Alliance Resource Partners LP (ARLP) 2016 Q1 法說會逐字稿

Welcome to the first-quarter 2016 Alliance Resource Partners LP and Alliance Holdings GP LP earnings conference. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Brian Cantrell, Senior Vice President and Chief Financial Officer. Sir, you may begin.

Thank you, Crystal and welcome, everyone. Earlier this morning, we released 2016 first-quarter earnings for both Alliance Resource Partners, or ARLP, and Alliance Holdings GP, or AHGP, and we will 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 we begin, a reminder that some of our remarks today may include forward-looking statements that are subject to a variety of risks, uncertainties and assumptions, which 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, neither partnership has any obligation to publicly update or revise any forward-looking statement whether as a result of new information, future events or otherwise.

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 the ARLP press release, which has been posted on ARLP's website and furnished to the SEC on Form 8-K. Now that we are through the required preliminaries, I will turn the call over to Joe Craft, our President and Chief Executive Officer. Joe.

Thank you, Brian. Good morning, everyone. ARLP's operating and financial performance for the 2016 quarter was solid. Tons produced, coal sales price per ton, segment adjusted EBITDA, expense per ton, margins per ton and distributable cash flow were all better than our expectations. While tons sold were approximately 600,000 tons below our plan, as customers deferred contractually scheduled shipments due primarily to reduced burn caused by the mild winter weather, the lower sales volume attributed to these different shipments, impacted the current quarter's EBITDA and net income by approximately $12 million.

On our last earnings call, we discussed at length the headwinds facing the US thermal coal markets and the overall decrease in coal demand predicted for 2016. We discussed the fact that we, along with the rest of the industry, would be forced to reduce supply due to this lower demand expectation.

I laid out ARLP's decision to address this uncertainty by producing fewer tons and over the last several months, we have worked to strategically adjust our production levels to more closely match ARLP's contracted coal sales position. By shifting production to our lowest cost mines, idling higher cost operations and reducing unit shifts and production days, our operating teams have trimmed capital expenditures and kept costs per ton in check despite lower volume.

These actions are consistent with our guidance for total production in 2016 of 34.7 million tons at the midpoint of our guidance range, or 15.8% below 2015 levels. We continue to believe these actions have established a reasonable baseline for our sales and production in light of the current market realities.

Our competitors have aggressively cut supply as well. Production of coal in the US during the 2016 quarter dropped more than 30% compared to the first quarter of 2015 and was down approximately 17% compared to the sequential quarter. We anticipate production cuts are likely to accelerate throughout the rest of the year as coal markets remain oversupplied.

Later this year, the reducing supply picture for both coal and natural gas should bring the markets more in balance and support higher prices for both commodities.

On the marketing front, ARLP strengthened its contract book by obtaining new commitments for the delivery of approximately 782,000 tons in 2016 and 2.35 million tons in 2017. As a result of these transactions, we have now secured price and volume commitments for 2016, 2017, 2018 and 2019 of 34.5 million tons, 21.5 million tons, 14.5 million tons and 7.1 million tons respectively.

Since ARLP's last earnings call, our finance team has made progress towards enhancing our debt capacity. We added additional operations to the receivables securitization pool, increasing the available utilization of this $100 million facility by approximately $17 million since year-end. ARLP is also in the market with a new capital sale-leaseback transaction, which is expected to close early next month.

Additionally, we began discussions with our banks and other lenders to address the May 2017 maturity of ARLP's current credit facilities. During these discussions, it has become clear that, even in this difficult commodity market, ARLP's strong performance, positioning and balance sheet will provide us with a variety of financing options to meet our objectives.

It has also become clear, however, that the financial struggles facing most of our competitors have caused the capital markets to become laser-focused on lenders preserving liquidity in the near term. As a result, our Boards have made the decision to proactively reduce quarterly distributions to ARLP and AHGP shareholders even though distributable cash flow for 2016 is expected to come in as previously guided.

This decision was made to ensure that Alliance maintains the access to a reasonable level of capital necessary to prudently manage its business for the future. This decision, while difficult, will generate $140 million of annual cash savings to enhance liquidity or repay indebtedness.

As many of you know, my family, our management team and I own a very significant portion of AHGP, so we are very well aware of the impact of reducing distributions to our unit holders. I am confident, however, that this was the right decision for us to make and that these adjusted distribution levels for ARLP and AHGP are sustainable, establish a platform for a return to future distribution growth and provide Alliance with needed financial flexibility to manage through the current market turmoil. I will now turn the call over to Brian for a review of our financial results. Brian.

