Q1 2023 SunCoke Energy Inc Earnings Call
Participants
Katherine T. Gates; President, Chief Legal Officer, Chief HR Officer & Director; SunCoke Energy, Inc.
Mark W. Marinko; Senior VP & CFO; SunCoke Energy, Inc.
Shantanu Agrawal; VP of Finance & Treasurer; SunCoke Energy, Inc.
Lucas Nathaniel Pipes; MD, Senior VP & Equity Analyst; B. Riley Securities, Inc., Research Division
Nathan Pierson Martin; Coal and Railroads Senior Equity Analyst; The Benchmark Company, LLC, Research Division
Presentation
Operator
Good morning. Thank you for attending today's SunCoke Energy First Quarter 2023 Earnings Call. My name is Bethany, and I will be the moderator for today's call. (Operator Instructions) I would now like to pass the conference over to our host, Shantanu Agrawal, VP of Finance and Treasurer with SunCoke Energy. Please go ahead.
Shantanu Agrawal
Thanks, Bethany. Good morning, and thank you for joining us this morning to discuss SunCoke Energy's First Quarter 2023 Results. With me today are Mike Rippey, Chief Executive Officer; Katherine Gates, President; and Mark Marinko, Senior Vice President and Chief Financial Officer. Following management's prepared remarks, we'll open the call for Q&A. This conference call is being webcast live on the Investor Relations section of our website, and a replay will be available later today. If we do not get to your questions on the call today, please feel free to reach out to our Investor Relations team. Before I turn things over to Katherine, let me remind you that the various remarks we make on today's call regarding future expectations constitute forward-looking statements.
The cautionary language regarding forward-looking statements in our SEC filings apply to the remarks we make today. These documents are available on our website as are reconciliations to non-GAAP financial measures discussed on today's call. With that, I'll now turn things over to Katherine.
Katherine T. Gates
Thanks, Shantanu. Good morning, and thank you for joining us on today's call. Earlier today, we announced SunCoke Energy's first quarter results. I want to discuss a few highlights before turning it over to Mark to review the results in detail. I'd like to start by thanking all of our SunCoke employees for their contributions to our first quarter results. Our domestic coke business operated at full capacity during the quarter, and our Logistics segment performed well as we continue to pursue new customers. Through our collective efforts, we delivered consolidated adjusted EBITDA of $67.1 million. Last week, we also announced the extension of our Indiana Harbor coke agreement with Cleveland-Cliffs through September 2035.
The key provisions of the extension are similar to the current contract. This renewal affirms our mutually beneficial relationship with Cleveland-Cliffs and positions Indiana Harbor well for the future. Our foundry coke business continues to perform well, with all sales finalized for the full year. The foundry coke expansion project is also progressing and it remains on time and on budget. Our order book for noncontracted blast furnace coke is solid, and all of our noncontracted blast furnace coke sales are finalized through the third quarter.
From a leverage perspective, at the end of the quarter, our gross leverage ratio was approximately 1.93x on a trailing 12-month adjusted EBITDA basis. Finally, as we continue to execute against our 2023 objectives, we remain well positioned to achieve our full year adjusted EBITDA guidance of $250 million to $265 million. With that, I'll turn it over to Mark to review our first quarter earnings in detail. Mark?
Mark W. Marinko
Thanks, Katherine. Turning to Slide 4. Net income attributable to SunCoke was $0.19 per share in the first quarter 2023, down $0.16 versus the prior year period. Adjusted EBITDA for the first quarter of 2023 was $67.1 million, a decrease of $16.7 million from first quarter 2022. Lower contribution margin on export coke sales was the primary driver of the decrease in both net income attributable to SunCoke and adjusted EBITDA. Moving to Slide 5 to discuss our Domestic coke business performance. First quarter domestic coke adjusted EBITDA was $60.4 million and coke sales volume was $950,000, $6 million decrease in adjusted EBITDA as compared to same prior year period, was primarily driven by lower contribution margin on export coke sales. The timing of non-contracted blast coke sales also impacted results this quarter.
