Alliance Resource Partners LP (ARLP) 2017 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Alliance Resource Partners and Alliance Holdings GP First Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to hand the floor over to Brian Cantrell, Senior Vice President and Chief Financial Officer. Please go ahead, sir.

Thank you, Karen, and welcome everyone. Earlier this morning, we released 2017 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'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 that are contained in our filings from time-to-time with the Securities and Exchange Commission and are also reflected in this morning's press releases. While these forward-looking statements are based on information currently available to us, if one or more of these risks or uncertainties materialize or if our underlying assumptions prove incorrect, actual results may vary materially from those we projected or expected. In providing these remarks, 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, 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 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're through the required preliminaries, I'll begin this morning with the review of the partnerships operating and financial results for the most recent quarter and then turn the call over to Joe Craft, our President and Chief Executive Officer.

So let's begin. The Alliance Partnerships reported impressive results this morning delivering year-over-year increases to coal sales and production volumes, revenues, net income and EBITDA for the 2017 quarter. Compared to the 2016 quarter, coal sales volumes increased 2.2 million tons to more than offset an anticipated decline in price realizations, driving coal sales revenues up by 9.3% to $438.7 million and leading total revenues for the 2017 quarter higher by 11.7% to $461.1 million. Even though coal sales and production volumes both increased during the 2017 quarter, overall operating expenses declined slightly compared to the 2016 quarter as we continue to see cost and efficiency improvements from our recent efforts to drive production to ARLP's lower-cost mines. These improvements are most clearly reflected in lower per ton cost, with segment adjusted EBITDA expense falling to $27.21 per ton sold in the 2017 quarter, a reduction of $8.13 per ton compared to the 2016 quarter.

Shifting production to our lower-cost operations also contributed to reduced DD&A, which was $5.5 million less than the 2016 quarter. The 2017 quarter also benefited from increased income and cash flow from our investments in oil and gas mineral interests. For the 2017 quarter, ARLP's consolidated results related to these investments include a $3.7 million increase to equity and income from affiliates and the receipt of $4.8 million of cash distributions.

Comparing the 2017 quarter to the sequential quarter, strong performance at our Hamilton, Gibson South and River View mines led production volumes higher by 7.7%. Coal sales volumes were lower by 8.5% compared to the sequential quarter reflecting deferred shipments due to force majeure claims by 2 of our customers during the 2017 quarter. Increased production and lower coal sales volumes combined to push coal inventory higher by approximately 600,000 tons compared to the sequential quarter. Lower coal sales volumes along with the anticipated reduction (inaudible) prices also contributed to a sequential decrease in revenues, net income and EBITDA for the 2017 quarter.

Turning now to the balance sheet. We ended the 2017 quarter with strong liquidity of $725.3 million and leverage at a conservative 0.83x total debt to trailing 12 months EBITDA. Since the end of the 2017 quarter, we also further strengthened our balance sheet by closing on $400 million of 7.5% senior unsecured notes due in 2025. After paying transaction costs, we intend to use proceeds from the offering and cash on hand to repay in full the $145 million Series B private placement notes due in June 2018 and the remaining $50 million due next month on our Term Loan A. We also plan to repay most of the $230 million of borrowings currently outstanding under ARLP's revolving credit facility and going forward anticipate using our available revolver capacity primarily for working capital purposes.

ARLP was well received as a debut issuer in the high-yield market, achieving an unsecured issue rating of B1/BB- and a best in sector corporate rating of Ba3/BB+, marking the first successful unsecured offering by a coal company in over 3 years. Investors also responded well to the transaction with the book ultimately being 2x oversubscribed and our deal pricing tighter than any debut coal issuance since 2006.

In conjunction with the bond offering, we also extended $457.3 million of our revolving credit facility to May 2021. In the end, these leveraged neutral transactions allowed ARLP to address its near-term debt maturities, while creating a stable long-term capital structure that leaves us in great shape to execute our plan and take advantage of future opportunities.