Thanks, Joe. Financial results for the 2016 quarter were largely driven by lower coal sales and production volumes. As Joe mentioned, over the past several months, ARLP has taken strategic steps to adjust production to more closely match our contracted position. These steps included the idling of our Onton and Gibson North mines in the fourth quarter of 2015 and the plan depletion of reserves at our Elk Creek mine at the end of the 2016 quarter.

In addition, reduced unit shifts and production days resulted in lower production at our River View, Pattiki, Warrior and Hamilton mines in the Illinois Basin and at the Tunnel Ridge and MC mining operations in Appalachia. Reflecting these planned adjustments, coal production fell 15.4% and 8.5% compared to the 2015 and sequential quarters respectively. Comparable sales volumes were down by 21.5% and 25.2% respectively, primarily driven by the previously mentioned customer deferrals of scheduled shipments and market-driven production adjustments.

Lower sales volumes were largely responsible for reduced coal sales revenues, which declined by 22.5% and 23.6% compared to both the 2015 and sequential quarters respectively. Other sales and operating revenues for the 2016 quarter were approximately $30.5 million lower compared to the 2015 quarter, primarily due to the termination of coal royalty and surface facilities agreements upon the closing of the White Oak acquisition in July 2015.

Lower sales volumes and revenues negatively impacted EBITDA and net income for the 2016 quarter. EBITDA for the 2016 quarter declined to $135.8 million compared to EBITDA of 192.2 million for the 2015 quarter and adjusted EBITDA of $186.8 million for the sequential quarter. Net income also declined in the 2016 quarter falling to $47.3 million compared to $106.5 million for the 2015 quarter and $88.4 million of adjusted net income for the sequential quarter.

Turning now to our balance sheet, liquidity at the end of the 2016 quarter was a very healthy $374.1 million. As anticipated, our leverage ticked up slightly, but remained very comfortable at 1.38 times net debt to trailing 12-months adjusted EBITDA. As Joe mentioned earlier, our strong balance sheet leaves ARLP well-positioned to execute on financing opportunities that we plan to pursue over the next year.

With that, I will now take a look at an update of ARLP's 2016 full-year guidance. As outlined in our release this morning, based on results to date and current expectations for the balance of 2016, we are maintaining our previous 2016 full-year guidance for coal production in a range of 33.7 million to 35.7 million tons; coal sales volumes in a range of 34.6 million to 38.1 million tons; and total revenues, excluding transportation revenues, in a range of $1.82 billion to $1.95 billion.

ARLP is also maintaining its 2016 estimates for EBITDA in a range of $545 million to $615 million and net income in a range of $230 million to $300 million. ARLP currently anticipates that its average coal sales price per ton will be approximately flat to 6% lower than 2015 realizations. Segment adjusted EBITDA expense per ton will be plus or minus 3% of our 2015 results, and segment adjusted EBITDA per ton will be approximately 5% to 12% below the prior year.

Capital expenditures of $33.3 million during the 2016 quarter were well below our expectations and ARLP continues to evaluate opportunities to minimize future capital expenditures. As a result, we are reducing the anticipated 2016 total capital expenditures by approximately $27 million at the midpoint of prior guidance to a range of $105 million to $115 million for the full year.

In addition to these capital expenditures, ARLP continues to anticipate funding investments in 2016 of $60 million to $70 million related to its commitment to acquire oil and gas mineral interests. Distributable cash flow is expected to be $384 million at the midpoint of our EBITDA guidance range of $580 million. We have not adjusted maintenance capital per ton for long-term distribution purposes even though actual maintenance capital for the 2016 quarter was below expectations, and as I mentioned, we did lower total capital expenditure estimates for the 2016 full year. With these forecasts and the new distribution level, ARLP's distribution coverage improved meaningfully to nearly 2 times over the remaining three quarters of 2016.

This now concludes our prepared comments. With Crystal's assistance, we will open the call to your questions and then following that, we will turn the call back to Joe for closing comments. Crystal.

(Operator Instructions). Mark Levin, BB&T Capital Markets.

Good morning, guys and congratulations on a very good quarter. My first question has to do with the distribution. Obviously, you guys mentioned being covered at 2 times the remaining three quarters. My question relates to 2017, the distribution level. I think you mentioned on the last quarter you are going to look at it on a quarter-by-quarter basis. It would appear that you guys are reasonably safe, obviously, through the beginning of this year, but when you think about 2017, if you assume, or if you were to assume that coal prices just didn't recover for whatever the reasons and volumes were steady state, put another way just a continuation of the way things are today, would you have to cut the distribution again, or could you maintain the distribution now at its present level?

