SunCoke Energy, Inc.

Good morning, my name is Rob and I will be your conference operator today. At this time, I would like to welcome everyone to the Suncoke Energy second quarter 2022 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again press the star one. Thank you. Shantanu Agrawal, Vice President, Investor Relations, you may begin your conference.

Thanks, Rob. Good morning, and thank you for joining us this morning to discuss Suncoke Energy's second quarter 2022 results. With me today are Mike Rippey, President and Chief Executive Officer, 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 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 our reconciliations to non-GAAP financial measures discussed on today's call. With that, I'll now turn things over to Mike.

Thanks, Shantanu. Good morning, and thank you all for joining us today. Today, we announced Suncoke Energy's second quarter results, and before I turn it over to Mark, who will review the results in detail, I want to discuss a few highlights. I want to start by thanking all of our Suncoke employees for their commitment and contributions to our shared goals of working safely and efficiently to deliver high-quality products and services to our customers. Our export and foundry coke initiatives continue to perform well, and we are seeing the positive impact in our financial results. In the logistics segment, we continue to see increased volumes at our domestic terminals, while CMT benefited from the easing of coal supply and rail delivery issues. By the second quarter of 2022, we delivered consolidated adjusted EBITDA of $71.3 million. Combined with the first quarter's results, this has been a record first half for SunCoke. During the second quarter, we also announced the signing of a non-binding letter of intent with U.S. Steel that sets out the principal terms and conditions upon which SunCoke will acquire U.S. Steel's Granite City blast furnaces and build a 2 million ton per year granulated pig iron facility with a 10-year initial term. This proposed project would significantly enhance Suncoast's current footprint, allowing us to become a diversified supplier of coked and metallics for the steel industry. Today, we also announced that our board of directors approved a 33% increase in our quarterly dividend from $0.06 to $0.08 per share effective September 1st, 2022, the next quarterly payment date. This meaningful increase demonstrates the board's and senior leadership's confidence in our continued progress and the stability of our underlying core businesses. Recognizing both record first half performance and softening in export Coke market conditions for the second half of the year, we are increasing our full year adjusted EBITDA guidance to 270 to 285 million from our original guidance of 240, 255 million. With that, I will turn it over to Mark to review our second quarter earnings in detail.

Mark? Thanks, Mike. I'm turning to slide four. The second quarter net income attributable to Suncoke was 21 cents per share, up 32 cents versus the prior year period. primarily driven by the absence of a 27 cents per share impact of debt extinguishment related charges in connection with the refinancing in the second quarter of 2021. Adjusted EBITDA for the second quarter 2022 came in at $71.3 million, up $3.3 million versus second quarter 2021. The increase was primarily driven by higher margins on export sales, and the API2 cold price adjustment benefit at CMT, partially offset by lower Coke sales volume due to product mix and timing of outages. Turning to slide five to discuss our liquidity position for Q2. As you can see from the chart, we ended the second quarter with a cash balance of approximately $63 million. Cash flow from operating activities generated close to $44 million. We spent approximately $21 million on CapEx during the quarter, and our debt decreased by almost $31 million. We also paid over $5 million in dividends at the rate of six cents per share during the quarter. In total, we ended the quarter with a strong liquidity position of approximately $313 million. As Mike mentioned, we announced a 33% increase in our quarterly dividend. which is consistent with our capital allocation strategy of continued strengthening of the balance sheet, along with rewarding our long-term shareholders. Now turning to slide six to discuss our domestic coke business performance and revised full-year outlook. Second quarter adjusted EBITDA was $64.3 million, and we sold just over 1 million tons of coke. The $2.9 million increase in adjusted EBITDA as compared to same prior year period was mainly driven by higher margin on export Coke sales, partially offset by lower Coke sales and production volume. The period over period Coke production and sales was negatively impacted by the timing of planned outages at our Coke plants, as well as due to the change in mix between foundry and blast furnace Coke production. As a reminder, foundry tons do not replace blast furnace tons on a ton for ton basis. For example, due to differences in the production process, a single ton of foundry coke replaces approximately two tons of blast furnace coke. Given our record first half performance, but also recognizing the softening export coke market conditions, we are increasing the domestic coke adjusted EBITDA guidance to $247 to $255 million from original guidance of $229 to $235 million. Coke sales volume guidance remains unchanged at approximately 4.1 million tons. Turning to slide seven to discuss our logistics business. The logistics business generated $12.5 million of adjusted EBITDA during the second quarter of 2022 as compared to $11.4 million in the prior year period. The increase in adjusted EBITDA was primarily due to the API 2 cold price adjustment benefit at CMT. While our domestic terminals handled higher volumes this quarter as compared to the same quarter last year, Margin was negatively impacted by higher fuel costs. The segment handled 5.8 million tons of throughput volumes during the quarter as compared to 5.1 million tons during the prior year period. CMT handled similar volume as compared to same prior year period. The coal supply and rail delivery issues which impacted CMT over the last couple of quarters seem to be easing off. and that is visible via the uptick in volume as compared to Q4 2021 and Q1 2022. Our domestic terminals handled approximately 700,000 tons more than the same prior year period, driven by increased demand of handling services from new customers. Given our strong first half 2022 results and an optimistic outlook for the balance of the year, we are increasing our logistics full year adjusted EBITDA guidance range to 48 to 52 million dollars. Turning to slide eight, which summarizes our revised 2022 guidance. We now expect consolidated adjusted EBITDA to be between 270 and 285 million dollars as compared to our original guidance of 240 to 255 million dollars. This incorporates updated profitability expectations from export sales in the Coke segment and the continuation of the API2 cold price adjustment benefit at CMT in the logistics segment through the second half of the year. Our capital expenditures guidance is unchanged at approximately $80 million. Our free cash flow guidance now stands at $120 to $135 million, as compared to original guidance of 110 to 125 million. We now expect higher than originally anticipated working capital draw due to an increase in coal inventory values and a change in coal payment terms. With that, I will turn it back over to Mike.

