SunCoke Energy Inc

NYSE:SXC

Earnings Call Analysis

SunCoke Q4 Results Exceed Guidance

SunCoke Energy reported a fourth quarter net income of $0.16 per share, up from the previous year, and a full year net income of $0.68 per share, down from $1.19 in 2022 after excluding tax adjustments. Adjusted EBITDA for Q4 2023 was $62.3 million, a $3.4 million rise from Q4 2022, while the full year adjusted EBITDA decreased by $28.9 million year-over-year to $268.8 million, despite surpassing the high end of the guidance range. The decrease was mainly due to lower margins on non-contracted blast coke sales. Domestic Coke delivered strong results while Logistics struggled with market conditions. The company improved operational cash flow, reduced gross debt, and raised the dividend by 25%. For 2024, SunCoke anticipates adjusted EBITDA between $240 million and $255 million, expecting full capacity operations but with lower contracted blast coke sales margins.

SunCoke Energy Celebrates Solid Performance and Strategizes for the Future

In a transformative year for SunCoke Energy, the company's dedication and team effort led to exceeding their 2023 financial objectives. With an impressive adjusted EBITDA of $268.8 million, SunCoke outperformed their guidance range, generating $138.9 million in free cash flow, well above the anticipated $120 million. This success builds upon their sterling record of operational performance in the Domestic Coke sector, and thriving foundry coke business, bolstered by the completion of the foundry screener project. A key contract extension with Cleveland-Cliffs at Indiana Harbor until September 2035 marks a fortifying step for the company's long-term plans.

Anticipating Challenges and Opportunities in 2024

Looking ahead to 2024, SunCoke stays realistic about the impending challenges while maintaining a positive outlook. They project the Domestic Coke adjusted EBITDA to range between $238 million and $245 million with sales around 4.1 million tons, running at full capacity. A vast majority of these tons are secured under long-term contracts, assuring steady operations. However, the company expects a slight reduction in EBITDA, owing primarily to anticipated lower coal-to-coke yield values in their contracts due to falling coal prices. Alongside, the Logistics segment faces a dip of $9 million to $14 million in adjusted EBITDA, driven by weak commodity markets expected to affect volume and pricing at CMT. Nevertheless, SunCoke's consolidation efforts point towards a steady adjusted EBITDA expectation of $240 million to $255 million.

Financial Projections and Capital Expenditure Strategy for 2024

SunCoke envisions operating cash flow to reach between $185 million and $200 million, with free cash flow forecasted between $105 million and $125 million. This anticipated liquidity is the result of reversing a favorable working capital build from the previous year. Capital expenditures are estimated to be lower than usual, between $75 million and $80 million, as SunCoke continues to showcase disciplined investment in their growth strategies while balancing capital allocation priorities. Their operational prowess aligns with these financial strategies to ensure safety, efficiency, and environmental compliance, laying the groundwork for continuous improvement and expansion.

Strategic Implications for Long-Term Growth

With an eye on the horizon, SunCoke positions itself for enduring success. The company emphasizes environmental stewardship and safety as key differentiators, alongside their commitment to technological leadership in coke production. They are poised to benefit from market dynamics as competitors retire aging assets while SunCoke's modern facilities continue to set industry benchmarks. Further, they intend to amplify their customer and product portfolio in the foundry and spot glass markets. Noteworthy efforts like the Granite City GPI project underline their proactive stance on growth, ensuring they remain competitive and continue to service and expand their customer base effectively.

Earnings Call Transcript 2023-Q4

[Operator]

Hello, and welcome to today's SunCoke Energy Fourth Quarter 2023 Earnings Call. My name is Jordan, and I'll be coordinating your call today. [Operator Instructions] I'm now going to hand over to Shantanu Agrawal, VP, Finance and Treasurer, to begin. Shantanu, please go ahead.

[Shantanu Agrawal, executive]

Thanks, Jordan. Good morning, and thank you for joining us this morning to discuss SunCoke Energy's Fourth Quarter and Full Year 2023 Results as well as 2024 guidance. 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 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 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. Thank you all for joining us today. Earlier today, we announced SunCoke Energy's fourth quarter results. Before I turn it over to Mark to review the results in detail, I want to share a few highlights from 2023. I want to start by thanking all of our SunCoke employees for their contributions in achieving our 2023 objectives. The dedication of our team is evident through our strong operational performance and our financial results. .

