SunCoke Energy, Inc. (SXC) Q3 2017 Earnings Report, Transcript and Summary

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.

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.

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.

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 dynamics. And when adding the favourable results in our corporate and other segment, the third quarter finished at $62.1 million in adjusted EBITDA. Looking at Domestic Coke on the next slide. Third quarter adjusted EBITDA per ton was up significantly to $57 per ton which you can see – as you can see from this chart is the highest it’s been in recent history. These results were driven by strong yield gains across the fleet, cost controls both at the plant and corporate level and the benefit from a portion of our 2017 outage cost falling outside of the third quarter. As you may recall, we had a scheduled outage at our Granite City facility in Q2 and we are currently executing its scheduled outage at our Middletown facility here in Q4. While the third benefitted from the timing of outages, we expect our total full year outage cost to be in line with expectations and flat to 2016. Through the three quarters, our coke segment remains well positioned to deliver adjusted EBTIDA per ton at the high end of our original guidance range of $46 to $49. Referring to Indiana Harbor results on slide 8. Indiana Harbor results remain inline with expectations and we are on track to report full year adjusted EBITDA and production in line with guidance. Through the third quarter we have successfully rebuilt 47 of the 58 total ovens within our 2017 rebuilt campaign, of which 31 were operating at full production levels by the end of Q3. The remaining 16 ovens are being brought back online throughout October. We are pleased with the progress of our 2017 rebuilt campaign. This year’s campaign remains on budget and on schedule with the remaining 11 rebuilt on track to be completed by the end of November. With the completion of this years campaign we will have rebuilt more than half of this facility. Rebuilt ovens are performing well and we are seeing increased charge rates and improved coking time, both of which contribute to higher production and a more stable operating environment. While Fritz will have more to say about our IHO outlook in a few slides, the oven rebuilt we have completed over the last few years have positioned us to report significantly improved adjusted EBITDA results in 2018. Looking at co-logistics on slide nine, our logistics business generated $12.6 million of adjusted EBITDA during the third quarter, up 26% sequentially and 73% year-on-year. We have seen stabilization of coal trans loading markets here in the U.S. and export margins remain healthy with the current API 2 benchmark hovering around $90 per ton. In total, logistics volumes in the quarter were up 18% versus Q3, 2016. Throughput at our KRT facility was largely in line sequentially and comparable with Q3, 2016. Volumes were impacted by mild summer weather which dampened the thermal coal usage. However, CMT volumes more than doubled versus the prior year period to 1.8 million tons as their customers benefited from strong export market dynamics. In total, CMT contributed $9.7 million to Q3 adjusted EBITDA not including the $5.7 million of deferred revenue related to take or pay volume. Year-to-date CMT deferred revenue totalled $14.5 million. As a reminder, we recognized deferred revenue generated at CMT on take or pay tons when it is recognized as GAAP revenue which occurs in the fourth quarter of each year. Looking at liquidity on the next slide, in the quarter strong operating performance coupled with working capital impacts which also include the timing of interest payments contributed to $74 million of operating cash flow. As we discussed in our 2Q call and as part of our debt refinancing activities, we repaid the CMT seller-financing in August using a combination of revolver borrowing and cash on hand. CapEx of $27 million during the quarter included $7 million related to the Granite City gas sharing project which remains inline with our full year guidance of $25 million. It also includes $8 million of Indiana Harbor of rebuilt work which also remains inline with our full year guidance of $20 million to $25 million. Additionally, ongoing CapEx is also inline with expectation. All-in-all we ended with a cash balance of approximately $150 million and strong liquidity of more than $300 million. Viewing our full year target of – full year guidance targets on slide 11 as mentioned we are well positioned to deliver full year 2017 adjusted EBITDA towards the top end of our guidance of 220 to 235. Based on results through the first three quarters you can see from this chart that we expect a solid quarter in Q4. Q4 results will include the recognition of deferred revenue at CMT. Looking at our capital priorities on slide 12, during the quarter we purchased 500,000 SXCP units for approximately $9 million. Since we began deploying cash towards SXCP unit purchases in May, we purchased $2.1 million total units which we expect will generate more than $5 million of additional cash flow annually. We believe they are purchasing SXCP units and the open market is the best use of SunCoke cash as it provides a highly attractive risk adjusted return and is an asset that we know and operate. And we expect to acquire additional units in the open market in Q4 and will remain price disciplined through that process. Additionally, we are focussed on efficiently managing our $80 million of CapEx including both the Granite City gas sharing project as well as our Indiana Harbor have been rebuilt. With that, I’ll turn it back to Frit.

