SunCoke Energy, inc (SXC) Q2 2021 Earnings Call Transcript

Image source: The Motley Fool.

SunCoke Energy, inc (SXC -0.56%)
Q2 2021 Earnings Call
Jul 29, 2021, 10:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and thank you for standing by. Welcome to the SunCoke Energy Second Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]

I would now like to hand the conference over to your speaker Shantanu Agrawal. Please go ahead.

Shantanu Agrawal -- Director of FP&A, Investor Relations and Treasurer

Thanks, Kathy. Good morning, and thank you for joining us this morning to discuss SunCoke Energy's Second Quarter 2021 results. With me today is Mike Rippey, President and Chief Executive 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 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 SCC filings apply to the remarks we make today. These documents are available on our website as our reconciliations to non-GAAP financial measures discussed on today's call.

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

Mike Rippey -- President & Chief Executive Officer

Thanks, Shantanu. Good morning, everyone, and thank you for joining us today. I want to discuss a few highlights of our second quarter results before turning it back to Shantanu who will review them in detail. First, I would like to thank all of our SunCoke teammates for their continued commitment to our shared goals of working safely and efficiently to deliver high-quality products and services to our customers.

On the Coronavirus front, we continue to take all necessary measures to ensure the health and safety of our workforce. We continue to strongly encourage all employees to get the COVID-19 vaccination as it gives the best protection against the virus, while also protecting families and coworkers.

Turning to our financial performance in the quarter, we are pleased with how our teams delivered across both the coke and logistics segments. Coke making operations continued to operate at full capacity, while our Logistics segment saw significant increases in volume. For the second quarter of 2021, we delivered adjusted EBITDA of $68 million, a 15% improvement over Q2 2020. During the second quarter, we also significantly strengthened our balance sheet with the execution of our debt refinancing transactions. We retired the existing 7.5% [Phonetic] senior unsecured notes due in 2025 and issued 4.875% [Phonetic] senior secured notes due in 2029. Additionally, we extended our revolving credit facilities maturity to June 2026, from August 2024. These refinancings both extend our maturity profile and lowers our debt cost significantly. We will save an excess of $17 million in interest on an annual basis as a result of these refinancing activities.

Operationally, our export and foundry coke initiatives continue to perform well and we are seeing a positive impact in our financial results. Our products are being well received as we demonstrate our ability to reliably deliver quality products during a time when supply chain disruptions and delays have become all too common. We remain committed to future growth in these markets and we continue to see solid prospects in the years ahead. CMT's revitalization is also well underway aided by global strength in commodity markets. We see continued improvement in both volumes and product mix handle the CMT contributing meaningfully to our financial results. Based on our record first half performance and the expectation of continued strength in steel and coal markets for the remainder of the year, we are increasing our full-year 2021 adjusted EBITDA guidance to $255 million to $265 million from the original guidance of $215 million to $230 million.

With that, I'll turn it over to Shantanu to review our second quarter earnings in detail. Shantanu?

Shantanu Agrawal -- Director of FP&A, Investor Relations and Treasurer

Thanks, Mike. Turning to Slide 4, our second-quarter net loss attributable to SXC was $0.11 per share, down $0.19 versus the prior-year period. Current quarter earnings per share reflects a $0.27 impact of debt extinguishment-related charges in connection with the refinancings. Adjusted EBITDA came in at $68 million for the quarter. The increase was primarily due to approximately 2.2 million tons of higher throughput volumes at our Logistics segment.

Turning to the adjusted EBITDA bridge on Slide 5, second quarter 2021 adjusted EBITDA was higher by $9 million or 15% over the prior-year period. Our coke operations again performed well this quarter and results were reasonably consistent with the second quarter of 2020. The majority of the period-over-period increase in adjusted EBITDA was driven by our Logistics segment as CMT continues to see significant increases in the coal export and iron ore volumes. With little change in corporate and other, we ended second quarter at $68 million of adjusted EBITDA.

