Jan 26, 2017
Executives
Kyle Bland - Director of Investor Relations Fritz Henderson - Chairman, President and Chief Executive Officer Fay West - Senior Vice President and Chief Financial Officer
Analysts
Lee McMillan - Clarkson Lucas Pipes - FBR Capital Markets & Co. Philip Gibbs - KeyBanc Capital Markets Inc.
Operator
Good morning. My name is Rachel, and I will be your conference operator today.
At this time, I would like to welcome everyone to the SXC Fourth Quarter 2016 Earnings 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. [Operator Instructions] Thank you.
Kyle Bland, Director of Investor Relations, you may begin your conference.
Kyle Bland
Thank you, Rachel. Good morning and thank you for joining us to discuss SunCoke Energy's fourth quarter and full-year 2016 earnings.
With me are Fritz Henderson, our Chairman, President and Chief Executive Officer; and Fay West, our Senior Vice President and Chief Financial Officer. Following the remarks made by management, 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 for a few weeks. 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 the call over to Fritz, let me remind you that the various remarks we make on today’s call regarding future expectations constitute forward-looking statements, and 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 any non-GAAP measures discussed on today's call.
Now, I'll turn the call over to Fritz.
Fritz Henderson
Thanks, Kyle, and thank you all for joining us this morning. Before we jump into the materials, I wanted to touch briefly on the simplification transaction.
Process is running its course as expected. The Conflicts Committee has hired legal and financial advisors has gotten input from SXCP unitholders and conducting its diligence.
We continue to gather SunCoke Energy shareholder feedback and appreciate the prospectus that many of you have shared with us. We remain confident in the strategic and financial merits of the transaction, but we will remain price disciplined through the negotiation.
Obviously, even that we are engaged in active discussions with the committee, we won't be commenting on anything beyond the scope of these materials today. As mentioned on SXCP's call earlier this morning, SXCP’s intend to maintain its existing distribution policy during the evaluation period of process.
And finally, the final qualifying income regulations which are now in effect only strengthen our conviction. The simplification transaction is the right thing to do to achieve the long-term value creation for all SunCoke shareholders.
Again, those negotiation with the committee remain ongoing and private, I won’t be saying anything further on the topic beyond what's on the chart. Turning to Slide 4, slide would reflect on accomplishments in 2016.
First, we delivered on our commitment to shareholders by achieving our financial guidance targets and operating the business within those targets that we laid out earlier this year, which made it possible the significant reduced consolidated debt outstanding [tune of about] $145 million in a consolidated basis. We divested our coal business earlier in 2016 and we are ahead of schedule on our run rate cash flow saving.
On the operation side specifically, we continue to be pleased with the overall safety and operating performance of our coke and logistic assets and we are able to achieve record results at our Middletown facility. Additionally, we are pleased to have finalized to commissioning our new ship loader at Convent and we're continuing our pursuit of further incremental business which spiked in 2017.
And finally, we made meaningful strides to our operating cost reductions at Indiana Harbor and continue to implement our holistic oven rebuild approach for facility. However, when you look at the numbers where we have work ahead, we remain committed to driving long-term performance in Indiana Harbor.
With that, I’d like to turn it over to Fay to review our fourth quarter and 2016 results.
Fay West
Thanks, Fritz, and good morning, everyone. Turning to Slide 4, you can see that quarterly EPS of $0.26 per share was down $0.04 versus the prior year period.
This is driven by lower taxes and a larger quarterly 2015 gain on debt extinguishment. Similarly, full-year EPS for 2016 was $0.22 and is up $0.66 over the prior year.
Current year benefited from $25 million of gains on debt extinguishment as well as the lapping of impairments and pension plan termination charges in 2015. Consolidated adjusted EBITDA for the fourth quarter was $77.3 million and is up over $20 million due primarily to the recognition of deferred revenue at Convent on take or pay times.
This revenue is included in adjusted EBITDA when it is recognized for GAAP purposes, which occurs in the fourth quarter of each year. And again, as Fritz mentioned, we were able to deliver full-year consolidated adjusted EBITDA within our guidance range, finishing the year at $217 million, up $31.6 million year-over-year.
