SunCoke Energy Inc

NYSE:SXC

Earnings Call Analysis

SunCoke Q3 Earnings: Solid EBITDA, Lower Margins

In Q3 2023, SunCoke Energy navigated market challenges to deliver a consolidated adjusted EBITDA of $65.4 million, with all noncontracted blast furnace coke sales settled for the year. The company announced a dividend of $0.10 per share, and maintains a robust liquidity of $475.9 million. Despite lower contribution margins leading to a $0.12 decrease in EPS, excluding tax adjustments, the company is poised to reach the higher end of its annual adjusted EBITDA guidance of $250 million to $265 million.

Performance Amidst Challenges: SunCoke Energy's Third Quarter 2023

In the face of a demanding market environment, SunCoke Energy sustained full capacity operations at its domestic coke plants during the third quarter of 2023. However, the company faced lower contribution margins on noncontracted blast coke sales compared to the previous year's record third quarter. Despite these challenges, SunCoke Energy managed to finalize their noncontracted blast furnace coke sales for the remainder of the year, showcasing their adeptness in navigating market conditions.

Financial Outcomes and Prospects: Adjusted EBITDA and Dividend News

The consolidated adjusted EBITDA amounted to $65.4 million, a noticeable downturn from the last year but in alignment with the market. A dividend payout of $0.10 per share has been announced, payable to shareholders on December 1, 2023. The company's quarter-end liquidity was robust at $475.9 million, complemented by a gross leverage of 1.91x based on a trailing 12-month adjusted EBITDA. Additionally, SunCoke Energy is poised to reach the upper boundary of its projected annual adjusted EBITDA between $250 million and $265 million, reflecting a resilient business model.

Earnings Per Share and Adjusted EBITDA: A Closer Examination

SunCoke's net income per share stood at $0.08 for the third quarter, a $0.41 decrease from the same quarter last year, with tax adjustments significantly impacting EPS. Adjusted for these changes, the EPS faced a $0.12 reduction mainly due to the low margins on noncontracted blast coke sales. The third quarter's adjusted EBITDA saw a $18.3 million dive from the preceding year, with the Domestic Coke segment anticipated to hit the upper spectrum of its $234 million to $242 million guidance range for the year.

The Logistics Business: Adjusted EBITDA and Volume Handling

SunCoke’s Logistics segment yielded an adjusted EBITDA of $8.4 million and managed approximately 5 million tons in throughput volume for the third quarter, which was less than the previous year due to reduced throughput volumes and lower API2 price adjustments. Despite this, there are expectations for the API2 price adjustment to bounce back in the fourth quarter, with the full year's adjusted EBITDA for Logistics projected at the lower end of the $47 million to $50 million guidance range.

Liquidity and Cash Flow: A Snapshot

With a cash balance of approximately $126 million and cash flow from operations around $94 million for the quarter, SunCoke demonstrated strong liquidity. The operating cash flow was favorably influenced by working capital shifts, though a revision is expected in the subsequent quarter. Dividends paid amounted to $8.4 million, evidencing SunCoke’s commitment to shareholder returns.

Strategic Moves and Future Ambitions

SunCoke successfully completed its foundry expansion on schedule and within budget, signaling their intent to expand in the foundry market. The achievement also reflects their adaptability, enabling them to make both blast and foundry coke. While reiterating their dedication to judicious capital allocation, SunCoke looks to the future with optimism, backed by the reliability and performance of its operations, to attain the highest projected adjusted EBITDA for the year.

Outlook for the Fourth Quarter and Beyond

SunCoke anticipates the recovery of the API2 price adjustment in the fourth quarter, which could positively affect the year's revenue. The company's steadfast approach to management and operations, despite the market's unpredictability, supports their forecast of reaching the objective EBITDA figures as they conclude the year.

Earnings Call Transcript 2023-Q3

[Operator]

Good morning, everyone, and welcome to the SunCoke Energy Third Quarter 2023 Earnings Call. My name is Chad. And I will be coordinating your call today. [Operator Instructions] I'd now like to hand over to Shantanu Agrawal, VP Finance to begin. Please go ahead.

