Alliance Resource Partners Q3 2023 Earnings Call Transcript

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Provided by Quartr
October 27, 2023

There are 7 speakers on the call.

Operator

Hello, and welcome to the Alliance Resource Partners Third Quarter 2023 Earnings Conference Call. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Senior Vice President and CFO, Carey Marshall. Please go ahead, sir.

Speaker 1

Thank you, operator, and welcome, everyone. Earlier this morning, Alliance Resource Partners released its Q3 2023 financial and operating results, And we will now discuss those results as well as our perspective on current market conditions and outlook for the balance of 2023. Following our prepared remarks, we will open the call to answer your questions. Before beginning, a reminder Some of our remarks today may include forward looking statements subject to a variety of risks, uncertainties and assumptions While these forward looking statements are based on information currently available to us, if 1 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 Finally, we will also be discussing certain non GAAP financial measures.

Speaker 1

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 ARLP's press release, Which has been posted on our website and furnished to the SEC on Form 8 ks. With the required preliminaries out of the way, I will begin with a review of our results for the Q3, then turn the call over to Joe Craft, our Chairman, President and Chief Executive Officer compared to $632,500,000 in the 2022 quarter. The modest year over year improvement was driven primarily by higher transportation And other revenues partially offset by lower oil and gas royalties. Total coal sales price per ton And continues to reflect the positive impacts of our contracted order book. On a sequential basis, coal sales price per ton was 3.2% higher.

Speaker 1

In our royalty segment, total revenues were $53,100,000 down 9% year over year, but up Specifically, coal royalty revenue per ton was up 13.5% compared to the 2022 quarter, While lower commodity prices led to oil and gas royalties average realized sales prices being down 31.2% per barrel of oil equivalent versus the 2022 quarter. Sequentially, coal royalty revenue per ton was up 3.7% In oil and gas royalties, average sales prices were up 2.1% per barrel of oil equivalent. As it relates to volume, coal production decreased 7% to 8,400,000 tons, While coal sales volumes decreased 7.9 percent to 8,500,000 tons compared to the 2022 quarter. Compared to the sequential quarter, coal sales volumes decreased 5% due to lower sales volumes in our Appalachia segment. Coal sales volumes in Appalachia were down 15.2% compared to the sequential quarters due to lock outages, customer plant maintenance, a reduction in operating shifts at our MC Mining operation and challenging geologic conditions at our Met Tiki longwall operation That is delayed development of a new longwall district.

Speaker 1

Coal royalty tons sold declined 11.8% year over year, While oil and gas royalty volumes increased 28.2% on a barrel of oil equivalent basis year over year. The increased volumes from oil and gas resulted from the acquisition of additional oil and gas mineral interest and increased drilling and completion activities on Turning to costs, segment adjusted EBITDA expense per ton sold for our coal operations was 41.19 per ton, an increase of 13.8% and 8.8% respectively versus the 2022 and sequential quarters. Higher labor, maintenance, purchased coal and sales related expenses per ton, particularly in Appalachia all contributed to the higher cost. The Appalachia segment adjusted EBITDA expense per ton increased by $11.06 per ton and $12.80 per ton respectively Compared to the 2022 and sequential quarters. Of the total increases approximately $3.97 per ton The longwall at Mattiki is expected to be back in production in the new longwall district in late November.

Speaker 1

Brokerage bought and sold at a profit in our Appalachia segment some high cost coal during the 2023 quarter, Which accounted for approximately $3.07 1 $0.59 per ton of the increased expense compared to the 2022 and sequential quarters. The balance of the Appalachia cost increase during the 2023 quarter was due to a 20% drop in production at our MC Mining operation And adverse mining conditions and equipment availability at our Tunnel Ridge mine, which resulted in several lost unit shifts during the 2023 quarter. Our net income in 2023 was $153,700,000 8.4% lower as compared to the 2022 quarter. The decrease reflects lower coal sales volumes, higher production expenses and lower realized prices in oil and gas royalties, Partially offset by higher coal sales price per ton realization and higher volumes in oil and gas royalties. EBITDA for the quarter was $227,600,000 down 10.3% as compared to the prior year period.

