SunCoke Energy, Inc. (NYSE:SXC) Q3 2022 Earnings Conference Call October 31, 2022 11:00 AM ET
Corporate Participants
Shantanu Agrawal – Vice President Finance and Investor Relations
Mike Rippey – President and Chief Executive Officer
Mark Marinko – Chief Financial Officer
Conference Call Participants
Lucas Pipes – B. Riley Securities
Operator
Good morning. My name is Dennis, and I will be your conference operator today. At this time, I would like to welcome everyone to the SunCoke Energy Third Quarter 2022 Earnings Conference Call. [Operator Instructions]. Thank you.
I would now like to turn the conference over to Shantanu Agrawal, VP, Finance and Treasurer. Please go ahead.
Shantanu Agrawal
Thanks, Dennis. Good morning and thank you for joining us this morning to discuss SunCoke Energy’s third quarter 2022 results. With me today are Mike Rippey, President and Chief Executive Officer; 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 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 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 Mike.
Mike Rippey
Thanks, Shantanu. Good morning and thank you all for joining us today.
Today we announced SunCoke Energy’s third quarter results. And before I turn it over to Mark, we’ll review the results in detail. I want to discuss a few highlights.
First, I would like to thank all of our SunCoke employees for their continued best-in-class safety performance, while achieving record third quarter results. For our collective efforts, we delivered a consolidated adjusted EBITDA at $83.7 million.
Our domestic coke business performed exceptionally well during the quarter, which allowed us to fully realize the benefits of a strong export coke market. In our logistics segment, we continue to see elevated levels of customer demand and favorable pricing.
Our foundry and export coke initiatives continue to perform well. And we are pleased with the positive impact they’ve had on our financial results. Looking forward, we’re experiencing softening in export coke markets, particularly in pricing driven by global economic uncertainties.
We are pleased to announce that our Board of Directors approved a new capital project that will enable our dual facility to produce 100% foundry coke, SunCoke has become a highly reliable supplier in the foundry market. We continue to see strong demand for our quality product. This project, which is expected to be completed in the third quarter of 2023 will allow SunCoke to continue to grow in the foundry market.
Importantly, the dual facility will not lose the flexibility to alternate between blast and foundry coke production after this project is completed.
Our gross leverage ratio at the end of this quarter was at approximately 1.9x on a trailing 12-month adjusted EBITDA basis. Lastly, recognizing our year-to-date financial performance, we now expect to surpass the high-end of our full year adjusted EBITDA guidance range of $285 million.
With that, I’ll turn it over to Mark to review our third quarter earnings in detail, Mark.
Mark Marinko
Thanks, Mike.
Turning to Slide four, our adjusted EBITDA for the third quarter 2022 was $83.7 million, an increase of $9.8 million over third quarter 2021. This increase was primarily driven by higher margin on export sales. The third quarter net income attributable to SunCoke was $0.49 per share up $0.22 versus the prior year period, primarily driven by higher margin on export coke sales, as well as income tax benefits from foreign tax and research and development tax credits.
In the current quarter, the company recorded deferred tax benefits of $15.9 million as a result of the release of a valuation allowance established on the deferred tax assets attributable to existing foreign tax credit for carry forwards and the recognition of research and development credits.
Turning to Slide five to discuss our liquidity position for Q3. SunCoke ended third quarter with a cash balance of approximately $59 million. Cash flow from operating activities generated approximately $54 million. We spent approximately $22 million on CapEx during the quarter and reduced our debt by almost $34 million. We also paid $6.6 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 $342 million.
Now turning to Slide six to discuss our domestic coke business performance. Third quarter domestic coke adjusted EBITDA was a record $76.6 million and coke sales volume was 1,022,000 tons, the $11.5 million increase in adjusted EBITDA as compared to the same prior year period was mainly driven by higher margins on export coke sales, and higher energy sales pricing. All uncontracted sales tons are committed for the remainder of 2022.
Given our record year-to-date performance, we anticipate surpassing the high-end of our domestic coke adjusted EBITDA guidance of $255 million. Coke sales volume guidance remains unchanged at approximately 4.1 million tons.
Turning to Slide seven to discuss our logistics business. The logistics business generated $12.9 million of adjusted EBITDA during the third quarter of 2022 as compared to $11.6 million in the same prior year period. The increase in adjusted EBITDA was primarily due to higher volumes and pricing across the terminals. Our logistic terminals handled 5.7 million tons of throughput volume during the quarter, as compared to 4.9 million tons during the prior year period.
CMT handled approximately 200,000 additional tons as compared to the same prior year period. Our domestic terminals handled almost 600,000 tons more than the same prior year period, driven by increased demand for handling services from existing and new customers. We expect this strong performance continue through the balance of the year.