Slide 3 lays out our key objectives for 2023 and how we performed against those objectives. We delivered consolidated adjusted EBITDA of $268.8 million, modestly exceeding the high end of our guidance range of $265 million. Strong Domestic Coke operational performance drove our results while our Logistics business faced headwinds due to challenging market conditions. We generated $138.9 million of free cash flow, exceeding the high end of our guidance range of $120 million. We continue to build on the success of our foundry coke business with the completion of the foundry screener project in 2023. This investment improves our handling efficiency and allows us to continue growing our foundry market participation. Our plants ran full in 2023, and we were able to successfully sell all non-contracted tons into the foundry and spot blast coke markets. We also extended our Indiana Harbor contract with Cleveland-Cliffs through September 2035 with key provisions similar to the prior agreement. The renewal affirms our mutually beneficial relationship with Cleveland-Cliffs, and positions Indiana Harbor well for the future.

We also made great progress on our capital allocation priorities in 2023. We deployed free cash flow to reduce our gross debt by approximately $44 million, ending the year with a gross leverage ratio of 1.86x on a last 12-month adjusted EBITDA basis. We returned approximately $31 million to our shareholders having increased our quarterly dividend from $0.08 per share to $0.10 per share during 2023. We expect the continuation of our quarterly dividend throughout 2024. And lastly, we continue to work on the development of the GPI project at Granite City.

With that, I'll turn it over to Mark to review our fourth quarter and full year earnings in detail. Mark?

[Mark Marinko, executive]

Thanks, Katherine. Turning to Slide 4. The fourth quarter net income attributable to SunCoke was $0.16 per share, up $0.02 versus the fourth quarter of 2022. Our full year 2023 net income at SunCoke was $0.68 per share, down $0.51 versus the full year 2022. Tax adjustments of $0.29 per share recorded in the third quarter of 2022 and the third quarter of 2023 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 $0.22 per share year-over-year, primarily driven by lower contribution margins on non-contracted blast coke sales.

Consolidated adjusted EBITDA for the fourth quarter 2023 was $62.3 million, up $3.4 million versus the fourth quarter of 2022. The increase was primarily driven by higher coal-to-coke yields and favorable O&M recovery on long-term take-or-pay contracts from our domestic coke plants, partially offset by lower volumes at CMT and higher noncash legacy liability expense at corporate. On a full year basis, we delivered adjusted EBITDA of $268.8 million, down $28.9 million versus record results of $297.7 million in 2022. The year-over-year decrease was primarily driven by lower contribution margins on non-contracted blast coke sales, lower volumes in the Logistics segments and higher noncash legacy liability expense, partially offset by higher cold coal-to-coke yields and lower employee-related costs.

Turning to Slide 5 to discuss the year-over-year adjusted EBITDA variance in detail. Our Domestic Coke business operated at full capacity, but was impacted by lower contribution margins from non-contracted blast coke sales. This was partially offset by higher coal-to-coke yields on long-term take-or-pay contracts. The Domestic Coke segment delivered full year adjusted EBITDA of $247.8 million, modestly above our full year Domestic Coke guidance range.

Results from our Brazil Coke segment were impacted by the absence of technology fees, which expired at the end of 2022. Including Brazil, our coke operations delivered adjusted EBITDA of $256.9 million. The Logistics segment adjusted EBITDA decreased by $5.4 million year-over-year, driven by lower throughput volumes at CMT as a result of weak commodity market conditions. The Logistics segment delivered full year adjusted EBITDA of $44.3 million. Finally, our corporate and other expenses were higher by $2.5 million year-over-year, mainly due to higher noncash legacy liability expenses, which were partially offset by lower employee-related expenses.

Turning to Slide 6 to discuss capital deployment in 2023. We generated very strong operating cash flow of $249 million during 2023, partially driven by the timing of favorable working capital changes, which allowed us to make good progress on our capital deployment initiatives. Capital expenditures came in at $109.2 million, which was above our guidance, mainly due to the timing of certain projects. We expect to see an offset in 2024, which is why our CapEx guidance of $75 million to $80 million is lower than our normal run rate. We reduced gross debt outstanding by $43.8 million in 2023, with no outstanding balance on our revolver at year-end.

During 2023, we also returned capital to our shareholders in the form of a $0.36 per share annual dividend, which was a use of approximately $31 million of cash. As mentioned by Katherine, we increased our dividend by 25%. That is from $0.08 to [ $0.10 ] per share during the third quarter of 2023. In total, we ended 2023 with a cash balance of $140.1 million and strong liquidity of approximately $490 million, setting the stage for continued progress against our capital allocation priorities in 2024.

