Good day, and welcome to the Alliance Resource Partners, L.P. Second Quarter 2019 Earnings Conference Call and webcast. 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. At this time I would now like to turn the conference over to Mr. Brian Cantrell, Senior Vice President and Chief Financial Officer. Please go ahead, sir.

Thank you Ian and welcome everyone. Earlier this morning, Alliance Resource Partners released its second quarter 2019 earnings and we will now walk through these results and discuss our outlook for the remainder of the year. Following our prepared remarks, we will open the call to your questions. Before we start 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 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. Definitions and reconciliations of the differences between non-GAAP financial 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 preliminaries out of the way, I will start with a review of our results and then turn the call over to Joe Craft, our Chairman, President and Chief Executive Officer for his perspective on the markets and ARLPs outlook for the remainder of 2019. We will begin this morning with a look at our results from our coal operations for the 2019 quarter which were impacted by numerous factors as noted in our earnings release…

Thank you, Brian good morning everyone. Since our April earnings call the thermal coal markets both domestic and export have fallen further than we anticipated. The combination of persistent transportation challenges in the United States was disrupted export shipments with an excessive stockpiles in Europe, moderate springtime temperatures and competition from low natural gas and LNG prices had pressured coal demand and prices. On the April call, we reported a need to reduce expectations for export sales and production growth plans in the Illinois basin for 2019, and target full-year results to the lower end of our initial guidance ranges for coal sales and production volumes revenues net income and EBITDA. Today market conditions are fluid and volatile, creating uncertainty throughout the entire coal industry. In light of this uncertainty, ARLP is lowering its current 2019 full-year guidance as outlined in our earnings release this morning and to reflect the range of options currently under evaluation. We are also widening ranges for total sales and production volumes. Even with lowered expectations at the midpoint of our revised guidance 2019 coal sales and production volumes will be record levels for a ARLP, which is celebrating its 20th year as a publically traded partnerships. API II has been our rollercoaster over the last two months getting a low during the second half of June. Since the beginning of July, API II pricing has rebounded, the month has risen 18%, Q2 is at 13% and calendar 2020 is at 8%. Due to this market uncertainty our revised guidance reflects export sales of nine million tons for the year, two million tons less than what we were targeting last quarter. Production has been adjusted lower by the same amount as we delay our Illinois basin land. Looking offshore, ARLP continues to believe future demand…

We will now being the question and answer session. [Operator Instructions] Our first question comes from Mark Levin of Seaport Global. Mark, please proceed.

Alright. Thanks very much Joe and Brian. Just a quick question as it relates to the distribution. So this morning the units are yielding about 12%, which might imply the market is thinking at some point along the way that conditions won't get better and there would be or could be a distribution cut. If you go back to early 2016 it looks like the coverage got to about around one time and then that was the point at which you guys decided to cut the distribution. Maybe you can give us some thoughts about obviously you have raised the distribution by half cent this morning, but maybe you can give us some thoughts about how you view the distribution into later this year and into 2020 if market conditions don't improve. Thanks.

Yes. So essentially when the Board makes a decision to increase the distribution they do so with the belief that it is sustainable over some period of time. So as we look at our current year's results, as well as what we are projecting over the next five years, we feel like that is a sustainable rate for our distribution with again say distribution coverage. If market conditions and in our view of the outlook does in fact reverse from where we are seeing the world today then the Board would act appropriately. So they would take action to possibly just stabilize distributions. Based on our environment today and what we are looking at, we believe that it is sustainable. So I don’t see a need to talk about anything lower than what current rate is.

This is Brian. Just to clarify to and the 2016 environment the actions we took around our distribution were really driven more by the bank market at that point in time. We had always believed that our distributions were sustainable, but given the large bankruptcies that were occurring at the time, the bank markets were very skittish and we wanted to make sure that we were taking control of our distribution policy and didn’t see that for the bankers. So there were a variety of factors that influenced our decisions several years ago.