The domestic coke fleet continues to operate at full capacity and all noncontracted blast furnace coke sales are finalized through the third quarter. Additionally, all foundry coke sales are finalized for the full year. Given our solid first quarter performance, we remain well positioned to deliver our Domestic coke adjusted EBITDA guidance of $234 million to $242 million. Moving on to Slide 6 to discuss our Logistics segment. The Logistics business generated $13.5 million of adjusted EBITDA during the first quarter of 2023 as compared to $12.6 million in the same prior year period. The increase in adjusted EBITDA was primarily due to higher volumes at our Convent Marine Terminal. Our logistics terminals handled combined throughput volumes of 5.3 million tons during the quarter as compared to 5.2 million tons during the prior year period, with CMT handling approximately 200,000 additional tons as compared to the same prior year period. Although thermal coal pricing has declined modestly, CMT continues to benefit from the API2 price adjustment. Our full year adjusted EBITDA (technical difficulty)
Now turning to Slide 7 to discuss our liquidity position for Q1. SunCoke ended the quarter with a cash balance of approximately $83 million. Cash flow from operating activities generated approximately $30 million, it was impacted by working capital changes. We spent $22.6 million on CapEx during Q1 and also paid $6.7 million in dividends at the rate of $0.08 per share during the quarter. In total, we ended the quarter with a strong liquidity position of approximately $398 million. With that, I will turn it back over to Katherine.
Katherine T. Gates
Thanks, Mark. Wrapping up on Slide 8. As always, safety and operational performance is top of mind for our company. We continue to focus on safely executing against our operating and capital plan for full utilization of our coke making assets. As I mentioned previously, we are pleased with the performance of our foundry coke business. The foundry expansion project is progressing as planned, and its implementation later this year will allow SunCoke to grow its market participation meaningfully. As we've demonstrated in the past, we will continue to pursue a balanced opportunistic approach to capital allocation. We continue to evaluate the capital needs of the business, our capital structure and the need to reward our shareholders and will make capital allocation decisions accordingly. Lastly, we look to achieve our full year adjusted EBITDA guidance of $250 million to $265 million for 2023. With that, let's go ahead and open up the call for Q&A.
Question and Answer Session
Operator
(Operator Instructions) We will pause briefly ask questions are registered. Our first question comes from the line of Lucas Pipes with B. Riley.
Lucas Nathaniel Pipes
Thank you very much, operator. Good morning, everyone. My first question is on the international coke markets. They've softened quite a bit alongside lower met coal prices. And I wondered if you could frame up the sensitivity to that weakness? That's question number one.
Katherine T. Gates
Thanks, Lucas. As we said in the fourth quarter and in discussing our full year guidance, we anticipated a weaker export market this year. We built that into our guidance. And as we've just said here, we're affirming our guidance for the full year.
Lucas Nathaniel Pipes
And roughly what amount of tons do you export into the Coke markets today?
Katherine T. Gates
Well, I appreciate the question. But as I think you know, we don't provide the breakdown of export versus our other tons. We have all of our domestic coke is treated as a segment. But as we've said, all of our non-contracted blast coke sales are finalized through Q3.
Lucas Nathaniel Pipes
That's helpful. And then what's the typical duration? So if you were to go out for coke sales in the international market today to finalize business would this be for 2024? Would it be for the fourth quarter of 2023, just getting -- trying to get a better sense for at what time we might see risks from weaker international markets?
Katherine T. Gates
Well, I think we're focused on our full year. And as we've said, we expect to meet our guidance for the year, we expect to run full. So we're focusing on those sales now, and we're affirming our guidance. So we're comfortable with what we're seeing in all the markets.
Lucas Nathaniel Pipes
Got it. What's a good benchmark to use for pricing on international coke sales for SunCoke?
Shantanu Agrawal
Lucas, this is Shantanu. Yes, so the benchmark generally, I mean, obviously, there's only one benchmark, which is out there for the met coke, which is the Chinese met coke 66, 65 CSR, right? But the way we price our coke, obviously, our quality of the coke is much higher than Chinese coke, right? And kind of it travels much better versus a normal regular traditional way -- of the way the coke is made. So those are kind of advantages versus kind of if you look at the mix and we -- our product demands the premium versus those indexes. And we have like kind of the exports that we are doing with the customers, we are building those relationships and that helps us kind of with the pricing as well. So yes, that's kind of the benchmark pricing, but there are some other things which plays into what ultimately we sell those coke at -- that coke as.
Lucas Nathaniel Pipes
That's very helpful. And remind me, what are some of the larger markets you're sending your coke to? Is it Europe, Latin America or Asia, would appreciate a little bit of color on that.
Shantanu Agrawal
Yes. Those are the 2 Europe and Latin America are the main export markets now. I mean -- now, but it's open, right? Like if anybody needs coke within the domestic market or Canada or Latin America or Europe, we are more than willing to supply and we are looking at all the opportunities that is available to us to the sell these export coke or non-contracted coke into this market.
Lucas Nathaniel Pipes
Got it. Got it. That's very helpful. And just trying to understand that segment a little bit better. So you typically lock in the sales contract first or the supply agreement for the met coal and then the supply agreement for the met coal afterwards. So does that happen simultaneously? Just trying to get a sense for how you lock in the spreads in that segment.