Speaker 1

Now turning to our balance sheet and uses of cash. Alliance generated $123,700,000 of free cash flow in the 2023 quarter. Our total and net leverage ratios were 0.36 and 0.17 times respectively, which included approximately $197,200,000 of cash on the balance sheet. During the 2023 quarter, We paid a quarterly distribution of $0.70 per unit equating to an annualized rate of $2.80 per unit. This distribution level is unchanged sequentially and up 40% versus the prior year quarter.

Speaker 1

Additionally, we reduced our outstanding senior notes balance by $54,600,000 and completed 2 strategic new venture investments And the SendElements and Infinitum during the 2023 quarter totaling approximately $50,000,000 Now turning to our updated guidance detailed in this morning's release. We have elected to slightly adjust our full year 2023 coal sales volumes and pricing, which will be highly dependent upon logistics during the Q4. We now anticipate ARLP's overall coal sales volumes in 2023 to be in the range of 34,500,000 to 35,000,000 tons. Our committed tonnage for 2023 is 35,000,000 tons. Of that total, 29,700,000 is committed domestically Based on recent international benchmark pricing, we believe there could be some incremental sales opportunities in late 2023 in the export markets.

Speaker 1

For 2024, we currently have 27,300,000 tons committed comprised of 25,700,000 tons in the domestic markets wants to ship more tons into the export markets in 2024 versus 2023 levels based on current export market fundamentals. Tries realizations for 2023, the new range is $64.50 to $66 per tonne From $65 to $66 per ton previously communicated. On the cost side, we have narrowed our full year 2023 segment adjusted EBITDA expense per ton to a new range of $39.50 to $40.50 per ton from the previous range of $0.38 to We have 4th quarter 2023 longwall moves scheduled at our Hamilton mine in the Illinois Basin In our Oil and Gas segment, we are reiterating our guidance ranges for the full year And all of our other guidance items are unchanged. And with that, I will turn the call over to Joe for comments on the market and his outlook for ARLP. Joins us now.

Speaker 2

Thank you, Carrie, and good morning, everyone. I want to begin my comments by thanking the entire Alliance organization for their continued hard work and dedication. I am proud of all that has been accomplished Revenue and net income numbers. Our well contracted coal order book enabled us to navigate an otherwise challenging Our coal segment achieved higher realized pricing per ton sold Relative to both the 2022 and sequential quarters, the theme that continues to favorably impact year to date results, During the 2023 quarter, which resulted in higher operating cost and fewer tons produced versus previous expectations. Mild weather experienced in the first half of the year combined with lower natural gas prices throughout the year As we look to next year, we have seen a recent increase in the natural gas forward curve As well as a jump in API2 pricing due in large part to the conflict in the Middle East.

Speaker 2

At projected pricing levels, we believe that our export potential in 2024 will improve markedly as compared to the back half of twenty twenty three. Our Oil and Gas Royalty segment reported continued growth in the 2023 quarter resulting in record production volumes, Underscoring the success of recent acquisitions in core parts of the prolific Permian Basin. Although average realized pricing per Our royalty portfolio is well positioned to provide significant cash flow via hedge free exposure As we continue to invest in minerals, the strong cash flow generation of our underlying businesses During the quarter, we paid our regular distribution, repurchased and redeemed a portion of our outstanding senior notes and announced 2 exciting investments made by our New Ventures Group. The first was a $25,000,000 investment in Ascend Elements, The investment was part of their $460,000,000 Series D funding round, which when combined with a $480,000,000 DOE will help advance the construction of North America's 1st commercial scale manufacturing facility Beyond our initial contribution, we plan to evaluate additional partnership opportunities with Ascend To expand our investment in the battery recycling industry and support the critical materials infrastructure needed The second investment included an additional $25,000,000 in Infinitum, a Texas based developer and manufacturer of high efficiency electric motors As part of their ongoing Series E equity raise, if you recall, we originally invested in Infinitum in April 2022.

