Greetings, and welcome to the Alliance Resource Partners, L.P. Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Cary Marshall, Senior Vice President and Chief Financial Officer. Thank you, sir. You may begin.

Thank you, and Good morning and welcome, everyone. Earlier this morning, Alliance Resource Partners released its second quarter 2024 financial and operating results, which we refer to as our 2024 quarter. And we will now discuss those results, as well as our perspective on current market conditions and updated outlook for 2024. Following our prepared remarks, we will open the call to answer your questions. Before beginning, a reminder that some of our remarks today may include forward-looking statements 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. 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. Definitions and reconciliations of the differences between these non-GAAP financial measures and the most directly comparable GAAP financial measures are contained at the end of this morning's press release, which has been posted on our website and furnished to the SEC on Form 8-K. Also, we have discovered that a version of the earnings release that was published by Business Wire this morning had an obvious typographical error in the line item for income from operations for the three months ended June 30, 2023. Earlier this morning, we filed our second quarter 2024 earnings release with the SEC under the cover of a Form 8-K. And…

Thank you, Cary. Good morning, everyone. I would like to reiterate the significance of completing our Senior Notes offering in June. As Cary said, the successful offering further strengthens our balance sheet and represents a vote of confidence from the capital markets, which will allow ARLP to pursue its growth initiatives in coal, oil and gas royalties, and other new business ventures. We continue to advance major infrastructure projects at Tunnel Ridge, Hamilton, Warrior, and the River View Complex. Starting next year, we expect our investments in these mines will make them more productive and improve their cost structure. When coupled with our enhanced liquidity position, we plan to remain the most reliable, low-cost producer in our operating regions for many years to come. As we think about the outlook for the coal industry and the markets we serve, a number of key themes continue to resonate, making us particularly bullish on our intermediate and-longer term prospects for the US coal industry at large. First, looking at current trends in supply and demand, year-to-date domestic utility coal burn in 2024 is essentially flat with 2023. At the same time, US thermal coal production has slowed significantly, with Eastern US production down 11% year-over-year. Further, we are encouraged that as summer progresses, demand for cooling has been strong across many parts of the country, driven by recent record-breaking temperatures that is pushing coal-based power generation ahead of last year's pace. Weather forecasts suggest this heat wave will continue through August, and one industry publication is projecting coal demand will exceed supply by close to 20 million tons in the second half of 2024. Therefore, it is reasonable to expect coal stockpiles will decline for producers and utilities as we close out the year supporting improved pricing potential heading into next year.…

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Nathan Martin with the Benchmark Company. Please proceed with your question.

Thanks, operator. Good morning, Joe. Good morning, Cary.

Hello, good morning, Nathan.

I wanted to start out on the export side. You mentioned in the release that part of the reason you're decreasing full year 2024 sales guidance is because netbacks aren't supportive. Excuse me, then Joe, and your prepared remarks you said I think the recent increase in prices we saw last week could cause that to change. So we just get a little more color there? Maybe if we look at today's API2 price of about $115, what do ARLP's netbacks look like? And what is a price that you would view favorable enough to bring back that production or shift tons back to the export market? Thanks.

So as I mentioned, when we were planning for the guidance, they were more in the range of $105 instead of the, like last Monday I think it was $106. So we've been seeing it about $105 to $110. And we've transacted at that level in our high sulfur market. But for whatever reason, most recently, the high sulfur discounts have been higher than what they typically have been. And we feel like that's a temporary situation, but we don't know. So we are encouraged by what the market did this past week. And we have historically told you that $120 is our targeted level, But like I said a few minutes ago, we can transact at $110 to $120 level and feel comfortable at that range. But we prefer not to go to a lower level and wait for the markets to improve before we enter those markets. So last week was encouraging. We all know API2 can be volatile. So the good news is we're ready to respond. We've got the people, we've got the equipment, we've got the capacity. So it's just a matter of what the market will bring us as to whether we win or that market or not.

Okay, got it. And just so we have an idea, where is the sulfur discount versus historical kind of levels?

Well, it's probably, I don't know, 50% higher than what it typically would be is what the most recent bids were when we made this decision. So as far as what a percent of the total, you know, it can range anywhere from 10% -- 5% to 15%, say, of what you would see on API2.

Okay, got it. Thanks, Joe. That's helpful. And then I also want to get some additional thoughts on the cost per ton increases on the coal side. This quarter at least [at cost] (ph), well above the high end of the full year guidance. I know you guys had multiple longwall moves. And I'm guessing the lower shipment denominator didn't help with the 800,000 tons being built inventory. But anything else to think about that could impact those costs per tons or anything sticky heading into the second half? And how should we really think about cost per ton for [2025] (ph)? I mean, do you guys still expect that to improve as you wrap up some of your current projects?