Shantanu Agrawal
So Lucas, I mean, it's always like you need to have a supply of coal to be able to continuously run our plants. And I think we have mentioned this before. We used to buy our coal on an annual basis. And since we went into these spot markets, we are doing more of a short-term coal buys. So obviously, the coal buys happen first, but we are trying to match those coal buys with our export coke sales as much as possible. There is always a timing differential. There is always a price differential, right? And I think coming back to your first question of when does the sale gets book, like, for example, sitting at the end of Q1, our sales are booked through the end of Q3. So it's like anywhere from 30 to 60 to 90 days' time lag between when the coke is produced versus when it's sold or when we are sitting here, when we're finalizing the sales. So there is a time lag of that, but that's what we are trying to minimize is the variance of the coal price we are buying and the coke prices we are selling at.
Lucas Nathaniel Pipes
Very, very helpful. And then I'm under the impression that most of this business comes out of Jewell. Am I -- is that a misconception, but -- or would you say that's a reasonable guess?
Shantanu Agrawal
Well, so you got to think of it like Jewell and Haverhill combined is our kind of swing capacity for foundry and spot book business, smart blast furnace coke business. So those are the 2 places where a combination of foundry and spot book business comes out of.
Lucas Nathaniel Pipes
Very helpful. Then switching topics. In June, we'll come up on the 1-year anniversary of the letter of intent with U.S. deal on Granite City and I wondered at this point what are the key things you are still evaluating, is there a punch list things kind of you need to check off and if so could you maybe share that with the market.
Katherine T. Gates
Thanks, Lucas. We're continuing to work towards reaching an agreement with U.S. Steel. This is a -- it's a large and complex project. So I wouldn't say that there's a punch list per se, but just that we're continuing to work towards reaching an agreement with them.
Lucas Nathaniel Pipes
Okay. All right. Well, I appreciate the update and best of luck.
Katherine T. Gates
Thanks, Lucas.
Operator
Our next question comes from the line of Nathan Martin with the Benchmark Company.
Nathan Pierson Martin
Congrats on the quarter in the Indiana Harbor extension.
Katherine T. Gates
Thank you.
Shantanu Agrawal
Thanks Nate.
Nathan Pierson Martin
I'd say Lucas did a pretty good job of hitting my list of questions, but maybe one more try on the Granite City opportunity there, and I'll take a different spin. Maybe let's just say hypothetically, you don't end up moving forward with that opportunity. Would that potentially change your thoughts on shareholder returns given the longer needing maybe as much dry powder for a transaction? And maybe what could those returns look like?
Katherine T. Gates
So I have to say, and I appreciate the question, but I have to say that our focus is very much on continuing to work towards reaching an agreement. So that is our focus now. And while we really don't get into hypotheticals, what we have said and we'll continue to say is that we really do look at capital allocation every day, and we evaluate it based on the circumstances of the time, and we're going to make decisions that are going to reward our long-term shareholders.
Nathan Pierson Martin
Got it. I appreciate that stance, Katherine. Maybe shifting gears kind of to the domestic coke business again, all foundry coke sales for the year finalized, not contracted, finalized in 3Q. I'm assuming the unsold production you have left will likely go to the export market in the fourth quarter. If so, how do you see the export markets trending as we get to the latter part of the year. I think Katherine, you said last quarter that you expected maybe some improvements in the second half. Is that still the case? Any update would be great.
Katherine T. Gates
Yes. Thanks for the question. Yes, I would say that we do expect to see some improvement. It's certainly been hard to predict, but we're very comfortable with what we see out ahead. And certainly, as we sit here, we're affirming our guidance for the year. So that's really where we sit, and we're very comfortable with where the market is.
Nathan Pierson Martin
Got it. And then I think you mentioned some of this in your prepared remarks, but I might have missed it, so I apologize. How are things progressing at Jewell with that investment to produce 100% foundry? How much of the CapEx has been spent, how much is left? Just any other thoughts here would be great.
Katherine T. Gates
Sure. We're very -- we're pleased with the progress we've made there. The project on the expansion is on time. It's on budget. And as you know, we don't provide specific numbers for our growth CapEx, but we expect to spend between $10 million and $15 million, and that's on track, and the project is going to be completed in the third quarter.
Nathan Pierson Martin
Great. All right. Well, I appreciate the time. I'll leave it there. Best of luck for the rest of the year.
Operator
That concludes our question-and-answer session. I would now like to pass the conference back to Katherine Gates, President of SunCoke for any additional remarks.
Katherine T. Gates
Thank you all again for joining us this morning and for your continued interest in SunCoke.
Operator
That concludes today's conference call. I hope you all enjoy the rest of your day. You may now disconnect your lines.