Turning to Slide 6 and taking a deeper look at our Q4 adjusted EBITDA result. Indiana Harbor which is in the midst of their oven rebuild initiative was down $5.9 million compared to 2015 due in part to lower volumes.
Also impacting the quarter where the take or pay payment to late terminal for 2016 coal handling services, which is an in and out and an SXC consolidated basis. Excluding Indiana Harbor, the remainder of the coke business was impacted by an unexpected turbine failure at our Haverhill facility.
This resulted in repair costs as well as lost energy revenue, which was partially offset by business interruption insurance proceeds. The turbine has been repaired and it came back on line in mid-January.
Quarterly results also reflect the Brazil related transaction, we announced in the quarter. As a reminder on Brazil, ArcelorMittal redeemed SunCoke indirectly helped preferred and common equity interest for $41 million of cash, which eliminated the annual dividend.
Also as part of this transaction we expanded the patent portfolio asset facility in exchange for an incremental $5.1 million in licensing fees each year through 2023. Net Coal Logistics to $24.2 million improvement is driven primarily by the recognition of deferred revenue at CMT.
Our corporate legacy and other segment benefited from lower legacy cost and lower professional services spend which was offset by mark-to-market adjustment and deferred board compensation that is driven by the change in SXC’s share price. And finally we continue to benefit from that divestiture of our coal mining business and realize $4.6 million in cost savings as a result.
Moving to the full-year adjusted EBITDA [Bridge] on Slide 7, you could see that despite challenging market conditions ended the year at $217 million, up $31.6 million from 2015. Indiana Harbor was up $4.2 million as lower volumes and yields were more than offset by favorable O&M spending.
Excluding Indiana Harbor, the remainder of the Coke business was impacted by several items some of which were anticipated in our guidance and some that were not. As expected Coke results reflect lower yield gain due to coal prices.
We also anticipated lower energy revenue due to the increase go a planned outages in 2016. Also impacting results for the fourth quarter turbine failure that I just discussed, the transfer of cost from Coal Mining to Jewell Coke, so just to segment bucketing items and the change in our Brazil structure outlined on the previous slide, which we think with an attractive transaction.
Moving on from Coke, Coal Logistics was up $25.9 million as the full-year contribution from our Convent facility was offset slight by lower volumes at KRT. Corporate legacy and other improved $15.2 million primarily due to the lapping of the non-cash pension terminations charge and lower spending.
And lastly, we realized $7.4 million in savings from the divestiture of our Coal Mining business. Well ahead of our 2016 target.
Turning to our Domestic Coke result on Slide 8. Fourth quarter adjusted EBITDA per ton was $38 million and approximately 964,000 tons of production.
These results reflect the impact of the turbine failure at Haverhill as well as lower production and higher cost that Indiana Harbor due to the oven rebuild initiative. The fourth quarter IHO rebuild schedule encompassed 38 oven and we have 30 of those ovens back up in online with remaining eight oven that to come back on line by mid-February.
While we are very early, we are pleased with the initial operating performance of this set of rebuild. Full-year adjusted EBITDA per ton finished in line with the guidance of $49 per ton and $3.95 million tons of production.
Including the impact that Haverhill turbine failure as well as the cost associated with the Indiana Harbor oven rebuild. Our coke making operation would have generated adjusted EBITDA per ton of approximately $51 for the full-year 2016.
Focusing on Coal Logistics performance on the next Slide. In the quarter we had sequentially higher Coal Logistics volumes across the board with approximately 4 million tons of KRT in late terminal and $1.7 million tons in Convent.
On the domestic coal side we continue to see increased volume supported by improved fundamentals in the coal face including increasing natural gas prices and cool weather in the fourth quarter. At Convent we are in $51 million of adjusted EBITDA in 2016 on 4.5 million tons of throughput, which included 2000 tons for our new merchant domestic thermal coal customers more than double our expectation as we enter the quarter.
Moving on Slide 10, as we look at capital deployed in 2016, you can see we have generated very strong operating cash flow over $219 million in the year which was driven by solid operating performance, as well as lower inventories and the impact of lower coal prices that benefit at our working capital position. We have put that cash flow towards value enhancing actions including divesting our coal mining business, targeting investment at our operating facilities and significantly de-levering our balance sheet throughout the year.
