Earnings Labs

SunCoke Energy, Inc. (SXC)

Q3 2017 Earnings Call· Thu, Oct 26, 2017

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Transcript

Operator

Operator

Good morning. My name is Chris and I will be your conference operator today. At this time, I would like to welcome everyone to the SunCoke Energy Third Quarter 2017 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Jonathan Law, you may begin your conference.

Jonathan Law

Analyst

Thanks Chris. Good morning everyone and thank you for joining us to discuss SunCoke Energy's third quarter 2017 earnings. With me today are Fritz Henderson, our Chairman, President and Chief Executive Officer; and Fay West, Senior Vice President and Chief Financial Officer. Following the prepared remarks, we will open the line for Q&A. This conference call is being webcast live on the Investor Relations section of our website, and a replay will be available on the site for a few weeks. If we don't get to your questions on the call today, please feel free to reach out to our Investor Relations team. As we do every quarter, let me remind you that the various remarks we make on this call regarding future expectations constitute forward-looking statements, 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 reconciliation to any non-GAAP, financial measures discussed on today's call. With that, I'll turn things over to Fritz.

Fritz Henderson

Analyst · Clarksons Platou. Your line is open

Thanks Jonathan, and let me add my thanks to all of you for joining us this morning. Before Fay takes you through the third quarter results in detail, we’ll talk about SunCoke’s progress for the first nine months of the year and our progress against the goals for the year. We normally wind up our presentations by looking at our progress relative to our [Indiscernible] changing at this morning and going to be there right upfront. Position to help view our investors understand our priorities, I think it also think about this chart as a means of holding ourselves accountable to the results. Then we are pleased with the company’s performance against these initiatives through the third quarter of this year. Then operating our plant [Indiscernible] efficiently while controlling cost to maximize profitability. We’ll talk about new business at [Indiscernible] more detail prior to Q&A, while I’m happy to report early wins in the organic growth front. We continue to expand and diversify our logistics offering and remain committed to increasing trends loading volume across our fleet. We are successfully executing our Indiana Harbor rebuild initiative and are well positioned to report full year Indiana Harbor result in line with our expectation for the year. We have some additional details on the 2017 progress and performance later in the slide deck as well as some insights relative to 2018, so I’ll hold my remarks until then. During the quarter, we also purchased additional SXCP units deploying capital towards the opportunity which we are confident to create the most value for SXC shareholders. And finally as a result of our operating and financial performance year-to-date, we believe we are well positioned to deliver full year results at the top end of our adjusted EBITDA guidance range. Turning to slide four and looking specifically at the third quarter was infact the best operating quarter we’ve had in three years after adjusting for the timing in fact were led to [Indiscernible] recognition to deferred revenues, it occurs – actually does occur in the fourth quarter of each year. Financially we delivered strong adjusted EBITDA results operationally we’ve performed well across our facilities including the urban rebuild campaign at the Harbor. The expansion of our products and customer mix at Convent continues. And once again as we look to the full year, and based upon our performance to date, we think we are well positioned to achieve adjusted EBITDA’s top end of our guidance range for the year and the range originally was $220 million to $235 million. And now I’ll turn it over to Fay to review our results.