Our logistics full year adjusted EBITDA guidance range of $48 million to $52 million is unchanged. With that, I’ll turn it back over to Mike.
Mike Rippey
Thanks, Mark.
Wrapping up on Slide eight. As always, safety and operational performance is the top priority of our organization. Our efforts will continue to focus on safely executing against our operating and capital plans. As I mentioned at the beginning of this call, we are pleased with our continued success in the foundry and export coke markets. We are now focused on executing the foundry expansion Project, which will allow SunCoke to meaningfully grow in the foundry coke market, while also preserving flexibility to switch between blast and foundry coke production.
Although the foundry market remains stable, the export coke market is experiencing significantly increased volatility. We realized the benefit of favorable market conditions and export coke sales through the third quarter. We are now seeing softening in the export coke market, which is factored into our guidance. We are pleased with the sustained demand for our services and new customers at our logistics terminals. Based on current projections, we expect a solid finish to the year for our logistics business.
We remain focused on making progress on our capital allocation strategy. From a growth perspective, we continue to work towards a mutually beneficial agreement with U.S. Steel on the Granite City GPI opportunity. We also continue to reward shareholders with substantial dividends, which were increased by 33% last quarter. Finally, on the debt side, we continue to make good progress, reducing our revolver balance and expect our deleveraging initiatives to continue for the balance of the year.
As we have done in the past, we continue to evaluate the capital needs of our business, our capital structure and our commitment to reward shareholders on a continuous basis and will make capital allocation decisions accordingly.
Finally, based on the outstanding performance of our operating segments, aided by favorable export coke market conditions, we look to surpass the high-end of our full year, adjusted EBITDA guidance of $285 million for 2022.
With that, let’s go ahead and open the call for Q&A.
Question-and-Answer Session
Operator
[Operator Instruction] Your first question is from the line of Lucas Pipes with B. Riley Securities. Please go ahead.
Lucas Pipes
Thank you very much, operator. Good morning, everyone and good job on the quarter. Mike, my first question is on the sustainability of the coke margin. So really good work there. You commented on the volatility, but what do you think is a reasonable margin per ton between good operations and then also the shift to the foundry business? Would really appreciate kind of your thoughts on what you think is most sustainable in the coke business? Thank you very much.
Mike Rippey
No, it’s an excellent question, Lucas. And obviously, when we discuss with great regularity here at SunCoke. As we said, the third quarter of this year really benefited from what were very strong export market conditions. And you saw we produced a million tons and generated 76.6 million of EBITDA. So that was exceptional work by our teams, we produced at a very, very high level, and we took full advantage of those excellent operating results by exporting a lot of coke.
If you think going forward, and it’s hard to predict the future, but certainly, export market conditions have softened, and pricing has come well off of what we’re able to realize in the third quarter. So when I look back, and I think about kind of Q3 of ’21, where we produced very similar levels of output, the output is down a tad, but that relates to the fact that we’re selling now, more foundries. So we produced at full output here in the third quarter ’22, as we did in the third quarter of ’21.
Going back to the third quarter of ’21 and you see that on Slide six, we generated $65.1 million of EBITDA. So kind of a $60 a ton type run rate. So if you’re looking for a run rate in a more normalized conditions, that wouldn’t be a bad place to focus your attention. But again, export –seaborne coke markets will demonstrate volatility. Again, as we experienced in a very positive way in the third quarter and would expect some return to more normal conditions going forward. I hope that helps you.
Lucas Pipes
That’s helpful, really appreciate the color. Switching topics to the logistics side, a lot of reports about challenges in the Lower Mississippi with low water levels. Is that an opportunity and that maybe more traffic shifts to the rail and then to your CMT terminal? Or is it more of a risk because you are in the Delta? And I imagine that may impact loadings as well. So would appreciate your thoughts on this. Thank you.
Mike Rippey
Another good question. Really, for us it’s a neutral, we don’t see any pickup in traffic because of those low water levels. And of course, we don’t see deterioration because we accept most of our materials inbound by rail so it’s kind of a neutral to us. We do utilize large deliveries to our Granite City facility on the coke side and to-date that hasn’t been an issue for us. I should have become of course we have backup plans in place to keep the facility well supplied in [coke] [ph]. So very much a neutral for our company.
Lucas Pipes
Appreciate the color, Mike. To you and the team, best of luck.
Mike Rippey
Appreciate it. Thank you.
Operator
[Operator Instructions]. And at this time, there appear to be no further questions. I will now turn the call back to Mike Rippey for any closing remarks.
Mike Rippey
Feel good again. As always, we appreciate you joining us on the call this morning and, of course your continued interest in SunCoke. So, with that we’ll end today’s call and look forward to talking to you guys out ahead. Thanks again.
Operator
Thank you for joining today’s call. You may now disconnect.
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