With that, let me turn the call over to Joe for his take on our first quarter performance, perspectives on the coal markets and ARLP's outlook for the balance of 2017. Joe?

Thank you, Brian. Good morning, everyone. As Brian just reviewed, both ARLP and AHGP delivered strong performance in the first quarter of 2017, posting year-over-year increases to all of our major financial and operating metrics compared to the 2016 quarter. Reflecting the strong start for the year and our current outlook for the remainder of 2017, ARLP is increasing its estimates for 2017 full year results.

We currently anticipate coal production in a range of 38.1 to 39.1 million tons and coal sales volumes of 38.5 million to 39.5 million tons, of which 35.5 million tons are priced and committed. We currently estimate revenues, excluding transportation revenues, in a range of $1.78 billion to $1.82 billion, net income of $290 million to $330 million and EBITDA of $605 million to $645 million.

As outlined in our press release this morning, we also currently anticipate ARLP's per ton average sales prices, our cost and EBITDA in 2017 will improve from our initial guidance. At this time, I'd like to share with you several observations that support our current guidance. Even though winter weather this year was comparable to the warmer-than-normal pattern experienced in 2016, we finished the 2017 quarter with our coal inventories 2.2 million tons less than the 2016 quarter. Higher than expected export sales in the 2017 quarter helped offset the force majeure events Brian mentioned. So our 2017 quarter ending inventory of 1.6 million tons came in close to what we had budgeted in our 2017 operating plan.

Not only did our 2017 quarterly results benefit from higher export volumes, our average sales price per ton increased due in part to the shipment of 156,000 tons of metallurgical coal. In our updated guidance, we anticipate shipping an additional 835,000 tons into the export markets over the rest of this year, including 130,000 tons of metallurgical coal. Most of these tons are expected to ship in the second quarter of this year. Another encouraging sign for our 2017 coal market outlook is the continuing resilience of natural gas prices. Based upon the current natural gas forward NYMEX curve and assuming weather patterns for the rest of this year are normal or better yet comparable to last year, we believe domestic coal demand for the markets we serve will be higher in 2017 compared to 2016.

With our expectations for improving coal markets in 2017 intact, we believe utilities will look to fill their open positions through spot purchases in the back half of this year and will also seek to secure significant tonnage for the 2018, 2019 time frame to fill their short position. Our operations had another excellent quarter as segment adjusted EBITDA expense per ton in the 2017 quarter was $8.13 per ton or 23% below the 2016 quarter and essentially flat with the sequential quarter.

Our updated guidance anticipates our per ton cost for the year of 2017 to be 7% to 9% lower than 2016 levels, helping to offset the estimated decline average coal sales price per ton of 11% to 12%.

The final topic I want to address is the significance of completing the $400 million bond offering of 7.5% senior unsecured notes due 2025 and the extension of the $457 million of revolving credit facility to May of 2021. One year ago, due to the capital market environment at that time, we felt it necessary to reduce ARLP's unitholder distribution to preserve liquidity in order to maintain access to capital. Over the past year, we took a strong balance sheet and made it stronger, by paying down $269.4 million of debt in 2016 and another $25 million in the 2017 quarter. ARLP finished 2016 with a 1.98x distribution coverage ratio. And based upon ARLP's current distribution rate, we will maintain that ratio in 2017 assuming results come in at the midpoint of our updated guidance. These financings provide ARLP with a stable, long-term capital structure with ample liquidity and flexibility to execute our strategy. With the expectations for generating strong cash flows, while maintaining a conservative balance sheet and robust distribution coverage ratio, we believe ARLP is well positioned to once again consider gradually increasing quarterly distributions to our unitholders.

This concludes our prepared comments. And now with Karen's assistance, we'll open the call to your questions.

(Operator Instructions) Our first question comes from the line of Mark Levin with Seaport.