Turning to Slide 6 to discuss our liquidity position in Q2. As you can see from the chart, we ended the second quarter with a cash balance of $51.7 million. The highlight of the quarter was our debt refinancing transactions as mentioned by Mike earlier. Along with the meaningful expansions on debt maturities we'll also benefit from significant cash interest savings in excess of $17 million on an annual basis. In the second quarter cash flow from operating activities generated close to $40 million. We spent $13.6 million on capex during the quarter and paid dividends of $5 million at the rate of $0.06 per share. We paid $10.5 million as transaction fees for issuance of the new senior secured notes and extension of the revolver. We also paid $22 million as premium to call the 2025 senior notes as part of the refinancing transaction.

Our total debt balance increased by $9 million over the quarter and stood at approximately $667 million at the end of second quarter. On an LTM adjusted EBITDA basis, our gross leverage ratio is just under three times and we expect additional deleveraging to continue over the balance of the year. In total we ended the quarter with a strong liquidity position of approximately $237 million.

Now moving to Slide 7 to discuss our Domestic Coke business performance and revised full-year outlook. Second year adjusted EBITDA per ton -- Second quarter adjusted EBITDA per ton was $58 on 1,063,000 sales ton. Our Domestic Coke fleet continues to run at full capacity and our products in both export and foundry coke markets are well received. Based on the performance during the first half of the year and the expectations for the remainder of 2021, we are increasing the Domestic Coke adjusted EBITDA guidance to $234 million to $238 million from original guidance of $219 million to $224 million. We are also projecting coke production to be higher by 50,000 tons from the original guidance. As a reminder, the coke production guidance includes all three products contracting blast furnace coke, export coke, and foundry coke.

Moving to Slide 8 to discuss our logistics business. The Logistics business generated $11.4 million of adjusted EBITDA during the second quarter of 2021, as compared to $3 million in prior-year period. The increase adjusted EBITDA is primarily due to higher throughput volumes at CMT. The segment as a whole handled $5.1 million tons of throughput volumes during the quarter as compared to 2.9 million tons during the prior-year period. CMT handled 1.9 million more tons versus the prior-year period mainly driven by higher coal exports and the addition of iron ore as a new product.

Increased global demand, strong API2 index pricing and elevated natural gas pricing in Europe continue to spur US thermal coal exports. Given our strong first half 2021 results and looking at the API2 forward curve, we now expect to deliver full year logistics adjusted EBITDA in the range of $45 million to $48 million, as compared to original guidance of $20 million to $25 million. We anticipate handling approximately 7.5 million tons of coal along with approximately 3.5 million tons of other products at CMT for the full-year 2021. The volume guidance for our domestic Coal terminals remains unchanged at approximately 10.5 million tons.

Turning to Slide 9, which summarizes our revised 2021 guidance. We now expect consolidated adjusted EBITDA to be between $255 million and $265 million as compared to original guidance of $215 million to $230 million. This incorporates increased profitability expectation from export foundry sales in the coke segment and higher volumes at CMT in the Logistics segment.

Our capital expenditures are now estimated to be approximately $90 million as compared to the original guidance of $80 million with inflationary pressures being the main driver for the increase. Our revised free cash flow guidance stands at $85 million to $100 million with the increase in adjusted EBITDA mostly offset by the 2025 senior notes call premium and debt issuance cost.

With that, I'll turn it over to Mike.

Mike Rippey -- President & Chief Executive Officer

Thank you, Shantanu. Wrapping up on Slide 10, as always safety and operational performance is top of mind for our organization. We work to continue to perform safely while successfully executing against our operating and capital plan for the remainder of the year. As we end the second quarter, we are fully sold out for 2021 and are running at capacity. Our order book is full for this year, we will continue to focus on further developing our customer base and participation in export and foundry coke markets for future years. We've made good progress on revitalizing CMT during the first half of the year.

