Title

Presentation

Operator: Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the SunCoke Energy Fourth Quarter 2022 Earnings and 2023 Guidance Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. Thank you. Shantanu Agrawal, Vice President, Finance and Treasurer, you may begin your conference.

Shantanu Agrawal: Thanks, Rob. Good morning. And thank you for joining us this morning to discuss SunCoke Energy’s fourth quarter and full year 2022 results, as well as 2023 guidance. 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 will 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 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 will now turn things over to Mike.

Mike Rippey: Thanks, Shantanu. Good morning and thank you all for joining us today. Let me start by recognizing the appointment of Katherine Gates as President of SunCoke effective January 1st of this year. Katherine joined SunCoke in early 2013 and has demonstrated excellent judgment and leadership in each of our various roles. Katherine’s promotion to President recognizes her significant contributions at SunCoke and I look forward to continuing to work together in her new role. Katherine will review our 2023 earnings guidance and key initiatives later in this presentation. As we look back on 2022, I want to thank all of our SunCoke employees for their contributions in achieving our 2022 objectives. The dedication of our team is evident through our excellent safety record, operational performance and financial results.

Slide three details the key objectives that we set out for 2022 and how we performed against these objectives. We exceeded the high end of our revised guidance range of $285 million, delivering $297.7 million of adjusted EBITDA in 2022, a record for our company. Additionally, we generated approximately $133 million of free cash flow, which was within our revised guidance range of $120 million to $135 million. Our Domestic Coke business operated at full capacity, which allowed us to take advantage of strong export coke market conditions, as well as increase our foundry market participation. As announced in our previous earnings call, we are undertaking a capital project that will enable our Jewell plant to produce 100% foundry coke. This project, which is expected to be completed in the third quarter of this year, will allow SunCoke to further grow our participation in the foundry market.

Importantly, the Jewell facility will not lose the flexibility to alternate between blast and foundry coke production after this project is completed. We also made great progress on our capital allocation priorities in 2022. We deployed free cash flow to reduce our gross debt by approximately $83 million. Additionally, we returned almost $24 million to our shareholders, having increased our quarterly dividend from $0.06 per share to $0.08 per share during 2022, which we anticipate will continue in 2023. Lastly, we entered into a non-binding letter of intent with U.S. Steel to manufacture granulated pig iron. We will continue developing this project in the coming year. With that, I will turn it over to Mark to review our fourth quarter and full year earnings in detail.

Mark?

Mark Marinko: Thanks, Mike. Turning to slide four. The fourth quarter net income attributable to SunCoke was $0.14 per share, down $0.01 versus the fourth quarter of 2021 due to lower export coke contribution margins being partially offset by lower interest expense. Our full year 2022 net income attributable to SunCoke was $1.19 per share, up $0.67 versus the full year 2021, driven by our strong operating results, the absence of debt refinancing related expenses and lower interest expense. Consolidated adjusted EBITDA for the fourth quarter 2022 was $58.9 million, down $4 million versus the fourth quarter of 2021. The decrease was mainly driven by lower contribution margin on export coke sales, partially offset by higher volumes in the Logistics segment and lower legacy liability expense at Corporate.

On a full year basis, we delivered adjusted EBITDA of $297.7 million, up $22.3 million versus the full year 2021. Turning to slide five to discuss the year-over-year adjusted EBITDA variance in detail. Our coke business delivered strong financial results, mainly driven by higher contribution margin on export coke sales. The Domestic Coke segment delivered full year adjusted EBITDA of $263.4 million, well above our full year revised Domestic Coke guidance range. Including Brazil, our coke operations delivered adjusted EBITDA of $277.9 million. The Logistics segment adjusted EBITDA increased approximately $6.2 million year-over-year driven by higher throughput volumes and higher pricing. With the backdrop of a strong commodity market, the Logistics segment delivered full year adjusted EBITDA of $49.7 million.

Finally, our Corporate and Other expenses were higher by $1.2 million year-over-year, mainly due to higher employee related expenses, partially offset by lower non-cash legacy liability expenses. Overall, we are very pleased with the performance across all segments, resulting in a historic year for the company. Turning to slide six to discuss capital deployment in 2022. We generated very strong operating cash flow of approximately $209 million, which allowed us to make good progress on our capital deployment initiatives. Capital expenditures of $75.5 million during the year were slightly below our guidance of approximately $80 million. We also reduced our gross debt outstanding by approximately $83 million in 2022. Year-over-year, we brought down our gross leverage ratio from 2.28 times to 1.83 times.