Joe, you kind of -- you answered -- you sort of answered my question -- my first question, which was raising the distribution and your thoughts, and it sounds like that now you feel like you're in a position to consider that. So maybe I'll ask it in this way, when you think about the balance sheet where is it, having termed out the debt the way you have, the liquidity where it is and access to the capital markets, how do you think about distribution raises versus M&A opportunities? I imagine there is probably some assets out there that might be of some interest to you. But how do you balance the 2? And what are you thinking in terms of the likelihood of either or both?

I think as we look at M&A is that may or may not affect distribution increases. If we were to do an M&A transaction, we would expect it to be immediately accretive. So we would expect economics of that transaction to effectively carry its own weight if you will and not impact our distribution decision. I think with our strong coverage ratio that we have at 2x almost, in the year past, our biggest concern was just access to capital and way -- even just from the revolving credit agreement amendment that we got, it was still relatively short-term to where we were continuing to have to look to be concerned about that prior to going out and doing our bond offering. By doing the bond offering, we now have an 8-year runway. So it takes that concern off the table. We got plenty of access to the subordinated market, if we ever needed it. We don't anticipate needing that. We plan on having a very conservative balance sheet. So we could see, if without distributions, we would expect our debt-to-EBITDA to be less than 1. If we do a transaction, we would not expect it to go more than 2 to 1 initially. So that's sort of the way we would look at it today.

No, that makes sense. And just in terms of M&A opportunities, is it -- would -- are there opportunities, have seller expectations come down to a level, a realistic level, or one that is attractive for you? And are you primarily focused on the Illinois Basin? Or would you consider opportunities in Northern App as well?

I think I can't answer your first question. But we'd long stated that our primary strategic areas of operations were Northern App and Illinois Basin, that hasn't changed. So we would consider transaction in either of those 2 places.

Got it. And my last question is just to think about how -- like when we are modeling met coal tons in 2017, what kind of prices or how should we think about the premium you get, so let's say a Northern App thermal product for the met that you're selling. And then I think you mentioned 300,000 tons, you shipped 150,000 something in the first quarter and expect another 136,000. Is that peak? Could you do more than 300,000? So price and volume around met is my question.

I'll try to answer those in reverse order. Yes, we could do more volume. The amount is going to be dependent on price and how long will the demand and the price structure stay at a level that would give us opportunity. And I think to try to give you a guidance on pricing, if you think about what you might read as the benchmark price or the spot price, the opportunities we get come in close to 50% of that number is the best way I can answer your question. Yes, that's at the coal mine.

Got it. Final last question. Last quarter you mentioned coal pricing -- realized coal pricing being higher in '18 than in '17. Do you still feel like that will be the case next year?

We're still looking at that. I think based on our most recent look, because our 2016 number has come in higher than our previous guidance. So our previous guidance, I think we were about $1.75 higher in this guidance versus the January guidance. So having that experience, I would say right now, we would assume that our pricing next year would be comparable to 2017.

And our next question comes from the line of Paul Forward from Stifel.

I think in the press release, you had said that you had, had 740,000 tons of new sales through 2019 and about half of that -- a little less than half of that was export. So just wondering when you're going to see the domestic utility customers become more active in filling their books for the next couple of years?

We had several RFPs this past -- really within the last 2 or 3 weeks. So we'll see if there is any lifting off those. There were some in the first quarter that some utilities elected not to lift. As we look at the demand, our demand projections for the year remain consistent with where we were in the first quarter. So we still believe that the utilities are short, and they will need to come back out. So we would expect that we'll start seeing activity in this June, July time frame probably at the latest. So we would -- I would expect by the next earnings call, we should have a lot more clarity on what their buying patterns are.

Okay. And just really nice job on cost in both Illinois Basin and Appalachia in the quarter and I know some of that was no longwall moves, I guess, at Tunnel Ridge. I was just wondering if you could talk a little bit about cost in the mid-20s for the last couple of quarters in the Illinois Basin, low 30s in Appalachia. I was just wondering if you could talk a little bit about how sustainable you think those cost levels might be. And have you really kind of moved down to a new normal with the shifting towards some of your lower cost mines?