Based on our projections, the second half should surpass the first. We will continue to build on this foundation for CMT's long-term success. As I mentioned earlier, we significantly strengthened our balance sheet during the quarter with the execution of the debt refinancings. To revise debt structure aligns well with our business model and capital allocation priorities. For the remainder of the year, we will continue to work toward reducing our debt balance. In the longer term, we will continually evaluate the capital needs of our business, our capital structure, and the need to reward shareholders and we'll make capital allocation decisions accordingly.

Finally based on the reliability and performance of our operating segments, we look to achieve our adjusted EBITDA guidance of $255 million to $265 million for 2021.

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

Questions and Answers:

Operator

[Operator Instructions] And your first question is from Matthew Fields of Bank of America.

Matthew Fields -- Bank of America -- Analyst

Hey, everyone. Congrats on great execution in the foundry coke market and the logistics market and with the successful refinancing. Just wanted to sort of touch on the debt reduction comments you made toward the end of your prepared remarks. Given the free cash flow guidance of $85 million to $100 million, I think we've had already about $70 million in the free cash flow this year. So $15 million to $30 million left, after dividends it's about $5 million to $20 million, perhaps for kind of debt paydown. Is that with [indecipherable] revolver pay down that we can expect to see over the back half or is there something more that you kind of have in the hopper? What's the kind of gross debt number that we can look to see reduced from June 30 to the end of the year?

Mike Rippey -- President & Chief Executive Officer

Well, I think Matthew your math is usual as pretty spot on given the guidance that we've laid out.

Matthew Fields -- Bank of America -- Analyst

Okay. And then, gradually that we're not going to be at so much debt reduction from here to the end of the year, you've obviously got a good amount in the first half. But that guidance the newly revised higher guidance you're kind of well below your historical leverage target. So I guess the question is kind of what changes first capital allocation or the leverage target?

Mike Rippey -- President & Chief Executive Officer

Well, here we might disagree a bit. Our long articulated and perhaps not well-articulated target was three times or less. And perhaps not emphasize fully enough or less part, we're delighted to be just below three times as we finished the second quarter. But the -- or less part becomes something that I need to emphasize more. So for the time being our focus is, as we've said is to continue to pay down debt, get below that three times. And in the years ahead we'll talk more about capital allocation recognizing fully the need to reward shareholders, to continue to invest in our facilities to maintain them at the high level that they are today, and have a prudent debt level as well.

Matthew Fields -- Bank of America -- Analyst

All right. Thanks very much for that answer. We appreciate the emphasis on the or less part. Very helpful and good luck on the rest of the year.

Mike Rippey -- President & Chief Executive Officer

Thanks. Appreciate it.

Operator

The next question is from Lucas Pipes of B. Riley Securities.

Lucas Pipes -- B. Riley Securities -- Analyst

Thank you very much and good morning, everyone. And congrats on the strong quarter and strong outlook for the year.

Mike Rippey -- President & Chief Executive Officer

Thanks, Lucas.

Lucas Pipes -- B. Riley Securities -- Analyst

Mike, I want to touch a bit on the minimum customer commitments for next year. I mean this is something we've been talking about for really the past 12 months, I think it was last August that you disclosed additional information there. So I wondered, kind of what's your outlook here, there continues to be a lot of talk about carbon reduction goals in the industry and I would appreciate if you could share your thoughts about one, on -- 2022 minimum commitments? But then also longer term, how do you see SunCoke positioned on that front? Thank you very much.