The other impact, other than the ones you just mentioned, is just that we ended up not operating at full capacity. So we took some vacation days at the end of the June that weren't anticipated previously. And that was driven basically by the inventories we had at Mettiki and at MC Mining. So we were impacted by the bridge collapse in the sense that the rail cars got reallocated and we didn't get some of the cars that we thought we would get for some of our shipments. And that created just less production, less days operating that impacted the quarter results. As we look forward into next year, we do believe that we'll get back to more normal cost levels for us in the sense of productivity because of the projects that we've invested in. So both at Tunnel Ridge and Warrior, we're completing man/material shafts that will allow us to reduce our travel time and actually get into better coal reserve geology. The Warrior Project is scheduled to be available at the beginning of next year. The Tunnel Ridge Project actually is moving up faster than we had anticipated. We expect to get into that portal sometime in November of this year. At River View, we've had the Henderson County mine that we've been constructing as part of that operation. You know, we entered into the 11 seam and we are now sloping down into the 9. We've completed the construction part or the mining part of going through the 11. It was a higher reject coal seam. The entry point that we went through compared to what our other River View product is, we believe when we get into the 9, we're going to continue, we will have better recoveries at River View, higher coal seams. And so we do believe we're going to have better cost going into 2025 from our River View mine. So all three of those operations should benefit next year. We also believe that the adverse geology we've had at Mettiki for basically the last year, we are encouraged of what we're seeing as far as the mining conditions for future panels starting next year as well. So we feel that our costs will improve next year compared to what we've been experiencing and what we're projecting for this year.

Yeah, Nate, the only thing I think I would add to what Joe said, yeah, the projects do look good right now. And In addition to that, we're also investing in new longwall shields at our Hamilton operation for next year. As a result of that, as we go into next year, we'll look for lower maintenance costs going forward out of that operation as well. So everything that we've communicated in the past in terms of costs as we go into next year still holds true. The mines are in a period of transition right now, but the projects look good. I think the only other thing I would add, just in terms of the volumes over in Appalachia for the quarter, Joe mentioned some of the impact of the outages for the Baltimore collapse area. If you look at the overall quarter, in addition to that, we did experience high water levels on the Ohio River during the quarter as well. When we combined the two there, it worked out to be roughly half million tons of impact that we had in terms of the quarter. So it's not that those tons are lost, they're just deferred and we'll be making those up here in the third quarter, as well as the fourth quarter. So it was about a half million ton impact in relationship to the volumes associated with the high water level, as well as the port issues that Joe mentioned a little bit earlier over on the bridge collapse.

Okay, perfect. Thanks for that.

The other thing looking into next year, our capital should be lower as we complete these numerous capital projects we had this year.

Okay, great guys. And then just one more, finally, just sticking with 2025. You added about 300,000 tons of, I guess – [300,000 tons] (ph) since last quarter, it looks like, based on my current shipment assumption, that puts you maybe slightly below 50% at the midpoint there, it seems much lower than usual. And I know, Cary, you said in your prepared remarks that you expect to add some additional commitments relatively soon. But is that true? Are you kind of well below where you guys usually are? Are you still confident that you can sell roughly 30 million tons domestically next year and supplement that with exports? It would be great to get your thoughts.

Yes, essentially all of our customers are in conversations looking for completing their book for 2025. So there has been some deferral in prior years, primarily low natural gas prices have made it difficult to secure the proper coverage. People don't want to price off today's price for next year in anticipation that gas prices will be higher next year. Forward curves higher, LNG should be stronger. So we believe, and there have been some pullback on production, so I think that we're getting to the point to where the utilities and the producers are willing to be realistic about what the needs are next year and active conversations are ongoing. So we should have a significantly better position to talk about at our next earnings call.

Any comments, Joe, on pricing for 2025, at least directionally maybe?

I can't give you any guidance at this time because we're -- like I said, we're in active negotiations. So, you know, we feel a bit -- we feel good about our future and we are hopeful that we can get back to a 3 million ton a year or 3 million ton a month the run rate for coal sales is what we're targeting for next year, if we're successful securing those markets.

Okay, got it. Great very helpful guys appreciate your time and best of luck in the second half.

Thanks, Nate.

Our next question comes from Mark Reichman with Noble Capital Markets. Please proceed with your question.

