Good morning, and welcome to the Alliance Resource Partners, L.P. First Quarter 2019 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Brian Cantrell, Senior VP and Chief Financial Officer. Please go ahead, sir.

Thank you, Chad, and welcome everyone. Earlier this morning, Alliance Resource Partners released its first quarter 2019 earnings and we’ll now discuss those results as well as our outlook for the balance of the year. Following our prepared remarks, we’ll open the call to your questions. Before beginning, a reminder that some of our remarks today may include forward-looking statements that are subject to a variety of risks, uncertainties and assumptions contained in our filings from time to time with the Securities and Exchange Commission and are also reflected in this morning's press release. 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. And providing these comments, 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. Definitions and reconciliations of the differences between these non-GAAP measures and the most directly comparable GAAP financial measure are contained at the end of ARLP's press release, which has been posted on our Web site 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 results and then turn the call over to Joe Craft, our Chairman, President and CEO, for his perspective on the markets and ARLP's outlook for the remainder of 2019. ARLP started the year strong posted quarter-over-quarter increases to all of our major operating and financial metrics. Total revenues for the 2019 quarter increased 15.2% over the 2018 quarter to $526.6 million on the…

Thank you, Brian. Good morning, everyone. Alliance entered 2019 with expectations for year-over-year growth in operating and financial results and our performance in the 2019 quarter clearly supports those expectations. As I look forward to the balance of 2019, I remain optimistic about our ability to generate strong cash flow from ARLP’s coal operations and continue to expect our new mineral segment will contribute $37 million to $47 million of EBITDA for the full year 2019. Our coal teams performed exceptional well to start the year despite disruptions to the river and gulf port systems caused by unprecedented flooding and high water levels. Our mining operations increased production over both the 2018 and sequential quarters while lowering cost per ton by nearly 2%. Our marketing team increased quarter-over-quarter total sales volumes by 920,000 tons and higher sales price realizations despite approximately 750,000 tons of planned shipments that were delayed by disruptive weather conditions. While our already strong results would have been even better without these shipment delays, conditions on the rivers and at the ports are improving and we expect these shipments to be made up during the second quarter. ARLP also continued to execute on its strategy of investing capital to drive long-term cash flow growth and support return of cash to unitholders. The development of our Excel Mine No. 5 into a new reserve base at MC Mining in Eastern Kentucky is progressing well and deployment of growth capital to increase production in the Illinois Basin at our River View mine and Gibson County Complex is ongoing. As announced earlier this year, we also meaningfully increased ARLP’s presence in the oil and gas mineral space with our $176 million AllDale acquisition. As Brian outlined earlier, we believe that capital invested in our mineral activities thus far has already…

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. The first question will come from Mark Levin with Seaport Global. Please go ahead.

All right. Thanks. Congrats guys on a great quarter, particularly given the weather that you encountered. A couple of questions and mostly around the export market as you might imagine. So it looks like Joe and Brian you got a couple million tons more of exports to price before the end of the year to get to I think would be 11 million tons if that’s right. What is your degree of confidence that you can price those remaining 2 million tons? And then as a follow up, when you look out to 2020 and I realize we’re sitting here only in the end of April and a lot can change between now and then, but let’s just assume for hypothetical sake that API too doesn’t really change much. What’s a reasonable assumption for steam exports in 2020 if that were to occur?

So, Mark, I think – thank you for the questions. But we are confident in the demand. We’re not real confident in what the markets going to do to be candid. Probably the market in the forward curve is in contango, so we expect that the market will improve as the year goes on. On the back half beyond just the curve itself, you also have the sulfur discount, high-sulfur discount and other factors. Along the delivery chain when you focus on margins, we’re confident right now we can place that tonnage and we factor that into our guidance for 2019. As we look to 2020, again, we believe the market will start improving. We continue to believe the demand is there. Everything gets back to weather and gas prices and what other suppliers would do. We still do not see anyone investing in thermal to bring on new coal mines, as an example. So with the reduction in expectation for 2019 going from over 12 million down to 11 million, we would look to 2020 sort of in the same volume range of 11 million. If it declines to 10 million or so, that would obviously impact what we would do in the export market. On the domestic side, we’re seeing opportunity continue to grow in that area where we believe we can pick up some market share as there is some depletion and/or higher cost operations that we believe we can compete with and pick up some market share domestically. Looking at 2020, I would say at this time I would anticipate volume to be comparable in 2020 to what we’re projecting or guiding to in 2019.