Mike Rippey -- President & Chief Executive Officer

Lucas, it's also great questions. And we're really not prepared today to talk about 2022. But you're correct in talking about August of last year and we started to discuss the fact that we would enter the foundry and the export markets with around 400,000 to 450,000 tons to sell. And we have indeed accomplished that, this year we're running full and we're selling those quantities into the export and foundry markets. That 450,000 grows to approximately 800,000 next year given the renewals that we did with what was then ArcelorMittal. Given the strength of our markets we see today, we feel we're well-received in the markets and should be able to continue to sell successfully into those markets notwithstanding the fact that things may change. So that's kind of when you think about '21 and '22 and what was required of us to sell into the foundry and export markets that's where that [indecipherable]. You mentioned carbon and that's a much longer-term question, people committed themselves to -- in the extreme be carbon-neutral by 2050. We of course, support initiatives to reduce the carbon footprint, it's associated with making the steel. I'd remind you that the US carbon footprint compared to the rest of the world is very, very favorable [Phonetic] comparing against European steel makers or Asian steel makers we clearly as a country have the best carbon footprint today.

And I look to see that continue to improve. We play a role in that of course and through all we play is and we emphasis this, we reliably produce a very high-quality coke. And the nature of our coke, the quality of our coke, the strength of our coke allows for better support and you might find in lesser cokes, and when you can support the burden in the blast furnace, that allows for the increased usage of substitute fuels whether it'd be natural gas or HPI. So as our customers look to reduce their carbon footprint and increase the use of other fuels in their furnace as we stand ready to support them again with our high-quality coke, so which we believe to be unmatched here domestically and perhaps globally. And as well, we look to maintain our leading environmental technology, which in the coke making process itself is the best in class. So we encourage the reduction in the carbon footprint and all those discussions that are taking place today. We think we're well positioned to participate.

Lucas Pipes -- B. Riley Securities -- Analyst

Terrific, really helpful. Thank you, Mike, for that detail. Second question, turning over to your logistics business, obviously a remarkable recovery and seaborne coal prices in particular and kind of as you look at how this business is positioned today, you raised guidance. Is there interest for longer-term arrangements again? There were discussions in the past about possibly selling CMT, is that something that you'd consider here and make them more interested parties as well? So I appreciate kind of a more comprehensive discussion of the market and then also the strategic outlook for CMT. Thank you very much.

Mike Rippey -- President & Chief Executive Officer

Good question, Lucas. Obviously, we're very pleased with the performance. At CMT it's -- I know you'll remember only a few years ago CMT was more or less a captive facility to two customers. And those customers went through bankruptcy and that was a blow to CMT. And the challenge then for our team was to reposition that asset into a merchant facility and had we been unable to successfully reposition the asset, we would have considered a sale of the asset perhaps to someone better positioned to bring about that revitalization. And that was a challenge for our teams. And as you can see in our results they responded beautifully. They've been out working hard, knocking on doors and looking to enter new supply chains which aren't easy, it's not easy to disrupt a supply chain that's working well, so you have to have some patience. Notwithstanding migrations; they have exceeded our expectation, part of that of course goes to the strength in the global commodity markets and a little wind at the back never hurt anybody, API2 prices are quite elevated today by historic measures and if you look at the forward API2 curve, it remains elevated.

So we're quite encouraged with the prospects for CMT and the thermal side as well as other commodities that we look to handle through the facility, and with good success with iron ore and pet coke and we're going to look to continue with those initiatives. So our singular focus now is to continue to build on the good success the team has had. Like I said, I couldn't be more pleased with the work that they've done over the last 18 months to get this facility turned around and repositioned.

Lucas Pipes -- B. Riley Securities -- Analyst

Very helpful Mike. And a quick follow-up on that. When I think about 7.5 million tons of coal, 3.5 million tons of other materials. How does that compare to the nameplate capacity, and so is there kind of little room to the cart to maybe increase volumes further given the strong market backdrop?

Mike Rippey -- President & Chief Executive Officer

There is a little more room, Lucas. So it's a great question. I'd like to see us perhaps a little longer-term handling 15 million tons through there. We've made some debottlenecking investments at the facility who allow for that to happen. We were going to be happy with 11 million this year and maybe 12 million, there is an all-time record for us. I don't go back that far because I recall some of the folks that were around the media talking about 12 million tons years. And we get to 12 million, we're not going to be satisfied, we'll look to debottleneck and get to 15 million.