No. That is a fair point, so it’s not like you are trying - if the distribution went to let's say below one times all of a sudden, but you would necessarily - that is a trigger point for you guys, that is not a fair statement is that right?

It’s really looking forward and our belief in the sustainability of the distribution that is in place.

Got it, and then just a question on the export markets. So I think you guys mentioned today that you will go to nine million tons or so what is the mass or how do we think about is in fact you get to 2020 and API II prices are at a point where it's still very difficult to contract tons. Is there a way to maybe think about what the contribution from exports has been in 2019 so that we can kind get good baseline for what it would be in 2020 if you could see their flat or worse or what have you.

No, I think what we seen in the market, we believe was an over shoot. I think that has been evidence of fact that in June prices went to levels that were obviously bottomed out, because we have seen this rise since July and nobody was selling into that market with the June price points. So we have seen that improvement. We think that we will continue again just based on what the cost levels are around the world for the different basins that we will be selling into that market. The back half of this year still has a lot of tons committed and there still some transportation disruption that it’s hard to determined what in fact happen, how fast this curve will respond to reasonable profit levels or producers to produce into this market. So we do think longer term that where we were a quarter ago to where we could participate in the 11 million tone level that we should be able to get back to that but pricing is going to have to reflect that. We still don't see any major supply investments worldwide, yet we continue to see coal fired power plants being built and do see the increase demand coming on to the market. So we continue to feel bullish about the longer-term effects of international market, but given the reality of where the price curve is today relative to our other opportunities, and that's the main reason why we are cutting backs that volume. We could transact today and still make money, it's not an effect of price points compared to where we have been and it’s really not an attractive price points to where we think we can sell some tonnage this year in the domestic market, either to AFV it will be coming open or with certain producers that we are talking to today, to where we may be selling coal producers to put on their contracts, we consider rationalizing some of their production.

Now that make sense and then Joe last quarter you talk about like given where market conditions were at the time you mentioned that the 2020 margin per ton might be down. I think you mentioned a dollar and a quarter, and I was wondering when export pricing was also very week, has you view changed about that sort of dollar in the quarter, down 2020 versus 2019 and you kind of fast forward 90 days or so.

Not really, so our pricing is down little bit, but some of the things we are looking at production wise could increase some of our lower cost production and reduce some of our higher cost production. So we may be able to be at that same range, we are planning at this 10 seconds a little early for next year, but we do see a view to get to that same level even with the prices that have dropped since the last call.

Got it. Great, I will let someone else hop on. Thanks very much guys.

Thanks Mark.

Our next question comes from Daniel Scott of Clarkson. Daniel please proceed.

Hey thanks. I'm on a cell phone, so apologies. But Joe you mentioned you are looking at a myriad of options in the market today and obviously there is a number of distressed companies in the domestic coal sector right now both in and out of your basins. Where would you rank potential asset acquisitions versus capital return policy versus for the diversification of the minerals.

I will take the last one first. I think on the oil and gas side we are very pleased with what we have been able to acquire over the last several years and in particular in 2019. We see a lot of opportunities in that space, so we are continuing to evaluate that, there is several packages if you will that we believe will be coming on to market, so those are things we will be looking at. On the coal side, I would say that I have been in this business a long time and it's probably more strategic discussions going on in the industry today than I have seen in my career. So that creates a lot of opportunity. I’m trying to determine how to take advantage of that opportunities is a challenge. But I think that with a lot of the major guys really focusing on Met coal versus Steam coal that is just changed the dynamics a bit and I think that we are going to evaluate those things and Peabody arch transaction first time that I'm actually seeing some time and actual joint venture arrangement in the coal business. You see a lot new oil and gas space, you don’t see it much in coal business, so that got people talking. So there is a lot of opportunity there. So we have got teams looking at that and evaluating that, it’s hard to predict if anything will come at that, but there are lot of options on the table right now.

I believe you said in the past that your focus in such market would be limited to basins you are already operating in. Is that still the case?

