Ladies and gentlemen, thank you for standing by, and welcome to SunCoke Energy Inc. Q2 2020 Earnings Call. [Operator Instructions] I would now like to turn the call over to your speaker today, Shantanu Agrawal, Director of Investor Relations. Please go ahead.

Good morning, and thank you for joining us to discuss SunCoke Energy's second quarter 2020 earnings. With me today are Mike Rippey, President and Chief Executive Officer; and Fay West, Senior Vice President and Chief Financial Officer. Following management's prepared remarks, we'll open the call for Q&A. This conference call is being webcast live on the Investor Relations section of our website and a replay will be available later today. If we don't get to your questions on the call today, please feel free to reach out to our Investor Relations team. Before I turn things over to Mike, let me remind you that 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 reconcilations reconciled to non-GAAP financial measures discussed on today's call. With that, I'll now turn things over to Mike.

Thanks, Shantanu. Good morning, and thank you for joining us on today's call. Let me start on Slide 3 with an update on our ongoing response to the COVID-19 pandemic. As we discussed in our last call, SunCoke has been designated an essential business and our facilities continue to operate safely. Our employees are working diligently to serve our customers with essential products and services. We continue to take all necessary measures to ensure the health and safety of our workforce, and have implemented policies and procedures that follow the guidelines established by the CDC, OSHA and local health and governmental authorities. Our COVID-19 task force continually monitors and evaluates the evolving situation and responds and adjust to the environment changes. As we move into the second half of the year, we recognize that market conditions remain challenged. In response, we have taken significant steps to support our customers in the short-term, while simultaneously providing long-term stability for our stakeholders. Additionally, we are making investments to expand our product capabilities and diversify into new markets. On the customer side, we have addressed the lower demand environment. All of our customers have idled or banked blast furnaces during the first half of 2020. While there has been modest recovery in demand, steel capacity utilization remains low at approximately 59%, and it is difficult to predict when demand will fully return to normal levels. In response to these unprecedented and uncertain times, we have partnered with our customers to address their near-term coke needs. In 2020, we will reduce our production by approximately 550,000 tons and now expect to produce approximately 3,750,000 tons for the whole year. Substantially, all of this reduction will occur in the second half of the year. In exchange for these near-term reductions, we have extended several of…

Thanks Mike, and good morning, everyone. Moving on to second quarter performance. As you can see on Slide 5, diluted EPS was $0.08 per share in the second quarter of 2020 compared to $0.03 per share in the second quarter of 2019. The prior year period included costs associated with the simplification transaction, which is the main driver of the increase year-over-year. Looking at adjusted EBITDA, this came in at $59 million in the second quarter of 2020 versus $63.1 million in the second quarter of 2019. Adjusted EBITDA from the coke operations increased $4.2 million compared to the prior year. Domestic sales volumes were approximately 54,000 tons lower than the prior year due to customer turn downs. The volume shortfall was more than offset by lower operating costs and better cost recovery. The adjusted EBITDA contribution from the Logistics segment decreased approximately $9 million versus the second quarter of 2019. Throughput volumes at CMT and the domestic terminals were approximately 2.7 million tons lower versus the prior year period. Slide 6 bridges second quarter 2019 adjusted EBITDA to second quarter 2020 adjusted EBITDA. Once again, coke operations were favorable by $4.2 million, driven by strong cost control and favorable cost recovery. Logistics operations were lower $8.8 million quarter-over-quarter, mainly due to Foresight and Mercury bankruptcies. Corporate and Other was better by $0.5 million. Moving on to the next slide, you can see in the chart that our cash balance at the end of the quarter was approximately $81 million, which is a more normalized cash balance. Our cash at the beginning of the quarter was artificially high because the company increased its borrowing under its revolving credit facility by approximately $157 million in order to preserve financial flexibility. We no longer believe that enhanced cash position is necessary, and…