Speaker 2

And with today's announcement, our total investment in Infinitum is now $67,000,000 making us a meaningful investor in the company. We believe Infinitum's patented AirCore Motor Technology has significant market potential And our technology division, Matrix, is actively exploring opportunities to collaborate with Infinitum and incorporate the technology into our joins our current mining operations. In closing, I am proud of ARLP's performance year to date That concludes our prepared comments and I'll now ask the operator to open the call for questions.

Operator

Our first question is coming from Nathan Martin from Benchmark Company. Your line is now live.

Speaker 3

Hey, thanks operator. Good morning, Joe, Carey. Appreciate you taking my questions.

Speaker 1

Good morning, Nate.

Speaker 3

Just maybe a quick clarification to start. Kerry, you mentioned Appalachian cost per ton could be up 8% to 10% in the 4th quarter. Just want to confirm that's versus the 3Q 2023 results, so that $54.84 And you also said a minute ago that IB cost, Illinois Basin cost should be flat. Was that also with the Q3 of 2023?

Speaker 1

Yes, that's right, Nate.

Speaker 3

Okay, perfect. Thanks for that. Kind of moving on, I think when we talked last quarter, Obviously, the expectation was sales would outpace production in the second half to help draw down inventories, I think, to around 500,000 tons or so by the year end. Unfortunately, that didn't really work out here in the Q3 because some of the items you guys mentioned, I think it was only about 100,000 ton draw. What do you need from a logistics standpoint to kind of get you to the high or the low end of your revised full year guidance?

Speaker 3

Are there any carryover effects from some of those 3Q items you guys mentioned like the lock outages, customer maintenance, etcetera?

Speaker 2

Yes. So when you look at the sales range, we show that our contracted position For 2023 is $35,000,000 That's what we are targeting to ship in the for the full year. There could be logistical impacts that could drop that to the 34.5. The tons are sold, whatever would not be delivered would be really primarily driven by making sure that we have the proper transportation And deliveries, vessel loadings, etcetera, occurring during the Q4. Whatever doesn't occur in the Q4 will roll over into 2025, so part of our mix when you get into sales price and you get into the volume, it does try to focus on what will The specific contracts that are being served in the particular years.

Speaker 2

So when you think in terms of The pricing, it's really not from 1 quarter to the next, I mean, the revenue is going to be basically the same. It's just a timing issue. Kerry mentioned in his prepared remarks that there is potential that we could pick up some additional export ton sales in the 4th quarter. If that were to happen, those would be at a little lower price than what our contract tons that would be rolled over into 2024. So that's the issue.

Speaker 2

So from a volume perspective, if we can ship what we want to ship And what we plan to ship, we will be in inventory levels near where we talked about last quarter, I believe. If for some reason we get delayed and we go to the 34.5 and that's going to push those inventory levels up. So it's a matter of The logistics on shipping, I think from a production standpoint, our production impact for the quarter And both Makiki and MC Mining is going to continue into the Q4. So we've had some People trying to retain sufficient people at our MC Mining has been a challenge for us. So We had to reduce a unit of production at AMC Mining towards the back end of the last quarter.

Speaker 2

That's going to continue into the 4th quarter. And then at Matiki, as Carey mentioned, the longwall is not expected to start until the end of November. So we'll pick up a little bit of tons with the longwall production, but still we are our production is Limiting our ability to ship some export tons coming out of those two operations.

Speaker 1

I think the only other thing I would add to that Nate is, When I made reference to the lock outages and the customer maintenance issues, those are slowing now. The customers that we were referring to in our comments are back online now. And so the

Speaker 3

second, you mentioned improving export coal demand based on recent trends in the API2 price As well as emerging opportunities in the markets, can you talk about what those emerging opportunities entail? And then second, you mentioned 2024 export potentially should improve markedly versus 2023. So how many export tons do you expect this year and then how should we think about ARLP's export tonnage over the next few years?

Speaker 2

So right now we're targeting 5.3, which is what we've got contracted. We could pick up another couple of vessels in 2023, so that number could go up a little bit. It's also possible that number could slide a little bit depending on vessels Domestic market share, we're right at 30,000,000 tons. We do think, however, in 2024 There's still continuing overhang of inventory at our utilities and We expect that the market pricing for export is going to be better than the domestic market. So we may be Had lower than the 29.7%, maybe it's 28%, don't know for sure.