Lucas Pipes -- B. Riley Securities -- Analyst

Very good. I will leave it here. Thank you very much for all the color and best of luck.

Mike Rippey -- President & Chief Executive Officer

Thanks.

Operator

Your next question is from Karl Blunden of Goldman Sachs.

Karl Blunden -- Goldman Sachs -- Analyst

Hi, good morning. Thanks for the time. We've definitely built some flexibility on the balance sheet with the recent transaction and looks like cash flow is coming in a bit stronger than your prior expectations. When you take a look at the M&A environment, is there opportunity for you to play a role in that?

Mike Rippey -- President & Chief Executive Officer

We'd like to so, Karl, it's good question, I Appreciate it. We have and we continue to look for opportunities, adjacent opportunities where we can provide value to our shareholders by delighting customers. And when I'm talking about consumer products of this year, we're talking about steel companies and related industries. So we'll look for opportunities to build on our foundation and serving our customers and markets we know, what products that we know, we've got a very nice technology portfolio of the company that we'd like to expand. You see the success of the foundry coke market while that's not M&A, it's organic growth. But those are the kind of undertakings we look for organic obviously, first because returns with organic growth are typically higher because the capex requirement is typically not large compared to the acquisition cost of an asset. But we're looking for good assets with good managements that are complementary to what we do. We're quite disciplined, we haven't done anything in my 3.5 years, not for lack of trying. But we're very disciplined in our approach. And unless we see returns that are well in excess of our cost of capital, we simply won't grow for the sake of growth. So we got a very disciplined approach here, we're looking -- we just haven't found anything as of this date that needs all of our criteria.

Karl Blunden -- Goldman Sachs -- Analyst

But when you look at valuations available in the market today. Could M&A deleveraging after synergies?

Mike Rippey -- President & Chief Executive Officer

Could be a lot of things. Well, I'll just leave it at that [indecipherable], start to predict the future.

Karl Blunden -- Goldman Sachs -- Analyst

It sounds good. We've spoken about success on kind of the commercial and revenue side. When you think about cost inflation and managing that through the footprint, are there areas of concern? Or how are you managing the business today?

Mike Rippey -- President & Chief Executive Officer

Well, we're seeing some inflation. As Shantanu indicated in his remarks on the capital side, clearly labors tighter than what it has been historically in the way you track labor in a tight market as you pay, it's more or less it's a simple math of supply and demand. And there is material cost inflation. We see hot bands at $1,800 a ton, we're not so long ago, there were $500 a ton. So, there is material cost inflation as well. We have to manage that by being as efficient as we can with the utilization of those inputs. On the operating front, we only really have two components, coal which is a pass-through to our customers and the labor that we use to convert that coal to coke, and the labor that we used to maintain our facilities, it's been remarkable inflation there yet. As you know the take or pay nature of our contracts allows for some of that increase to be passed on to our customers. But we don't -- just because we can pass it on take that as a reason not to continue to look to be ever more efficient.

So in all of our activities we're doing maintenance, for example, we look to extend the time between outages, so there's less need for outages and therefore less need for our labor and materials. We look to deploy automation to the extent we can, we look to increase our yields, we look to increase our throughputs we guided 50,000 tones up for the balance of the year on coke and there is no requirement for additional labor with that 50,000 tones, so to the extent we can be more efficient with our output, there is no labor component. So, you're offsetting the cost those inflationary cost increases by generating more throughputs. So there's lots of levers and industrial company can pull to try to offset what may be some structural changes in the inflationary environment, there's a lot of debate out there about whether this is transitory inflation or if it's structural, I don't want to second-guess the economists from the Fed. But it certainly feels to me anyway that there is a little bit of structural inflation in the economy now.

Karl Blunden -- Goldman Sachs -- Analyst

Okay. Thanks a lot, Mike. Appreciate it.