[Shantanu Agrawal, executive]

Thank you, Chad. Good morning, and thank you for joining us this morning to discuss SunCoke Energy's Third Quarter 2023 results. With me today are Mike Rippey, Chief Executive Officer; Katherine Gates, President; and Mark Marinko, Senior Vice President and Chief Financial Officer. Following management's prepared remarks, we'll open the call for Q&A. This conference call is being webcast live on the Investor Relations section of our website, and a replay will be available later today. If we do not get to your questions on the call today, please feel free to reach out to our Investor Relations team. Before I turn things over to Katherine, let me remind you that the various remarks we make on today's call regarding future expectations constitute forward-looking statements. The cautionary language regarding forward-looking statements in our SEC filings, apply to the remarks we make today. These documents are available on our website as are reconciliations to non-GAAP financial measures discussed on today's call.

With that, I'll now turn things over to Katherine.

[Katherine Gates, executive]

Thanks, Shantanu. Good morning, and thank you for joining us on today's call. Earlier today, we announced SunCoke Energy's third quarter results. Before I turn it over to Mark to review the results in detail, I do want to share a few highlights from Q3. We I'd like to start by thanking all of our SunCoke employees for their contributions to our third quarter results. Our domestic coke plants operated well and continued to run at full capacity. When compared to last year's record third quarter results, we delivered lower contribution margins on noncontracted blast coke sales. Similarly, our logistics terminals continued to operate well, but saw lower volumes and pricing driven by weaker demand during the quarter.

Through our collective efforts, we delivered consolidated adjusted EBITDA of $65.4 million. We continue to successfully navigate through challenging market conditions with all of our noncontracted blast furnace coke sales finalized for the remainder of the year. Earlier today, we announced a $0.10 per share dividend payable to shareholders on December 1, 2023. From a balance sheet perspective, we ended the third quarter with a strong liquidity position of $475.9 million. Our gross leverage was approximately 1.91x on a trailing 12-month adjusted EBITDA basis at the end of the quarter. Finally, we continue to execute against our 2023 objectives and remain well positioned to achieve the high end of our full year adjusted EBITDA guidance range of $250 million to $265 million. With that, I'll turn it over to Mark to review our third quarter earnings in detail. Mark?

[Mark Marinko, executive]

Thanks, Katherine. Turning to Slide 4. Net income attributable to SunCoke was $0.08 per share in the third quarter of 2023, down $0.41 versus the prior year period. Tax adjustments of $0.29 per share impacted EPS, primarily due to tax law changes in the U.S. and Brazil in both 2022 and 2023. Excluding the impact of these adjustments, EPS was lower by $0.12 per share quarter-over-quarter, primarily driven by lower contribution margins on noncontracted blast coke sales, partially offset by favorable coal-to-coke yields. .

Adjusted EBITDA for the third quarter 2023 was $65.4 million, a decrease of $18.3 million from record results of third quarter 2022. The decrease in adjusted EBITDA was primarily driven by the lower contribution margins on noncontracted blast coke sales, partially offset by favorable coal-to-coke yields and lower transloading volumes and pricing in our Logistics segment.

Moving to Slide 5 to discuss our Domestic Coke business performance in detail. Third quarter domestic coke adjusted EBITDA was $64 million and coke sales volumes were 1,016, 000 tons. While the domestic coke fleet has continued to run at full capacity, the decrease in adjusted EBITDA as compared to the record prior year period was primarily driven by lower contribution margin on our noncontracted blast coke sales, partially offset by higher coal-to-coke yields. As Katherine mentioned, we continue to successfully navigate through difficult market conditions and all our coke sales are finalized for the rest of the year.

