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 fourth quarter 2022 earnings and 2023 guidance 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, Finance and Treasurer, you may begin your conference.

Thanks, Rob. Good morning, and thank you for joining us this morning to discuss Suncoke Energy's fourth quarter and full year 2022 results, as well as 2023 guidance. With me today are Mike Rippey, Chief Executive Officer, Catherine 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 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 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 Mike.

Thanks, Shantanu. Good morning, and thank you all for joining us today. Let me start by recognizing the appointment of Catherine Gates as president of Suncoke, effective January 1st of this year. Catherine joined Suncoke in early 2013 and has demonstrated excellent judgment and leadership in each of her various roles. Catherine's promotion to president recognizes her significant contributions at Suncoke, and I look forward to continuing to work together in her new role. Catherine will review our 2023 earnings guidance and key initiatives later in this presentation. As we look back on 2022, I want to thank all of our Suncoke employees for their contributions in achieving our 2022 objectives. The dedication of our team is evident through our excellent safety record, operational performance, and financial results. Slide three details the key objectives that we set out for 2022 and how we performed against these objectives. We exceeded the high end of our revised guidance range of $285 million. delivering 297.7 million of adjusted EBITDA in 2022, a record for our company. Additionally, we generated approximately 133 million of free cash flow, which was within our revised guidance range of 120 to 135 million. Our domestic Coke business operated at full capacity. which allowed us to take advantage of strong export Coke market conditions, as well as increase our foundry market participation. As announced in our previous earnings call, we're undertaking a capital project that will enable our Juul plant to produce 100% foundry Coke. This project, which is expected to be completed in the third quarter of this year, will allow Sun Coke to further grow our participation in the foundry market. Importantly, The Jewell facility will not lose the flexibility to alternate between blast and foundry coke production after this project is completed. We also made great progress on our capital allocation priorities in 2022. We deployed free cash flow to reduce our gross debt by approximately 83 million. Additionally, we returned almost 24 million to our shareholders, having increased our quarterly dividend from six cents to eight cents per share during 2022, which we anticipate will continue in 2023. Lastly, we entered into a non-binding letter of intent with U.S. Steel to manufacture granulated pig iron, and we will continue developing this project in the coming year. With that, I'll turn it over to Mark to review our fourth quarter and full year earnings in detail. Mark? Thanks, Mike.

Turning to slide four. The fourth quarter net income attributable sun coke was 14 cents per share, down 1 cent versus the fourth quarter of 2021 due to lower export coke contribution margins being partially upset by lower interest expense. Our full year 2022 net income attributable sun coke was $1.19 per share, up 67 cents versus the full year 2021. driven by our strong operating results, the absence of debt refinancing related expenses, and lower interest expense. Consolidated adjusted EBITDA for the fourth quarter 2022 was 58.9 million, down 4 million versus the fourth quarter of 2021. The decrease was mainly driven by lower contribution margin on export Coke sales, partially offset by higher volumes in the logistics segment and lower legacy liability expense at corporate. On a full year basis, we delivered adjusted EBITDA of 297.7 million up 22.3 million versus the full year 2021. Turning to slide five to discuss the year-over-year adjusted EBITDA variance in detail. Our Coke business delivered strong financial results mainly driven by higher contribution margin on export Coke sales. The domestic Coke segment delivered full year adjusted EBITDA of 263.4 million, well above our full year revised domestic Coke guidance range. Including Brazil, our Coke operations delivered adjusted EBITDA of 277.9 million. The logistics segment adjusted EBITDA increased approximately 6.2 million year over year, driven by higher throughput volumes and higher pricing. With the backdrop of a strong commodity market, the logistics segment delivered full-year adjusted EBITDA of 49.7 million. Finally, our corporate and other expenses were higher by 1.2 million year-over-year, mainly due to higher employee-related expenses, partially offset by lower non-cash legacy liability expenses. Overall, we are very pleased with the performance across all segments, resulting in a historic year for the company. Turning to slide six to discuss capital deployment in 2022. We generated very strong operating cash flow of approximately 209 million, which allowed us to make good progress on our capital deployment initiatives. Capital expenditures of 75.5 million during the year were slightly below our guidance of approximately 80 million. We also reduced our gross debt outstanding by approximately 83 million in 2022. Year over year, we brought down our gross leverage ratio from 2.28 times to 1.83 times. We expect to continue to delever in 2023 and reduce our outstanding revolver balance. We returned capital to our shareholders in the form of our common dividend in 2022, which was a use of approximately $24 million of cash. As mentioned by Mike, we increased our dividend by 33%, That is from 6 cents to 8 cents per share during the third quarter of 2022. In total, we ended 2022 with a cash balance of approximately 90 million and strong liquidity of approximately 405 million, setting the stage for continued progress against our capital allocation priorities in 2023. Now I'd like to turn it over to Catherine to review our guidance expectations for 2023. Catherine?