Speaker 2

And whatever that would be, it would flow into The export market, as we think of our sales for 2024, right now, I think I think a conservative estimate is consistent with what we're doing in 2023, but we do have we believe we would have the potential Based on what we're seeing in the export market right now to possibly expand that to $36,000,000 if The export market opportunities do in fact occur as we're projecting. So there could be that spread of maybe going as high as 7,500,000 to 8,000,000 tons in the export market It's going to be depend between the domestic and export Opportunities that are presented to us in 2024.

Speaker 3

Got it, Joe. Thanks. And then just maybe wrapping up With a question on the domestic side, I think you mentioned last quarter, there are a number of customers out with RFPs is looking to fill their books up for 2024 and beyond, I think many for multi year periods. You mentioned some of the issues we've had this year with The high utility stockpiles of net gas prices, but it should be great to get your updated thoughts on what you guys are seeing in the market and how that demand looks for the next couple of years?

Speaker 2

Yes. We are seeing a couple of we're participating in a couple of solicitations Right now, 4 tonnage in the 2025 to 20 28 time period. Again, for 2024, there is some solicitations also, there are more volumes in the out years than it is in 2024. When we look at the tonnage we were able to book in the Q3, we actually booked 1,100,000 tons of opportunity, but it's mostly in 2023 And then that has allowed for some rollover into 2024 as we look at that position. So again, we're very is comfortable that 2025 the market reopens to where we will be at that 30,000,000 ton level at least on domestic sales And we would like to expect that that's going to continue through the balance of this decade that we would be at that 30,000,000 ton level domestically and feel that the contracts will definitely be there for us As we progress looking forward for the next decade until the end of the decade.

Speaker 2

And then the export market, We'll just have to read that and see if it's going to be in that 7000000 to 8000000 ton level, slide pack, slide it up. It just depends on whatever the market is going to be at the time.

Speaker 3

Appreciate those comments. So I'll leave it there. Thank you guys for your time and best of luck in the 4th quarter.

Operator

Thank you. Thank you. Next question is coming from Marc Reichman from NOBLE Capital Markets. Your line is now live.

Speaker 4

Thank you and good morning. So just continuing that discussion on 2024. So I mean, for 2023 from the last quarter, it looked like you picked up 500,000 tons in the export market. And for 2024, you picked up an additional 400,000 tons kind of split evenly between domestic and export. Now that's a little slower where you were last year, Q3 compared to the Q2.

Speaker 4

So is this Just the timing or do you think I mean, do you are you looking at it from a standpoint that, yes, this overhang, It's slowing things down a little bit, could weigh on domestic pricing, but you'll make some of that up in the export market? Or do you feel like domestically, is just kind of a timing that you would kind of at the very least be kind of even for with 2023 levels?

Speaker 2

We think consumption in the U. S. Domestic market for coal in 'twenty four will be very comparable to 'twenty three. We know that was impacted by natural gas prices. We are seeing natural gas prices rise compared to where it's been in 2023.

Speaker 2

So there could be some upside to that, But there is still the increased inventory that the utilities have to they would like to work And maybe that's 20 day supply at both the Illinois Basin and Northern App. So we're not anticipating The increase in sales as I just mentioned to the domestic market. So we do believe we will be is selling more tons in the export market in 2024 than 2023 as we look at our book of business today. So again, we're looking at 35,000,000 tons of sales this year, 35,000,000 next year, Possibly going to 36 depending on what the demand is for coal.

Speaker 4

Okay. No, that's very helpful. And then also, this quarter, I had not assumed any outside coal purchases during the quarter, And you had some in the Q2. Do you expect any in the Q4?

Speaker 2

So those purchases were really caused by our longwall not producing in the Q3. So when we look in the Q4, Kerry, do we I don't think we have

Speaker 1

Maybe just a modest amount. It's not very much at all, Mark.