Fay West

Analyst · Clarksons Platou. Your line is open

Thank you, Fritz, and good morning, everyone. Turning to Slide 5, our third quarter net income attributable to SXC was $11.6 million or $0.18 per share. EPS this quarter was up from the $0.10 in the prior year period despite the impact of higher interest expense in the absence of debt extinguishment gains. As a reminder, we completed a comprehensive refinancing of SXCP capitals structure in May of this year pushing debt maturities outside of many of our contract renewals. Q3 adjusted EBITDA of $62.1 million was up 26% over the prior year. The performance in the third quarter was driven by strong operating performance across both our Coke and our logistics businesses, which we have detailed in our adjusted EBITDA bridge on the next slide. Our coke business performed well this quarter. The impacts of the Indiana Harbor [Indiscernible] rebuilt campaign were more than offset by strong operating results across their remaining coke plant. Our domestic coke making facilities benefited from favourable yield performance in lower allocated central costs, which were driven by our ongoing cost reduction effort. The timing of outage cost also favourably influenced our quarterly comparison. Coke results also benefitted from incremental technology and licensing fees resulting from a Q4, 2016 result coke transaction in which we announced [Indiscernible] redemption of our preferred equity interest in that facility. As a result of this of the transaction we expect to earn an incremental $5.1 million of technology and licensing fees annually through 2023. Note that last year we received a full $5.1 million benefit in the fourth quarter at the time of the transaction, but we began recognizing this ratably in 2017. Our Coal Logistics business was up $5.3 million or 73% due to increased volumes at CMT, which continue to benefit from attractive coal export market…

Fritz Henderson

Analyst · Clarksons Platou. Your line is open

Thanks, Fay. Turning to the next slide 13, regarding Convent. When we acquired the Convent Marine terminal in late 2015, a large part of our strategic rationale is that we were acquiring the strategically located facility with unique capabilities and importantly there was also a sizeable opportunity to grow volumes and earnings. Now one of our strategic priorities since that acquisition has been to – the services we offer, the products we transload and the customers we serve through our Convent Marine terminal. To that end our business development team has been working very hard to bring new volumes in the terminal. Today we have a few new wins we'd like to share which bolster our original acquisition pieces. In the third quarter, we took our first delivery of aggregate or crush stone from an ocean going vessel and the ground storage under our multi year contract with firm [Indiscernible] that we first mentioned on our second quarter earnings call. As you may know Convent is located in the heart of Chemical plant developments linked to the Shale Gas home. Construction activity in the quarter between New Orleans and [Indiscernible] is accelerating and Convent now transloads an important raw material for infrastructure development. Another part that we have been targeting is Pet Coke. We believe that the infrastructure at Convent provides the number of unique advantages to refiners for the shipment of Pet Coke and they have been working alongside our rail road partners to win the business. We’ve recently successfully unloaded the first test train of Pet Coke from two separate refinery customers at Convent and are excited about additional Pet Coke volumes in the fourth quarter and beyond. Together, we expect these new business wins to contribute between $1 million to $2 million to our logistics adjusted EBITDA…

Operator

Operator

[Operator Instructions] Your first question comes from Lee MacMillan of Clarksons Platou. Your line is open.

Lee MacMillan

Analyst · Clarksons Platou. Your line is open

Hello, again. Thanks for the helpful update on Indiana Harbor. I’m sorry, I’m not sure I caught everything there. I think I already say that the remaining B-Batteries would be 700,000 instead of 500,000 with that rate?

Fritz Henderson

Analyst · Clarksons Platou. Your line is open

750, that’s our estimate today and the level of degradation that we’ve seen would suggest they’re certainly going to be higher cost than our experience today on the other batteries.

Lee MacMillan

Analyst · Clarksons Platou. Your line is open

Okay. So it’s the state of the batteries and so if not sort of like escalating external cost?

Fritz Henderson

Analyst · Clarksons Platou. Your line is open

No, no, it’s just the much more extensive level of repair.

Lee MacMillan

Analyst · Clarksons Platou. Your line is open

Okay, understood.

Fay West

Analyst · Clarksons Platou. Your line is open

I’ll just going to say, the 2018 rebuilds are going to be at the same past level as what we’d experienced here in 2017. So just about 500,000, that’s for 2018 I just want to entire.

Fritz Henderson

Analyst · Clarksons Platou. Your line is open

Thank you.

Lee MacMillan

Analyst · Clarksons Platou. Your line is open

Okay. I got that. And the remaining B-batteries if you did them, okay. And then, a question on the [Indiscernible] making side. You’re still making customers seem to having unusually high amount of maintenance plan during the fourth quarter. I was just curious if could see then sort of indication just maybe the requirements will be lower or is there might certain impact on your fourth quarter? Thanks.

