SunCoke Energy Partners' (SXCP) CEO Fritz Henderson on Q4 2015 Results - Earnings Call Transcript

| About: SunCoke Energy (SXCP)

SunCoke Energy Partners (NYSE:SXCP)

Q4 2015 Results Earnings Conference Call

January 28, 2016 10:00 a.m. ET


Kyle Bland - Investor Relations

Fritz Henderson - Chairman, President and Chief Executive Officer

Fay West - Senior Vice President and Chief Financial Officer


Lin Shen - HITE

Brian Yu - Citi

Garrett Nelson - BB&T Capital Markets


Good morning and thank you for joining us to discuss SunCoke Energy Partners' fourth quarter and full year 2015 earnings conference call. I will now like to turn the call over to Kyle Bland, Director of Investor Relations. Please go ahead.

Kyle Bland

Thanks, Suzanne and good morning and thank you for joining us to discuss SunCoke Energy Partners' fourth quarter and full year 2015 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 Web site and a replay will be available for your convenience. 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 Web site as are reconciliations to any non-GAAP measures discussed on today's call.

Now with that, I will turn it over to Fritz.

Fritz Henderson

Thanks, Kyle and thank you all for joining us this morning. Before we dive into the fourth quarter results I would like to reflect on 2015 more broadly.

Despite the significant challenges facing both our steel and coal customers, we did make progress at SXCP against our plan. And in particular, we were encouraged by the contingent stability in our business model and in the cash flows of the business. In the year we also expanded our distributable cash flow base through the acquisition of the Convent Marine Terminal and through the dropdown of the Granite City facility from our sponsor SunCoke.

When including these acquisitions, we delivered against our revised guidance ranges for adjusted EBITDA and distributable cash flow. Importantly, if you exclude both of these transactions, the Convent Marine Terminal and the Granite City dropdown, the existing base business that was at the beginning of the year achieved its original guidance targets for both adjusted EBITDA and distributable cash flow as well.

In 2015 we returned $56 million by distributions and repurchases to public unit holders. We just declared our 12th consecutive distribution of 59.4 cents per unit. We also took significant steps towards executing our delevering strategy later in the year and retired $48 million in senior notes in the fourth quarter of 2015.

So in summary, we largely accomplished the goals we set for ourselves at the Partnership in 2015. But notwithstanding this performance, our unit price declined almost 75% reflecting we believe the significant challenges and the higher risks. Significant challenges faced by our customers and the higher risks in our environment, both in the coke side of the business supporting our steel customers and more specifically with the Convent acquisition, our coke customers. We will have more to say about that later in the presentation but it really sets the backdrop for 2016.

We remain cognizant of the challenges facing our steel and our coke customers and the guiding principle, if you will, is in operational execution and then remaining flexible and responsive in deploying capital through means that are in the best interest of our unit holders. With that, I would now like to turn it over to Fay.

Fay West

Thanks, Fritz. Turning to Slide 3 and starting at the left side of the chart. You could see that notwithstanding the challenges that Fritz talked about and that we faced in 2015, our base business shown on an apples to apples basis to our original guidance, achieved adjusted EBITDA attributable to SXCP of $170 million in 2015, which is in line with the original guidance we provided last January.

In October, we revised our guidance to reflect the impact of both the acquisition of Convent and the 23% dropdown of Granite City would have on reported adjusted EBITDA and distributable cash flow. As you could see on the chart, adjusted EBITDA on a reported basis was $192 million and distributable cash flow was $117 million. Both of these metrics are above the revised guidance range that we provided in October.

Diving into the details of page 4. In terms of performance for the quarter, total adjusted EBITDA was up $10.5 million to $56.9 million. This increase was mainly due to the benefits from the Convent acquisition. On a full year basis, adjusted EBITDA was up nearly $13 million to $201.7 million and reflects the $21 million benefit from the Convent acquisition as well as a strong performance from our domestic coal logistics business. This benefit was partially offset by the impact of the Haverhill Chemical reorganization and a decrease in coke sales due to lower demand for volumes above our contract maximum.