Yes. I mean, what gave us the confidence to increase our guidance is because we do believe our costs are sustainable. We've -- if you go back to third, fourth quarter and first quarter, they have been very stable. We started to ramp at Hamilton in the third quarter. So you can't see exactly that pattern, but we can. So when we look at exactly where we think Hamilton should come in, it's meeting our expectations. As far as longwall moves, we did have longwall move at Pattiki in the first quarter. We do expect that all 3 of our longwall -- longwalls will have a move in the second quarter. So we started one at Tunnel Ridge as we're speaking today and it started today. So all 3 of them will have a move in the second quarter, but then there will be no other moves this year at our longwall mine. So we're very pleased with the way our operating [mines] are showing consistency. I think it shows you the benefit of having the ability to operate at full capacity. A year ago when we had significantly high inventories and deferrals by customers having to cutback in some cases to 4 days a week, to cut back over time, move people around, it was disruptive. This year, we've been able to pretty much rightsize our operations, get our people in the lowest cost operations, and they are able to operate at full capacity and we're seeing the results of that.

Great. While you mentioned inventories little bit, they were up in -- by the end of the first quarter, but with the 3 impending longwall moves in the second quarter, would you anticipate that you would reverse that relatively small inventory build and see them come down over the next couple of quarters?

Let me correct what I said, I misspoke, as I look at my numbers here. There is actually 1 longwall move this quarter and there's 2 in the third quarter, so I apologize for that. I was looking at the wrong data here. So Brian, I don't know if you have that number.

Yes, by year-end, Paul, we expect that our inventory levels will be comparable to where they were at the end of 2016, if not a little bit [below].

Great. And maybe last question, I know you'd talked about the met coal business, where you've got about 300,000 tons exports planned for the full year, a lot of that's coming in the second quarter. But there's -- I think you'd said there is an implied -- approximately 700,000 tons for the rest of the year of thermal coal exports, just wondering if you could talk about kind of where that's -- where that thermal coal is going to be sourced from? Is it more Appalachian, more Illinois Basin? And as you look at that thermal coal business, is that something you expect to continue for the next couple of years? Or is it likely more of a 2017 event as you see it right now?

From a projection standpoint, we really don't project being in the export market. We participate when it's opportunistic. And it has been for the fourth quarter and first quarter, and now it's rolling into the second quarter. If you look at the steam market or API 2, it does show backward dated. But this time -- when we -- on our last earnings call, it showed lower prices for the second quarter than what actually materialized. So we'll continue to watch that and participate in that market. Most of that export volume is in the Illinois Basin as far as thermal market. And as just mentioned, all our guidance is really based off of what we booked and what we got committed. So we're not projecting the market greater than what we've entered into contracts for.

(Operator Instructions) Our next question comes from the line of Lucas Pipes from FBR.

Good job not only on the quarter, but also on completing that high-yield transaction. That was great to see. So my first question is related to that. Joe and Brian, you mentioned that now that you have that visibility line of sight in terms of your debt maturities, you would consider maybe increasing the distribution again. And I was wondering if you could maybe provide a little bit of color around the cadence of potential distribution increases, kind of what are you looking for from here? How quickly could it be raised? And there from there what sort of growth rates should we be looking at? And then, do you have a distribution coverage ratio, for example, that we should be looking at in our models? I would appreciate your thoughts.