We believe we would be able to maintain it, so we have stress-tested our 2017 for existing prices, as shown by the various indexes and we believe that we would have a coverage ratio of about 1.2 in 2017 with slight increases in production. So we believe we will have the opportunity to increase our production next year as there are a couple of contracts that are expiring that we believe we will be more competitive to secure from those that currently have those contracts. So we do anticipate increased production. With that increased production and even current prices that you see, we do believe we will have a 1.2 coverage ratio and it could be a little higher depending on how the market responds towards the end of this year.

Joe, when you reference increased production, are you talking about a couple of percent here and there, or are you talking about a meaningful increase, or how would you characterize that?

A couple million tons, roughly.

Got it. Second question is more of a big picture question. So if you look at the first-quarter annualized production run rate for US coal, it's about 650 million tons plus or minus and I think even two of the last three weeks have been well below the 600 million ton annualized run rate. You mentioned that you thought coal production would continue to rationalize through the course of the year. Is there a view around those numbers that I gave you, how many more tons need to come out of the market before maybe the producer start to regain some leverage with the customer?

If we look at our market region, specifically northern half and Illinois Basin, we believe with the customers' current stockpiles, there's probably a 20 million ton overhang still, so that would be the tonnage that needs to be -- either supply needs to come off or domain needs to go up from first-quarter levels to eradicate that overhang.

Got it. And then last question, 2017 costs -- I know it's early, you don't want to get into talking about costs in the future, a lot of things can happen between now and then -- but is it reasonable to assume that if you guys were able to increase production several million tons, and given all the efficiencies you guys have made that costs would not necessarily increase, in fact they could stay flat with where they are?

That's reasonable to assume, yes.

Okay. Great. Thanks very much. Appreciate it, gentlemen.

(Operator Instructions). Lin Shen, HITE Hedge.

This is actually Matt Niblack for HITE Hedge. So in terms of the decision to cut the distribution, given leverage was low, given coverage was there, how did you arrive at that decision and the decision to cut it by this much? Is there something strategic about this capital investment or acquisitions that you want to be able to finance, or did the banks really just say if you don't do this, it's going to be harder to get your maturities refinanced. What was the logic there?

To answer your first part as to why the level, I think the level was established really driven off of what we think could be sustainable through 2017, and we do believe that we will see even better results. As we look further out to 2018, we do believe that this will be a foundation to grow because we believe prices will strengthen and tonnage volumes will be able to be returned back to where we were a year ago plus.

So really our focus is how do you get through the 2017 time period, and we wanted to make the reduction to a level that we felt comfortable that it was sustainable based on what we know today. And so that's how we got to the amount. Now why today versus later? That was not mandated by anyone. This was a Board decision. But we did just start discussion with lenders and one of the things that just sort of jumped off the page looking to 2017, it was obvious that there would have to be some adjustment given the -- assuming that we don't want to borrow to pay distributions -- which we don't do -- that we would have to make some adjustments, so we felt that let's go ahead and address it with the Board and go ahead and make the decision now so that it will provide clarity to our lenders, as well as our unitholders so that they didn't have to worry about what, when and where as they were trying to evaluate where the proper dividend level should be.

Got it. And in terms of opportunities for acquiring companies or properties, given that the -- given your relative strength, given that after this move that relative strength is only going to improve, do you see an opportunity, or perhaps more opportunities than there were earlier in the cycle, to go out and acquire some assets, expand the footprint?

There are opportunities. (technical difficulty) over the last call, there was some discussion about that. We continue to look at that. I think financing a transaction for acquisitions is a little bit more challenging than financing a transaction -- just extending our current debt level. So the actual opportunity to add to our footprint in a material way would require the current debtholders with the existing sellers to participate and try to be flexible and come up with some creative solutions to support the transaction.

Thank you.

It's James. Can I just follow-up? With the Peabody bankruptcy and others, how has the competitive dynamic changed by having major competitors that are bankrupt or near bankrupt?

I think that from a competitive nature it strengthened our position in the sense that, from a customer perspective, the credit quality of their suppliers is always an issue. So when they enter into a contract, they want to know that their supplier has the financial ability to discharge that contract and also not have their contract be rejected. So from that standpoint, it's been a strength to us. As you think about how it affects the financing market, it has distracted lenders who have spent a lot of time trying to protect the loans that they've made to bankrupt companies, so trying to get into what we would consider to be a reasonable dialogue for a company that's got less than 2 times debt to EBITDA coverage and to distinguish us from others, it just takes more time to try to go through the dialogs so that they remember they are talking to us and not some of the competitors that are in bankruptcy.