With that, I'll turn it back to Fritz.
Fritz Henderson
Thanks Fay. And wrapping up 2016, challenging year [indiscernible], but I'm proud of what the team was able to accomplish despite the significant headwinds facing our steel and coal customers particularly in the first half of the year were perfect, but we delivered on a number of critical objectives including meeting or exceeding our headline adjusted EBITDA and operating cash flow guidance particularly in the operating cash flow side [indiscernible] time.
Second, reducing debt at the combined enterprise level by over $145 million leaving apparent actually in a net cash position at the end of the year. And finally, completing the Haverhill 1 gas sharing project and finally commissioning our new ship loader and securing new merchant business at our Convent Terminals.
While we have worked to do at Indiana Harbor and we did missed our adjusted EBITDA and production guidance targets at that facility. We are committed to furthering our holistic oven rebuild approach to more oven in 2017 with a goal of stabilized performance and driving long-term profitability at the Indiana Harbor plant.
Turning to Slide 13 and looking at 2017 now. Our full-year 2017 consolidated adjusted EBITDA guidance was $220 million to $235 million representing a $10 million improvement at the midpoint versus 2016 actual.
Domestic Coke is expected to be down $5 million to $10 million compared to 2016 driven principally by the impact of additional oven rebuilds at Indiana Harbor. We also assumes the Middletown performance back to more historical run rate levels from the record levels that we experienced in 2015.
In the favorable column, we expect to see higher yield gains and higher coal prices favorable Jewell contracted coal prices versus 2015 and lapping of 2016 items highlighted on the chart. Coal Logistics is expected to be up $3 million to $8 million driven by higher volumes at KRT and Convent.
In corporate legacy and other which will include in 2017 our historical coal mining operating segment $10 million to $15 million favorable to the prior year and reflects the benefits of the full-year savings of the coal mining divestiture for lapping of certain 2017 costs. And finally, the benefits from our cost rationalization exercise we completed in the year and will be discussed in more detail later in the presentation by Fay.
Turning to Slide 14 and looking at the Harbor. As I mentioned, we expect to continue our holistic oven rebuild program in 2017 with another 53 ovens in the schedule.
Including the 86 oven completed in 2015 and 2016, this will push our total to over 50% of the total oven population completed by the end of 2017. Our consolidated guidance for the year assumes Indiana Harbor generates approximately $13 million adjusted EBITDA loss on 900,000 tons of production.
The expense portion of the 2017 oven rebuild as well as cost to apply the comprehensive lessons learned from 2016 back into the 2015 rebuild have been incorporated into that guidance. As we move forward in the Indiana Harbor, we continue to take an analytical approach to this holistic rebuild to ensure value added return.
We do expect to continue the oven rebuild work in 2018 and remain focused on returning the Indiana Harbor to profitability in 2018 in part driven by oven performance, in part driven by cost performance and finally the contract with our [terminal reset] 2018. With that, I will turn it over to Fay to go through segment guidance.
Fay West
Thanks, Fritz. Turning to Slide 15, in 2017 we expect Domestic Coke adjusted EBITDA excluding Indiana Harbor of $197 million to $202 million.
This is driven by similar operating performance as compared to 2016 including over 100% asset utilization, steady coke yields of around 70% and production of between 3.025 tons to 3.05 million tons. As noted on the chart, we again expect to deliver 75,000 tons to low contract max to AKS steel out of our Haverhill facilities, but we will receive take or pay payments to keep SunCoke economically whole.
Moving to the next Slide, 2017 adjusted EBITDA guidance for Coal Logistics of $67 million to $72 million. At KRT, we expect the strengthening domestic coal fundamentals just on the back half of 2016 to continue into 2017 helping drive higher volumes product.
At Convent, we anticipate that attractive coal export economics will drive increased volume. Our guidance assumes 8 million tons of throughputs between our two take or pay coal customers.
We’ve also assumes 500,000 tons of merchant volume running through this facility in 2017. As we continue our pursued of new business in 2017, we except to add barge unloading capabilities at Convent, in order to expand the product offerings and broaden the list to potential future customers.
