SunCoke Energy Partners' (SXCP) CEO Frederick Henderson on Q1 2016 Results - Earnings Call Transcript

| About: SunCoke Energy (SXCP)

SunCoke Energy Partners (NYSE:SXCP)

Q1 2016 Earnings Conference Call

April 27, 2016 10:00 AM ET

Executives

Steve Carlson - Investor Relations

Frederick Henderson - Chairman, President and Chief Executive Officer

Fay West - Senior Vice President and Chief Financial Officer

Analysts

Kevin Maw - Nationwide

Garrett Nelson - BB&T Capital Markets

Operator

Good morning. My name is, Keith, and I’ll be your conference operator today. At this time, I’d like to welcome everyone to the SXCP First Quarter 2016 Earnings 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. [Operator Instructions]

Thank you. Steve Carlson, with the Investor Relations team, please go ahead, sir.

Steve Carlson

Thank you, Keith. Good morning and thank you for joining us to discuss SunCoke Energy Partners first quarter 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. 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.

Frederick Henderson

Thanks, Steve, and good morning. Turning to Slide 2, I’ll start with the operating performance in the quarter. At SXCP, we did despite the challenges in the industry, we started off the year with strong safety environmental and operating performance across both the Coke as well as the Coal Logistics fleet. Beyond that from a capital allocation perspective, we did repurchase $53 million of face value bonds in the quarter, and that means cumulatively were $100 million in reduction of our unsecured bonds through the last six months.

We – the third point I would make is, we did last week announce the continuation and maintenance of our distribution to $59.4 in the quarter. I’m going to talk about flexibility on the next chart, but I think you’ll see we remain flexible and responsive in a challenging industry environment. And lastly, with a good start to the year, we’re today reaffirming our guidance with respect to both adjusted EBITDA, as well distributable cash flow.

Looking at current market conditions and what to place in the first quarter, I recall coming into the year, my long list of various things that we were monitoring as we came into January. And as we think about where we stand here in April – at the end of April, I think, we were flexible and responsive to the challenging industry landscape.

A couple of things that I would highlight first with respect to our Haverhill 2 contract in Haverhill 2 facility. We did agree with our customer to reduce production at Haverhill 2 by 75,000 tons on a full-year basis, and we also with respect to Granite City agreed with our customer to backload production deliveries through 2016.

And either both of these actions were taken to work with our customer to reduce working capital and help them. At the same time, neither of these actions would affect or expected to affect our adjusted EBITDA for 2016. The good example is, how we can be responsible to our customers needs, while highlighting the strength of our take-or-pay agreements.

And then finally, as I mentioned, we outlined some goals with respect to deleveraging the balance sheet at Investor Day. And then, again, we reaffirmed them when we released our fourth quarter earnings, and we look at what was accomplished in the first quarter and cumulatively for six months we did bring our leverage slightly below four. And we are, as I look at what was accomplished in the first year, well on track to achieve our deleveraging goals through 2016.

Now, I’ll turn it over to Fay.

Fay West

Thank you, Fred. In terms of performance for the quarter, total adjusted EBITDA was up $9.1 million to $57.4 million, primarily due to the benefit of the Convent acquisition. This was partially offset by the impact of the Haverhill Chemicals reorganization that occurred in the fourth quarter last year.

Total net income in the fourth quarter was up over $16 million to $40.5 million. And this reflects once again the Convent acquisition, as well as the gain on the extinguishment of debt that was driven by our delevering activities. The quarter produced distributable cash flow of $45.9 million, which includes strong operational performance as well as the $7 million benefit of a corporate cost holiday. We also ended the quarter with a healthy cash coverage ratio of 1.64 times, which includes the $1.4 million benefit of the IDR giveback from our sponsor.

Looking at the Coke segment on the next side, we earned adjusted EBITDA per ton of approximately $80, on a production of 576,000 tons. These numbers reflect the approximately 20,000 ton impact of our – of the customer accommodations at Haverhill and Granite City, as Fred just mentioned, as well as the lost steam revenue from the Haverhill Chemicals reorganization. Our outlook for Coke performance in 2016 remains unchanged in a $160 million to $170 million of adjusted EBITDA.

Focusing on our Coal Logistics segments on the next slide, while we are seeing lower volumes in both the domestic and export markets, we produced steady results through our take-or-pay contracts and benefited by actively managing our staffing and variable costs across the segment.

Looking at Convent specifically, we inbound at 945,000 tons through the facility. This was lower than expectations, and was mainly driven by depressed API2 pricing throughout the quarter. However, we’ve seen API2 pickup here in April and we have started to see volumes at this facility increase as well. Overall, we reaffirm our 2016 adjusted EBITDA guidance of approximately $70 million for this segment.