Fay, why don't I take it from here. And again, we'll look to be at the lower end of our original guidance in the Logistics segment at $17 million. The next slide, Slide 10, summarizes our 2020 revised guidance. We now expect adjusted EBITDA to be between $190 million and $200 million. This incorporates all of the volume changes we discussed as well as foundry development expenses and cost reduction activities. Our capital expenditures are estimated to be approximately $80 million, which now includes $12 million of capital for foundry coke. This amount was not contemplated in our original guidance. We have reduced our free cash flow guidance based on revised adjusted EBITDA. We now anticipate that free cash flow will be between $36 million and $52 million in 2020. Wrapping up on Slide 11, as we continue to operate in these extraordinary times, our first priority continues to be the safety and well-being of our employees and contractors. We will continue to do everything possible to ensure that they are well protected and able to perform their jobs with confidence. We remain focused on our core business and how to best optimize our operations, including our logistics assets. As we discussed earlier, we have made significant progress in reducing our cost structure and adding stability by working collaboratively with our customers to address both current market challenges and longer term supply needs. We also continue to maintain our asset base to ensure that we are able to operate efficiently in the long-term even as operating levels may fluctuate in the near-term. We are proud of the investments we have made, creating the highest quality assets in the industry, which we are committed to fully utilizing and maintaining. Looking forward, we are developing a new business line in foundry coke and are confident that we will be successful and able to capture significant share in the domestic foundry market. Finally, we are fully committed the revised financial targets we have put forward and we'll make every effort to ensure that they are achieved. Before we end our prepared remarks, I would like to take this opportunity to thank all of our employees, contractors and suppliers who are working diligently during these difficult times to keep our business operating safely. With that, we can open up the call to Q&A.

Thank you. [Operator Instructions] Your first question comes from the line of Nick Jarmoszuk with Stifel. Nick, your line is open.

Good morning. Thanks for taking the questions. First one on the foundry coke business. Can you give us a little detail as to which facility will be producing the foundry coke?

We will be producing foundry coke out of our Jewell facility. We would be able to produce that coke out of other of our facilities, but Jewell is well positioned logistically to be the most efficient producer. So we'll be producing out of Jewell.

Okay. And then in terms of thinking about the potential EBITDA per ton margin, given that it seems like it needs to be in the coke oven for double the amount of time, can we assume that the EBITDA margins are going to be materially higher than the existing operations as well?

As we indicated, approximately a two-for-one replacement ratio. And while we're not providing 2021 guidance today, we are saying that we expect to have a very quick payback on the $12 million investment in capital. So the margin, rather than think about it as per ton is better thought of as per unit of time. So the margins are attractive on a time basis given that it's a two-for-one replacement ratio.

Okay. And then on the Haverhill contract, you can correct me if I'm wrong, but the way that I read it is, you'll ship tonnage to Arcelor in 2021, but then there is nothing beyond that. Is that accurate?

We have 800,000 tons coming from both facilities in '21. And '22 through '25, we anticipate shipping 400,000 from Haverhill, but we have the flexibility should we want to shift that production over to Haverhill.

So it's flexible as to where it can come from?

That's correct.

Between Haverhill and Jewell?

That's correct.

Okay. And then in terms of the volume decline to Arcelor, does that indicate that they're doing something more material on their blast furnace side or how should we think about how they're sourcing their coke that they're going to need to maintain production levels?

Well, as it relates to their blast furnace side, that's certainly a better question for them. I think the agreements that we've reach are reflective of the current market circumstance as well as where we have clarity of a view in '21 and '22 and beyond. You shouldn't assume though that we're not in almost a constant dialog with our customers. So our discussions with ArcelorMittal and other customers are ongoing with regard to their longer term requirements for coke.

[Operator Instructions] Your next question comes from the line of Matthew Castellini with Bank of America Securities. Matthew, your line is open.

Hey guys. Thanks for taking my question. And I apologize if this was just already answered, I cut out for a bit. But -- so it seems like you're attempting to replace the lost tons from the extended contracts with this foundry coke opportunity. And so if that's lower margin, what's the differential between that and your presumably higher priced blast furnace contract tons?

I don't want to leave an impression that it's a lower margin at all.

Okay.

We've made no statement to that effect.

Okay. Got it. Thank you. Just second. Where do you think you need to get the balance sheet leverage wise over the last couple of years that support if there was sort of a reduced level of EBITDA and cash flow based on sort of the different -- the change in contracts?

