1. So we expect to have outages and, you know, kind of not expect we have planned outages in Q3 and Q4 of the year, right? So that will impact our performance during that time. And kind of from our contracted sales perspective, it's kind of we kind of pretty ratably laid out and then but Coke, if Q1 was heavily loaded, obviously like the rest of the year would kind of even out based on that?
As we said, we have 650,000 equal and blast and foundry coke sales, the coke tons to sell and that just laid out for the year, it just heavily loaded in the front first quarter. So it's going to be lower than that. That's top of the year.

Nathan Martin

Scott, I appreciate those comments and I'll leave it there. Best of luck in the second quarter.

Shantanu Agrawal

Thank you.

Operator

Lucas Pipes, B. Riley Securities.

Lucas Pipes

Thank you so much, operator, thank you so much for taking my follow-up question and I wondered if you could maybe give us a little bit of an update on to kind of the size of the North American blast furnace coke market. There's been the idling at Granite City, will it depend some other changes on the utilization rate of the blast furnace fleet? Obviously, there are changes if you look out over the years ahead, as discussed earlier, but and kind of what's the status quo of where would you put that the size of the market today?
Thank you.

Shantanu Agrawal

And Lucas, I mean, apart from the Granite City idling, you know, things haven't really changed that much in the North American market, right? I mean there is obviously a lot of announced year capacity coming online in the future. And two, three, four years. But as we sit here today and you know, you kind of think about versus the last two, three years, apart from the Granite City, our blast furnace shut down the utilization or the coke demand hasn't changed as a whole in North America.

Lucas Pipes

Okay, okay. So what's the what's the market size?

Shantanu Agrawal

It's roughly, you know, kind of as we have said in our earnings deck, it's around, you know, 8.5 to 10 million tons of coke coke. What is kind of being produced in the US in the North American market.
Got it.

Lucas Pipes

So this would include Algoma and the fast-growing Stelco up and up in Canada?

Shantanu Agrawal

Correct.

Lucas Pipes

And so so kind of fair to say you have what kind of 50 40% of the market.

Shantanu Agrawal

Today, we see we have roughly 30, 35% to 40% of the market because because we only sell 3.6 million tons of contracted capacity.
Right. Got it. Yes.

Lucas Pipes

Then but then you sell some other blast furnace coke in North America as well, right?
On a on a spot basis?

Shantanu Agrawal

Yes, it's not met again all over the world.

Lucas Pipes

Yes.
And then foundry as well, right?

Shantanu Agrawal

Yes, Mitch, we are not including on that, Cai.
Yes.

Lucas Pipes

So the so the 30% to 35% would just be your contracted volumes directly?
Shrimp?

Shantanu Agrawal

Yes, yes.

Lucas Pipes

Okay.
Yes.
But from then on, do you have a what is the competition on the merchant coke side? Kind of the next closest merchant coke supplier.

Shantanu Agrawal

How large with Davy, I mean, this is also again, as we've discussed, the only other merchant coke producer in the US is DDE. and you know, their capacity is in the like 800,000 to 1 million ton range.
Got it.

Lucas Pipes

And they don't have a they don't have byproducts of this set, right?

Shantanu Agrawal

They do have byproduct. They have the traditional coke production, Coke met coal production methodology.
Got it. Got it. Got it.

Lucas Pipes

Okay. Does that make sense? So kind of to the if I just kind of look at this high level of integrated capacity, still around 50%. Is that about right?

Shantanu Agrawal

Yes, a little more than 50%, I would say.
Yes.

Lucas Pipes

And how would you describe that fleet? Has it been generally well maintained? Or do you have a view on that?

Shantanu Agrawal

Yes.
I mean, as you know, kind of, you know, the coal plants that have shut down recently rates.

Lucas Pipes

Obviously, there hasn't been much capital spend on that of which which are the ones that shut down coal facilities.

Shantanu Agrawal

The recent announcement was done flatten right. The two factories that shut down, what was the utilization rate prior to that shutdown on Lucas' net for that, I guess, you know, kind of how you guys we don't follow that that closely are you know, you got to ask you US Steel for that?

Lucas Pipes

Okay.
My follow-up, if that's okay. That's that's helpful. But Tom, if your view is that you can compete effectively with that integrated capacity and kind of take share from there?

Shantanu Agrawal

Yes.
I mean, if you look at last three years, right, like what we have done since coming out of COVID, right? We have maneuvered the market really well. The market has been constantly changing as we have dogged about, and we have been able to run full and kind of, you know, run really profitably, and we continue to believe that we will be able to do that in the future.

Lucas Pipes

Okay. In terms of kind of your spot Coke our sales today, have there been increased opportunities due to customer outages in terms of the spot blast furnace coke market in North America, we look at the on the kind of we don't talk about five blast furnace coke separately.

Shantanu Agrawal

We always talk about spot glass and foundry coke on a combined basis, given the size of the market. And that part hasn't changed. That's the 650,000 equaling blast furnace coke that we sell and we intend to sell in 23, 24.

Lucas Pipes

Okay.
All right. I really appreciate the additional color.

Shantanu Agrawal

Thanks.

Lucas Pipes

Thanks so much for taking my follow-up question. Best of luck.
Thank you.

Operator

Thank you. We currently have no further questions, so I'll hand back over to Catherine to conclude.

Katherine Gates

Thank you all again for joining us this morning and for your continued interest in SunCoke. Let's continue to work safely and create value for all of our stakeholders.

Operator

Thank you.
This concludes today's call, and thank you for joining. You may now disconnect your line.