Moving to Slide 7, we ended the quarter with approximately $100 million in total liquidity, including cash of $34 million and remaining revolver capacity of $67 million. In the quarter, we generated over $40 million in operating cash flow and paid out over $30 million in distributions to our unitholders. As previously mentioned, we made significant progress on delevering our balance sheet by retiring $53 million in senior notes for approximately $33 million in cash.

Turning to our distribution and capital allocation priorities on the next slide. Last week, we declared our first quarter 2016 distribution of $59.4 per unit, representing a 44% increase since our IPO. Additionally, our sponsor agreed to provide support for the second quarter in the form of a one-year payment deferral on corporate costs and IDR payments, bring up a little over $8 million of cash for this period.

This enabled us to maintain our distribution, while directing significant cash flows towards our delevering objectives. As before we will continue to work with our sponsor on future support arrangements and we will evaluate our capital allocation and distribution priorities each quarter.

Looking at Slide 9, as mentioned earlier, we are reaffirming our guidance for 2016, and continue to focus excess cash towards delevering our balance sheet. As a reminder for illustrative purposes, our 2016 guidance assumes the full-year benefit of support from our sponsor. As before, we will continue to work with our sponsor on future support arrangements and will evaluate our distribution priorities each quarter in order to remain responsive to market developments.

With that, I’ll turn it back over to Fred.

Frederick Henderson

Thanks, Fay. Wrapping up our 2016 priorities, I think, it’s important to remain flexible and responsive to the industry backdrop, while leveraging our unique value proposition for our customers. We did see conditions improve somewhat over the course of the first quarter. You did see steel pricing, both globally as well as domestically increase with U.S. hot-rolled coal prices recently eclipsing $500 ton for the first time since early 2015.

Imports into the domestic market have decreased significantly, but still the market is impacted by unfairly traded imports. Foresight has put forth a framework to resolve its ongoing dispute its creditors, which we viewed as constructive, but obviously it’s still work in process.

API2, as Fay mentioned, has rebounded a bit in April, which we found also constructive. And finally, while things are – have improved through the quarter, I would say, you have to remain responsive, because there’s still plenty of challenges that need to be resolved, as we look at the remainder of 2016.

We’re going to – we will continue to optimize our utilization rates to drive EBITDA achievement as well as EBITDA growth and achieve our goals for 2016, particularly at our Convent Terminal, as we look for and continue to pursue new business opportunities across a variety of industrial products. Company remains focused on driving strong operational, safety, environmental performance at our operations, both the Coke plants as well as in our terminals.

And lastly, with the start to the year, we’re pleased to be able to affirm our 2016 financial guidance, while continue to delever the balance sheet at the partnership.

With that, I’ll turn it over for Q&A

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Kevin Maw with Nationwide. Your line is open.

Kevin Maw

Hi, good morning. Thank you for taking my question. I know previously you had stated that one of your top priority to secure new business for the terminal. And could you comment on the progress on that front?

Frederick Henderson

Kevin, good morning. I would say, we had ongoing dialogue with a number of potential customers at the terminal. These are long, as I look at it from a marketing perspective actually, many of these are long-dated decisions that the customers need to make, for example, reaching out with our partners in the railways to various refineries, for example, to provide services to them. I’m not going to discuss which specific customers.

But I would say, I think, we’re pleased with our value proposition. But like we’re going to – we’ll announce something we have in our pocket. So I would say a lot of activity, and we were, I think, encouraged by the openness and receptiveness, but nothing that I can report today in terms of business on the books.

Kevin Maw

Thank you.

Frederick Henderson

You bet.

Operator

[Operator Instructions] Our next question comes from the line of Garrett Nelson with BB&T Capital Markets. Your line is open.

Garrett Nelson

Hi, good morning, everyone.

Frederick Henderson

Hi Garrett.

Fay West

Good morning.

Garrett Nelson

I think last quarter you said you expected Convent to generate $50 million to $55 million of EBITDA for the year. And if you annualize what is generating in Q1, it looks like you’re right on track. But any changes to those expectations for the full-year EBITDA?

Frederick Henderson

No, no, I think, first quarter performance certainly in our view substantiated reinforced our $50 million to $55 million guidance for the year.

Garrett Nelson

Okay. And regarding your ongoing debt reduction, do you plan to continue to retire debt in the coming quarters and continue on that path of delevering the MLP?

Fay West

Absolutely. So, while we’re not going to comment necessarily on kind of what activity has occurred here in April since we’ve been in blackout. But that is our intent to continue to delever throughout the balance of the year using the excess cash flow generated by the MLP.

Garrett Nelson

Great. Thanks very much.

Frederick Henderson

Thank you, Garrett.

Operator

[Operator Instructions] And we have no further questions at this time. I’ll turn the call back over to the presenters.

Frederick Henderson

All right. Again, thank you very much for joining the call and for being an investor in SunCoke Energy Partners. A little bit later this morning, we’ll have the call for SunCoke Energy. Thank you very much.

Operator

Ladies and gentlemen, this concludes today’s conference call. You may now disconnect.

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