Good morning and welcome to the Alliance Resource Partners Third Quarter 2018 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. And with that, I would like to turn the conference over to Mr. Brian Cantrell, Senior Vice President and Chief Financial Officer. Please go ahead.

Thank you, Brian, and good morning, everyone. Alliance Resource Partners released its 2018 third quarter earnings earlier today, and we’ll now discuss these results as well as our outlook for the balance of the year. Following our prepared remarks, we will open the call to your questions. Before beginning, a quick reminder that some of our remarks today may include forward-looking statements that are subject to a variety of risks, uncertainties and assumptions that are contained in our filings from time-to-time with the Securities and Exchange Commission and are also reflected in this morning’s press releases. While these forward-looking statements are based on information currently available to us, if one or more of these risks or uncertainties materialize or if our underlying assumptions prove incorrect, actual results may vary materially from those we projected or expected. In providing these remarks, the partnership has no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, unless required by law to do so. Finally, we will also be discussing certain non-GAAP financial measures. We have provided definitions and reconciliations of the differences between these non-GAAP measures and the most directly comparable GAAP financial measures at the end of our press release, which has been posted on ARLP’s website and furnished to the SEC on Form 8-K. With the required preliminaries out of the way, I’ll begin with a review of our financial results and then turn the call over to Joe Craft, our President and Chief Executive Officer for his perspectives on the coal markets and ARLP’s outlook for the remainder of 2018. As mentioned in our release this morning, ARLP reported strong results for the 2018 quarter-end period, posting increases to all of our key operating and financial metrics. Led by…

Thank you, Brian, and good morning, everyone. As Brian just reviewed, ARLP delivered strong results during the 2018 quarter. And I’m extremely pleased with our year-to-date performance and I’m equally optimistic about our prospects for near-term growth. And delivering these results, our teams have effectively responded to improved fundamentals in both the domestic coal markets and growing international markets. On the strength of increased coal demand, ARLP secured new commitments during the 2018 quarter or approximately 11.1 million tons to be delivered through 2021, including an additional 4.9 million tons of export shipments through 2019. We now have volume and price commitments for approximately 32.9 million tons in 2019 or approximately 75% of what we currently plan to produce next year. As part of these 2019 planned shipments, ARLP has already secured commitments to export 7.7 million tons of thermal coal and 100,000 tons of metallurgical coal as we continue to increase our presence in the growing international coal markets. Responding to strong demand in our markets and in keeping with our goal of investing in ARLP’s core coal business, during the 2018 quarter, we brought the second continuous mining unit into production at our Gibson North mine and added the 10th continuous mining unit at our River View mine. With the focus on improving productivity and controlling cost, we also began making investments in various infrastructure projects at several operations. With these additions and our solid performance so far this year, we now expect to increase full-year 2018 production by approximately 8% over 2017 levels. As we assess the future, we continue to see significant opportunities for ARLP in both the international and domestic coal markets. Globally, increased coal-fired power generation, strong power demand, high natural gas prices and lack of meaningful supply response continue to favor U.S. producers…

[Operator Instructions] And today’s first question will be from Mark Levin with Seaport Global. Please go ahead.

Thanks very much, gentlemen. Couple of quick questions. The first just -- it sounds like next year, you will increase your production 6% to 10%. Joe, how did you weigh that decision versus -- the returns from that decision versus the returns of maybe buying back your stock or your units, more aggressively?

As we look at the supply-demand for the markets where we are participating, we see that these are very attractive investments. I mean, the market pricing that we see is strong. It continues to provide very strong margins. We believe our margins next year will be comparable to this year, maybe a little bit better, depending on where prices actually end up for the year. So, we are committed to maintaining, growing our market share and markets giving us that opportunity. So, we feel like, we’re in this for a long-term investment. Just because we’re investing in those coal markets, doesn’t mean that we won’t still continue to buy our units. So, we’re looking at all three prongs. We’ll look at investing in coal, we’ll look investing in investments outside of coal, and we’ll continue to buy back our units.