Speaker 4

Okay, great. And then just lastly, on capital allocation, Joe, you did a very articulated kind of your capital allocation strategy on the last quarter But the company is finding some very promising investments outside its traditional businesses. So I mean, if you were to wanting to increase, let's could say the amount of investments outside the traditional businesses, how are you thinking about claims on cash flow for 2024, being the debt repayment, the dividend or the distribution changes versus growth expenditures?

Speaker 2

Yes. I think when we're To respond to that question, we have been evaluating opportunities to refinance some of the senior notes as opposed to paying them off That would free that cash flow up. So there's about 4 different avenues we're evaluating and we find that they're is promising that it's more likely than not we'll be able to do that. So that's going to free up. So we're $2.85 today, Carey?

Speaker 2

That's right. Yes. So assuming that we can refinance that $2.85 that's going to free up Some capital that allows us to follow the path that I talked about last quarter on our capital allocations.

Speaker 4

That's very helpful. Thank you so much.

Operator

Thank you. Next question is coming from David Marsh from

Speaker 5

on kind of where that last line of questioning was going with regard to the acquisitions outside of the calls face into some of the newer ventures, could you just talk about kind of A long term plan and thought process in terms of how large These external investments could grow and obviously I think it's pretty exciting that the acquisition is into the electric vehicle battery recycling space, could you just talk about Any other spaces that you're looking at outside of the traditional coal and oil and gas spaces that Could be potentially on the horizon.

Speaker 2

Yes. So I think we mentioned in our release as well as in Carey's comments in mind as well that both of our investments in the investment in Ascend as well as the investment Give you exact dollar amounts as to what that could be, but it could be sizable. So what we're looking for With those relationships are the ability to invest in businesses that we can bring online that would be sustainable for many years And that can generate cash flow that actually can be financeable as well. So that's our goal within those two investments. We have focused within our technology group at Matrix to focus on the battery space And that battery space can be anything from what we're talking about with Ascend, it could be with battery recycling, It can also be in battery storage whether it be for industrial, whether it be for Commercial, whether it be for utility grade battery storage that we think is necessary.

Speaker 2

There could be in addition to the recycling other aspects of battery technology, we're looking at Some manufacturing work that can apply to the transmission area And the build out of the grid, utilizing our machine shops that we have within That are being managed by the Matrix Group as well. We're also looking at Matrix and their products that they're developing. We've talked in the past about them growing their cash flow with innovative products that they are bringing to market, Specifically there IntelliZone which is the product that we have now That has been providing the cash flow that's being broadened Internationally and we believe that has growth potential and we're booking orders for 2024 in that specific area of matrix. In addition, they've got OmniPro, which is we've talked about. It's also going to be rolling out in 2024, which is a collision avoidance camera type technology for the forklift industry.

Speaker 2

We think that within that technology company we have, there are a lot of exciting things that their R and D group we're looking at that we think we'll be adding meaningfully as we look over the next 5 to 6 years, Meaningfully growing that particular segment, hopefully it will be large enough to be a segment in 3 to 4 years if we can Bring these things to market like we're currently anticipating. So those are some of the ideas that we have And obviously we're continuing to believe in our minerals segment and continuing to want to invest in that So that that can continue to grow as well as the other new venture concepts that I just outlined.

Speaker 5

Tried Kickers, that's compelling. With regard to the distribution, which you guys continue to maintain very solid distribution, obviously, where the units are trading now, dividend yield is Very attractive. Would the cash flow at this point in time and the outlook support possibly an increase in that distribution as we start to head into next year or Yes, given where the units are trading, is the Board perhaps evaluating maybe repurchasing some of the units?

Speaker 2

I think that as we look to next year, we're still in our planning process. However, I'm giving you some indication that we're looking at next year pretty much being a mirror of this year as far as Where we are right now thinking that our cash flow would be. And so when we think of distributions, we have the capability to Maintain or grow, I think that right now we're focused on finishing out this year strong and we are committed As I've repeated the last two calls with our distribution at the level it is this year, to be frank, we're a little disappointed that The market hasn't appreciated those by the unit price not reflecting to where we've got a yield that's probably Higher than it should be. In other words, our unit price should be higher than where it is. But the Board will Once we finalize our plan and present that to them, we'll have a preliminary review with them in December, but the final plan will be approved in January and we'll be in a position to better answer your question as to what the future distribution policy will be at our January

Speaker 5

Fair enough. Thanks guys for taking questions and good luck with the 4th quarter.