Now I'd like to turn to our guidance expectations for 2024. We expect consolidated adjusted EBITDA to be between $240 million and $255 million in 2024. Domestic Coke adjusted EBITDA is expected to be lower by $3 million to $10 million, driven primarily by our expectation of lower coal-to-coke yield value on contracted blast coke sales due to lower coal pricing. We expect to continue running our coke fleet at full capacity.

Brazil Coke adjusted EBITDA will be flat to better by $1 million. 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. Logistics adjusted EBITDA is expected to be lower by $9 million to $14 million in 2024. We anticipate lower volume and pricing at CMT year-over-year, driven by weak commodity markets. Lastly, we expect our Corporate and Other segment expense to be higher by approximately $3 million to $5 million, driven by normalized noncash legacy liability expenses.

Moving on to Slide 9 to discuss the Domestic Coke segment in detail. In 2024, we expect our Domestic Coke adjusted EBITDA to be between $238 million and $245 million, with sales of approximately 4.1 million tons, which includes contract, foundry and spot blast coke. We expect to continue to running the full domestic coke fleet at full capacity. Approximately 3.6 million tons are contracted under long-term take-or-pay agreements in 2024. We anticipate selling the remaining 650,000 furnace equivalent tons in the foundry and spot coke markets. As a reminder, foundry tons do not replace blast furnace tons on a ton per ton basis. For example, due to differences in the production process, a single ton of foundry coke replaces approximately 2 tons of blast furnace coke. The order books for foundry and spot blast coke are solid with a substantial portion of our 2024 sales finalized. While we expect to continue running at full capacity, the lower year-over-year adjusted EBITDA is primarily due to lower coal-to-coke yield value on our long-term take-or-pay contracts due to lower coal pricing.

Moving to Slide 10 to discuss Logistics in more detail. 2024 Logistics adjusted EBITDA is estimated to be between $30 million and $35 million. This estimate is driven by significantly weaker market conditions at CMT. Our outlook considers the low expectations for thermal coal export volumes from the Gulf Coast as a result of tepid demand due to mild weather, lower cast -- lower cost gas imports and ample coal inventory in Europe. We also expect a lower API2 price adjustment benefit as compared to 2023, which is factored into our guidance. We anticipate approximately 4.1 million tons of coal to be exported through CMT and approximately 3.8 million tons of noncoal throughput such as iron ore, petcoke and other products.

Moving to the 2024 guidance summary on Slide 11. Once again, we expect consolidated adjusted EBITDA to be between $240 million and $255 million. Our Domestic Coke business expected to run at full capacity, but with lower coal-to-coke yield value on contracted coke sales due to lower coal pricing. We expect to face significant headwinds due to weak commodity markets and Logistics segment, impacting both volumes and pricing.

As indicated earlier, we anticipate our CapEx requirements in 2024 and to be between $75 million and $80 million, which is lower than our normal annual run rate. We expect 2024 operating cash flow to be between $185 million and $200 million, driven by the reversal of favorable working capital build in 2023. Our free cash flow is expected to be between $105 million and $125 million.

With that, I'll turn it back over to Katherine.

[Katherine Gates, executive]

Thanks, Mark. Wrapping up on Slide 12. As always, safety is our first priority, and we'll continue to focus on strong safety and environmental performance in 2024. We robust safety and environmental standards set SunCoke apart and our Central 2 are reliable delivery of high-quality coke and logistics services. In 2024, we will continue to focus our efforts on adding new customers and products at CMT as well as further broadening our foundry and spot glass customer base. As we've demonstrated in the past, we will pursue a balanced yet opportunistic approach to capital allocation. From a growth perspective, we continue to work on developing the Granite City GPI project. We continuously evaluate the capital needs of the business our capital structure and the need to reward our shareholders, and we will make capital allocation decisions accordingly.

Looking beyond 2024, we see SunCoke being 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 newest coke-making facilities in North America with a leading technology. We continue to invest in our facilities to ensure that they are safe, efficient, reliable and environmentally compliant. The strong operational performance that comes from these investments provides us with the basis to grow and diversify our customer and product base.

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

[Operator]

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

[Lucas Pipes, analyst]

My first question is on the balance sheet. Can you remind us what are your net debt targets? And ultimately, what is the goal? Is it to get to net debt 0. Some of your peers in the industry have done that. Do you look to build sufficient cash buffer to kind of pay off that the debt kind of as you generate the cash? Or -- or create -- create a balance to take out the maturity when it comes to or are you ultimately looking to refinance it? I would appreciate your color on that.