Moving to Slide 17, in 2016, we partnered with experts of A.T. Kearney to help champion a full review of all of our operational sourcing and administrative processes.
The Board and Management review encompassed all aspects of the business. Each plant and corporate function was benchmarked and cost and staffing levels in organizational design changes were analyzed to ensure proper burden for all activities.
As a result of this project, we identified approximately $10 million in total savings which we expect to drive about $7 million in annual EBITDA benefit beginning in 2017. While cost discipline has always been a focus at SunCoke this third-party review helped validate and enhanced many of our existing operational practices and optimize staffing level.
We are pleased to achieve these savings going forward is a more streamlined organization. Looking at our corporate legacy and another segment on Slide 18.
The cost rationalization project will help to continue the trends of cost reductions that corporate and we expect about $60 million of controllable corporate cost in 2017, $25 million below our spending level in 2013. We are now operating our Corporate segment, which include not only legal accounting and administrative personnel, but also centralized engineering technology coal procurement and commercial team with 80 people, this is down significantly from the 168 people we had in 2013.
Walking down from corporate expense to segment adjusted EBITDA, you can see that we expect a $10 million to $15 million improvement in 2017 versus 2016, which includes $4 million savings from the full-year benefit of the coal mining divestiture. Please note that beginning in 2017, our historical Coal Mining segment will be rolled into our corporate legacy and other segments to reflect our divestiture of that business in 2016.
Turning to 2017 capital plan, we expect to spend $80 million in 2017 as increased oven rebuild that Indiana Harbor and the implementation of gas sharing technology at our Granite City facility or driving higher capital requirements. And margin installations we completed at Haverhill one in two over the past few years, we expected the Granite City gas sharing project will significantly reduce the amount of bending we have at the facility and will cost around $50 million in total between 2017 and 2018.
We expect our ongoing capital excluding the additional of Indiana Harbor to be roughly flat year-over-year. On Slide 20, we summarize our 2017 guidance.
As we have covered throughout this presentation we expect 2017 adjusted EBITDA to be between $220 million and $235 million. We expect operating cash flow to come down year-over-year primarily due to higher coal prices impacting working capital.
Before turning the call back over to Fritz. First, I want to touch briefly on liquidity in capital allocation plans and Slide 21.
We expect to generate solid cash flow at the current level in 2017 driven by cash distribution from SXCP. Reimbursement of the IDR and corporate cost deferral we granted to the partnership in 2016 and the receipt of the final installment from ArcelorMittal related to the redemption of the Brazil equity interest.
At this point any capital allocation decisions at the SXC level are on hold pending the ongoing negotiations around the simplification transaction. As previously indicated when the simplification transaction is completed.
We intend to recommend a $0.25 annual dividend at the SXC level. That I will hand back to you Fritz.
Fritz Henderson
Thanks Fay and ramping up of the Slide 22. You just heard in 2017.
We're going to remain focused on operational execution, maximizing the capability and performance of our coke and logistics assets and ensuring execution on further rebuild at Indiana Harbor. We continue to make progress of the conflicts committee on the proposed simplification transaction and but we do remain as I said before quite disciplined in that regard.
Targeting a potential closing of the transaction in mid of 2017, we are able to reach the agreement with the conflicts committee. And finally, will be focused on executing on our commitment to shareholders by achieving our full-year financial targets that we laid out today.
With that, I would like to open it up for Q&A.
Operator
[Operator Instructions] Your first question comes from the line of [indiscernible]. Your line is open.
Unidentified Analyst
Hi, I am wondering when you think the iPhone 7 come out because I am really decided Apple?
Fritz Henderson
Eli, good morning. This is Fritz Henderson.
You are on the SunCoke Energy conference call, and I don’t know anything about the iPhone 7.
Unidentified Analyst
Sorry, do you remember what number is for Apple?
Fritz Henderson
No, I don’t. I am sorry.
Unidentified Analyst
Sorry about that.
Fritz Henderson
No problem.
Operator
Your next question comes from the line of [indiscernible]. Your line is open.
Unidentified Analyst
Hey, Fritz good morning. Thanks for taking our call.