Given the solid year-to-date performance of our Domestic Coke segment, we are well positioned to deliver domestic coke adjusted EBITDA on the high end of our guidance range of $234 million to $242 million. Now moving on to Slide 6 to discuss our Logistics business. Our Logistics business generated $8.4 million of adjusted EBITDA and handled combined throughput volumes of approximately 5 million tons during the third quarter of 2023 as compared to $12.9 million and 5.7 million tons, respectively, during the same prior year period.

The decrease in adjusted EBITDA was primarily due to lower throughput volumes and a lower API2 price adjustment benefit at CMT. We continue to see volatility in thermal coal pricing as evidenced by CMT recognizing a limited API2 price adjustment benefit during the third quarter. However, we expect the API2 price adjustment to recover during the fourth quarter. Based on our year-to-date performance and anticipation of continued volatility in the market, we expect to deliver Logistics full year adjusted EBITDA at the low end of our guidance range of $47 million to $50 million.

Now turning to Slide 7 to discuss our liquidity position for Q3. SunCoke ended the third quarter with a cash balance of approximately $126 million. Cash flow from operating activities generated approximately $94 million. For the quarter, cash flow was favorably impacted by working capital changes, mainly the timing of receivables and payables. We expect this favorability to reverse in the fourth quarter. We paid $8.4 million in dividends at the rate of $0.10 per share this quarter and spent $34.1 million on CapEx. In total, we ended the quarter with a strong liquidity position of approximately $476 million.

With that, I will turn it back over to Katherine.

[Katherine Gates, executive]

Thanks, Mark. Wrapping up on Slide 8. safety, environmental and operational performance are top priorities for our company. We remain focused on safely executing against our operating and capital plan for full utilization of our cokemaking assets. As mentioned in our second quarter earnings call, we completed the foundry expansion project on time and on budget. This project allows us to grow our foundry market participation while maintaining flexibility to make either blast or foundry coke. We will continue to pursue a balanced opportunistic approach to capital allocation as we've demonstrated in the past.

We continuously evaluate the capital needs of the business and our capital structure and we'll make capital allocation decisions accordingly. As mentioned earlier, despite challenging market conditions, we were able to finalize all of our noncontracted blast furnace coke sales for the year. Finally, based on the reliability and performance of our operating segments, we look to achieve the high end of our full year consolidated adjusted EBITDA guidance of $250 million to $265 million.

With that, let's go ahead and open up the call for Q&A.

[Operator]

[Operator Instructions] Our first question today comes from Lucas Pipes of B. Riley.

[Lucas Pipes, analyst]

Just a few quick ones. The first one is on the blast furnace coke side, and you mentioned kind of the weaker contributions there during the quarter. I wondered if you could remind us how those tons are typically priced and what causes variability in the contribution margin.

[Katherine Gates, executive]

So thanks, Lucas. Appreciate the question. So -- the contribution margins are dependent on what the spot blast furnace coke price sales are. And so this quarter, we've just seen lower contribution margins based on the spot sales that we had remaining for this year..

[Shantanu Agrawal, executive]

And Lucas, I would add that, this is Shantanu is like we are comparing this against the Q3 2022 last year quarter, right, which was one of the highest points from spot market perspective where the blast took was trading at. So the comparison is kind of a little bit unfair. And if you look at our quarterly performance over the last 3 quarters, it is more in line with that. So it was just kind of the comparison. It's coming off of a really high record quarter of last year.

[Lucas Pipes, analyst]

Got it. Got it. No, that's helpful. What are typically the lags or the lead times in that segment? So are you selling blast furnace spot coke today for Q4 or Q1 next year, for Q2 next year? How does that kind of typically flow through the business?

[Katherine Gates, executive]

It's typically, Lucas, about 3 to 6 months.

[Shantanu Agrawal, executive]

It's like quarter, right? Basically, that's what we have said before.

[Lucas Pipes, analyst]

Got it. Got it. And this is essentially like the supply/demand for coke, kind of with that outlook, that kind of sets the price and the margin.

[Katherine Gates, executive]

It does, Lucas.

[Lucas Pipes, analyst]

And remind me is that true for both domestic and export? Or should we differentiate between the 2?

