SunCoke Energy, Inc.

Good day and thank you for standing by. Welcome to the Suncoke Energy second quarter 2021 earnings call. At this time all participants are in a listen only mode. After the speaker's presentation there will be a question and answer session. To ask a question at that time you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance please press star 0. I would now like to hand the conference over to your speaker, chance to move AgriWall. Please go ahead.

Thanks, Kathy. Good morning, and thank you for joining us this morning to discuss Suncook Energy's second quarter 2021 results. With me today is Mike Rippey, President and Chief Executive 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, 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. 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 Mike.

Thanks, Anup. Good morning, everyone, and thank you for joining us today. I want to discuss a few highlights of our second quarter results before turning it back to Shantanu, who will review them in detail. First, I would like to thank all of our SunCoke teammates for their continued commitment to our shared goals of working safely and efficiently to deliver high-quality products and services to our customers. On the coronavirus front, we continue to take all necessary measures to ensure the health and safety of our workforce. we continue to strongly encourage all employees to get the COVID-19 vaccination as it gives the best protection against the virus while also protecting families and coworkers. Turning to our financial performance in the quarter, we are pleased with how our teams delivered across both the Coke and logistics segments. Coke making operations continue to operate at full capacity while our logistics segment saw significant increases in volume. For the second quarter of 2021, we delivered adjusted EBITDA of $68 million, a 15% improvement over Q2 2020. During the second quarter, we also significantly strengthened our balance sheet with the execution of our debt refinancing transactions. We retired the existing 7 1⁄2% senior unsecured notes due in 2025 and issued new 4 7⁄8% senior secured notes due in 2029. Additionally, we extended our revolving credit facilities maturity to June 2026 from August 2024. These refinancings both extend our maturity profile and lowers our debt costs significantly. we will save in excess of $17 million in interest on an annual basis as a result of these refinancing activities. Operationally, our expert and foundry Koch initiatives continue to perform well, and we are seeing the positive impact in our financial results. Our products are being well received as we demonstrate our ability to reliably deliver quality products during a time when supply chain disruptions and delays have become all too common. We remain committed to future growth in these markets as we continue to see solid prospects in the years ahead. CMT's revitalization is also well underway, aided by global strength in commodity markets. We see continued improvement in both volumes and product mix handled at CMT, contributing meaningfully to our financial results. Based on our record first half performance and the expectation of continued strength in steel and coal markets for the remainder of the year, we are increasing our full year 2021 adjusted EBITDA guidance to $255 to $265 million from the original guidance of $215 to $230 million. With that, I'll turn it over to Shantanu to review our second quarter earnings and details. Shantanu?