Thank you. Just in the Illinois basin, how much production, I guess and or sales were lost at River View and Hamilton? Because I know that in April there was the 420,000 tons that was going to get deferred at River View due to the barge traffic. But that was kind of offset by Gibson. So I just want to understand a little better what was going on in the Illinois basin and then how much, it sounds like most of all of the lost production is going to get made up in future quarters.

Yeah, I think, Mark, just in terms of the 420,000 tons that we had previously communicated and we're talking about, most of that was more Tunnel Ridge related versus River View related. Maybe a small amount was River View related, but most of that was Tunnel Ridge related. So whatever impact we had in River View was offset by Gibson. So it was a very small number in terms of the quarter where River View was impacted.

Okay, [recently] (ph) there was a disclosure in your financing. And that kind of did sound like it was 420,000 tons at Riverview and 77,000 tons at Tunnel Ridge. So maybe I just misunderstood that a little bit. So in terms of River View, then, how much of the loss production was due to the slowing barge traffic versus the lower recoveries because of the initial mining at the number 11 seam?

Most of it was recoveries in that 11 seam. Most of the recoveries, We just didn't get the production. And the other challenge we've got there is that coal seam that we produced had a higher sulfur. So we're having, so it's part of our inventory issue at River View relates to having to move that coal, blend that coal into the rest of our River View operation on a slower pace than what we had anticipated. So again, we believe by the end of the year that will be behind us --.

I guess what I was getting at is it sounds like all of these issues are almost like transitory. In other words, Gibson South kind of made up for River View. All of these deferred seam would be made up over time. Even the export volumes with pricing improvements you know, that may accelerate. So if you were just to look at your overall total sales guidance, what do you think is the biggest. What would be the number one reason attributed to the reduction in the guidance? Is it just pulling the historical forward or is it the longwall moves or is it the export market?

It's primarily the export market. So we are pulling down our production the second half, we've got inventory on the ground that can take care of our contracted business. And we do believe, as Cary said earlier, that there will actually be opportunities in the fourth quarter for some spot business because of the summer burn. But the volume in the export market is just lower, primarily based on pricing, than we anticipated at the beginning of the year. And so I would say our reason of our lower sales is primarily driven because we were expecting a stronger export market in 2024 than what our current guidance projects.

And that was mainly due to Hamilton?

Yes, mainly due to the high sulfur for both Hamilton and River View.

Okay, because -- I kind of overlooked Hamilton that was -- I kind of looked at River View and the others, but I didn't really recognize that during the quarter, what was going on at Hamilton. So while you are reducing the coal sales guidance, but expected coal prices are higher. So it seems like if utilities are drawing down their inventories, that sets you up pretty nicely for 2025. Just looking at your maintenance capital guidance, what was the major drivers in the reductions there?

I think there's a couple of things on that, Mark when you just kind of look at how we've been trending throughout the year. As we're seeing our capital spend, it is a little bit behind what our original forecast was. And the fact that you've reduced the guidance numbers with the [Tunnel] (ph) levels leads to lower CapEx numbers as well. We also did spend a good deal of time in discussions with vendors in relationship to payment terms. And so we were able to negotiate more favorable payment terms since the beginning of the year that allowed us to defer some of those expectations in terms of 2025 capital numbers where you had to make prepayments in terms of securing the commitments for those. We were able to defer some of those payments into next year as well. So all of the combination of those led to the adjusted guidance.

Okay. Well, thank you very much. That's very helpful.

Thank you, Mark.

Our next question comes from Dave Storms with Stonegate. Please proceed with your question.

Good morning.

Hello.

Good morning. Can you hear me?

Yes. Good morning.

Awesome. Perfect. Just noticed that the outside coal purchases took a jump in the quarter and was curious if this is a knock-on effect from some of the logistical delays or if there is something else that's keeping this number slightly elevated?

That number is related to some coal we're buying in our Mettiki mine that allows for some additional met coal sales to where we have the ability to put some of that coal on our met contracts. So that's what that's related to.

Yeah, I think in addition to that, in addition to what Joe was talking about, we did have another opportunity over on the purchase coal side to where we were able to buy a small amount of volume of purchase coal that did hit on that, earn a small margin on that. So there is a part of that that is a little bit higher in the quarter than what you would typically see. I think on a going-forward basis, if you go back to where we were more in terms of a couple million a month or so, is a good number in terms of purchase coal forecast on a going forward basis. As we look at that.

A couple million a month?

A couple million a month, correct. 6 million a quarter versus the run rate of where we are through the first half of the year.

Understood. Very helpful. And then oil and gas, the royalty side keeps producing. Is there any opportunities that you're seeing to expand and hope if there is not, what opportunities would you keep an eye out for?