Thanks, Mark. Wrapping up on slide nine, as always, safety and operational performance is top of mind for our organization. Our efforts will continue to focus on safely executing against our operating and capital plans. We are pleased to see continued growth in demand for services and new customers at our logistics terminals. And based on current projections, we expect a solid second half for our logistics facilities. As I mentioned in the beginning of this call, we're extremely pleased with the success in the foundry and export coke markets. While foundry is a stable market, of limited commodity price risk, similar to our contractual last furnace coke sales, the export coke market is much more volatile. We realize the benefit of lower coal cost and export sales during the first half of the year, but now expect a softening of export markets in the second half, which is factored into our revised guidance. Importantly, sales into these markets allow our coke plants to run optimally at full capacity. We continue to make progress on our capital allocation strategy during the quarter. From a growth perspective, we continue to work towards an agreement with U.S. Steel on the Granite City GPI manufacturing opportunity. Additionally, our board of directors declared a meaningful increase in our quarterly dividend. And finally, on the debt front, we expect our deleveraging initiative to continue as we look to further bring down our revolver balance. As we have done in the past, we continue to evaluate the capital needs of our business, our capital structure, and the commitment to reward shareholders on a continuous basis and will make capital allocation decisions accordingly. Finally, based on the reliability and performance of our operating segments, while factoring in export market conditions in the second half, we look to achieve a revised adjusted EBITDA guidance of $270 to $285 million for 2022. With that, let's go ahead and open the call for Q&A.

At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. Your first question comes from a line of Lucas Pipes from B. Reilly Security. Your line is open.

Thank you very much, operator, and good morning, everyone. A good job on the quarter and raising the guidance. Mike and team, I first wanted to ask about the Granite City deal and specifically, how should we think about the commodity risks you might take, right? Historically, Suncoke passed through cost, locked in a margin. Is that the sort of structure we would be looking to at Granite City as well? Thank you.

Lucas, thanks. And, uh, you ask an excellent question as always, but, uh, and I hope you can appreciate this and I'm sure there's other questions regarding the investment we're anticipating at Granite city, but it's premature at this point, uh, why we're still evaluating the opportunity to comment beyond what we've already publicly done. I think it should go without saying. that we're very excited about the opportunity. We believe this supply chain of bringing U.S. Steel's iron ore pellets down combined with our coke, which we currently manufacture at Granite City, converted into a GPI and then utilized in the EAF segment is an extremely strong supply chain. And that's really what our company looks to do is to profitably insert ourselves into these supply chains and I think it probably goes without saying, we see this as a win-win for both ourselves and U.S. Steel, and a win for our company is a win for our shareholders. So as we've said now for many years, we're very selective and disciplined in our approach, and we expect that if we were to consummate this transaction, that it will be a profitable growth opportunity for many years to come for our shareholders. But again, I appreciate perhaps a little frustration, but this is all we can say at this time, Lucas.

No, that's how things go. I understand. You mentioned that there are still a few things to iron out, like you just said, like if we close this transaction. What are some of the major items that are still kind of up for negotiation or that need to be settled before

this transaction could close there's a principal agreement between ourselves and u.s steel there's things that we still need to learn about the overall viability of the project one could imagine that the capital cost would of course be one of those things and it's in the presence of the public announcement that we've both made so we can better determine what the capital commitment will be to complete the investments necessary to produce this product. So we're now actively in the presence of our public statement, looking to ascertain in fullness what's required to make this a truly beneficial undertaking.