[Shantanu Agrawal, executive]

Yes, Lucas, this is Shantanu. I can take that question. Our long-term target has been always a gross leverage of 3x or lower, and that still remains the target, right? Right now, we are in a position that -- we are well below that target, and we are very happy with that, but that's kind of our long-term target. And as we have discussed before, we have this GPI project that we are working on, which will potentially require -- which will be potentially funded from our cash flows and some borrowing on the revolver. And that's kind of what we have in our kind of in front of us to make sure that we are within the target there.

[Lucas Pipes, analyst]

And so -- yes. No, I guess it would be helpful to understand how much lower than 3x you might consider going. For this year 2024, how should we think about uses of excess cash, right? You're generating free cash flow. You have a dividend. What happens to the cash above and beyond that?

[Shantanu Agrawal, executive]

Yes. So Lucas, I mean, the way to think about it is that once -- if we sign this GPI project and this project goes ahead and we start spending capital on that, we expect our leverage to go back to 3x or so, right? So the cash flow, but that we're going to be generating in 2024 is an anticipation to kind of save for this project and spend on this project.

[Lucas Pipes, analyst]

Okay. Have -- are you in discussions with the potential new owners of Granite City or -- let's start there?

[Katherine Gates, executive]

Yes. So Lucas, this is Katherine. We are working with U.S. Steel now on the NPI project, and we look forward to working with Nippon in the future.

[Lucas Pipes, analyst]

And is it reasonable to expect that you could conclude a deal prior to the sale of U.S. Steel to Nippon steel closing? What do you think the deal -- that deal needs to close first before you can close the -- kind of the deal, if any, at all?

[Katherine Gates, executive]

Yes. Lucas, what I would say is we're just continuing to work with U.S. Steel now, and that's really what our focus is on the GI project, and we'd welcome working with Nippon.But we can continue to work with U.S. Steel on the project now.

[Operator]

[Operator Instructions] Our next question comes from Nathan Martin of the Benchmark Company.

[Nathan Martin, analyst]

Congratulations on full year '23 results. Maybe just a quick follow-on to Lucas' Granite City line of questioning. The other piece to consider Granite City's contract, I believe, expires at the end of this year. So does that maybe put a little bit more pressure or speed up the process at all as far as coming to a decision ahead of that contract expiry? .

[Katherine Gates, executive]

Thanks, Nathan. The coke contract is actually part of our discussions with U.S. Steel on the GPI project.

[Nathan Martin, analyst]

Fair. And as expected, so that -- this question was, does that speed up the process at all, you think? Or I mean, can those things be mutually exclusive? Like could you extend that contract and still not come to an agreement on the GPI project?

[Katherine Gates, executive]

Well, we're certainly continuing to work with U.S. Steel, and that the coke contract is part of that. I mean we would expect as part of the GPI project that the coke plant would continue to supply the coke needed for GPI and run throughout the time that the project is being developed and constructive.

[Nathan Martin, analyst]

Right. And I think you said, obviously, the goal would be to extend that contract maybe for another 10 years post completion of the project, assuming that that's...

[Katherine Gates, executive]

Absolutely. Exactly. You would envision that, that coke contract would be coterminous with any GPI agreement.

[Nathan Martin, analyst]

Okay. Got it. Maybe moving to the Logistics business. You guys mentioned in your prepared remarks and I think it was in the slide deck as well, obviously, about some pressures on the export coal front that you expect to lead to coal shipments being down this year at CMT. First, I think you still have a take or pay there. How many tons -- is that true? And then second, it also looks like guidance implies year-over-year decline in the other product shipments from CMT as well. Is that right? And then, maybe could you update us on some of those initiatives you have going to increase shipments of some of those other products? I think you mentioned that a little bit in your closing remarks gather.

[Shantanu Agrawal, executive]

Thanks, Nathan. Yes, I mean, so we do have a take-or-pay at CMP with our customer for coal, which is for 4 million tons. So we're going to be handling a little bit in excess. Our guidance contemplates handling a little bit in excess of that minimum take-or-pay. On the other product side, the guidance is a little bit lower than last year but not significantly lower. So -- obviously, as Katherine mentioned in our prepared remarks, one of our initiatives for this year is to kind of continue to look for opportunities at CMT and continue to look for other products, additional products at CMT. And that's what we are going to focus on this year.

[Nathan Martin, analyst]

Appreciate that, Shantanu. And then just to confirm, is this the last year for the take-or-pay on the coal side of the business?

[Katherine Gates, executive]

The contract can be extended and Javelin is obviously a customer of ours, and we're in continuous dialogue with them.