Thanks, Mark, and good morning, everyone. We expect adjusted EBITDA to be between $250 and $265 million this year. Domestic Coke adjusted EBITDA is expected to be lower by $22 to $30 million, driven primarily by our expectation of lower price realization on export sales due to market conditions. We expect to continue to run our Coke facilities at full capacity and to continue increasing our participation in the foundry Coke market. Brazil Coke adjusted EBITDA will be lower by $5 to $6 million due to the expiration of a technology fee from a prior transaction. In 2016, Ursula Middle Brazil redeemed Suncoke's equity interest in the Brazil Coke facility for $41 million cash consideration. Suncoke also received approximately $5 million in technology fees annually for years 2017 to 2022 as part of that redemption transaction. As a reminder, the Brazil Coke facility is owned by ArcelorMittal Brazil, and Suncoke provides the operating and technological services pursuant to an operating agreement. Turning to the logistics segment, we expect adjusted EBITDA to be flat to lower by 3 million in 2023. We anticipate similar volumes at CMT year-over-year, but with normalized high water costs that could impact profitability year-over-year. Lastly, we expect our corporate and other segment expense to be higher by approximately 6 to 9 million driven by normalized non-cash legacy liability expenses. Moving on to slide nine to discuss the Coke segment in detail. In 2023, we estimate our domestic Coke adjusted EBITDA to be between 234 and 242 million, with sales of approximately 4 million tons of contract, foundry, and export Coke. We expect to run the domestic fleet at full capacity, Approximately 3.6 million tons are contracted under our long-term take-or-pay agreements in 2023. We anticipate selling the remaining 650,000 furnace equivalent tons in the foundry and export coke markets. 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. The order book for foundry coke is solid, and export sales for the first quarter of 2023 have been finalized. While we expect to continue running at full capacity, the lower year-over-year adjusted EBITDA is primarily due to lower price realizations on export coke sales based on current and future expected market conditions. The export coke market is experiencing significant price volatility, and that is factored into our guidance. Moving to slide 10 to discuss logistics in more detail, 2023 logistics adjusted EBITDA is estimated to be between 47 and 50 million. This estimate is based on normalized high water costs at CMT, which we did not experience in 2022. Our outlook also considers the current expectations for thermal coal export volumes from the Gulf Coast, the price realizations based on the API2 forward curve. We anticipate volumes to be similar year over year at CMT, projecting approximately 5.7 million tons of coal to be exported and approximately 4.3 million tons of non-coal throughput, such as iron ore, pet coke, and other products. We anticipate logistics adjusted EBITDA to be slightly lower to flat year over year, mainly driven by the expectation of more normalized high water costs in 2023. Like 2021, 2022 was another unusual year at CMT from a high water perspective. We incurred no high water costs during 2021 or 2022, but anticipate a more normalized weather pattern resulting in high water costs at CMT in 2023. Overall, we anticipate another strong year for our logistics segment. Moving to the 2023 guidance summary on slide 11, this slide provides a historical view of actual performance across several metrics as well as a summary of our 2023 guidance. Once again, we expect adjusted EBITDA to be between $250 and $265 million. Our Coke business is expected to run at full capacity, but with lower price realizations on export Coke sales. We expect 2023 logistics performance to be similar to 2022. We anticipate our CapEx requirements in 2023 to be approximately $95 million, which includes the Foundry Coke expansion project. Our free cash flow is expected to be between 105 and 120 million after taking into account cash interest, cash taxes, capital expenditures, and working capital changes. Now turning over to slide 12 to discuss our 2023 key initiatives. As always, safety is our first priority, and we will continue to focus on strong safety and environmental performance in 2023. Operational excellence will drive our operating and capital plan achievements. We will continue to pursue opportunities to optimize our assets, specifically as it relates to foundry and export Coke. As mentioned earlier in the call, we are pleased with our increased participation in the foundry Coke market, and our focus in 2023 will be on completing the foundry Coke expansion project at our dual facility. This will enable us to continue to grow our market participation and provide further diversification. As we've demonstrated in the past, we will continue to pursue a balanced yet opportunistic approach to capital allocation. We expect our deleveraging initiative to continue in 2023 as we look to bring down our revolver balance further. From a growth perspective, we will work on developing the Granite City GPI project. We continue to 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. Looking beyond 2023, we believe that Suncoke is well positioned for long-term success. We believe that Coke supply will continue to exit the market as many assets are underinvested and significantly aging. Suncoke has the youngest domestic coke-making facilities in North America with the leading technology. We will continue to invest in our facilities to ensure that they operate safely, efficiently, and with outstanding environmental performance. We will continue to take advantage of our facilities and their performance by taking additional steps towards diversifying both our customer and product base. In 2023, we see good potential to further build on the strength of our core coke making and logistic businesses to meet our financial targets and create value for shareholders. With that, let's go ahead and open up the call for Q&A.