We expect to continue to delever in 2023 and reduce our outstanding revolver balance. We returned capital to our shareholders in the form of our common dividend in 2022, which was a use of approximately $24 million of cash. As mentioned by Mike, we increased our dividend by 33%. That is from $0.06 per share to $0.08 per share during the third quarter of 2022. In total, we ended 2022 with a cash balance of approximately $90 million and strong liquidity of approximately $405 million, setting the stage for continued progress against our capital allocation priorities in 2023. Now I’d like to turn it over to Katherine to review our guidance expectations for 2023. Katherine?

Katherine Gates: Thanks, Mark, and good morning, everyone. We expect adjusted EBITDA to be between $250 million and $265 million this year. Domestic Coke adjusted EBITDA is expected to be lower by $22 million to $30 million, driven primarily by our expectation of lower price realization on export sales due to market conditions. We expect to continue to run our coke facilities at full capacity and to continue increasing our participation in the foundry coke market. Brazil coke adjusted EBITDA will be lower by $5 million to $6 million due to the expiration of a technology fee from a prior transaction. In 2016, ArcelorMittal Brazil redeemed SunCoke’s equity interest in the Brazil coke facility for $41 million cash consideration.

SunCoke also received approximately $5 million in technology fees annually for year 2017 to 2022 as part of that redemption transaction. As a reminder, the Brazil coke facility is owned by ArcelorMittal Brazil and SunCoke provides the operating and technological services pursuant to an operating agreement. Turning to the Logistics segment. We expect adjusted EBITDA to be flat to lower by $3 million in 2023. We anticipate similar volumes at CMT year-over-year, but with normalized high water costs that could impact profitability year-over-year. Lastly, we expect our Corporate and Other segment expense to be higher by approximately $6 million to $9 million, driven by normalized noncash legacy liability expenses. Moving on to slide nine to discuss the coke segment in detail.

In 2023, we estimate our Domestic Coke adjusted EBITDA to be between $234 million and $242 million, with sales of approximately 4 million tons of contract, foundry and export coke. We expect to run the domestic fleet at full capacity. Approximately 3.6 million tons are contracted under our long-term take-or-pay agreements in 2023. We anticipate selling the remaining 650,000 furnace equivalent tons in the foundry and export coke markets. As a reminder, foundry tons do not replace blast furnace tons on a ton per ton basis. For example, due to differences in the production process, a single ton of foundry coke replaces approximately 2 tons of blast furnace coke. The order book for foundry coke is solid and export sales for the first quarter of 2023 have been finalized.

While we expect to continue running at full capacity, the lower year-over-year adjusted EBITDA is primarily due to lower price realizations on export coke sales based on current and future expected market conditions. The export coke market is experiencing significant price volatility and that is factored into our guidance. Moving to slide 10 to discuss Logistics in more detail. 2023 Logistics adjusted EBITDA is estimated to be between $47 million and $50 million. This estimate is based on normalized high water costs at CMT, which we did not experience in 2022. Our outlook also considers the current expectations for thermal coal export volumes from the Gulf Coast, the price realizations based on the API2 forward curve. We anticipate volumes to be similar year-over-year at CMT, projecting approximately 5.7 million tons of coal to be exported and approximately 4.3 million tons of non-coal throughput such as iron ore, pet coke and other products.

We anticipate Logistics adjusted EBITDA to be slightly lower to flat year-over-year, mainly driven by the expectation of more normalized high water costs in 2023. Like 2021, 2022 was another unusual year at CMT from a high water perspective. We incurred no high water costs during 2021 or 2022, but anticipate a more normalized weather pattern, resulting in high water costs at CMT in 2023. Overall, we anticipate another strong year for our Logistics segment. Moving to the 2023 guidance summary on slide 11, this slide provides a historical view of actual performance across several metrics, as well as a summary of our 2023 guidance. Once again, we expect adjusted EBITDA to be between $250 million and $265 million. Our coke business is expected to run at full capacity, but with lower price realizations on export coke sales.

We expect 2023 Logistics performance to be similar to 2022. We anticipate our CapEx requirements in 2023 to be approximately $95 million, which includes the foundry coke expansion project. Our free cash flow is expected to be between $105 million and $120 million after taking into account cash interest, cash taxes, capital expenditures and working capital changes. Now turning over to slide 12 to discuss our 2023 key initiatives. As always, safety is our first priority and we will continue to focus on strong safety and environmental performance in 2023. Operational excellence will drive our operating and capital plan achievements. We will continue to pursue opportunities to optimize our assets, specifically as it relates to foundry and export coke.