I appreciate that, Joe. When you think about pricing, I know – I’m just giving you feedback from clients that are concerned I guess about the potential for more export tons to come back into the domestic market in '20 as contracts roll off, also some concern along the lines of the production levels in the Illinois Basin with a couple of other big mines, one big one in particular that’s ramping up. Do you worry in 2020 about a situation where Illinois Basin prices could be under pressure because there is increased production and maybe the export window isn’t opened? And if that were to happen, how would you position the company for that?

So on the export side in Illinois Basin there’s only two players that really compete in that area, Murray is tied with Javelin; Foresight/Murray are tied with Javelin that has some very strong presence in the market. I think they see the export market the way we do. The demand is there. And I think the pricing when you look at the world cost curve for the producers, we’re still confident that the price will be there. So obviously you can paint a downside scenario that you may have to factor but that’s not the case. We think that’s a low probability ourselves. But if we had to adjust to that, we would. It’s easier for us to adjust than others because we’ve got same [ph] units as opposed to being so reliant on longwall production. I think that the real concern should be for those guys who are out in the high price side of the cost curve – the high side of the cost curve. They are the ones that are going to have to pull their production off the market as opposed to the low cost producers. So we continue to believe confidently that we can sell in that 43 million ton market, again consolidate it looking over our entire production footprint that we’ll be able to compete. On the domestic side of the Illinois Basin there are stories of people ramping. We just don’t think that they’re going to ramp to that speed. And we’ll see what Foresight does with their Hillsboro mine whether they bring that on and if they’re going to bring that on, will they take things off. I can’t predict what they’re going to do. But it’s our expectation now based on the markets, the demand for the export market with the people that we’ve relied upon in the past that that volume is available to us.

That’s very helpful. In the past you’ve been kind enough to maybe give a very, very preliminary outlook for how to think about pricing in the out years. Now if you look at and obviously understanding a lot can change between now and then, but when you think about 2020 relative to the 2019 Illinois Basin price guidance that you’ve given, how does that look? Does that look down, flat? Where are you pricing? What do you think we should be modeling for price in '20?

It’s still early but based on several solicitations we’re engaged in right now for the domestic market assuming that those come in as we expect them to come in and the softness in the export market right now I would expect our margins would be impacted $1.25 next year with our cost relatively flat. So essentially all of that is a medium market, so it’s sort of where it would be right now plus or minus a quarter is we’re looking at '20 --

That’s very helpful because that kind of frames like if things don’t get better that’s what – which is I’m sure what a lot of people are looking at. And the last question is CapEx, obviously due to an elevated year you had some growth projects. In 2020 again I know you guys haven’t set the budget but just trying to think ahead. Would we be back toward maintenance levels again in 2020 or will there be some growth? I’m thinking just specifically for coal not for oil and gas.

We would still have some capital for our MC Mine, so some of that is actually going to be in 2020 because that’s when we – we don’t expect that mine to be fully operational until the end of the year. So we will have additional capital but that’s factored into our maintenance capital number that we’ve given. So I guess from a growth capital standpoint there’s none in the forecast right now in our coal space. Brian, I think --

That’s fair. And the level of capital in 2019 obviously reflects a very active rebuild schedule, et cetera and that does fluctuate year-to-year. So I think you’ll likely see 2019 from that perspective as being a bit of a high point for the next several years.

But our maintenance capital factors that in.

It does. We give a five-year view on maintenance which I believe is $5.57 a ton at the moment, but that includes 2019 which as I mentioned on a relative basis a pretty high year given rebuild schedules, et cetera.

Right.

Okay, great. And will squeeze one more in. Met coal production for 2019, how much met coal do you expect to sell? And then from a pricing perspective, what percentage of the benchmark do you think you can capture if that’s the right way to think about it?

Last year we were right at 1 million tons and we’ve got about 300,000 tons remaining to sell under that market to reach that same target for '19. So we would be looking for '19 to be at the same level as we were last year. And we don’t really price off a bit [ph] index per se, but we expect that our pricing in the back half of the year is slightly lower than what we got – what we have looked for in the first half of the year. But it’s relatively small, maybe a 4% decline from the back half of the year to the first half of the year that we’ve built in our guidance.

Got it, great. Thanks very much. I appreciate all the time.

Thanks, Mark. [Operator Instructions]. The next question comes from Lucas Pipes with B. Riley FBR. Please go ahead.

Hi. Good morning everybody and congrats on a great start to the year.

Thanks, Lucas.

I wanted to follow up a little bit on the updated guidance. Obviously you maintained the ranges but you’re pointing towards the lower end. So if I think about EBITDA, for example, 720 million to 760 million, let’s say you shifted from 740 million at the midpoint closely to 720 million, call it $15 million to $20 million or so on 1 million tons of reduced export sales. Is that kind of a reasonable margin to think about for the export business, $15 per ton or am I simplifying in this conclusion? Thank you.