Fritz Henderson
Good morning, Adam.
Unidentified Analyst
I want to confirm my understanding that something you said earlier which is that you're targeting Indiana Harbor profitability in 2018 is that correct?
Fritz Henderson
Yes.
Unidentified Analyst
Got it. And are you able to put a range around what sort of profitability you might expect in 2018?
Fritz Henderson
Not today Adam, as we finalize the work in 2017 and develop our targets for 2018 that's when I’d like to lay those numbers.
Unidentified Analyst
Okay. Can you help us understand or put a frame of reference around sort of the bridge from negative $13 million of EBITDA to some sort of profitability, how much of that is from the oven rebuilds and improved performance and how much of that is from the [metal] contract?
Fritz Henderson
I would say it will be combination of three things. One, we do anticipate as we have over half the ovens rebuilt in the plants at that point that production level should rebound from the 900,000 tons.
Second, we do continue to be focused on cost discipline. One of the things I mentioned in the 2017 guidance is, we're incorporating the lessons learned from our 2016 rebuild back to the 2015 rebuild.
We're going to spend about $5 million in that regard associated with actually making those changes in the 2015 rebuilds in their entirety in 2017. That would not carryover into 2018.
So that would be a second swing factor. And then the third swing factor would be the middle contract which comes back to developing budget related O&M reimbursement at the facilities contracted.
Unidentified Analyst
Got it. Okay, thank you.
That’s very helpful. I have another question if you want to take it.
Fritz Henderson
Sure.
Unidentified Analyst
I noticed in the year-over-year bridge for EBITDA performance, 2016 was a little bit lower than 2015 due in part to $3.6 million or $3.5 million of reduced met yield profitability?
Fritz Henderson
Fay, do you want to handle that?
Fay West
Yes, so you are bridging 2015 to 2016?
Unidentified Analyst
Yes.
Fay West
Yes, and so coke price is that just a function of coal prices and when we put out our guidance in 2015, we had anticipated that we would achieve lower benefit from the coal-to-coke yield would be lower based on coal pricing in 2015 compared to coal pricing in 2016.
Unidentified Analyst
In your 2017 budget or you budgeting for getting all that $3.5 million or $3.6 million back. What is your assumption on coal pricing in 2017?
Fay West
Correct, so as coal price have increased, our 2017 guidance includes the benefit of those – and coke yields of those higher prices.
Fritz Henderson
Yes, we think coke prices should be up about $18; actually they are up $18 year-over-year. And I think on chart, look at the coal profitability chart, but the benefit of the higher coal prices has been factored into the guidance for 2017.
Fay West
Correct.
Operator
Your next question comes from the line of Lee McMillan with Clarkson. Your line is open.
Lee McMillan
Good morning, everybody. Thanks for taking the question.
Fay West
Good morning.
Fritz Henderson
Good morning, Lee.
Lee McMillan
I had a little bit more on Indiana Harbor, looking at kind of the trajectory of where production has gone over the past couple quarters and then the 900,000 for 2017, I'm just curious how you're thinking about a ramp back up to get to that level from the 200,000 in December? Should we assume that Q4 was the low point and we ran from here or is it more or like backend loaded towards the end of 2017?
Fritz Henderson
Q4 is a low point because if you look at the Harbor Q4 results, we had all the ovens out pretty much throughout that quarter in addition to obviously the performance of the ovens that have been rebuilt. They pretty much stay the same.
So what we anticipate in 2017 is couple things, one, we’re obviously going to be doing more ovens, but we'll be doing them, I mean our game plan at this point is actually be doing the more readably through the year rather than in one quarter. So you would be seeing it in each quarter, but fourth quarter 2016 would be a low point.
Lee McMillan
Okay, got it. And then for the $13 million EBITDA loss guidance for 2017 there, I didn’t see the actual for 2016.
Was that in presentation?
Fritz Henderson
It was actually.
Fay West
Yes. So we say it’s $4.2 million lower than the prior year.
Yes, favorable versus the prior year, so it’s around – it’s a loss of around $3 million.
Lee McMillan
Okay. And then last one, I think you said that Haverhill turbine came back up in mid January.