Thanks, Mike. Turning to slide four, our second quarter net loss attributable to SXE was $0.11 per share, down $0.19 versus the prior period. Current quarter earnings per share reflects a $0.27 impact of debt extinguishment-related charges in connection with the refinancing. $68 million for the quarter. The increase was primarily due to approximately 2.2 million tons of higher throughput volumes at our logistics segment. Turning to the adjusted EBITDA bridge on slide five, second quarter 2021 adjusted EBITDA was higher by $9 million or 15% over the prior year period. Our co-cooperations again performed well this quarter and results were reasonably consistent with the second quarter of 2020. The majority of the period-over-period increase in adjusted EBITDA was driven by our logistics segment as CMT continues to see significant increases in the coal export and iron ore volumes. With little change in corporate and other, we ended second quarter at $68 million of adjusted EBITDA. Turning to slide six to discuss our liquidity position in Q2. As you can see from the chart, we ended the second quarter with a cash balance of $51.7 million. The highlight of the quarter was our debt refinancing transactions, as mentioned by Mike earlier. Along with the meaningful extensions on debt maturities, we'll also benefit from significant cash interest savings in excess of $17 million on an annual basis. In the second quarter, cash flow from operating activities generated close to $40 million. million on capex during the quarter and paid dividends of $5 million at the rate of $0.06 per share. We paid $10.5 million as transaction fees for issuance of the new senior secured notes and extension of the revolver. We also paid $22 million as premium to call the 2025 senior notes as part of the refinancing transaction. Our total debt balance increased by $9 million over the quarter and stood at approximately $667 million at the end of second quarter. On an LTM adjusted EBITDA basis, our gross leverage ratio is just under three times, and we expect additional deleveraging to continue over the balance of the year. In total, we ended the quarter with a strong liquidity position of approximately $237 million. Now moving to slide 7 to discuss our domestic Coke business performance and revised full year outlook. Second quarter adjusted EBITDA per ton was $58 on 1,063,000 sales terms. Our domestic Coke fleet continues to run at full capacity and our products in both export and foundry Coke markets are well received. Based on the performance during the first half of the year and the from original guidance of 219 to 224 million. We are also projecting coke production to be higher by 50,000 tons from the original guidance. As a reminder, the coke production guidance includes all three products, contracted blast furnace coke, export coke, and foundry coke. Moving to slide eight to discuss our logistics business. The logistics business generated $11.4 million of adjusted EBITDA during the second quarter of 2021 as compared to $3 million in prior year period. The increase in adjusted EBITDA is primarily due to higher throughput volumes at CMT. The segment as a whole handled 5.1 million tons of throughput volumes during the quarter as compared to 2.9 million tons during the prior year period. CMT handled 1.9 million more tons versus the prior year period, mainly driven by higher coal exports and the addition of iron ore as a new product. Increased global demand, strong API2 index pricing, and elevated natural gas pricing in Europe continue to spur U.S. thermal coal exports. given our strong first half 2021 results and looking at the api 2 forward curve we now expect to deliver full year logistics adjusted ebitda in the range of 45 to 48 million dollars as compared to original balance of 20 to 25 million dollars we anticipate handling approximately 7.5 million tons of coal along with approximately 3.5 million tons of other products at cmt for the full year 2021. the volume guidance for our domestic coal terminals remains unchanged at approximately 10.5 million tons. Turning to slide nine, which summarizes our revised 2021 guidance, we now expect consolidated adjusted EBITDA guidance of $215 to $230 million. This incorporates increased profitability expectations from export foundry sales in the coke segment and higher volumes at CMT in the logistics segment. Our capital expenditures are now estimated to be approximately $90 million as compared to the original guidance of $80 million with inflationary pressures being the main driver for the increase. Our revised free cash flow guidance stands at $85 to $100 million, with an increase in adjusted EBITDA, mostly offset by the 2025 Senior Notes Call Premium and debt issuance cost. With that, I'll turn it over to Mike.

Thank you, Shantanu. Wrapping up on slide 10, as always, safety and operational performance is top of mind for our organization. We look to continue to perform safely while successfully executing against our operating and capital plan the remainder of the year. As we end the second quarter, we are fully sold out for 2021 and are running at capacity. While our order book is full for this year, we will continue to focus on further developing our customer base and participation in export and foundry Coke markets for future years. We've made good progress on revitalizing CMT during the first half of the year. Based on our projections, the second half should surpass the first. We will continue to build on this foundation for CMT's long-term success. As I mentioned earlier, we significantly strengthened our balance sheet during the quarter with the execution of the debt refinancings. The revised debt structure aligns well with our business model and capital allocation priorities. For the remainder of the year, we will continue to work towards reducing our debt balance. In the longer term, we will continually evaluate the capital needs of our business, our capital structure, and the need to reward shareholders, and we'll make capital allocation decisions accordingly. Finally, based on the reliability and performance of our operating segments, we look to achieve our adjusted EBITDA guidance of 255 to 265 million for 2021. With that, let's go ahead and open the call for Q&A.

At this time, in order to ask a question, you will need to press star 1 on your telephone keypad. Again, that is star 1. We'll pause for just a moment to compile the Q&A roster. And your first question is from Matthew Fields of Bank of America.