Total net income in the fourth quarter was $36.9 million and was up $13 million from the prior year period, reflecting the Convent acquisition and a gain on the extinguishment of debt that resulted from our delevering activities in the quarter. Looking at distributable cash flow and cash coverage on the next Slide, you could see the significant jump in distributable cash flow in both the quarter and full year results. This is largely driven by the CMT and Granite City acquisition. We ended 2015 with cash coverage of 1.06 times. And when making pro forma adjustments for the impact of M&A activity, we finished at a strong 1.19 times for the full year. Additionally, we expect full year 2016 cash coverage to be between 1.41 and 1.54 times which reflects our capital allocation strategy of shifting excess cash towards delevering versus growing quarterly distribution.

Slipping to Slide 6. We ended the quarter with approximately $117 million in total liquidity including cash of approximately $49 million and remaining revolver capacity of $68 million. In the quarter we generated over $65 million in operating cash flow and paid out nearly $30 million in distributions to our unit holders. We made significant progress on delevering our balance sheet by retiring approximately $48 million face value of senior notes for approximately $35 million in cash. Additionally, during the quarter we issued a $50 million term loan to refinance the SXC notes that we had assumed from our parent as part of the 23% dropdown of Granite City.

Turning to our distribution performance and capital allocation priorities on Slide 7. Earlier this week we declared our fourth quarter distribution of $0.5940 per unit, representing a 10% year-over-year increased and a 44% increase since our IPO. Going forward and as we stated on investor day, we intend to use excess cash flow to delever our balance sheet and we will continue to evaluate our capital allocation and distribution priorities each quarter.

Moving on to Slide 8. As highlighted earlier, we delivered a solid year in 2015 and achieved both our original guidance and revised guidance. In 2016, we expect to meaningfully grow distributable cash flow as we benefit from the full year contribution of convent and the stability of our operating assets. As I mentioned earlier, our objective is to maintain a healthy cash coverage ratio in order to create excess cash flow to delever our business.

For illustrative purposes, our 2016 guidance includes the full year benefit of a corporate cost holiday from our sponsor as well as a full year of IDR giveback. These capital allocation decisions as well as our distribution policy will be evaluated quarterly. With that, I will turn the call back over to Fritz.

Fritz Henderson

Thanks, Fay. Wrapping up with our 2016 priorities. The team remains focused on managing through the current industry environment while delivering against our operational and financial targets for the year. First and foremost, our top focus is to be prepared to adapt, anticipate, adapt and respond as an organization to the challenges and the risks our industry and our customers face. We will work on optimizing our utilization rates to drive organic EBITDA growth, particularly at our coal logistics business and continuing our efforts to deliver operational excellence across the fleet.

And last, we will work towards achieving our 2016 guidance and executing our delevering strategy to fortify our financial foundation and position SunCoke Energy Partners for the long term. With that, let's turn it over for Q&A. Thank you.

Question-and-Answer Session


[Operator Instructions] And your first question comes from the line of Lin Shen of HITE. Your line is open.

Lin Shen

I was just wondering maybe you can talk a little bit more about how should we think about the [indiscernible] safety in '16 and when you think about -- you have 1.1 [coverage] [ph] or so but also facing some uncertainty about the macro also for your clients. How should we think about the strategy every quarter when the board makes decision about whether to maintain or cut distribution? What are the main reasons or levers you think about?

Fritz Henderson

Good question. As Fay mentioned on chart 8, we will look at capital allocation decisions on a quarterly basis through the year. With respect to the first quarter, the cash actually being paid out related to the fourth quarter of last year relative to distribution. I think we would look at the following. One, obviously we will look at our own results of our operations and our operating performance and its commitment to operate in accordance with our plan. Two, we will look at the risks in the business and specifically the risks that have either materialized or we will look at the changes in the forward outlook with respect to our customers, whether it's in the steel or the coal side of the business.

Third, the overarching goal is to achieve our deleveraging objective. And we articulated in December when we met with investors that we intended to use $60 million, at least $60 million of excess cash flow to delever the balance sheet. We executed in the fourth quarter slightly ahead of the plan that we outlined in December. And so if we think about future capital allocation priorities, those decisions will be taken relative to that objective to delever the balance sheet.