[Nathan Martin, analyst]

Got it. And then maybe just one more. On the domestic coke side of the business. You mentioned 3.6 million tons contracted already for this year remaining going to the foundry and the spot market. I think it would be helpful to get some more color from you guys on the health of both the foundry and even the export code market today? And just how you see that shaping up for the rest of 2024?

[Katherine Gates, executive]

Yes, absolutely. So we're sold out for the first quarter on our stock coke sales. And as we've said, we finalized a substantial portion of the foundry and the blast sales. We expect to run full as we have in the past, but we have to remember that the seaborne markets don't contract a year out. So there's obviously -- we expect to sell out, but we're just going to be doing that in due course. And then on the foundry, the foundry markets are strong, and those sales are substantially finalized for 2024. So we feel good looking out ahead.

[Operator]

We now have a follow-up question from Lucas Pipes of B. Riley Securities.

[Lucas Pipes, analyst]

Sorry if I missed it, but what is the amount of coke business that is not fixed or committed at this point?

[Shantanu Agrawal, executive]

That's the 650,000 tons, Lucas, it's same as last year, right? And we mentioned and it's the mix, the whole -- that's a 650,000 blast coke equivalent, right, and that's what we are selling into the foundry and spot blast coke market.

[Lucas Pipes, analyst]

Got it. And that's equivalent. So that's some amount of foundry, some amount of blast, and I guess you take the foundry times to to make it equivalent. And so the way to think about it is that those tons would be kind of open to price movements starting Q2 than through the rest of the year.

[Shantanu Agrawal, executive]

The spot piece is foundry sales, the way it works is more or less, as Katherine said, we have finalized sales of the foundry coke throughout the year, and the price for those are fixed at the start of the year. It's the spot side, which can fluctuate on the pricing Q2 and beyond.

[Lucas Pipes, analyst]

And is that also 650,000 tons? Or is that a different number?

[Shantanu Agrawal, executive]

No, no. The total of foundry and spot blast is 650,000.

[Lucas Pipes, analyst]

And what is the amount subject to spot price variations?

[Shantanu Agrawal, executive]

That is -- again, I think just going back to what we said before, Lucas, we do not -- are not in a position to disclose the differential between the foundry and the spot blast coke because of the small nature of both the foundry and spot blast coke markets. So -- but you can think about, right, like out of the 650,000, there is a portion of foundry and there's a portion of spot. So the amount is not significant.

[Lucas Pipes, analyst]

Okay. So a couple of hundred thousand tons is probably the right way to think about it, that's subject to price and price...

[Shantanu Agrawal, executive]

Not -- I cannot comment on that.

[Lucas Pipes, analyst]

And put differently, have you purchased -- have you committed a price for all the coal to convert into this coke? Are you locked in on the [indiscernible] side?

[Shantanu Agrawal, executive]

No. No, Lucas, we haven't -- since we started doing this spot blast -- spot sales, we have kind of aligned our coal purchases to go with the spot blast sales, right? As spot blast sales don't sell out more than 3 to 6 months in advance, we try to tie our coal purchases with that. Now obviously -- we are doing a mix of hard and foundry. So we have to kind of think about that. But we haven't fully bought our 2024 coal needs because there's some sales of spot blast coke outstanding in the later half of the year.

[Lucas Pipes, analyst]

Got it. Got it. So essentially, if you would try to kind of match that up in real time on the supply side...

[Shantanu Agrawal, executive]

Exactly.

[Lucas Pipes, analyst]

And then -- got it. Okay. That's helpful. And -- and then -- in terms of the Granite City deliberations, on kind of -- on the Nippon Steel, U.S. Steel deal announcement, there's been a lot of coverage regarding the union and commitments to workers kind of across the aisle. And when you think about the labor impact of Granite City and the pig iron conversion project. What's your message on that? I would appreciate your thoughts.

[Katherine Gates, executive]

Well, the message there is that the Granite City GPI project is something where we would look forward to working with the union. We're working with U.S. Steel now. We work well with the United Steel workers. As you know, most of our plants are unionized with the steel workers. We work well with them, and we look forward to working with them on the GPI project.

[Lucas Pipes, analyst]

Has the union taken a position on this conversion?

[Katherine Gates, executive]

They have not.

[Operator]

We have no further questions on the line. With that, I'll hand back to Katherine Gates, President.

[Katherine Gates, executive]

I want to thank everyone for joining us today. And again, thank the SunCoke team for their hard work. We're looking forward in 2024, and we see great potential to meet our financial targets and to create value for our stakeholders. Thank you.

[Operator]

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.