Hey, everyone. Congrats on great execution in the founder Coke market and the logistics market and the successful refinancing. I just want to sort of touch on the debt reduction comments you made towards the end of your prepared remarks. Given the free cash flow going to 85 to 100, I think we've had already about 70 million in the free cash flow this year, so 15 to 30 left. After dividends, it's about 5 to 20 million left for kind of debt paydowns. Is that the scale of revolver pay down that we can expect to see over the back half, or is there something more that you kind of have in the hopper? What's the kind of gross debt number that we can look to see reduced from June 30 to the end of the year?

I think, Matthew, your math, as usual, is pretty spot on given the guidance that we've laid out.

Okay. And then, you know, you know, granted that we're not going to be at so much debt reduction from here to the end of the year, you've obviously got a good amount, you know, in the first half. But at guidance, the newly revised higher guidance, you're kind of well below your historical leverage target. So I guess the question is kind of what changes first, capital allocation or the leverage target?

Well, here we might disagree a bit. Our A long articulated and perhaps not well articulated target was three times or less. And I've perhaps not emphasized fully enough the or less part. We're delighted to be just below three times as we finished the second quarter. But the or less part becomes something that I need to emphasize more. So for the time being, our focus, as we've said, is to continue to pay down debt, get below that three times. And in the years ahead, we'll talk more about capital allocation, recognizing fully the need to reward shareholders, to continue to invest in our facilities, to maintain them at the high level that they are today, and have a prudent debt level as well.

All right. Thanks very much for that answer. We appreciate the emphasis on the or less part. Very helpful, and good luck on the rest of the year.

Thanks. Appreciate it.

The next question is from Lucas Pipes of B. Reilly Securities.

Thank you very much, and good morning, everyone, and congrats on a strong quarter and strong outlook for the year. Thanks, Lucas. Mike, I want to touch a bit on, you know, the minimum customer commitment for next year. I mean, this is something we've been talking about for really the past 12 months. I think it was last August that you disclosed additional information there. And so I wondered kind of what's your outlook here? There continues to be a lot of talk about carbon reduction goals in the industry. And I would appreciate if you could, you know, share your thoughts. Well, one on, you know, 2022 minimum commitments, but then also longer term, how you see Sunco positioned on that front. Thank you very much.

Look, those are great questions. And we're really not prepared today to talk about 2022. But you're correct in talking about August of last year. And we started to discuss the fact that we would enter the foundry and the export markets with around 400 to 450,000 tons to sell. And we've indeed accomplished that this year. We're running full and we're selling those quantities into the export and foundry markets. that 450 grows to approximately 800 next year, given the renewals that we did with what was then ArcelorMittal. Given the strength of markets we see today, we feel we're well-received in the markets and should be able to continue to sell successfully into those markets, notwithstanding the fact that things may change. So that's... You know, kind of when you think about 21 and 22 and what was required of us to sell into the foundry and export markets, that's where that stacks up. You mentioned carbon, and that's a much longer-term issue. question you know people committed themselves to uh you know in the extreme be carbon neutral by 2050 we of course support initiatives to reduce the carbon footprint that's associated with making a steel i'd remind you that the U.S. carbon footprint compared to the rest of the world is very, very favorable. Whether you're comparing against European steelmakers or Asian steelmakers, we clearly, as a country, have the best carbon footprint today. And I look to see that continue to improve. We play a role in that, of course, and the role we play is, and we emphasize this, we reliably produce a very high-quality coke. And The nature of our coke, the quality of our coke, the strength of our coke allows for better burden support than you might find in lesser cokes. And when you can support the burden in the blast furnace, that allows for the increased usage of substitute fuels, whether it be natural gas or HBI. So as our customers look to reduce their carbon footprint and increase the use of other fuels in their furnaces, we stand ready to support them, again, with our high-quality cokes, which we believe to be unmatched here domestically and perhaps globally. And as well, we look to maintain our leading environmental technology, which in the coke making process itself is the best in class. So we encourage the reduction in the carbon footprint and all those discussions that are taking place today. We think we're well positioned to participate.