Got it. And then, thinking about the 2019 and you just kind of alluded to margins that were up maybe comparable to ‘18 if not a little better. From a CapEx perspective in ‘19, I realize it’s early, we’re not at Thanksgiving yet. But, is this sort of the new baseline for CapEx or are you accelerating some spending this year, and it would tail off next year? How should we think about capital in ‘19?

When you look at that capital, it includes growth capital. So, as you think about maintenance CapEx, we’re right now in the middle of our planning process. So, as we talked to you before, we’re continuing to evaluate, looking at our East Kentucky mine and continuing production there. We would look at that as maintenance capital, if we make that investment. So, that investment is made, and that would drive our maintenance cost -- maintenance capital number up a little bit in 2019. Absent that, it would not be that different than what we’re looking at right now. So, the increase this quarter was all growth capital and it’s going to add our EBITDA and add to our production. We believe all that’s sustainable.

Mark, as you alluded and as Joe mentioned, we’re in the middle of our process right now. On the January call, as we always do, we’ll provide an updated view on our longer term maintenance capital on a per ton basis. So, you can anticipate that coming next time we chat.

Got it. And then, one last question and then, I’ll let someone else jump in here. Pricing in the Illinois Basin for 2019, obviously you guys were active layering on some new business, which is fantastic. What are you guys pricing coal for calendar ‘19? I think we see on DTC and maybe some of the other coal publications $44, $45 number. Does that look right, does the physical number look close to that? And then, the second question would be, how does that price compare to the export netbacks you’re getting, right now? What does that price look like?

That’s -- you’ve got to look at customer by customer. So, it’s hard to answer that question on average basis right now, especially since we’re right in the middle of bidding on several solicitations. So, I’m going to take a pass on trying to give you that number for competitive reasons. But, as I mentioned, I think our overall average sales price will be equal to, if not higher, in 2019. That’s overall consolidated. And I think one correction on the margins really for the increased production we’re bringing on, those margins that will actually be higher because they’re incremental tons and they’re at lowest cost operation. So, we’re going to be adding some lower cost, higher margin business in 2019. So, overall, we think 2019 is shaping up to be an outstanding year for us.

Next question today will be from Lucas Pipes with B. Riley FBR. Please go ahead.

Yes. Good morning, everyone, and thanks for taking my questions. I wanted to follow up first on the 2019 production guidance. And I wanted to ask specifically, to what extent you believe this is unique to Alliance or do you think we’re going to see maybe growth across the industry in the Illinois Basin? Thank you.

I do think it is unique to Alliance. There is one other operation that’s planning to come into the market if you all are aware of. So, there could be some additional production. We still believe that the total production for Illinois Basin in 2019 will be below demand when you factor in both the thermal exports and domestic demand. What we believe, if you look at the 2017, ‘18 and ‘19, we are seeing utilities draw down their stock. So, the deliveries have been lower than their actual consumption. So, we see that both 2018 is coming in quite a bit short, production is coming in short of that demand. And so, we’re trying to fill that gap, both domestically as well as internationally. As we look at our competitors, most of our competitors are already operating at their full capacity. We just have the benefit of capital that we spent over the last five years to have excess capacity at our existing operations that is really - the capital is very, very low on an annual ton basis. So, we don’t see anybody talking about putting in new coal mines, and neither are we with the one exception in East Kentucky, which is necessary if we want to maintain a position, in that high-BTU, low- sulfur market in the Eastern Kentucky.

Got it. That’s very helpful. I appreciate that color. Maybe looking towards the export market. Obviously, you signed additional contracts, the way I understand it for 2019. And kind of big picture, what’s the appetite out there in the market for term business in the export market? And, could you be doing more if you wanted to or would you be facing higher discounts either on a sulfur level or trading margins et cetera?

Most of our contracts are one-year or less, because the curve is backward dated, what we’ve seen over the last couple of years and we believe will continue. As you get closer in time that curve flattens out and we can get higher realizations. Again, most of our growth in the export market is coming from a low-sulfur Gibson County mines. And so, we think that there is high demand for that product. So, we continue to try to fill that need, based on the demand, the customer base keeps encouraging us to bring on that volume. So, we do believe that there is adequate demand for the tonnage we’re bringing on. And we do believe that if we look at 2019 versus 2018, thermal exports will grow another 10% or so overall and most of that will come from the Illinois Basin.