Staying on oil and gas? Yeah. So we're continuing to make investments, and we're looking to add volumes through acquisitions. So that is a continued growth area for us. You know, that's exactly how we can quantify that. It just depends on quarter by quarter basis as to what opportunities present themselves and what we're able to close. I can't give you a precise number on what that percentage would be.

Understood. Thank you for taking my questions and good luck in 3Q.

Thank you.

Our next question comes from David Marsh with Singular Research. Please proceed with your question.

Hey, good morning, guys, and thank you very much for taking the questions.

Good morning.

Hi, guys. I just wanted to start quick question on kind of a housekeeping item, Cary. The debt balance on the balance sheet is a little bit elevated relative to the first quarter. Is that a little bit of a timing issue with the closing of the offering or is there something else there?

It is higher than where it was in the first quarter. So if you look at the offering in total, it was a $400 million offering in total. And we used proceeds on that to pay off our existing balance of our senior notes of $284.6 million. So there was a small amount of leverage that was added to the balance sheet as a result of that offering. On a net basis it's really very close to the same but on a gross basis it is a little bit higher as a result of that.

Okay. So is there anything that you guys can pay down in terms of what's left on the balance sheet without prepay, obviously, the $400 million is not going anywhere, but...

Yeah, the $400 million is not going anywhere, there are -- we do have a term loan associated with our credit facility. The current balance, I'm not sure exactly where it is, but it's somewhere in the $50 million to $55 million range. So, that could certainly be an option in the event that we wanted to do some prepayments in terms of a term loan. So that could be a potential in the event that we decide we'd like to repay that. Ideally, we'd like to find opportunities to utilize that capital to invest it, but that's certainly an option going forward.

Absolutely. Understood. And then just kind of following on the question -- the previous question, this was with regard to inventory. I mean, this is certainly your highest inventory in quite some time. I guess the question is, what level of inventory would you be most comfortable with as you sit and think about that? Because obviously that ties up working capital and you know just looking back over the last few years I mean I've seen it as low as $77 million but you know typically it's you know kind of closer to a $100 million and you know now we're kind of pushing to and then could you give me a sense of you know what your kind of target level is if you have one internally for that?

Generally speaking on the inventory side we like to be somewhere between a 0.5 million tons to a million tons inventory, preferably on the lower end side of that. And if you look at where we were at the end of the year last year, I think that number was around 1.3 million tons. That's a little bit higher than what we would typically like to see, but anywhere from a 0.5 million to a million tons is generally what we like to see. So based upon our current plans, we do anticipate getting down to that 0.5 million to 1 million ton a year level by the end of the year.

Okay, that's helpful. And then just the last one from me, just with regard to the guidance and just some of the comments that you guys have made throughout the call, you know, it actually sounds like the new guidance would be in your eyes, and I'm not trying to put words in your mouth, but it seems as though the new guidance would be conservative with potential upside. Is that a fair statement, just if you get some spot sales kind of in the back half of the year that maybe you aren't currently planning for or thinking about? Is there maybe potential upside to get back to where you were or you just think that -- just the first half was, you know, just a little bit tougher than you thought it would be and this is just kind of the right kind of neutral number here?

Yeah, I think that it is definitely possible that this export pricing would maintain and grow, that we could have more vessels in the fourth quarter than what's planned in this guidance. It won't get us back to where we were at the beginning of the year just because of timing as to getting in the queue and being able to sell the volume. So we won't make up all that volume, but we could actually have higher than the $34 million that Cary talked about as our current target. So it could be the higher end of the range if we can get two or three more vessels that we weren't otherwise anticipating when we gave the guidance. So we would like to believe it's going to be better, but it is going to be market dependent on what that volume is. But right now we feel good about their guidance that we can hit that 34 million ton target and hopefully we get three, four, maybe five vessels more in the fourth quarter if this pricing holds up.

That's really helpful. Hey, thanks guys. I appreciate taking the questions.

Thanks, David.

Our next question comes from Abe Landa with Bank of America. Please proceed with your question.

Good morning. Thanks for the opportunity to ask some questions.

Good morning, Abe.

Good morning. Congrats on the [debt refi] (ph) and the [Volvo extension] (ph). And you've kind of touched on this. But based on your operations and kind of this new transaction, it's led to a significant increase in your liquidity to over $660 million plus about $200 million cash there. I guess, what are your priorities for using that cash, maybe anything on like the cadence of deploying that cash, and do you have any like minimum cash or minimum liquidity levels that you want to hold?