Terrific. Really, really helpful. Thank you, Mike, for that detail. Second question, turning over to your logistics business, obviously a remarkable recovery in seaborne coal prices in particular. And And kind of as you look at how this business is positioned today, you know, you raised guidance. Is there interest for longer-term arrangements again? There were discussions in the past about possibly selling CMT. Is that something that you'd consider here? And maybe there are more interested parties as well. So I appreciate kind of a more comprehensive discussion of the market, and then also the strategic outlook for CMT. Thank you very much.

Good question, Lucas. Obviously, we're very pleased with the performance at CMT. As I know you'll remember, only a few years ago, CMT was more or less a captive facility to two customers. And those customers uh went through bankruptcy and that was a blow to cmt and the challenge then for our team was to reposition that asset into a merchant uh facility and had we been unable to successfully reposition the asset we would have considered a sale of the asset uh perhaps to someone better positioned to uh to bring about that revitalization and that was a challenge for our teams uh and as you can see in our results they've responded beautifully they've been out working hard knocking on doors and uh looking to enter new supply chains, which aren't easy. It's not easy to disrupt a supply chain that's working well, so you have to have some patience. Notwithstanding my patience, they've exceeded our expectation. Part of that, of course, owes to the strength in the global commodity markets. A little wind at the back never hurt anybody. API2 prices are quite elevated today by historic measures. And if you look at the forward API2 curve, it remains elevated. So we're quite encouraged with the prospects for CMT on the thermal side, as well as other commodities that we look to handle through the facility. And we've had good success with iron ore and pet coke, and we're going to look to continue with those initiatives. So our singular focus now is to continue to build on the good success the team has had. Like I said, I couldn't be more pleased with the work that they've done over the last 18 months to get this facility turned around and repositioned.

Very helpful, Mike. And a quick follow-up on that, when I think about 7.5 million tons of coal, 3.5 million tons of other materials, how does that compare to the main plate capacity? And so is there kind of room to the, you know, to the top to maybe increase volumes further given the strong market backdrop?

There's a little more room, Lucas. It's a great question. You know, I'd like to see us, you know, perhaps a little longer-term handling 15 million tons through there. We've made some de-bottlenecking investments. at the facility to allow for that to happen. You know, we're going to be happy with 11 this year, and maybe 12 is an all-time record for us. I don't go back that far, but I recall some of the folks that were around longer than me talking about 12 million ton years, and if we get to 12, we're not going to be satisfied. We'll look to be bottleneck and get to 15.

Very good. I will leave it here. Thank you very much for all the color, and best of luck.

Thanks.

Your next question is from Carl Blandon of Goldman Sachs.

Hi, good morning. Thanks for the time. You've definitely built some flexibility on the balance sheet with the recent transaction and looks like cash flows coming in a bit stronger than your prior expectations. When you take a look at the M&A environment, is there opportunity for you to play a role in that?

We'd like to think so, Carl. It's a good question. I appreciate it. We have and we continue to look for opportunities, adjacent opportunities, where we can provide value to our shareholders by delighting customers. We're not talking about consumer product companies here. We're talking about steel companies and related industries. We look for opportunities to build on our foundation in serving our customers and markets we know with products that we know. We've got a very nice technology portfolio at the company that we'd like to expand. You see the success of the foundry Coke market. Well, that's not M&A. It's organic growth. But those are the kind of undertakings we look for. Organic, obviously. First, because returns with organic growth are typically higher because the CapEx requirement is typically not large compared to the acquisition cost of an asset. But we're looking for good assets with good managements that are complementary to what we do. We're quite disciplined. We haven't done anything in my three and a half years, not for lack of trying, but we're very disciplined in our approach. And unless we see returns that are well in excess of our cost of capital, we simply won't grow for the sake of growth. So we've got a very disciplined approach here. We're looking. We just haven't found anything as of this date that meets all of our criteria.

When you look at valuations available in the market today, could M&A be deleveraging after synergies?

Could be a lot of things. Let's just leave it at that. We're not going to start to predict the future.