Very interesting. Maybe to follow up on your larger contract book, what percent do you anticipate to have -- of your 2019 volumes, what percent do you anticipate to have fully priced by the end of this year for 2019?

We’re at 75% today. I can’t -- again, because we are pricing in the export market on a quarter to two quarter basis, most of that will better end, but there is still some domestic bids that are outstanding that could increase another 5% or 10%. It depends on our success in those solicitations.

Got it. I have one more if you don’t mind and that’s -- kind of going back to the export business, there’s been a fair bit of press about widening quality spreads. I think it relates more to ash than to sulfur. But, if you have maybe a few thoughts to share on the topic and to what extent does it, doesn’t affect you, I would very much appreciate it. Thank you.

There are some production regions where their BTUs are dropping or declining. And so, with the transportation of the export product, the customers are looking for high BTU coal. So, the coal we have to offer, our BTUs are stable for the foreseeable future. So, that does not impact to us. In fact, it’s an advantage because we got some extremely high BTU coal in our West Kentucky mines that we’re now looking to see if we can’t place that in international market, which historically met [ph] coal’s down domestically.

[Operator Instructions] Next question will come from Nick Jarmoszuk with Stifel. Please go ahead.

Hi. Good morning. I wanted to talk about the RFP environment. I wanted to just see if you could talk about how competitive you are seeing the environment. And I know you guys commented on looking to grow market share. Is that based on the quality of products, are you looking to build share and being aggressive with price? Just any color you can provide on how the market is looking?

I think that because, as I’ve mentioned earlier, the utilities have been pulling from their inventories, there’s only so far they can go. And I think from the customers that we are targeting, you look at the strength of our balance sheet, that’s an advantage that we have. And if these utilities are actually going to go out for three years, which some of them are, they’re wanting to find counterparty that they believe will be there for the full three years, and the strength of our balance sheet helps us in that regard. So, there are contracts that are coming up with customers who have open positions this year in 2019 that give us an opportunity to increase volumes into those customers, whereas in the past, they’ve been fully committed to other suppliers, and they would like to diversify their supplier base. And so, we’re hoping that we’ll be able to compete and pick up some of that market to grow our domestic book.

Next question will be a follow-up from Mark Levin with Seaport Global. Please go ahead.

Thanks very much. Just one more question, this time on the balance sheet. So, I think Brian, you referenced being roughly 0.7 times. What is a good long-term level at which you are comfortable in terms of gross leverage ratio. Where do you think the business should be over the longer term?

Yes, Mark. We’ve talked in the past that if there was a very large strategically important opportunity for us, we’d be willing to leverage up somewhat. As long as within a reasonable period of time, we felt like we could bring it down to something in the 1.25 to 1.5 times range, long-term. But, it will be dependent on facts and circumstances.

And the reason why I ask because that’s kind of what I remember was kind of in that 1.25 to 1.5 range and sitting at 0.7 times. Is there any movement around or any discussion at the Board level with the stock or the units yielding roughly 10 or -- put 10% plus, almost 11% that using some leverage maybe to buy back stock more aggressively or buyback units more aggressively just because they are, at least in my humble opinion mispriced by the market. I think you referenced to 1.5 coverage ratio and fundamentals getting better and yet the units are still yielding 11%. So, I’m just curious if leverage even for a short period of time would make sense in the eyes of the Board to go back and buy back stock more aggressively.

We do have a $100 million authorized at this point in time. We indicated in the release how much we had done through the end of the second quarter -- third quarter, I’m sorry. And since then we have been in the market as well. We have worked with our Board to establish parameters under which we would be active. And at this point in time, we do continue to believe that we will be purchasing markets. We agree with your humble opinion in terms of our unit price. So, I don’t know that we’re prepared to step up and say we’re going to go in and be extremely aggressive about the programs in place and we’re continuing to execute on it.