Operator

You bet. Thank you. Our next Question is coming from Dave Storms from Stonegate. Your line is now live.

Speaker 6

Good morning. Good morning. Appreciate you taking questions. Just wanted to go back earlier in the call, you had mentioned that logistics are going to be the big driver of what your ship tons look like To close out the year, are there any variables, any notable variables in logistics channel that you're keeping a particular eye on?

Speaker 2

The primary is just our export shipments. So we do have inventory at the pier, But we're going to need to continue to ship coal from our mines to the peers and we've had some low water In the Mississippi that has slowed some of the barge movements. So it's really just a matter of timing of barge availability to be able to ship our tons to be able to also match when the vessels come in and what the loading dates actually turn out to be. So that's the primary logistical issue that we'd be faced. I don't think with our domestic customers there are any concerns about barge availability, water, etcetera, but it's more on the export side to where we could have some timing issues on vessel loadings.

Speaker 6

Understood. Thank you. And then you also mentioned in the call just some challenges around labor and equipment in the quarter, should we expect that that will be all wrapped up before the end of fiscal year 2024?

Speaker 2

From an equipment standpoint, yes. That was isolated basically at both NC Mining and at Tunnel Ridge. Tunnel Ridge has already corrected itself. We've gotten the repairs. The delays are behind us.

Speaker 2

At MC Mining, we've had new deliveries for equipment to replace the older equipment That were delayed that caused some of the impact on production and I think all that those Items are expected to be delivered now as we speak. So we do believe by the end of the year From an equipment standpoint that will be behind us as far as headcount. Right now we're planning to run MC at 3 units. So that's still in the balance. So that still could be an issue for MC Mining, so that could be 1 unit of production.

Speaker 2

But at all other mines, we're expecting that we'll be fully staffed to be able to meet our production levels that we're able to do this year and continue into next year. We are actually seeing some improvement in Illinois Basin. So we've done some reevaluation of our approach to try to recruit by opening our Henderson County mine that's opened a new market for Some workers that we're starting to see some increased applicant flow that's encouraging for our Riverview mine.

Speaker 6

That's great to hear. And then lastly, we'd just love to get your thoughts on the domestic regulatory environment, anything that you're watching with the upcoming election cycle or anything of that nature?

Speaker 2

Right. From a regulatory standpoint, the big issues related to our customers. I mentioned about that in the last quarter, not a lot progressed in that area. There's 8 different regulations that EPA has proposed, there's only one that's been finalized and they're still out there. At At the same time what we've seen really starting from last call through today and I think it's going to continue is that we're starting to The industry is starting to value the need for reliability and because there is a concern of reliability and what the impact of regulations may have on reliability of electricity generation that may have slowed down the process here, I don't know for I don't really know why we haven't seen much progress.

Speaker 2

I'm not complaining, but It's still out there. It's still an issue. However, I think the demand that's needed has been a recognition that similar to what you look at where the administration is on oil, Right. I mean they want to make Dagon sure that gasoline prices are reasonable to low, so they're going to try to encourage enough supply to come on the market in an election year. I would hope that they don't want to see blackouts and brownouts on the electric side in an election year either.

Speaker 2

So maybe things will delay be delayed until after the election. It's hard to know But they're still out there from EPA perspective at the same time. They're just artificial compliance dates. There's no reason why they have to be on the certain dates that they got in proposed and so we haven't seen the final, they've got comments. So We got to wait and see what the final rules are to really be able to answer your question.

Speaker 6

That's very helpful. Appreciate the color and could look at the Q4.

Speaker 2

Thank you, David.

Operator

Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over to Cary for any further or closing comments.

Speaker 1

Thank you, operator, and to everyone on the call. We appreciate your time this morning as well And also your continued support and interest in Alliance. Our next call to discuss our Q4 2023 financial and operating results

Operator

Thank you. That does conclude today's teleconference. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.

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Earnings Conference Call
Alliance Resource Partners Q3 2023
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