As mentioned earlier in the call, we are pleased with our increased participation in the foundry coke market and our focus in 2023 will be on completing the foundry coke expansion project at our Jewell facility. This will enable us to continue to grow our market participation and provide further diversification. As we have demonstrated in the past, we will continue to pursue a balanced yet opportunistic approach to capital allocation. We expect our deleveraging initiatives to continue in 2023 as we look to bring down our revolver balance further. From a growth perspective, we will work on developing the Granite City GPI project. We continue to evaluate the capital needs of the business, our capital structure and the need to reward our shareholders, and we will make capital allocation decisions accordingly.

Looking beyond 2023, we believe that SunCoke is well positioned for long-term success. We believe that coke supply will continue to exit the market, as many assets are underinvested and significantly aging. SunCoke has the youngest domestic cokemaking facilities in North America with the leading technology. We will continue to invest in our facilities to ensure that they operate safely, efficiently and with outstanding environmental performance. We will continue to take advantage of our facilities and their performance by taking additional steps towards diversifying both our customer and product base. In 2023, we see good potential to further build on the strength of our core cokemaking and Logistics businesses to meet our financial targets and create value for shareholders.

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

Operator: Your first question comes from the line of Lucas Pipes from B. Riley Securities. Your line is open.

Lucas Pipes: Thank you very much, Operator. Good morning, everyone, and nice results. And this leads me to my first question, you are providing solid guidance for next year kind of from EBITDA down to cash flow. What stands in the way here of significantly higher capital returns to shareholders? Thank you very much for your color on that.

Mike Rippey: Lucas, I appreciate your comments and we don’t think anything stands in the way of our continued progress. Our balance sheet is in great shape. As we have indicated in the past, we expect it to delever significantly. We have done that. We positioned ourselves very well to grow. Our focus with regard to growth now is the GPI facility at Granite City. We continue to work in developing that project and our cokemaking assets continue to run full. We have been able to move some away from the contractual market into the export market, as well as our success in foundry. We have repositioned CMT towards slowing off very, very high levels of return operating — not yet capacity, but pretty darn close to it. So there are incremental opportunities to grow our participation down at CMT, but the challenge for us is to keep doing the good things we are doing and generating cash and deploying it to grow to the benefit of our shareholders.

Lucas Pipes: That’s helpful. Thank you. Then maybe to turn to the balance sheet on this note. What is your long-term debt gross or net target?

Mike Rippey: We said we wanted to be under 3 times. We have successfully brought it down under 3 times. We have had great progress, $83 million down this year and we are going to continue to work. We still got a little bit left in revolver. We will pull it down, and again, that leaves us very well positioned. For growth, it leaves our balance sheet in a really good shape to weather any storms we might see out ahead. We have to remind ourselves that this is, in fact, a cyclical business. So we are not going to lever up and we have the ability to continue to reward shareholders as we did last year when we raised the dividend by 33%.

Lucas Pipes: I appreciate that. And then in terms of the capital for 2020 — CapEx spending, capital spending for 2023, can you provide the breakdown between sustaining capital and growth capital?

Katherine Gates: Thanks, Lucas. In terms of the capital for 2023, we don’t give out specific capital on projects itself. But as you can see in the capital number. That reflects the growth expansion project for foundry at Jewell and that is built into our $95 million number.

Lucas Pipes: And order of magnitude of maybe $10 million to $20 million, would that be the right?

Katherine Gates: That would be and that gives you a good sense of going forward when we think about our sort of ongoing maintenance CapEx to continue to invest in our facilities, you can think about that around $80 million to $85 million.

Lucas Pipes: That’s very helpful. I appreciate the color. I have more questions, but I will turn it over for now. Thank you and best of luck.

Katherine Gates: Thanks, Lucas.

Operator: Your next question comes from the line of Nathan Martin from The Benchmark Company. Your line is open.

Nathan Martin: Hey. Good morning, everyone. Thanks for taking my questions and Katherine, congrats on the recent appointments.

Katherine Gates: Thanks, Nathan.

Nathan Martin: You are welcome. You guys talked about how again expected lower realizations on export sales or likely to drive down EBITDA per ton in the Domestic Coke segment this year. Can we maybe get your thoughts on possible cadence of that pricing over the next four quarters? I know you pointed out 1Q export coke sales have already been finalized. So as an example is the market weaker now and you expect it to get better in the second half or any color there would be great? Thank you.

Katherine Gates: Sure. Thanks, Nathan. I think as we look over the full course of 2023, we expect to see some improvement in the market as we move further into 2023. So the back half is looking better for us than as we sit here in the first quarter and second quarter.

Nathan Martin: Great. Very helpful, Katherine. Maybe a quick question on CMT. It looks like you guys guiding to kind of flat volumes overall, about 5.7 million tons of coke exports for this year. Curious how does that compare to full year 2022, even just directionally would be helpful and then with the pullback of API2 prices we have seen around $145 a metric ton a day. So are you still receiving that price kicker on those tons?