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 in 2017. And while these wins represent a nice start in affected down payment, [Indiscernible] generates $5 million to $10 million of incremental EBTIDA within two years at Convent. I believe there are even more focus and signal to the market that we are ready, willing and most importantly able to extend our footprint on the lower Mississippi. Now on the next chart 14 looking ahead we are excited about the additional growth prospects at Convent in the near term. We are targeting further coal export volumes, additional refinery partners and higher volumes of Pet Coke and other potential dry bulk material similar to our new aggregate business. In addition, we have a small total in the liquids markets, and we look to leverage our existing infrastructure and the land we have for potential expansion to the site to grow this business. Longer term, we are busy adding barge and loading capabilities in order to expand our reach into new and existing product categories to provide multiple options for our customers. This capability will make an already world class operation to Convent into what we believe is the most attractive terminal, one of the most attractive terminal excuse me and the river for both bulk and liquidity shipments. We are encouraged by the progress we’ve made and look forward to updating you on more wins in future calls. Switching gears now I’d like to turn my attention to Indiana Harbor on slide 16. Fred touched on it already with respect to the results in the quarter. Slide 16, as you can see in this chart, Indiana Harbor is made up of four equal sets of oven grouping known as battery, A, B, C and D, each with 67 ovens equates to 268 ovens throughout the facility. We divide the plant into two distinct sides, the A/B side, one set of mechanical oven, and the C/D side for another set of mechanical oven. We began this multiyear turnaround effort focusing first on the C/D side of the facility. We started 2015 with an initial set of 48 rebuild ovens and based on the learning from these rebuilds, we design a process we feel is less build less cost-effective scalable across the facility. So, based on our learnings and experience we’ve recently increased the scope of this year’s campaign to cover even larger number of rebuilds. 58 ovens in total, five more than originally anticipated at the beginning of the year, something we’ve reviewed with you in the second quarter of this year. As Fred previously we remain on schedule and on budget with our rebuild work through the third quarter and we’ll have rebuilt to 144 total ovens or more than half facility by year-end. Total includes the entire C/D side of facility. To-date the result of these oven rebuilds are been encouraging and we feel confidence in our rebuild design and implementation technique. As we’ve detailed in the past non-rebuild oven continue to degrade over time often at an accelerating rate. This comprehensive rebuild campaign stops the degradation and return rebuild oven back to standard performance on the two most critical measures; charge weight and talking time. As a reminder charge weight is the volume of coal loaded into each oven, and the coking time is the time the oven takes to convert that coal into coke. When the Coke plant is operating well, charge weights are consistent and cycle times are both stable and also consistent, therefore production is relatively constant. And measuring IHO’s oven performance we focus on five cycle windows at a time or approximately 10 days of performance both before and after rebuilds are completed. Looking back at our 2017 and prior campaign we create significant improvement on both charge weight and talking time on rebuild ovens which yield production increases of over 50% on the rebuild oven versus the previously degraded oven. Given these results we are planning execute oven rebuilds across all 67 ovens on the A-battery in 2018. 2018 oven campaign will be our largest undertaking since launching this rebuild initiative in late 2015, but we have the knowledge from the resources execute on the plant. Based on her experiences and understanding of the A battery condition we believe that we can execute these rebuilds at a comparable cost of this year's target of approximately $500,000 per oven. As it been the case this year, approximately 80% or estimated 2018 spend will be capital and the remaining 20% spend. Turning to the next chart, looking further into our Indiana Harbor Outlook on slide 17, once the 67 ovens from our 2018 campaign are completed we will address 75% of the plants Indiana Harbor and three fold oven battery, A, C and D will be entirely rebuilt and fully operational. Our last oven battery, B-battery is most operationally challenged battery plant that has been. The [Indiscernible] that facility has had