Yes, you’re simplifying because what we’re pulling off, there’s a lot of things going on in our business based on how we’re pulling off that 1 million tons. And so we’re actually pulling off some of our lower priced volume into the market but it also happens to be some of our lower cost mines as well. So it’s hard to simplify the answer to your question and it’s hard to give you the precise answer that you’re looking for because we’re in the market every day. I wish I could help you better with that, but for competitive reasons I’m not in a position to do so.

That’s understood and helpful. But kind of high level, would it be reasonable to conclude that export margins are similar to domestic margins in the Illinois Basin or are there some major pluses or minuses that you would point us to specifically for 2019?

I think that’s a reasonable assumption. So they’re both competing for our volume and our tonnage. But as we have moved up in the export volume, we really look at – we got an export book and we’ve got a domestic book. And so yes, they compete on the higher end of the range but for a base of that business they’re really not competing with each other, they’re only competing within the markets they’re in. So again, it’s hard to say that the margins are identical I’d say. As you get towards the end of the year, yes, they probably are because they’re both competing for that last volume of tonnage we’ve got to sell into the marketplace. But I can’t say that that’s true for the average.

Got it, okay. That’s helpful. Thank you. And to switch over to the mineral side if I understood you correctly in the prepared remarks you mentioned growth rate of 77% year-on-year but I believe that included growth from the acquisitions. And if on an organic basis, what sort of growth rates should we be thinking about for that business? Thank you.

Well, obviously it’s dependent on pace of drilling, timing of completions, commodity pricing, et cetera. But, Lucas, the guidance we provided for the full year reflects the positions we own, the drilling activity that is ongoing as we speak, the number of wells that are being permitted, the disclosures by our operators in terms of their pace of drilling. So it’s multifaceted. But I think at the end of the day you can see what our equity investment income was last year and we’re seeing a meaningful ramp, I think it was in the low 20s, $20 million range and at the midpoint of our current guidance for roughly in the $40 million range. So all-in, we’re seeing a pretty healthy bump. And to try to break it down to how much of that is specifically attributable to what we own prior to the acquisition versus what we own after the acquisition is a bit difficult.

Got it. Okay. Well, that gives me something to work with. I appreciate it. I’ll turn it over for now. Thank you.

Sure.

The next question will be from Lin Shen with HITE. Please go ahead.

Hi. Good morning. Thanks for taking the call.

Sure.

I have a quick question on the minerals also. When I look at your first quarter production, about 0.25 million BOE, then you indicated that daily production is probably less than 3,000 BOE per day. And your full year guidance, the production per day is 3,500 per day. So I guess – I can tell there’s production goals. But they your EBITDA guidance has basically annualized the first quarter number. So can you maybe talk a little bit about how should we reconcile production goals versus EBITDA guidance?

Well, our EBITDA guidance at the low end is the first quarter annualized, but I think we’re 37 million contribution on the low end and first quarter NOIs is a little over 36 million. But the full year guidance reflects all of the factors that I just mentioned to Lucas. We are continuing to see drilling activity I think at the – in our January call we had 529 wells currently drilling. Today it’s about 630. We had around 900 wells permitted. Today it’s a little over 1,200. Producing wells have increased from about 3,800 in January to close to 5,200. So I don’t think you can look at the first quarter annualized and tag it to the low end of the range. The high end of that range is $47 million which reflects expectations around pace of drilling. And the activity we’ve seen in the first quarter relative to where we were at the end of the year at this point I think supports our expectations around pace of drilling. And then obviously commodity pricing has an impact on that as well and the current strip is higher than original expectations. So there’s multiple factors involved in it, Lin, but I feel pretty comfortable with both our expectations on average daily production and our EBITDA contribution from minerals as we’ve guided.

Great. Appreciate it. Do you see the rig number also increase quarter-over-quarter or what’s the rig number last quarter versus this quarter? What are you seeing now?

I don’t recall exactly what the rig count was on our acreage last quarter, but I think you can equate it to the number of wells that are drilling the increase that we’ve seen, you would expect to see a corresponding increase in the number of rigs that are actually operating.

Great. Thank you. I appreciate it.

You bet.

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Brian Cantrell for any closing remarks.

Thank you everyone for your time this morning and your continued support of and interest in Alliance. Our next quarterly earnings release and call will be scheduled for late July and we look forward to discussing our second quarter 2019 results with you at that time. This concludes our call and thanks to everyone for your participation.

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.