Katherine Gates: Thanks. So in terms of the volumes, we are really flat year-over-year, satisfied with those volumes, but really it’s flat year-over-year. And when we look at API2, we are very comfortable that the guidance that we have build in the price adjustment for the full year and with where we are today, we are very comfortable with that guidance on the API2 pricing.

Nathan Martin: So are you receiving that kicker today or no or is that incorporated in your guidance that you are comfortable with, I guess?

Katherine Gates: We are receiving the kicker today and the guidance incorporates the anticipation of receiving it for the full year.

Nathan Martin: Perfect. Very helpful. Thank you. Maybe just one final question on a segment you doesn’t give much attention. I think you have described this a little bit in your prepared remarks, but the Brazil Coke segment again kind of down $5 million to $6 million on the EBITDA side, the expiration of those technology fees. Is there any opportunity to get some of that EBITDA back over the next few years or is it kind of going from $15 million of EBITDA plus or minus to $22 million to around, let’s call it, $10 million this year, is that $10 million kind of a good run rate to think about going forward for that?

Katherine Gates: It is, Nathan. That really is the run rate going forward. This was an expected drop and based on the structure of Brazil, we don’t take any risk on the capital or operating side and we anticipate collecting that $10 million going forward.

Nathan Martin: Got it. And maybe just one final one, just I am going to try. Any updates you can share on the Granite City opportunity?

Katherine Gates: I appreciate. Yeah. I am going to try. But I may disappoint you a bit Nathan. But we are in discussions with U.S. Steel and we are continuing to assess the capital and the other project requirements.

Nathan Martin: As I expected, Katherine, but I wanted to throw that out there. Appreciate

Katherine Gates: No. I tried real hard for you. Sorry, Nathan.

Nathan Martin: All right. I will leave it there. Best of luck in 2023.

Katherine Gates: Thank you.

Operator: And we have a follow-up question from the line of Lucas Pipes from B. Riley Securities. Your line is open.

Lucas Pipes: Thank you very much, Operator. And I want to ask a few more questions on Granite City. So I appreciate Nathan softening the ground on that score. Is there a time by which you would like to conclude the analysis?

Katherine Gates: Well, Lucas, I appreciate the question. I think we are — this is a complex project. It takes time. We are going to take the time that it takes to get the project right.

Lucas Pipes: And in terms of the aspects that are still under analysis today, is it — could you comment on that, what — where are you spending most of the time in the due diligence today?

Katherine Gates: We are really focused on the capital. That is the primary focus is the capital requirements for the project.

Lucas Pipes: And that’s on an ongoing — that’s essentially like the amount of capital you would have to put into the facility to convert it to pig iron facility?

Katherine Gates: Exactly right. You are exactly right.

Lucas Pipes: Okay. That’s very helpful. I appreciate that. And in terms of cap — back to capital returns, would it be fair to assume that part of the current capital return policy is contingent upon a decision on Granite City or is that maybe a step too far? Thank you.

Katherine Gates: No. Sure. Absolutely. No. I think that’s really — that’s right in the sense of right now. We are really focused on preserving our cash for the GPI project.

Lucas Pipes: Got it. Very helpful. Thank you. And do you have a minimum liquidity target, can you remind us?

Katherine Gates: We really don’t. I mean, as Mike said before, I mean…

Shantanu Agrawal: Yeah. I can take that, Lucas. I mean, basically, what we have left on the revolver kind of — that’s kind of our target to get that off about, like, get that paid down. That’s what Mike said and then kind of we will go from there.

Mike Rippey: And as we said in the past, Lucas, 3 times is the high watermark for us, so we are not going above that, and as we indicated with regard to the GPI project, we fully expect to fund that with cash flow from operations and perhaps, some very modest borrowings under our revolver. But we have very, very significant liquidity and we don’t expect to have to go into that, and if we do at all, it will be in a very modest revolver. So we are in good shape all the way around.

Lucas Pipes: Very helpful. Yeah to the entire team. Thank you. Thank you for this and again best of luck.

Operator: And there are no further

Katherine Gates: Thanks very much, Lucas.

Operator: And there are no further questions at this time. Ms. Katherine Gates, I turn the call back over to you for some final closing comments.

Katherine Gates: All right. Well, thank you all again for joining us this morning. For those of you who are attending the BMO Conference coming up here, I look forward to meeting with you in-person and thank you for your continued interest in SunCoke.

Operator: This concludes today’s conference call. Thank you for your participation. You may now disconnect.