a larger relative impact of B-battery compared to other three batteries and is contributed to historical operating challenge. With that said, we did rebuilt 10 B-battery oven in 2016, and just finished up in 2017, five within that 10. The results to-date have met our expectations as charge weight and talking time that return to performance. Consistent with our approach over the last few years we intend to monitor performance of 10 B-battery ovens rebuilt as well as remaining non-rebuild oven and D-battery. As we progress through 2018 we will formulate a plan based on the economic return of rebuilding all, none or portion of remaining 57 ovens. Through the expected economic return and portfolio rebuilds we anticipate the remaining work would likely cost more though, our estimate is approximately $750,000 for oven based upon the conditions we see today in the B-battery. As we’re doing this quarter we intend to provide regular updates and progress of the 2107 rebuild campaign and we’ll also share addition information on our B-battery rebuilt assessment as it comes together. Turning now to Indiana Harbor performance outlook for 2018. From an adjusted EBITDA perspective we expect Indiana Harbor return to profitability in 2018 driven by the full year benefit of 2017 oven rebuild campaign and including these ovens we rebuilt in 2015 and 2016. Including the impact from our 2018 rebuild campaign on the A- Battery which I just covered, we anticipate full year production up to 900,000, 950,000 ton as the plan. In 2017 Indiana Harbor also return to a budgeted OEM cost sharing mechanism, for the last three years the plan is operating with fixed OEM reimbursement rate per ton and with SunCoke has been under recovery. Returning to a budgeted OEM process, if the plan for 1.22 million ton nameplate capacity level for 2018 with during of the contract will have a benefit on the plants overall profitability. Thus you when combined with the improved performance in the C and D battery oven, which will be entirely rebuild entering next year. We’re still working through the specific details of the OEM research as well as the overall budget Indiana have with our customer and therefore we do have specific 2018 financial targets to provide at this time. We do expect to provide full 2018 guidance for the harbor along with all of our plants in the company in the normal course of our fourth quarter 2017 earnings call. Again we’re committed to making this project a success not of our self but for our customer, our shareholders and the surrounding community. As part of that, we will continue to update investors on a regular basis going forward. Pay had pointed out, ones the 2018 campaign is completed we expect that 2011 total rebuild oven should have a capability to produce between 950,000 and 975,000 tons going forward. Wrapping up before opening the call for Q&A. As you’ve heard this morning we’ve made progress against our commitments for 2017 and are well-positioned to deliver long full year financial result on top of our guidance range. Now the third quarter in the book our focus just for closing up a year strongly. I’d like to take a moment here to acknowledge our people, our success with the direct launch and the effort of the 1200 men and women here at the SunCoke family. So I’d like to take this opportunity to thank all the team members for their effort. We’re proud of the progress we’ve made moving our business model for a tough market in late 2015 and 2016 and coming out stronger and more resilient as a result. We’re encouraged by what we see thus far and because of our collective efforts the company’s for longer term success. With that, I’d like to open up the call for questions.

[Operator Instructions] Your first question comes from Lee MacMillan of 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?

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.

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

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

Okay, understood.

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.

Thank you.

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.

No. Not this point, Lee.

Okay. Thanks a lot.

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

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

Thank you.

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.

Go ahead.

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?

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.

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?

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.

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

Thank you, Ted.

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

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.

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