Well, as we have said, our long-term goal continues to be three times, and we'll work toward that. I think capital allocation for 2020 is relatively spoken for in our guidance and it will remain a priority in the years ahead to reduce that debt. So as we talk about 2021, early next year, we'll provide further guidance as to what might be expected in the 2021 period. But we'll continue to look to reduce that to the three times number.

Okay, great. Thank you. And just lastly, any progress on any asset sales, terminals, etc.?

Now is really not the time to be looking at asset sales of any type. The pandemic has taken a temporary toll on not just the U.S. industrial sector, but the global economy. So our focus currently is to, as we've talked this morning, reduce our cost to the extent possible. Recognizing the lower volume levels, we've taken a lot of variable cost out of our, particularly our logistics side where even in the presence of these very, very low volumes, we've been able to maintain positive EBITDA as well as look at, on a more permanent basis, our cost structure and that's the $10 million of permanent savings, which begin in 2021. So our focus now is to generate the $190 million to $200 million of EBITDA in 2020 given the greatly reduced volumes on both the logistics and the coke side and be as efficient as we can. As we've said many times, CMT is a very, very efficient terminal, but with the very low volumes, it's hard to demonstrate the real value of that asset. Clearly, if an opportunity at attractive and fair price were to be brought to us, we would entertain it.

Your next question comes from the line of Lucas Pipes with B. Riley FBR. Lucas, your line is open.

Hey, good morning, Mike. And first off, congratulations on picking up this call without any operator assistance, it was quite impressive. And speaking of picking things up, obviously with the ArcelorMittal contract announcement this morning, a lot of questions around there. And it appears a little bit like a now glass half-full, glass half empty type of situation, how would you describe it and how can we get -- how do we get the glass all the way full? Thank you very much for your perspective on this.

Thanks for your good questions, Lucas. We tend to see the glass already as more than half full. We're pleased to have been able to support our customers this year. We're pleased with the outcome of having 800,000 tons of business from ArcelorMittal next year in addition to the 1.2 million tons that comes out of a Harbor works. But we continue to work with customers. As I said, the industry is currently operating at 59% of capacity. We don't know, I don't think anyone knows, when the industry will fully recover. But when it does, we'll be there with our efficient facilities to serve. So in the meantime, we again focus on our cost. The addition of foundry to our customer mix, as I said, we're targeting 100,000 next year that replaces 200,000 tons of blast furnace coke. So we've got 800,000, plus if you use the two-for-one replacement ratio, you've got 200,000 tons equivalent of foundry going out next year. We're not stopping at 100 in foundry, there should be no impression of that. It's a 600,000 ton market. And we are going to look to achieve significant market share in that space. We didn't enter this market with the idea of 100,000 tonnes of foundry sales. That's an initial estimate, our first year in the business. Trials with potential customers have gone very, very well. So we looked at good success in foundry. So we're going to pursue foundry hard. And we're, again, in dialog with our blast furnace customers as their markets continue to recover. So that's the focus.

Very helpful, Mike. I appreciate that. And two quick questions. One, on foundry coke, why now? Is there something that's -- that has allowed this to kind of go make more sense now than in years prior? And then secondly, a very impressive coke margin per ton during the second quarter, can you expand on what's been behind that? And is this a margin that's sustainable as we look ahead into 2021 and beyond? Thank you very much for your perspective on this.

Sure. We're not going to start to preview 2021 in this call. But the teams have been working very hard, and I'm very proud of the efforts that all of our coke-producing assets have turned in this year. We've looked to variablize our cost where we can given the lower volume levels, and we're taking our fixed or structural cost as well. So I'm very, very pleased with the cost discipline that everyone's been able to evidence this year. There is no reason to think that we can't maintain that kind of discipline. Certain cost will come back because they are variable, but we're not doing anything to take any risks with regard to the long-term reliability of our assets. So we're not in any way starving an asset. You can do that in the short-term, you can cut back on R&M and save some costs. That's not what's going on here. So we're not sacrificing our future to generate these kind of margins today. Your first question on the foundry side, why now, it's really, Lucas, it goes back over a year. We saw over a year ago that certain of the foundry producers, domestic producers were shutting down. We saw foundry customers looking to import. So we started to take a very serious review of our ability to profitably produce this product in a very reliable, very consistent way to meet customer demand. So it goes back a while. We also of course hear the same things you do about blast furnace participation market share in the future, and we thought it advisable to develop into another market. So we've put a lot of work into this. And clearly, no one could have foresaw the pandemic and the effects on demand in the domestic steel segments. So the timing was not motivated by the current challenges that the market faces. But clearly, it's fortuitous that it all came together with regard to us proving out the ability to produce in this time period. So it's really not a new idea here at SunCoke, but rather it's something we've been working on, like I say for over a year. So it's not new. And the value of participating in the market, the ideas of diversification of market and customer aren't new to us either.

