SXC Q4 2024: Coke Margin Guidance Cut to $47/T on Contract Shift
- Resilient Domestic Coke Business: Management highlighted that the company is essentially sold out for the full year and has strong track records in both foundry and spot coke markets—even in the face of a nonrenewed Haverhill contract—demonstrating their ability to adapt pricing and maintain production efficiency.
- Robust Free Cash Flow & Disciplined Capital Allocation: The guidance for strong free cash flow generation, coupled with a deliberate focus on rewarding shareholders through dividends and potential growth opportunities (including the Granite City GPI project), underlines a solid financial foundation and flexibility for future investments.
- Improved Market-Relevant Pricing in Logistics: The shift from the API2 to the FOB New Orleans index for pricing adjustments in the Logistics segment is aimed at better reflecting market conditions, potentially enhancing revenue attribution as market fundamentals improve.
- Domestic Coke Margin Pressure: The Q&A highlighted that expected lower margins—driven by adverse economics under the Granite City contract extension and the potential nonrenewal at Haverhill forcing sales into the lower-margin spot market—could weigh heavily on adjusted EBITDA per ton (dropping from $58 to $47 at guidance midpoint).
- Granite City GPI Project Uncertainty: Ongoing delays in the U.S. Steel Nippon transaction and extended litigation introduce uncertainty about the timing and potential benefits of the Granite City GPI project, which could negatively impact future capital allocation and growth prospects.
- Index Adjustment Risks in Logistics: The change from the API2 price index to an FOB New Orleans-based index, coupled with the conservative assumption of no built-in price benefit in 2025 guidance, exposes the logistics segment to potential volatility if market conditions worsen.
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Domestic Coke Margins
Q: Explain drop from $58 to $47 per ton?
A: Management explained that the margin decline is driven by lower economics from the Granite City contract extension and the shift to spot sales at Haverhill, which has reduced EBITDA per ton, even though production remains solid. -
Free Cash Flow & Debt
Q: How will free cash flow boost shareholder returns?
A: They noted strong free cash flow generation and emphasized that, with $500M of senior bonds outstanding, there are currently no plans for debt buybacks; instead, they are focused on profitable growth opportunities like the GPI project and returning capital via dividends. -
CapEx Details
Q: Why is CapEx guidance at $65M?
A: Management pointed out that lower CapEx is due to the completion of previous large-scale projects, with $5M earmarked for KRT growth and the remainder supporting steady maintenance spend throughout the year. -
GPI Project
Q: Impact of U.S. Steel on the GPI project?
A: They stressed that, despite delays and uncertainties related to U.S. Steel, the underlying project fundamentals remain robust, and discussions continue with all parties to secure its long‐term benefits. -
Logistics Index
Q: Why switch to the FOB New Orleans index?
A: The change to an FOB New Orleans index was made to better match the market dynamics of their customers, though management is not assuming any immediate price benefit in its guidance; the index is tracked daily by Platts. -
Haverhill Utilization
Q: How will nonrenewal at Haverhill affect utilization?
A: Management expects that if the Haverhill contract is not renewed, the asset will transition to spot sales, with the team adapting to market conditions in this cyclical industry while maintaining core long-term relationships. -
Coal Contract Timing
Q: When are long-term coal contracts finalized?
A: They clarified that long-term take-or-pay coal contracts are typically finalized between September and November, ensuring that coal pricing does not adversely affect profitability. -
Quarterly EBITDA Decline
Q: Will EBITDA per ton weaken in H2?
A: Management anticipates a slight quarter-to-quarter decline in EBITDA per ton in the second half of the year due to the timing of contract expirations impacting earlier figures. -
M&A Opportunities
Q: Are you pursuing any M&A targets?
A: They indicated that while the team is always evaluating potential growth opportunities, including M&A, specifics cannot be disclosed until any deal is finalized. -
Revolver Extension
Q: Any concerns on the revolver coming due?
A: Early discussions about extending the revolver due in June 2025 have been positive, and there are no current concerns or red flags regarding its renewal.
Research analysts covering SunCoke Energy.