So that's manageable, but it does affect the process. As far as tons that will be on the market, I think most of the bankruptcies -- in years past, a lot of the bankruptcies -- there was still a lot of capital available to those companies that went in bankruptcy and so therefore they could come out and reorganize, get new financing and keep up production levels just rolling.

I think the investment market today is different, so I think creditors are going to, one, want more than likely to get financing size, as well as the creditors will want to get these companies out of bankruptcy sooner than later, so they won't drag it out. And secondly, I think that they are going to force these debtors to go ahead and rationalize their production that's truly -- their costs are above what their contract position is that aren't sustainable so that they can extract the value of the contracts they've got.

So that's one reason why I believe that there will be an acceleration of supply going down because I think the lenders are going to evaluate the true cost of these operations and the sustainability of those and rather than these folks continuing to produce (inaudible) with high-cost mines and making a small amount of money on above-market contracts that they will bring some discipline to say you are leaving a lot of money on the table here, so why don't you go ahead and shut that production down, sell the contract, or buy some production to put on that contract so that we all get more cash flow to take care of your obligations.

And last one from me, in terms of the warm winter, how much do you think that that contributed to the quarter here and how would a normal winter help you?

Well, as I say, so typically we will sit down -- all our contracts pretty much require ratable shipments, but they also have in there that third parties will sit down and discuss on a quarter-by-quarter basis what the shipping schedule be, so in the fourth quarter, we established a shipping schedule for the first quarter and the warm weather impacted that by the 600,000 tons for us. So those terms were committed. They were committed contractually, but verbally we had shipping schedules for those tonnages that were in our plan that did not get delivered. As we went through the quarter, we were getting pushback saying our inventories are full. We are not burning. We don't need it. Can you just delay it, we will take it by the end of the year, but we need some help here because our inventories are full at the utility -- they were at a level they didn't want to increase them I should say. And so that's -- for us, it was about a 600,000 ton impact to our sales.

All right. Thank you very much.

John Bridges, JPMorgan.

Good morning. Just wondered you've been planting the seeds of your next businesses, just wondered if you could talk a little bit about what you are doing there? Obviously, you keep on spending there, so you are enthusiastic about it. If you could talk a little bit around that and where you see that side of the business going. Thank you.

The question really refers I assume specifically to our minerals investment?

Yes.

Yes, we are very pleased. We've continued to fund that investment consistent with what we've shared with you in the past, so we are spending, or investing, I should say, $4 million to $7 million a month as anticipated. So we have been successful in acquiring some minerals primarily in the stack play in Oklahoma, as well as the Permian, which accounts for most of our ownership. We feel like we are aggregating large positions there that, as we grow in scale, it just increases the value of what we are bringing to the table. So we are comfortable with that investment and we believe that it's going to provide us some very nice returns as we look forward to the minerals being produced.

As far as cash flows, we've already received some modest distributions from the royalties and lease bonuses for some leases that we've already entered into, and we expect that these cash flows begin to ramp up next year and in the following years. So this is a long-term investment where we expect to make mid to high-teens unlevered returns on our capital.

Very nice. How big a part of your business do you think this could become in the medium term?

We've made a $144 million commitment counting our first tranche and our second tranche when you look at the exact ownership that we have. We had -- this was an annual program that started last year rolling into this year, so we will need to sit down with AllDale to talk about continuing that program probably starting in the third quarter of this year to determine whether we can continue this at the same pace, or whether there are opportunities to accelerate that. But right now, we are hopeful that we could continue at some level going forward, but we have not -- we don't have an option, so it'll have to be a negotiated transaction with them to determine a mutual interest to continue investing at the level we've been investing.

Okay, great. Congratulations on the results and get well soon. Thanks, Joe and Brian.

I'm showing no further questions from our phone lines. I would now like to turn the conference back over to Mr. Joseph Craft for any closing remarks.

Thank you, Crystal. In conclusion, ARLP's financial strength and low-cost strategically located operations leave us well-positioned to benefit as coal pricing and demand recovers. Being willing to make the difficult decisions necessary to see us through this challenging market downturn until the market recovers, we are confident of our ability to deliver on our goal of creating long-term value for ARLP and AHGP unitholders.

We appreciate your time this morning, as well as your continued support and interest in both ARLP and AHGP. Our next quarterly earnings release and call are currently scheduled for late July 2016 and we look forward to discussing our second-quarter results with you at that time. This concludes our call. Thanks to everyone for your participation.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a wonderful day.