[Katherine Gates, executive]

No. It's the same whether we're selling into the North American market or into the seaborne market.

[Lucas Pipes, analyst]

And is the seaborne market currently open given where international coal prices are relative to met coal prices?

[Shantanu Agrawal, executive]

I mean, yes, the prices are a little bit depressed on the international seaborne market, right? Like there's a price at which -- the product will clear. It is definitely depressed, but we kind of look at all our options and see where our coke can go.

[Lucas Pipes, analyst]

Okay. Okay. And then -- a couple of questions on Slide 8. The first is the foundry coke expansion project. And I wondered 2 things. First, can you remind us on the timing of that project and then also the capital intensity of that project. .

[Katherine Gates, executive]

Yes. So we completed that project actually before in Q2. And so that was actually finished a little bit early. We had originally said we would have it done by Q3. So we got that done on time. And we don't give the specifics, but as we said, we expected this to be -- typically, our CapEx is around $80 million to $85 million. We were at $95 million. So we had built in approximately $12 million to $15 million for that project, Lucas.

[Lucas Pipes, analyst]

$12 million to $15 million. Got it. And is it operating at full capacity today?

[Katherine Gates, executive]

It is. The screener itself is operating at full capacity. As we have said, our sales are finalized for the year. .

[Lucas Pipes, analyst]

Okay. And then -- on Slide 8, I don't see a mentioning of Granite City. Should we assume that project is kind of off the table or a low priority at this point?

[Katherine Gates, executive]

That would be a no and no. So we are continuing to work with U.S. Steel on the GPI projects. So that is continuing to move forward, and it is a very, very high priority for us. I think it can be unsatisfying to have to wait to hear an announcement on this type of project. And Lucas, it's a complex project, but we've continued to work with U.S. Steel, and they've continued to work with us. And we just -- we really have a strong belief that if this is consummated, it's going to be meaningfully rewarding to our shareholders. And so it's really -- it's worth the time to continue to move forward with U.S. Steel on this.

[Lucas Pipes, analyst]

And in light of the strategic process that U.S. Steel is running, has there been more or less activity since August?

[Katherine Gates, executive]

We have continued to move forward. The activity remains the same.

[Operator]

The next question is from Nathan Martin from The Benchmark Company. .

[Nathan Martin, analyst]

Just maybe 1 more, Katherine, on the Granite City GPI opportunity. Can you talk about maybe any of the biggest hurdles kind of remaining there on those negotiations?

[Katherine Gates, executive]

I would just say in saying it was complex, I mean, whether we're talking about the capital, we're talking about the [indiscernible], we're talking about all of those elements of it, those things just take time. They are absolutely things that we can work through, but they do take time.

[Nathan Martin, analyst]

Okay. Got it. Maybe shifting over to the Domestic Coke segment. Obviously, you maintain your expectations for full year adjusted EBITDA at the high end of the range. If my math is correct, that only implies EBITDA of around $49 million in the fourth quarter to get you to that high end of the range, which would -- should be down about [ $15 ] million quarter-over-quarter. So I guess the question is, given all your coke sales are finalized, I'm wondering what are the headwinds you see in the fourth quarter that caused you to believe maybe a sequential decline like that is possible? Or maybe are you baking a little bit of conservatism into your guidance?

[Katherine Gates, executive]

I appreciate the question. Yes. No, we're really pleased with our year-to-date performance, and we have a significant amount of planned outage work in the fourth quarter. That's contemplated in our guidance. And I think we've said before, certain of our planned outages are largely expensed. And so this is really -- it's not dissimilar to, for example, last year and some of our other fourth quarters, Nathan. And it's actually it's why we don't give quarterly guidance. But with those planned outages and this planned work, we still remain well positioned to achieve the high end of our guidance range.

[Nathan Martin, analyst]

So Katherine, just maybe a little bit more on the planned outages. Are those going to affect adjusted EBITDA per ton? I mean, clearly, your sales volume guidance stayed around $4 million. So I guess that doesn't necessarily get affected much. How does that kind of affect the operations output?