Should we assume any Q1 impact or no?
Fritz Henderson
I would say small, but I think the impact is largely behind us at this point.
Lee McMillan
Okay, great. Thanks.
Fritz Henderson
Thanks.
Operator
Your next question comes from the line of Lucas Pipes with FBR & Company. Your line is open.
Lucas Pipes
Hey. Good morning, again.
I have a higher level question. On Slide 15, you show the Domestic Coke production.
And it shows a modest decline going back to 2013, 2014 when the range excluding Indiana Harbor bit closer to 3.2 million tons and including Indiana Harbor I thought if historically SunCoke on a consolidated basis being a producer of roughly 4.3 tons or so. And I was wondering what accounts for this decline.
There seems to be much healthier sentiments surrounding this steel market, so what would it take to get back to 3.2 million tons and hopefully on a consolidated basis pushing that 4.3? Thank you.
Fritz Henderson
As Fay outlined the chart, in 2016, we did turn down for rate case deal about 75,000 tons, the [indiscernible] O&M reimburse were adjusted to make us full. Our guidance for 2017 has been done on a carryover basis, so we basically assume similar arrangement would be made.
And I would say with respect to AKS production, I mean the Ashland facility remain idle and what I would say is when we look at I mean let me just discuss your point directly. When you look at the sentiment around respectively, what might happen with our customers, it's true.
I mean there is certainly a better overall sentiment with respect to the outlook for steel demand and production therefore respectively, but if you look at the actual operating rates Lucas today, I mean they're pretty much similar to what we've been running at in the third and fourth quarter of 2016 and we've developed our guidance basically assuming that we're to continue.
Lucas Pipes
Got it. Okay.
And I mean SunCoke capacity has been coming out of the market over the last couple years. How would you assess SunCoke’s opportunity to take for the market share?
Fritz Henderson
So capacity has been coming out. One of the things we're going to watch very carefully through the year and not just 2017, but in the 2018 is what happens with aggregate steel demand and operating rate in the blast furnaces themselves.
As I look at the environment today to say what's your ability to improve share or take share if operating rate stay where they are today, obviously we’ve to see what happens with other capacity, but we feel good about our contract renewals that come up in 2020 at both our Jewell and our Haverhill facility. But I would say your opportunity to grow share from here if operating rates stay where they are is modest.
If we see an uptick in operating rates from things like infrastructure build for example, not only does that make us even more optimistic about our contract renewals, but we do have as you could see in the chart, we have 100,000 to 200,000 tons of additional capacity that we can bring on line from the facilities that you see on Page 15. So we would be very pleased to be able to ramp our plant back up.
Lucas Pipes
All right. Thank you very much.
Fritz Henderson
You’re welcome.
Operator
[Operator Instructions] Your next question comes from Philip Gibbs with KeyBanc. Your line is open.
Philip Gibbs
Good morning, Fritz. How are you?
Fritz Henderson
Good. Phil, how about you?
Philip Gibbs
Doing well. A question on the coal prices up $18 a ton year-over-year in 2017, is that the implied input cost upside for your Coke business which is largely tolling or the implied coal pricing in your coal sales?
Fritz Henderson
On the tolling side, we don't sell any coal any longer.
Philip Gibbs
Okay. And with some of your comments to do more of the ovens in terms of the rebuilds at Indiana Harbor that any of that have to do with our metals decision to restart one of the blast furnaces in the fall or did you have that in the plans prior to that?
Fritz Henderson
We will be encouraged that we see additional blast furnace production come on stream, but the rebuild plan is really been something we've been focused on over the last several years and the 53 that we've outlined for 2017 has been they for us to some time.
Philip Gibbs
Thanks very much.
Fritz Henderson
You're welcome. End of Q&A
Operator
And we have no further questions at this time. I turn the call back over to the presenters.
Fritz Henderson
Thank you. Thanks for everybody joining.
I must say it’s the first time I’ve ever taken a phone call on the iPhone 7. So that was an interesting question.
But appreciate everybody from SunCoke both analysts and investors joining us for the call and for your investment in the SunCoke. Thank you.
Operator
This concludes today's conference call. You may now disconnect.