Fritz Henderson

Analyst · Clarksons Platou. Your line is open

No. Not this point, Lee.

Lee MacMillan

Analyst · Clarksons Platou. Your line is open

Okay. Thanks a lot.

Operator

Operator

[Operator Instructions] Our next question comes from Lucas Pipes of FBR & Company. Your line is open.

Lucas Pipes

Analyst · FBR & Company. Your line is open

Hey, guys. Ted [Indiscernible] for Lucas Pipes. First thing good job on the quarter.

Fritz Henderson

Analyst · FBR & Company. Your line is open

Thank you.

Unidentified Analyst

Analyst · FBR & Company. Your line is open

So my first question in 2018 can you remind us of what the build schedule would look like for battery A. I mean, like it again front loaded or lumpy in anyway. And secondly – sorry go ahead.

Fritz Henderson

Analyst · FBR & Company. Your line is open

Go ahead.

Unidentified Analyst

Analyst · FBR & Company. Your line is open

I just going to say, secondly and this is kind of a different question. If it is economical when can we expect the rebuild of battery B2B in full force like [Indiscernible] battery A [Indiscernible] decided in the first 2018 that we were going to out all battery D?

Fritz Henderson

Analyst · FBR & Company. Your line is open

So, one step at a time. We expected to commence some of what we did this year actually. We expect to commence depending on whether the 2018 activities in March of next year where we would likely start to cool down. We’re not – we don’t plan, we did it in 2000, try not do in 2017, do any work at January, but invariably ended up actually finishing the 2016 campaign this year. So, we’re trying to lead January, February without activity, we commenced the work in March and then we will complete the work by the end of November. And that’s pretty similar to what we’ve done this year, and then you would do it progressively through the year. So now your second question. We’re not planning to do any more than the 67 in 2018, that’s frankly we got a handful getting that done. We’re quite confident we’ll get that done. But what we’ll be able to do in 2018 as much of the 10 ovens we rebuild on D battery continue to monitor the performance of the remaining D-battery oven throughout the year we are producing, we will be producing from that battery throughout the year. And then makes call as we get into the spring and summer probably next year as to whether or not – as to whether or not we want to rebuild all portion or non of that remaining 57 up.

Unidentified Analyst

Analyst · FBR & Company. Your line is open

Okay. That sounds great. And then my second question, is the cost trading agreement Indiana Harbor going to change from 2017 to 2018 and if so how this look in combination with the refurbishment program going on?

Fritz Henderson

Analyst · FBR & Company. Your line is open

So we outlined in our 10-K disclosure last year. What happens as the way the cost sharing mechanism work effective 1118, we look back to a budgeted OEM share with our customer. That budgeted OEM share is based upon the plants to 1.22 million tone nameplate. |So we’re still under recovered, because we’re not producing 1.22 million because it’s basically OEM divided by 1.22 ton. But the levels under recovery is less than what we been experience with the fixed number and us continuing to run less the nameplate capacity. And the actual number is a function of what the OEM spends is and ultimately that hasn’t been finalized yet with our customer. But we just use the 2016 OEM which we articulated in the K. the estimated cost, the estimated differential will be approximately $15 million. But the actually number will depend on what our actual OEM spend is.

Unidentified Analyst

Analyst · FBR & Company. Your line is open

Sounds great. Thank you guys, very much and good job with the quarter again.

Fritz Henderson

Analyst · FBR & Company. Your line is open

Thank you, Ted.

Operator

Operator

There are no further questions at this time. I return the call to our presenters.

Fritz Henderson

Analyst · Clarksons Platou. Your line is open

Okay. Again thank you very much for your interest and your investments in SunCoke and look forward to talking with you subsequently is our investor relations hit the road and we talk about the business and we’ll be next time with the portfolio result. Thank you.

Operator

Operator

This concludes today's conference call. You may now disconnect.