Yes, our priorities, again back to we do plan to redeploy in the oil and gas segment. So we would like to be able to grow some of that. We're continuing to evaluate other opportunities for investments that are additive to where we are in the coal and oil and gas segment. So we've got multiple things we're looking at, so there are possibilities that we could deploy some capital in areas that would supplement our existing core segments. We talked about opportunities related to [indiscernible] item investment. We've also talked about doing some other arrangements where we could be engaged in the data center world that we're considering. So there are things that we're looking at, matrix, and we continue to believe -- provide some growth opportunities for us over the next 12 months or so that we're hopefully going to be able to capitalize on. So there's several things, and as Cary said, we're looking for ways to deploy that capital on good cash on cash returns. And very active looking for opportunities, nothing to announce today, but we are looking for ways to deploy that capital or that cash flow.

Could you maybe just talk about just the competitive landscape within the oil and gas royalties area just has gotten more competitive over the last handful of years, recent months? It does seem like an area that you want to go.

Yeah, it has been competitive over really since we've gotten in it. It seems like it's competitive. I think that right now, we're probably maintaining our underwriting standards that looks more of a long-term pricing that might be a little lower than what the current pricing has been. Because prices have been elevated this year for potentially reasons that are dealing with geopolitical issues going on in Europe, Ukraine, situations in the Middle East, as to how oil flows can be impacted by the wars that are going on. So it's hard for us to predict exactly how long that price of oil is going to stay where it is. And that might be a factor to where on things we've bid on. We've bid for a lot of different projects this year. We've come close, but we haven't reached to the level it took to win those auctions. So there has been adequate supply of opportunity. It's just that we've elected not to price or to bid at the level that has allowed us to acquire those thinking that the pricing is a little high. We still believe that there's going to be adequate opportunities to make acquisitions. So we're going to stick to our underwriting standards. And we feel confident that we will be able to deploy that. We will be able to deploy capital in that space. And what we do, what we are able to be successful with, that it will yield returns consistent with what we've been able to achieve to grow our company with value, as Cary mentioned, when you look at the growth we've had from 2020 to 2023. It's continuing into 2024. We mentioned we think we'll have another record year this year or so. Sometimes you have to be patient. But -- whether it's competition or just some people being a little bit more optimistic about future pricing than we are, it's hard to answer exactly what's going on there, but we do believe that we'll be able to continue to deploy capital without compromising our underwriting standards.

That's very helpful. And last question for me. Your bonds have performed pretty well since you priced them, I think, above [105 million] (ph), as I've seen from last quote. You also mentioned that you can upsize your bonds by 200 million. Under what circumstances would you consider upsizing your bonds? Thank you.

I think when you think about that, we were just talking about opportunities out there that may be larger scale than what we have done in the past. An example could be, say in the oil and gas mineral space, in the event that you come across more of a sizable opportunity in that type of environment. That could certainly be a potential to where you could go and do something on a bigger scale like that. So it would primarily be opportunity related based upon what some of the investments are that we see out there. Joe, I don't know if you have anything else to add to that.

I think that's exactly right.

Thank you very much. Really appreciate it.

Thank you.

Thank you. [Operator Instructions] Our next question comes from Mike Edwards with Boston Hill Advisors. Please proceed with your question.

Hey guys, good morning. I was a little late attending the call, so I just had a quick question that may have been answered already and I apologize for that. But when you talked about the disruptions obviously in the Ohio River flooding and the Baltimore Bridge, how much of that loss in deliveries do you think you're going to recoup? And can you break it out between this quarter, next quarter, or is it just lost sales?

Yeah, it's not lost sales. It's definitely just deferred sales. And so out of that $500,000 or so, it will take the balance of the year to do that. We may be able to get a little bit more in the third quarter. As we think about our anticipated sales volumes, I think and the guidance that we've provided for the Appalachia region, I think it's probably a little bit more to be made up in the third quarter. So you'd see higher volumes in the third quarter versus the fourth quarter as a result of that. But all the volumes will be made up.

So just a quick follow up. So as I look at the revised guidance for the rest of the year, is that revised guidance for the rest of the year, which is a little bit lower, below the median forecast from earlier, is that catch-up in the revised guidance or is that in addition to what's in the revised guidance?

It is in the revised guidance.

Okay, all right, thank you.

Thank you.

There are no further questions at this time. I would now like to turn the floor back over to Cary Marshall for closing comments.

Thank you. And to everyone on the call, we appreciate your time this morning as well as your continued support and interest in Alliance. Our next call to discuss our third quarter 2024 financial and operating results is currently expected to occur in late October, and we hope everyone will join us again at that time. This concludes our call for the day. Thank you.

You may now disconnect your lines. Thank you for your participation.