We will consider all of your questions at our July board meeting. At that time, I just mentioned in the markets we're going to have better clarity on exactly what we think that buyer attitude is. We'll have ideas that will confirm our expectations on market prices. So in large part what our rate of increase is and how we consider the sustainability of quarter-to-quarter type increases will be made when we have a little bit better market intelligence in the second quarter. And we never really had a distribution policy that targets a coverage ratio. I repeat what I said earlier, we don't need 2x coverage ratio, given the debt financing we have. So I'm confident or comfortable that there will a robust discussion in July and I would expect that there will be some increase. I don't want people to believe that because of financing we'll go back to where we were. Obviously, the markets are different than where they were. But at the same time, being less than 1x covered from a balance sheet perspective is very conservative and having 2x coverage ratio was very conservative. And answering the question earlier about our confidence in our sustainability of our cost curve, looking forward, there is room for growth here. So we believe there will be some increase and we'll have better information for you precisely how to think about that in the next quarter when we have the benefit of the deliberations I just mentioned.

That's helpful. I appreciate all of those comments and look forward to July. Turning to the broader market, Joe, I think you mentioned in response to one of the earlier questions that your outlook on the U.S. coal demand hasn't really changed from 3 months ago. If I understood you correctly, you're increasing your production guidance slightly. I was wondering, how -- could you maybe give us a little bit more color on both the Illinois Basin market, especially on the demand side? And then also on the U.S. market more broadly, where would you expect inventories to end the year? Where do you see coal demand, again, both in the Illinois Basin and across the U.S.? And then into 2018, how -- kind of just from a high level, where do you see, what's your demand outlook? I would appreciate your thoughts.

For Illinois Basin, we're looking at demand -- we believe that demand will be right at 115 million tons, that's including exports, domestic and other assumed consumption or purchasing. We think Northern App's in the 111 million ton range. As we think about going into '18, we have Illinois Basin coming down by about 1 million tons and that's impacted by export market and a plant that's -- double plants that have announced are going to close down in '18. So that's been factored into our assumptions for '18 compared to '17. As far as Northern App, we got that pretty flat, maybe slightly down in '18 as to how we see that. I think as we looked at our guidance, we're really not increasing it necessarily because of the demand it's really driven by the fact that our operations are doing well at being at full capacity, and we'd like to maintain our production at full capacity. And so we've had some improved results this quarter that we believe will generate that additional volume that you mentioned. And we'll either sell it in the market, because it's very low cost, we believe we will. But that's how we made that decision to go ahead and guide to higher tons.

Great, that's helpful. Maybe one quick clarification on the demand figures that you mentioned. Is that tons delivered -- produced and delivered or are those tons consumed? Because, for example, I project a stockpile decline in 2017. So would that stockpile decline or those consumption from inventories, would that be captured in the 115 million tons and the 111 million tons?

Those numbers are consumption. Now there is a debate on how much will come out of inventory and how much will stay in inventory. And different utilities look at it different ways. So -- but those are consumption numbers I did give you.

And our next question comes from the line of Lin Shen from Hite.

Congratulations for good quarter and also bond offer. I guess, what I'm trying to ask is that based on your healthy balance sheet and also very good coverage, and also you intend to [restitution] next quarter or so, how should we think about there may be [simplification] for GP, LP structure so that make your DCF more attractive or more sustainable.

As we mentioned in the past, we do look at that periodically, and we're continuing to evaluate that. We're trying to determine what in the world's going on in Washington, D.C. with tax law. So that sort of factors into considerations. But it is something that we continue to look at, and it's a possibility. I can't say much more than that.

Joe, I just want to clarify, why will be the tax law change impact your decision because (inaudible)

Well, you just don't know what's going to be in the tax law. And I think that as we think through how you model -- how the exchange would occur, you wouldn't want to model it off the old law and then a month later there's a new law, and you wish you knew what's in the new law that may have changed your mind. We don't know if it will or won't, but it's hard to know. And the way the debate goes in D.C., just don't know that it's the right thing to do is to make a decision without all the facts when you're trying to factor in the tax aspects of a transaction.

Thank you. And that concludes our question-and-answer session for today. I would like to turn the conference back over to Brian Cantrell for any closing remarks.

Thank you, Karen. For everyone on the phone, 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 scheduled for late July, and we look forward to discussing our results for the 2017 second quarter with you at that time. This concludes our call, and thanks, again, to everyone for your participation.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone, have a great day.