Mike Rippey -- President & Chief Executive Officer

Yes.

Operator

[Operator Instructions] Your next question is from Nathan Martin of The Benchmark Company.

Nathan Martin -- The Benchmark Company -- Analyst

Yes. Thanks, good morning, everybody. And congrats on the quarter and the debt refinancing.

Mike Rippey -- President & Chief Executive Officer

Thanks, Nathan.

Nathan Martin -- The Benchmark Company -- Analyst

Yes. My bigger picture questions have -- most have been addressed at this point. So just really a quick modeling question. You may be -- understand the release but can you guys give us the breakdown in volumes at CMT between coal and other products? You mean the --

Mike Rippey -- President & Chief Executive Officer

7.5 for coal and 3.5 for other.

Nathan Martin -- The Benchmark Company -- Analyst

No. In the quarter, Michael. I'm sorry. I think, Shantanu, you guys did about maybe was 2.1 million tons of coal in the first quarter and of other [Phonetic]. I was just curious what that might look like in Q2?

Shantanu Agrawal -- Director of FP&A, Investor Relations and Treasurer

It's similar in the second quarter as well.

Mike Rippey -- President & Chief Executive Officer

That's right.

Nathan Martin -- The Benchmark Company -- Analyst

Okay. Got it. Perfect, appreciate that. Really that's all I had left guys. I appreciate the time and best of luck for the second half.

Mike Rippey -- President & Chief Executive Officer

Thanks.

Shantanu Agrawal -- Director of FP&A, Investor Relations and Treasurer

Thanks.

Operator

And your next question is from Josh Taykowski of Credit Suisse.

Josh Taykowski -- Credit Suisse -- Analyst

Hey guys, thanks for taking the question. Just had one for me, most of mine have been answered. But I was wondering if you could maybe just talk through the sequential slight margin pressures that you saw in 2Q versus 1Q. I guess more specifically the sequential decline in EBITDA per ton on the domestic side as well as the margin differential in your Brazil coke?

Mike Rippey -- President & Chief Executive Officer

Josh, it's really kind of what I would think of on the one hand, is noise. We have a little more outage work going on in the second quarter than the first. As we discussed in the first it was really an exceptional quarter were almost nothing went wrong. So it's relatively quarter-over-quarter the same results, you got some seasonality, some outage work, so timing for lack of a better word. And then in Brazil, I think we earned the bonus in the second quarter and a little more throughput there. Is that right, Shantanu?

Shantanu Agrawal -- Director of FP&A, Investor Relations and Treasurer

Yes. I mean it's really not a margin question. I think it's more of a denominator that coke tons produced and sold. I mean I think that the numerator -- the EBITDA was more or less the same it's just the timing of the tons being sold and that leads to the dollar per ton being higher in Q1 versus Q2. It's really not of a margin question.

Josh Taykowski -- Credit Suisse -- Analyst

Got it. That's helpful. Thanks, guys. Appreciate it. Congrats again.

Operator

And there are no further questions at this time. I'd turn the call back over to Shantanu.

Shantanu Agrawal -- Director of FP&A, Investor Relations and Treasurer

Okay. Thanks, Kathy, and again thank you all for joining us this morning and for your continued interest in SunCoke. Look forward to talking soon.

Mike Rippey -- President & Chief Executive Officer

Thank you.

Operator

[Operator Closing Remarks]

Duration: 31 minutes

Call participants:

Shantanu Agrawal -- Director of FP&A, Investor Relations and Treasurer

Mike Rippey -- President & Chief Executive Officer

Matthew Fields -- Bank of America -- Analyst

Lucas Pipes -- B. Riley Securities -- Analyst

Karl Blunden -- Goldman Sachs -- Analyst

Nathan Martin -- The Benchmark Company -- Analyst

Josh Taykowski -- Credit Suisse -- Analyst

More SXC analysis

All earnings call transcripts