Okay, that's helpful. Thank you, Mike. And then really quickly, my second theme is Coke. sales mix in 2023 between domestic blast furnace coke export uh foundry blast furnace coke and then foundry coke domestically what what's roughly the split of the market should we anticipate any any major changes to um to your sales book in 2023 thank you very much it's a great question uh lucas and we're starting now to look into uh 2023 opportunities there's

not really any change between our contractual business the more traditional coke business that we've been involved and uh between then export and foundry so no change on the contractual side no meaningful change uh what we're exploring is uh the continued opportunity to uh to grow our foundry business and we've had good success uh To date, we expect those opportunities to continue for our company. Our customers are very appreciative of the quality of our product, reliability of supply, and the value we bring them. So as we start to look into 23, one could imagine continued growth in the foundry market. And that would come at the expense of some export sales.

And your next question comes from the line of Nathan Martin from The Benchmark Company. Your line is open.

Hey, good morning, everyone. Thanks for taking my questions. Luke has kind of hit on the grant city opportunity, so I'll leave that alone for now. Maybe if I think about a couple of modeling questions. If I'm looking at the domestic Coke business, your adjusted EBITDA per ton was like $79 in the first quarter, $64 in the second quarter. Obviously, you did raise your four-year guidance to $60 to $62 per ton, but that would seem to imply a pretty decent fall-off in the second half. First, am I thinking about that correctly? If so, what's behind the expected decline, or could that range maybe still be a little bit conservative? I'd appreciate any thoughts. Thanks.

It's an excellent question, Nathan. Clearly, in the first quarter, we benefited, as we indicated in our first quarter call. by the presence of lower coal costs going into what was a rising export market. So that was a nice tailwind in the first quarter. In the second quarter, we didn't experience that benefit of the reduced coal prices. And what we see now as we go into the back half of the year is some softening in export coal market opportunities. So the change in the second half is reflective of the deceleration and the availability of price

export markets so that's uh a good question i hope that's a helpful answer got it mike i appreciate that i was figuring it was probably mainly due to your earlier comments on the south and export markets um okay maybe maybe next uh shifting gears to cmt specifically on the coal side of things looks like you're now expecting around six excuse me six million tons for the whole year which as i recall is at the lower end of your initial guidance mentioning your prepared remarks that coal supply and logistics have both started to ease or improve and obviously we know export thermal pressures remain extremely elevated so just hoping to get you know maybe a little more color there why why shipments maybe you know aren't quite as high as i would have expected them to play out thanks well you're right we had some uh catching up to do in the second quarter because there were uh disruptions in supply in the first so that was a nice catch-up quarter and now we're seeing uh

perhaps more normal run rate in the back half. The capacity is there in the facility. If the demand is there and supply is there, we'll take full advantage of it. But you're 100% correct in acknowledging that global thermal demands remain quite high. And the pricing is favorable to us with regard to the additional price we pick up over certain levels of international pricing, API too.

Mike, just real quick on that last part with the API 2 kicker, any comments on, you know, is that a tiered structure? Do you benefit even more with some of these record prices we've seen or any colors you provide there would be great?

Yeah, we don't provide insight into that contract beyond what we've already said, which is, you know, above certain levels, there is that price kicker you mentioned.

I appreciate that. I had to ask. I'm sure you understand.

I'm glad you did ask. It proves you're paying attention. But I hope you can appreciate our answer.

I do. I do. Thank you. So I'll leave it there, guys. Again, I appreciate the time. And best of luck in the second half.

Thanks. Appreciate it.

Your next question comes from the line of Carl Blunden from Goldman Sachs. Your line is open.

Hi, Mike, Mark. Thanks for the time. Congrats on the strong results and guidance raised. I appreciate a lot of still being explored for Granite City, and you mentioned that. I wonder if you could go into some of the timing considerations. Assuming you proceed, is there a sense of when you might have needs to fund the project and then the types of sources of capital you might consider based on volatility we've seen in the market recently?

That's a good question, Carl. We've said in the past, and I think it remains the case, After we've completed our discussion and reached agreement, we expect a construction period of about two years prior to startup. So that's kind of the timeline for you. Then with regard to capital needs, we would expect to fund this project out of our cash flows from operations and perhaps some borrowing under our revolvers.

That's helpful. Then as we assess the CapEx needs for the rest of the business in 23, 24, is there some kind of directional thoughts you can provide relative to how you've been running in 2022?

Yeah, I think this year is a fairly representative year where we're talking about $80 million. Of course, we're working hard now to manage the negative effects of inflation, not only on CapEx, but also on our operating expenses. So, you know, kind of a quantum of work, you'd think in that same range of 80 million. And as we come out with guidance in 23, we'll factor in not only specific projects, but also inflationary impacts that we might experience beyond what we currently have.

Helpful. Thanks for the time.

Yep. Thanks, Paul.

And there are no further questions at this time. Mr. Mike Ribby, I turn the call back over to you for some closing remarks.

Hey, well, once again, thank you all for joining us on the call this morning and your continued interest in Suncoke. Look forward to talking out ahead in the future. Thanks again. Have a great day.

This concludes today's conference call. Thank you for your participation. You may now disconnect.