Yes, and we are focused strictly East of Mississippi, we would include metallurgical coal in that venue though, so that could be an area where we could see some growth as well. We see the value and have some exposure to the Met markets ourselves, so that would still be in the same reason where we are operating today.

Okay great and lastly for me if the cadence of your committed tonnage for next year is that running about typical pay for a little over half or you are lighting, or you are running right now on that.

We are actually ahead of where we were at this time last year, so this time a year ago, we were 2.5 million tons less than where we are today I believe something like that.

Yes. Dan we currently have almost 24 million tons committed and priced for 2020, at this point in time.

And that is above where it was a year ago.

Yes.

Okay. So I was going to say one last thing that pops in my head. With roughly nine million tons of export business this year and you did said a little while ago that you could place it today and make money just not the kind of margins you would expect and could possibly get domestically. If the markets stays week on the export side is there a concern about being all the reabsorb that tonnage domestically or would mine plan change, how would you kind of look at that distressed kind of environment?

Again I think if that market stays distressed then that is going to put pressure on higher cost producers. Our competitors today and I think that will open up opportunities that will allow us to do some transactions without where they will bringing up production, they would contracts that would need to be serviced that type of an arrangement. So feel right again at this 10 seconds, we see our volume next year, at least where it is today even and as a flat export markets, there is a flat API II price curve, let’s say or whether API II price curve is today. Now we believe that price curve is going to go up as I said earlier, so we are hopeful that we will be able to maintain our export, if not growing back to where we were at the first half of this year, but that will be dependent on the API II price curve. As far as what the other producers do will be the other - unknown right now. But I believe there will be action by others that will bring supply demand balance in place where we can maintain and produce tons at the level we are this year if not grow it.

Alright, thanks. Very helpful. Thanks Brian.

Thanks.

[Operator Instructions] Our next question comes from Matthew Fields of Bank of America Merrill Lynch. Matthew please proceed.

Hey everyone. Just wanted to follow-up on that last question about kind of being able to take exports down but still maintain sales I guess because of increased domestic sales. Do you primarily see yourself winning contracts and share over from distressed - suffering producers in your basins or do you see an opportunity to maybe win some contracts from the PRB producers that are - you have enormous cost advantage of especially into the South East just things - like what are these domestic opportunities that are better than exporting.

I think that there could be rationalization by high cost producers that will be cutting back supply and that they will be giving up market share if they do that. So I’m not suggesting that we are seeing a growing domestic market, I’m suggesting that yes, we will either compete with them and we will bid lower and when that business because we got low cost operations or there will be some form of supply response by the high cost producers that will free that market share up for the low-cost gas, which we would be one of those of being able to take advantage of that.

You worry that the companies that are going through bankruptcies right now Blackhawk, Black Jewel et cetera are pricing irrationally because of their financial distress and actually having the opposite effect.

Well they are not really competing with us in the thermal coal space, Black Jewel is talking about they are trying to decide where they are going to 11 or seven and Blackhawk I think is more focused on the Met side of the business. So they don’t really influence net outlook that I just mentioned. I think it’s going to be the other -.

Its big, could big opportunity can’t be right? There is a lot.

But there your question about PRB impacting the markets in the East, I don't really see that happening, I mean I guess you have seen the significant reduction in production in PRB if it was going to happen it would have happened this year. And the utilities have decided how much PRB they are going to buy East of the Mississippi and that appears to be pretty constant. We do hear some PRB buyers in the East talking about buying more Easter production, so we see it more the other side than PRB coming into the eastern markets.

I mean with transportation cost you should have a huge cost advantage especially like in the Georgia and Florida where maybe you could get some more penetration.

We could, you know again I’m not counting on that, I’m not counting on the domestic market mix changing and I’m not counting on the domestic market growing and I’m just saying we can absorb if there is no export market or the export markets stays flat, there are opportunities for us to sell coal domestically that would be more attractive than selling into the current price curve or API II and I think that was what you were asking earlier. Now and we would get that by either A, bidding, you know lower point that these other high cost guys decide they want to compete, then we could did at prices where its below their cost but still be profitable for us, or we can work out a deal, where either they decided to ruin the take or may just decide to hold but coal and put on their contracts.