I think, it goes back to your earlier question as compared to what. And so, we continue to look for avenues to provide that long-term stable cash flow growth. And given the opportunities and the size of the things we’re looking at that’s been a factor in what level of investment we’re making in our own units.

And as we tried to articulate Mark, just to reiterate, as Joe mentioned, our first capital allocation priority is to grow the long-term cash flows of our business, both within our core coal operations and then opportunities in addition to coal; and then, the second being with that long-term cash flow growth focusing on returning cash to our unitholders. And we have been on a pattern of increasing distributions on a quarterly basis. And with the simplification and the ability to buy back units, we’ve got several tools at our disposal to execute on those priorities.

That makes sense. I was just curious. And then, the last question is just more for my own edification. When I’m looking at the cost increase in the Illinois Basin, I think you referenced some geologic issues at Hamilton, which we know is a low-cost mine. And you also referenced some additional hiring. How should we think about those buckets, Brian, in terms of like what was the bigger contributor? Was it the issues at Hamilton? Was it additional hiring? And then, just kind of a baseline from which to think about, cost in the Illinois Basin in 2019? Thanks.

Yes. I think the biggest issue for the quarter were the challenges that we had at Hamilton. That was the primary driver on cost increases during the third quarter. The reference to additional headcount and training, we have begun that without question. But, you’ll probably see more of an impact on that side between now and the end of the year. Going forward, we do see the 6% to 10% increase in production that we’re currently anticipating. We are continuing to work through our planning process, Mark, so maybe a little bit early to say what the per ton cost will look like next year. But again, we’ll be providing all that detail in January.

And I think when you look at the third quarter, we did have three longwall moves. So, we also have longwall move at Tunnel Ridge; we have one at Mettiki. So, overall, again, this is looking at beyond the Illinois Basin. But, when you look at consolidated, that had an impact. We’ve got one into fourth quarter. We’re going to have the benefit in the fourth quarter of additional volume, because we will see the full impact of adding that 10th unit and -- well, not full but significant in step up, the 10th unit at River View plus, the second unit at Gibson. Our sales tons and production should be up maybe a 1 million tons in the fourth quarter compared to the third quarter. So, even though, our costs will be higher as we’re training and bringing that on, we’ll have volume that will offset that, because these are two of our lowest cost operations. And I believe once we roll that in at full capacity next year, and we only have -- I think we have left just in Illinois Basin, I would expect the cost to come in comparable if not lower in 2019, because of the added volume that we’re bringing on at our low cost mines.

And that’s perfect. That answers my question. It’s a good kind of follow on. Are you guys seeing any raw material or labor cost inflation? I know number of other mining companies are beginning to kind of see the beginning stages of some inflationary pressure. Are you guys seeing any of that?

Yes. And that’s factored into that 4.5%. So, we are definitely seeing some impact of the steel prices rolling through our consumables. And labor costs are up, benefit costs are up. So, we’re seeing some of that. But that’s been factored in to what I’ve said to you previously today.

Perfect, great. Thanks very much, guys. Really appreciate the clarifications.

Next question today will be from Walt Sosnowski with SRC Capital Management. Please go ahead.

For 2018 production volume and 2018 sales volume, I know we are just about down with the year here. And I apologize. I may have missed this. What do you all anticipate for production volume in 2018 and sale volume in 2018?

Yes. Walt, we left our previous guidance ranges intact. So, on the production side, we are anticipating 40 to 41 million tons, and on the sales side, 40.3 to 41.3 million tons.

Okay. I thought that was the case, just wanted to double check. Thanks.

Yes.

At this time, this will conclude today’s question-and-answer session. I would now like to turn the conference back over to Mr. Cantrell for any closing remarks.

Thank you, Brian. We appreciate everyone’s time this morning as well as your continued support and interest in Alliance. Our next quarterly earnings release and call will occur in late January of 2019, and we look forward to discussing our fourth quarter 2018 results with you at that time, as well as our outlook for 2019 year. This concludes our call. Thanks to everyone for your participation.

The conference is now concluded. We want to thank you again for attending today’s presentation. At this time, you may now disconnect.