So, as we think about continuation of the corporate cost holiday, and by the way that is a decision that the parent makes and the parent made that decision with respect to the first quarter but that decision can be re-evaluated each quarter. Two, we will look at distribution and obviously corporate cost holiday and distributions both factor into coverage. And so as we think about the objectives and priorities with respect to 2016, the overarching goal is to deliver at least $60 million of excess cash flow to delever. We will accomplish that goal. It's our intention and it's our commitment to delever the balance sheet at least to that extent. And so with that overarching goal, we will evaluate the performance of the business, the risks we see in the environment.

Lin Shen

Yes. Thanks.

Fritz Henderson

We will look at each of these levers.


And your next question comes from the line of Brian Yu of Citi. Your line is open.

Brian Yu

My question somewhat relates to the prior one, just about the distributions maybe from another angel. I think on the investor day you had mentioned for some of the coal suppliers contracts in '16, you guys have built in a plus or minus 15% optionality in there. So as we are looking at the first quarter utilization rates have ticked up a bit. They remain low. Has there been any discussions surrounding the coke production rates in Q1 where you would have to [exercise] [ph] that optionality or are you still planning to run that full rates.

Fritz Henderson

Brian, I think we would still -- I mean our plan is for 2016 to run at our full contract maximum rates. Obviously, the optionality you refer to relates to our coal contracts. I think it would be too early to -- if in fact we do execute against our full year plan, we would anticipate basically using our coal commitments. We do have the flexibility to turn down our assets, have done so in the past on a limited basis. When we do that, we work with our customers to -- if you think about it, reduce coal cost and reduce working capital, but we bill our [6C] [ph] in our own [M] [ph]. So that option always remains available to us, working with our customers would result in obviously with the flexibility we built into our coal commitments, we can do that.

Brian Yu

All right. Okay. And they on the coal logistics business, do you have -- give a sense what level of utilization rates are you anticipating for that and maybe break it down like domestic versus the export terminal.

Fritz Henderson

Well, what I will do is with respect to the export terminal, I will just touch on that and then I will invite Fay to talk about our domestic coal business. In the export terminal we based our plan on 6.5 million tons through Convent. That’s our expectation at this point. Fay will give you the answers with respect to the domestic terminal. At the domestic terminal, interestingly as we look at '15, we ran lower in terms of volumes while we ran richer in terms of services and resulted in, I think quite acceptable EBITDA within our domestic coal handling business. And so your volumes and the level of services you provide are inter-related to EBITDA obviously. Fay, you want to touch on the KRT?

Fay West

So at KRT we anticipate that our 2016 volumes will be comparable to 2015 and 2105 even though our volumes were down slightly, we had a very strong performance year-over-year and that was based on really strong management of operating cost as well as kind of just a mix of revenues, higher generating revenue in 2015.


And your next question comes from the line of Garrett Nelson of BB&T Capital Markets. Your line is open.

Garrett Nelson

It looks like your domestic coke EBITDA per ton was down by about $11 from the third quarter. Is that just mainly the impact of adding Granite City to the mix?

Fay West

So generally what you are seeing kind of sequentially from year-over-year sales volumes, third quarter -- I am sorry, sequentially from third quarter versus fourth quarter, is we had to pull back slightly at our operations, both from a sales perspective as well as from a production perspective so that we don’t exceed our contract maximum. So it was just the ratability of how the coke produced and sold throughout the year. But we did end the year at contract maximums for all of our businesses. And then when you compare it to last year, we just didn’t have any spot sales either. So sequentially the decrease in sales is just to get us on a full year basis to contract maximum but not beyond that.

Garrett Nelson

Okay. But I think you guided for your SXCP's EBITDA per ton to be up a little bit from the fourth quarter level in 2016. Are you still expecting that?

Fay West

Yes. There is no change to our 2016 guidance.

Garrett Nelson

Okay. Just wanted to clarify that. Thanks a lot.


[Operator Instructions] There are no further questions in the queue at this time I would turn the call back over to presenters.

Fritz Henderson

Okay. Well, again, thanks very much for joining us this morning. A little bit later this morning we will have the SunCoke Energy call and thank you again for participating and investing in SunCoke Energy Partners.


And this concludes today's conference call. You may now disconnect.

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