Okay. That is helpful I appreciate the color. On the Wing acquisitions you guys said 10% to 15% increase in mineral royalty EBITDA from wing is that right?

Net-net of transaction cost, correct.

Okay so that is on 37 to 47 of EBITDA that is about $4 million to $7 million of EBITDA is this the right way to think about it.

That fair. Yes.

Yes. That is for 19.

That is for 19 and then we see both on our existing assets today as well as the drilling and development that is occurring on the Wing assets. We see line of site to track the volume growth heading into the next 18 to 24 months.

Okay. I was about to say that is like a 20 weeks multiple on 19 EBITDA, imagine that the lower multiple when you take it forward projection on that.

There is also transaction cost and that it didn’t have it. If you exclude those it’s a different dynamic.

Okay, alright great. And then just you mentioned financing, I just wanted to hear this again, because I think I heard it correct. You are going finance the way acquisition with a term loan in the third quarter for closing.

No, we have plenty of capacity available on our existing revolver that will allow us to close the transaction as we look forward. However, we are evaluating options and the bank and the debt capital markets to extend our existing credit facility and potentially term out some of the oil and gas activity we have done this year.

Okay, alright thank you for that clarification. And then lastly understand the push to acquire more oil and gas properties and potential coal opportunities that come your way. What are you comfortable levering up the balance sheet to in terms of like a leverage total or net leverage ratio in order to achieve these strategic goals.

I don’t think you would see us lever to the point where in our view we would be putting our franchise at risk. We have generally been operating at one-time or less. For a larger strategic transactions, we may be willing to go up above that as long as we were comfortable that we had a path to bring it back down and to one in a quarter to one times over a reasonable period of time. But you would see us go lever up significantly to chase a deal.

Okay great and if there was a significant opportunity whether it’s in oil and gas or coal and you would lever it up above where you are comfortable would cutting distribution temporary and get back to that?

Let me rephrase that, I would not lever it up above where we are comfortable. We may lever up above or we traditionally been operating, but we would only do so if we had a view that we could bring that back down to levels that are within our historical past, within a reasonably quick period of time.

Okay, great. That is it from me. Thank you guys very much.

You bet. Thank you.

Our next question comes from Nick Jarmoszuk of Stifel. Nick, please proceed.

Hi good morning, thanks for taking the question. On the 2020 domestic book indicatively, can you give us a sense for is that pricing up or down year-over-year relative to the tons that its replacing.

It will be down little bit or as Mark mentioned earlier we had talked about [Technical Difficulty].

I’m sorry.

About a dollar and a quarter year-over-year, and that maybe a little bit wider since our last call but factors in both export and domestic. But it’s going to be down compared to this year, more than -.

And in the prepared remarks you comment that long-term positive fundamental demand for export markets long-term and you are seeing contracting opportunities, can you talk about contracting opportunities that you are seeing what markets they are going into, how you think about that net back economics of those opportunities?

We sell to 31 different countries, I mean predominantly we are going into Europe, Africa and India and I think 88% of our total volumes go into the remaining 12% is fairly spread.

Yes. So there are contracting opportunities in Latin America, there are contracting opportunities in India, there are contracting opportunities in Eastern Europe, Northern Africa. So there are some opportunities for us to lock in volume. Sometimes the pricing is set quarterly some off index, there are different ways to structure those contracts. Yes, so there is the ones that I was mentioning specifically was just looking at in 2019. There is a possibility that we could be selling that volume and maybe even more, depending on how fast the prices rebound is the only point I was trying to make.

So with the major markets of Europe, Africa, India, can you give us a sense for how the mix of export volumes has trended over the past couple of years. Are you getting more exposure to Africa and India or is the mix basically stable over the past several years and going forward?

There has been more exposure to those countries away from Europe, away from Western Europe.

Okay. And then last one in terms of the API II price, what sort of range of price, you know there are some moving parts of sulfur discounts and freight rates, what range do you need to be breakeven on a net back basis?