At this time, I'd 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 the line of Lucas Pipes from B. Reilly Securities. Your line is open.

Thank you very much, operator. Good morning, everyone, and nice results. And this leads me to my first question. You're providing solid guidance for next year, kind of from EBITDA down to cash flow. What stands in the way here of significantly higher capital returns to shareholders? Thank you very much for your color on that.

Lucas, I appreciate your comments, and we don't think anything stands in the way of our continued progress. Our balance sheet is in great shape. As we've indicated in the past, we expected to deliver significantly. We've done that. We've positioned ourselves very well to grow. Our focus with regard to growth now is the GPI facility at Granite City. We continue to work in developing that project, and our copemaking assets continue to run full. We've been able to move some away from the contractual market into the export market, as well as our success in foundry. We've repositioned CMT towards throwing off very, very high levels of return operating at not yet capacity, but pretty darn close to it. So, you know, there are incremental opportunities to grow our participation down at CMT. But the challenge for us is to keep doing the good things we're doing and generating the cash and deploying it to grow to the benefit of our shareholders.

That's helpful. Thank you, then. Maybe to turn to the balance sheet on this note, what is your long-term debt growth or net target?

Well, I said we wanted to be under three times. We've successfully brought it down under three times. We've had great progress, $83 million down this year. And we're going to continue to work. We still got a little bit left in the revolver. We'll pull it down. And again, that leaves us very well positioned for growth. It leaves our balance sheet in really good shape to weather any storms we might see out ahead. We have to remind ourselves that this is, in fact, a cyclical business, so we're not going to lever up. And we have the ability to continue to reward shareholders, as we did last year when we raised the dividend by 33%.

I appreciate that. And then in terms of the capital for 2020, that's capital spending for 2023, can you provide the breakdown between sustaining capital and growth capital?

Thanks, Lucas. In terms of the capital for 2023, We don't give out, you know, specific capital on projects itself, but as you know, as you can see in the capital number, that reflects the growth expansion project for Foundry at Jewell, and that is built into our $95 million number.

In order of magnitude, is it maybe 10 to 20 million? Would that be the right zip code?

That would be, and that gives you a good sense of, you know, going forward when we think about our sort of ongoing maintenance capex to continue to invest in our facilities. You can think about that, you know, around 80 to 85 million.

That's very helpful. I appreciate the caller. I have more questions, but I'll turn it over for now. Thank you, and best of luck. Thanks, Lucas.

And again, if you'd like to ask a question, press star one on your telephone keypad. Your next question comes from a line of Nathan Martin from the Benchmark Company. Your line is open.

Hey, good morning, everyone. Thanks for taking my questions. And Catherine, congrats on the recent appointment. Thanks, Nathan. You're welcome. You guys talked about how, again, expected lower realizations on export sales are likely to drive down EBITDA opportunity domestic Coke segment this year. Can we maybe get your thoughts on possible cadence of that pricing over the next four quarters? I know you pointed out 1Q export Coke sales have already been finalized. So, you know, just an example, you know, is the market weaker now and you expect it to get better in the second half? Or any color there would be great. Thank you.