[Katherine Gates, executive]

So with these outages, there's higher O&M when they occur. It does affect our EBITDA per ton, but that's fully contemplated in our guidance. It was contemplated at the beginning of the year.

[Nathan Martin, analyst]

Okay. Maybe I'll move over to the logistics business. I mean, there, I guess you did adjust your full year guidance to the low end of the prior range, which actually looks like it would imply a $5 million or so quarter-over-quarter EBITDA increase. Would be great to get your thoughts maybe on some puts and takes there in the fourth quarter. Also curious what you guys are assuming for full year throughput. I think original guidance was 22 million tons, with maybe 10 million from CMT. Is there any updates on that front?

[Katherine Gates, executive]

So with respect to what we're seeing for fourth quarter, as Mark mentioned, the API2 price adjustment is recovering for us. So that's part of what you're seeing coming through. And then we do expect to see higher volumes on logistics.

[Shantanu Agrawal, executive]

To add to that, Nate, on a full year basis, our guidance was $10 million -- approximately 10 million tonnes for CMT and approximately 12 million or Other logistics business. So we are going to be a little bit short of that on a full year basis. So if you look at kind of what we have performed earlier in the year, that's kind of what Q4 is going to look like. But overall, the volume will come in a little bit short, but we are guiding towards the lower end of the EBITDA guidance.

[Nathan Martin, analyst]

Okay. Yes. And Shantanu, that's kind of what's going to be my next question. So that makes sense that you may be a little short on a shipment guidance standpoint. I guess it would also be helpful, though, if you guys could give some more color around the split between coal shipments and other shipments at CMT. That was kind of the bulk of the quarter-over-quarter decline, it looked like from a shipment perspective. Is it more weakness in coal? Or is it some of the other products you guys are moving through the terminal?

[Shantanu Agrawal, executive]

It's mostly coal. Yes. I mean, Nate, I mean, on the CMT side, most of the variability comes from the coal side, the ancillary business is kind of more or less stable from a quarter-to-quarter basis. And obviously, it comes from what the demand is, and that is kind of reflected in the API2 pricing, which drives the demand of the coal. So most of the variability comes from the coal.

[Nathan Martin, analyst]

Okay. Got it. Very helpful. And then maybe just 1 last kind of modeling question for me. CapEx, Mark mentioned it was $34 million in the third quarter. I think that's what's your year-to-date spend already about $85 million, you maintain guidance of $95 million. It's a pretty big fall off, I guess, in the fourth quarter, roughly $10 million. Is that right? Is that the right way to think about it or am I missing something?

[Katherine Gates, executive]

No, that's the right way to think about it. I mentioned earlier that we have our own planned outages at our coke plants, and those are really higher O&M. They're not CapEx heavy. So that's really what we're -- that's what we're seeing in the fourth quarter. So it's -- we're low on CapEx there. But what we have seen is that we've seen the inflationary pressures related to our maintenance CapEx, and that's throughout the year. We actually have some nominal capital spend on preliminary engineering work on the GTI project as well. So both that inflationary pressure and the GPI project was not anticipated at the time that we gave our CapEx guidance. So we actually anticipate CapEx coming in slightly above our guidance of the $95 million.

[Nathan Martin, analyst]

Got it. So slightly above 95, okay. So maybe it's again, a little more than that $10 million, which would seem like it would be a little bit light just based on your run rate, okay? .

Great. That's very helpful. And then 1 more thing. Actually, Katherine, the tax law changes you guys highlighted, is that just kind of a onetime thing? Or is there a new kind of tax rate we should assume going forward?

[Katherine Gates, executive]

No. This is absolutely a onetime thing.

[Operator]

We have no further questions in the question queue. So I'd now like to hand back to Katherine Gates, President of SunCoke Energy.

[Katherine Gates, executive]

All right. Well, thank you all for joining us today, and thank you for your continued interest in SunCoke.

[Operator]

This does conclude today conference call. You may now disconnect your lines. Have a lovely day.