That varies by operation. So we don't like to look at break even. We really are trying to price our products in the export market closure to where API IV would be, relative to API II. So earlier in the year, we were looking at numbers in the mid-80 we could transact at 70. We would like it to be closer to the mid-80s than the low 70s and we are in that range with the opportunities that we could potentially sell into.

Yes, I mean we could be profitable at the lower end of that range, but not at margin that we would otherwise like.

Yes.

Okay. Alright that is all I had. Thank you.

Thank you.

Our next question comes from George Stien of Corre Partners. George please proceed.

Hey guys, I wanted to follow-up on the consolidation comments you guys made. I think in particular the opportunities that you guys have probably that are you guys are the biggest Illinois basin producer, the second largest is clearly having some issues. I just wanted to kind of check or at least kind of understand how you think about kind of any potential antitrust issues as you guys think about consolidation opportunities. Or conversely would you guys be targeting NAAP instead?

I have a hard time understanding how there could be any cost issues. In the markets we have today with the way natural gas is priced and its setting really the market in large part. I think there is plenty of competition for thermal coal in particular to where our customers have alternatives. So I think everything is back to how do define markets and get you to buy them with the true competition that we feel every day, I think it would be very, very hard argument for the government to make that the markets would be concerned about consolidation impact in the coal industry. But you know yes we will see how Government reaction with the Peabody deal, but just my opinion is I don’t see how that they can step in and make very solid case that there is - and have competitive impacts by that consolidation. I think that is unlikely with the Trump Administration and if there would be a change it's really hard for me to see how the Democrats could make a case when they are trying to put more constrains on the coal industry. So I would I think they would welcome the consolidation efforts as opposed to trying to continue to eco them - want to step in and interfere with that but this not the -.

Got you. I appreciate that. Secondarily just in terms of diversification, is there a bias between kind of NAPP opportunities in the Illinois basin as you kind of evaluate the M&A landscape.

No there is not bias.

Okay. That is it for me thanks.

Thank you.

Our next question comes from Lin Shen of HITE. Lin, please proceed.

Hey good morning. Thanks for taking the call. I just want to clarify for the Wing acquisitions. So what are your expectation for 2020 EBITDA based on that current - price.

We haven't provided guidance for 2020 Lin.

So the four million to five million is annual run way for 2019 is that right.

No. The transaction didn’t occur on January 1, so that obviously - no it is not a full-year run rate.

Okay. So thought it was only for the deal closed for 2019 that make sense. And also you mentioned the natural gas pricing is low. So if we think about the current natural gas price, to $20 to $30ish what is alike prosperity or equivalent Illinois basin in coal price you are seeing now if they want to price for their coal when they can even buy a gas like $2 - $22 I’m sorry.

Well I think Lin, for the people that have coal fire power plants that are consuming Illinois basin coal today, they are not making gas versus coal decision on a daily basis. So in order for them within their particular generation mix, it does influence it, but it's further away from the Illinois basin. Further transportation you go more the gas has an impact, and we have seen that with some reduction in demand this year strictly for gas, but for those utilities that have coal plants, committed and they still need to have a large percentage of their generation being coal fired, it does have some influence, but it’s not as if it’s going to be a day-to-day call on dispatch based on two-third of gas. So it’s more of a market impact, broadly speaking than it is my growth. So we are seeing, we would like to see it be more to 270 plus because that provides opportunities further away in Southeast, but yes I think if utilities thought that gas would be at 230 forever and that might change some of their plans to build new gas plants, but based on the capacity that exit today coal still has to be in the mix in the mid-20% market share and higher than that really in the region where it could be - in that markets you are over 50% in some of these markets close to 60% in some of these markets.

Okay. got it. Thank you. I appreciate it.

Our next question comes from Mark Levin of Seaport Global. Mark please proceed.

Yes. Just two quick follow-up questions from earlier. When you think about your EBITDA guidance for 2019 and maybe if you were to carve out oil and gas, is there any way to get an idea for how much the export coal business is contributing to your overall coal EBITDA?