Sure. Thanks, Nathan. I think as we look over the full course of 2023, We expect to see some improvement in the market as we move further into 2023. So the back half is looking, you know, better for us than as we sit here in first quarter and second quarter.

Great. Very, very helpful, Katherine. Maybe a quick question on CMT. It looks like you guys got into kind of flat volumes overall. About 5.7 million tons of coal exports for this year. Curious, how does that compare to full year 22? Even just directionally would be helpful. And then with the pullback in API 2 prices, we've seen around $145 a metric ton today or so. Are you still receiving that price kicker on those tons?

Thanks. So in terms of the volumes, we're really flat year over year, you know, satisfied with those volumes, but really it's flat year over year. And when we look at API 2, we are very comfortable that the guidance that we have builds in the price adjustment for the full year. And with where we are today, we're very comfortable with that guidance on the API 2 pricing.

So are you receiving that kicker today or no, or is that incorporated in your guidance that you're comfortable with, I guess?

We are receiving the kicker today, and the guidance incorporates the anticipation of receiving it for the full year.

Perfect. Very helpful. Thank you. Maybe just one final question. On a segment that doesn't get much attention, I think you described this a little bit in your prepared remarks, but the Brazil Coke segment, again, kind of down $5 million to $6 million on EBITDA side. the expiration of those technology fees, is there any opportunity to get, you know, some of that EBITDA back over the next few years? Or, you know, it's kind of going from 15 million of EBITDA plus or minus from 22 to around, let's call it 10 this year. Is that $10 million kind of a good run rate to think about going forward for now?

It is, Nathan. That really is the runway going forward. This was an expected drop. And based on the structure of Brazil, you know, we don't take any risk on the capital or operating side when we anticipate collecting that $10 million, you know, going forward.

Got it. Maybe just one final one, just I'm going to try. Any updates you can share on the Granite City opportunity?

I appreciate the, I'm going to try, but I may disappoint you a bit, Nathan, but, you know, we are in discussions with U.S. Steel, and we're continuing to assess the capital and the other project requirements.

As I expected, Catherine, but I wanted to throw that out there.

You know, I tried real hard for you. Sorry, Nathan.

All right. I'll leave it there. Best of luck in 23.

Thank you. And we have a follow-up question from the line of Lucas Pipes from B Reilly Securities. Your line is open.

Thank you very much, operator. And I'm going to ask a few more questions on Granite City. So I appreciate Nathan softening the ground on that score. Is there a time by which you would like to conclude the analysis?

Well, Lucas, appreciate the question. I think this is a complex project. It takes time. We're going to take the time that it takes to get the project right.

And in terms of the aspects that are still under analysis today, could you comment on that? Where are you spending most of the time and the due diligence today?

We're really focused on the capital. That is the primary focus, is the capital requirements for the project.

And that's on an ongoing, that's essentially like the amount of capital you would have to put into the facility to convert it to a pig iron facility?

Exactly right. You're exactly right.

Okay. That's very helpful. I appreciate that. And in terms of back to capital returns, Would it be fair to assume that part of the current capital return policy is contingent upon a decision on Granite City, or is that maybe a step too far? Thank you for the follow-up.

Sure, absolutely. No, I think that's it. I think that's right in the sense of right now we are really focused on preserving our cash for the GPI project.

Got it. Very, very helpful. Thank you. And do you have a minimum liquidity target? Can you remind us?

We really don't. I mean, as Mike said before, I mean.

No, I can take that, Lucas. I mean, basically, you know, what we have left on the revolver, kind of that's kind of our target to get that off the balance, like get that paid down. That's what Mike said. And then, you know, kind of we'll go from there.

And as we've said in the past, Lucas, you know, three times is the high watermark for us, so we're not going above that. And as we indicated with regard to the GPI project, we fully expect to fund that with cash flow from operations and perhaps some very modest borrowings under our revolver. But we have very, very significant liquidity and we don't expect to have to go into that. And if we do it all, it'll be in a very modest way and revolver so.

know we're in good shape all the way around um very helpful um yeah to the entire team thank you thank you for this and again best of luck and there are no and there are no further questions at this time miss catherine gates i turn the call back over to you for some final closing comments all right well you know thank you all again for joining us this morning

For those of you who are attending the BMO conference coming up here, I look forward to meeting with you in person. And thank you for your continued interest in Suncoast.

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