Sounds good. We've spoken about success on kind of the commercial and revenue side. When You think about cost inflation and managing that through the footprint, other areas of concern, or how are you managing it in the business today?

Well, we're seeing some inflation, as Shantanu indicated in his remarks on the capital side. Clearly, labor's tighter than what it has been historically, and the way you attract labor in a tight market is you pay it more. It's a simple math of supply and demand. And there's materials cost inflation. We see hot bands at $1,800 a ton, where not so long ago they were $500 a ton. So there's material cost inflation as well. We have to manage that by being as efficient as we can with the utilization of those inputs. On the operating front, we only really have two components, coal, which is a pass-through component, to our customers and the labor that we use to convert that coal to coke and the labor that we use to maintain our facilities. We haven't seen remarkable inflation there yet. As you know, the take or pay nature of our contracts allows for some of that increase to be passed on to our customers. You know, we don't, just because we can pass it on, take that as a reason not to continue to look to be ever more efficient. So in all of our activities, you know, if we're doing maintenance, for example, we look to extend the time between outages so there's less need for outages and therefore less need for our labor and materials. We look to deploy automation to the extent we can. We look to increase our yields. We look to increase our throughputs. We guided 50,000 tons up for the balance of the year on COPE, and there's no requirement for additional labor with that 50,000 tons. So to the extent we can be more efficient with our output, there's no labor component. So you're offsetting the cost, those inflationary cost increases, by generating more throughput. So there's There's lots of levers an industrial company can pull to try to offset what may be some structural changes in the inflationary environment. There's a lot of debate out there about whether this is transitory inflation or if it's structural. I don't want to second-guess the economists in the Fed, but it certainly feels, to me anyway, that there's a little bit of structural inflation in the economy now.

Thanks a lot, Mike. Appreciate it.

Yep.

And once again, to ask a question, you will need to press star 1 on your telephone keypad. Again, that is star 1. Your next question is from Nathan Martin of the Benchmark Company.

Yeah, thanks. Good morning, everybody, and congrats on the quarter and the debt refinancing. Yeah, my bigger picture questions have mostly been addressed at this point. So just really a quick modeling question. Maybe I missed it in the release, but can you guys give us the breakdown in volumes at CMT between coal and other products? You mean 7.5 for coal and 3.5 for other?

No, in the quarter, Mike. I'm sorry.

In the quarter, I would have to look at it. I've seen something that you guys did about, I think it was $2.1 million in time in the first quarter and $750,000 of other. I'm just curious what that might have looked like in Q2. It's similar in the second quarter as well.

That's right.

Okay. Got it. Perfect. Appreciate that. Really, that's all I had left, guys. I appreciate the time and best of luck in the second half.

Thank you.

And your next question is from Josh of Credit Suisse.

Hey, guys. Thanks for taking the question. Just had one for me that might have been answered. But was wondering if you could maybe just talk through the sequential you know, slight margin pressures that you saw in 2Q versus 1Q. I guess more specifically, you know, the sequential decline in EVPA per ton on the domestic side as well as the margin differential in your Brazil Coke.

Josh, it's really, you know – Kind of what I would think of on the one hand is noise. You know, we have a little more outage work going on in the second quarter than the first. As we discussed in the first, it was really an exceptional quarter where almost nothing went wrong. So, you know, it's relatively quarter over quarter the same results. You know, you've got some seasonality, some outage work, so timing, for lack of a better word. And then Brazil... I think we earned the bonus in the second quarter and a little more throughput there. Is that right, Shantanu?

Yeah, I mean, it's really not a margin question. I think it's more of a denominator that Coke tons produced and sold. I mean, I think that the numerator, the EBITDA, was more or less the same. It's just the timing of the tons being sold, and that leads to the dollar per ton being higher in Q1 versus Q2. It's really not a margin question. Got it.

That's helpful. Thanks, guys. Appreciate it.

And there are no further questions at this time. I will turn the call back over to Shantanu.

Thanks, Kathy. And, again, thank you all for joining us this morning and for your continued interest in Sunco. I look forward to talking soon.

Thank you.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.