For the guidance if you look at the guidance that we got for 2019. We do have a million tons anticipated roughly or million 250 to be sold in the export markets and those are at prices that are reflective of the Q4 price curve, so they are quite a bit lower than what the domestic price is. We will be looking to determine whether we are going to want to sell into that export markets or whether some of these other transactions will come the bears were we can potentially sale on other people's contract. If we can sell other people's contract that's what we would do and you can see some improvement in the midpoint of the EBITDA that is our guidance for 2019.

Got it. I guess what I was after is, if you took the midpoint of let's just call it $.645 million of EBITDA, you back out the oil and mineral expected contribution in whatever low 40s, you are kind of around 600 and the you took that 600 number and you said okay well 56 of it was domestic and sixth of it is export is that a bad way of thinking about the mix in terms of contribution?

If you look what we have left, as to what the influence could be, it could be up to $10 million more than the midpoint if we elect not to sell in the export market if that helps answer your question. Really focused on where we are from here going out to the rest of the year, I think there is potentially $10 million up side if we don’t sell in the export market. And there is downside if the price curve changes.

Got it. I was just after it, because I think there are definitely people out there that fear that the export terminal market in 2020 is going to be so terrible that your ability to generate any EBITDA from the export business is going to be so severely constrains. So I was just trying to just at least frame what domestic coal EBITDA looks like versus export EBITDA. That was the thought process at least. Anyway I’m sorry.

I mean if we have the persist- what I tried to say earlier and maybe I didn’t make it very clear. If we have a persistent export market that does not improve and the volume push back in the domestic market is going to put pressure on high-cost gas, and I think high cost gas will go out of business. Or does not hold their production back and then that will provide us to have an opportunity to sell in the domestic market, that we would be able to pick up and get that market uplift. That gives you that balance to where year-over-year we feel like earnings will be stable, whether we are in the export market or the domestic market I mean they tie together in some respect.

Neither market operates in a vacuum -.

Of course.

Lever get pulled on one side it can get pushed on the other and as we assess our opportunities we are always looking at where can we realize the highest and best value for our product as we compare those alternatives.

Absolutely.

Again I think what everyone needs to understand is the demand internationally is growing. So, we are seeing growing demand internationally. No increase in supply. We believe that that will - the assumption of seeing export prices stay where they are or going back to where they are in June is just a very, very, very, very conservative assumption. I can understand what people may want think of it that way, but I would just encourage them to look at the fact that there is a demand and its stable, if not growing internationally and the hedges are coming off and those customers want the coal, they are going to have to pay a price that incents the producers to produce coal and sell into that market.

There is question that the recent markets has been challenged, but we absolutely view these circumstances as cyclical and not structural and as we look forward the structural supply demand fundamentals are favorable and we expect we will be able to take advantage of those.

Brian maybe I will ask it another way and you probably don't want to answer, but I’m going to ask it anyway. Any way to say how much EBITDA has come from your exported tons so far in the first half of the year?

I’m sure we could calculate that Mark, but to be honest I’m not assessing it on export -.

On that type of basis, no I go it. That is fair. I was just curious because I was just again just trying to frame it. I understand the market are completely inter related. Last question for me is about Illinois basin pricing. So maybe you can characterize if you were to go out into the market today calendar 2020 realize the gas isn't terrific at the moment, the weather hadn’t been terribly cooperative for while, but if you wanted to go contracting in 2020 where we would you be doing at around what kind of price range in the Illinois basin.

Since we are in that market it’s pretty hard to give you an answer to that question for competitive reason.

Okay, fair enough. Alright guys. Thanks very much.

Thank you Mark.

Okay.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Brian Cantrell, Senior Vice President and Chief Financial Officer for any closing remarks.

Thank you Ian. 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 be scheduled for late October and we look forward to discussing our third quarter 2019 results with you at that time. This concludes our call and again thank you to everyone for your participation.

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