Very good to hear. Mike and team, really appreciate the efforts and continue. Best of luck. Thank you.

Thank you. Your final question comes from the line of Matthew Sandschafer with Mesirow Financial. Matthew, your line is open.

A couple of quick questions. What percentage of the foundry coke market right now is supplied by imports?

I think this year it's probably in a 150,000 ton range a quarter.

150,000 a quarter of it. So who do you -- I guess, how do you expect to take market share otherwise domestically if you want to grow beyond that 100k? Are there other mergers currently planned? Or are you going to have to actually go out and take customers in competitive situations?

Well, our focus is to be a long-term reliable supplier, no different than what we have with our integrated customers. If we make a quality product and we do so reliably and we're cost efficient, market share will naturally come to us. Customers, whether it's steel customers, whether it's foundry coke customers, they look for diversity in their supply base for a variety of good reasons, and we'll stand ready to really be a preeminent supplier. We've made the investments. So we've got good balance sheet. We have the ability to commit ourselves through this market for the long-term, no different than the integrated blast furnace market. So we're going to earn our way by, again, producing a reliable high quality coke product in the cost-efficient manner.

Okay. And then on the topic of the ArcelorMittal extensions, what does the cost structure look like at Jewell and Haverhill now with the new volume levels? Are these levels -- can you make enough money that it makes sense to continue to invest in these assets given the high fixed costs -- well, high capital intensity of the business?

Well, the answer -- the short answer is yes. We have the newest coke oven fleet in North America, that's an advantage for us. We're a low-cost producer. We're not going to starve ourselves out of that leading position. At typical year, R&M capital is in the $65 million, $70 million range. And we expect to be able to continue to invest and maintain the integrity of our assets even though volumes are off here this year, and we have some work to do to fully fill our facilities out ahead. We'll do that from a good asset position not a deteriorating asset position.

So the expectation is not -- the expectation is you're going to try to fill out the Jewell and Haverhill demand portfolio rather than reduce capacity?

100% correct.

Okay. And so I guess back to the same sort of question about the foundry coke. Where does that demand come from do you think in the environment we're in currently? I know that you guys are -- have the best assets, but I also know that a large customer is choosing to not commit to buying coke from you guys at that kind of level three years from now.

The foundry market like our markets in the U.S. is currently off a bit. We expect it to recover. Foundry is -- it's not like blast furnaces. There is a lot of sub-markets within the foundry market. There's over 30 customers that we're currently working to develop relationships. And they're everything from ductile iron pipe producers to people who make manhole covers. Frank shafts, engine blocks for trucks, there's just a variety of users, and we expect that industrial America will in time recover.

Right. I guess, the second question, are you planning to sell -- are you planning to drive the volumes on the blast furnace coke back up beyond the 400,000 at Jewell and Haverhill? Are you looking to fill out primarily with foundry?

Well

Which the market doesn't seem they're going to support that. I guess, I'm just trying to figure out that the hole here created by the new contract is pretty large a couple of years out, I'm just trying to figure out what the components are to fill it up?

Yeah. Well, it will be again both with our traditional blast furnace customers as well as our continued success in foundry. For example, you assumed 50% of the foundry market as 300,000 tons, which is 600,000 tons of our blast furnace coke.

This concludes our question-and-answer session. I will now turn the call back over to Mike Rippey for closing remarks.

Thank you. And thank you all for joining us on the call this morning and your continued interest in SunCoke. And we'll look forward if not able currently to visit in person, certainly take your calls as the period unfolds. So thanks again and have a good day.

Ladies and gentlemen this concludes today’s conference call. Thank you for participating. You may now disconnect.