Greetings, welcome to Alliance Resource Partners L.P. Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note that this event is being recorded. I will now turn the conference over to Mr. Brian Cantrell, Senior Vice President and CFO. Thank you, you may begin.

Thank you, Sherry and welcome everyone. Earlier this morning, Alliance Resource Partners released its second quarter 2021 financial and operating results, and we will now discuss these results as well as our perspective on market conditions and outlook. Following our prepared remarks, we'll open the call to your questions.

Thank you, Brian. As Brian mentioned, ARLP's operating and financial performance for the 2021 quarter improved significantly compared to both the sequential and 2020 quarters. Looking ahead, coal market fundamentals are extremely favorable, both at home and abroad, prompting us to increase our full year 2021 guidance. We are increasing the midpoint of our targeted total coal sales and volumes for 2021 by 1.8 million tons or approximately 6% to 32.9 million tons. Over the past two months commodity prices for each of our business segments have skyrocketed. In our primary U.S. markets year-over-year power demand has surged 7.5% through the first half of 2021. Rising natural gas prices have driven coal consumption higher for the 2021 period. According to Argus, June coal generation in the PJM hit a three-year high, while MISO and SPP grids reported increased coal demand of 37% and 42% respectively. For the full-year coal consumption in the U.S. is expected to rebound 16%. Increased domestic demand is coming amidst declining utility stockpiles, constrained supply response, and a robust export market. International coal demand is rising as global economic expansion post COVID-19 has lifted power demand and higher LNG prices have favored coal generation. IHS market currently projects U.S. thermal coal exports will climb to a range of 41 million to 45 million short tons this year compared to 26.7 million short tons in 2020. Alliance has responded to these favorable market conditions by significantly strengthening our contract position during the 2021 quarter, booking new commitments to deliver 8.7 million tons through 2024 including 2.5 million tons into the export markets. For 2021 we are targeting export sales volumes at 4.4 million tons compared to a little less than 1 million tons last year. We are actively evaluating opportunities to further increase production and sales in response to expectations for continued strong coal demand and pricing through 2022. However, the current tight labor market may limit what we can accomplish in this regard. Market fundamentals for ARLP's royalty businesses are also favorable. Increased coal sales volumes from ARLP's mining operations should benefit our coal royalty segment and we are raising the midpoint of estimated 2021 royalty tons sold by 3.3%.

Thank you. Our first question is from Nathan Martin with Benchmark. Please proceed.

Hey, good morning, gentlemen. Congrats on the quarter.

Thanks Nate. Thank you.

I guess first just I'll start with a question on incremental pricing. It looks like you guys committed and priced in addition to about 3 million tons in the domestic side, so another 2 million tons or so on the export side for 2021 since last quarter. Can you give us a sense maybe on pricing on these tons?

Some of that timing was before this recent price run up, but we were able to get some of it on the back ends. We have factored that into our increased pricing in our guidance where we increased the bottom, the lower end of the range on our average sales price. So when you look at the midpoint, I think that raises the price around $0.50 ton for all tons that helps you in understanding the increase in revenue for the year on a sales price basis.

Okay, thanks, Joe. And I mean, I guess you mentioned pricing, we've had that recent increase and then based on what I'm seeing out there, I don’t know based on prices tend to be up maybe $7 just this month, they're like the mid 40s or more now that prices are $50 plus, and if you add to is, $130 plus in the front month. So is that kind of similar to what you guys are seeing in the market as well?

It is really hard right now. I mean, there are people that are interested in the volume, trying to price in volumes for the back half. There's limited coal and they alone, if you look at our open positions at the quarter end, we were right at about 1.8 million or exceeding 1.4 million tons, I believe and we're right now we're probably a million tons that we had to sell. So we are seeing pricing in that level in the current timeframe. As you look at the fourth quarter, some people are suggesting that price would go lower, I don't really see that. I don't see how there can be inventory restocking given the tight supply in the domestic market.

All right, got it. I appreciate that. And then I guess just, if pricing does kind of remain at these levels Joe as you pointed out now hopefully through the back half of the year and the next year, maybe Brian or Joe, can you comment on potential priorities for your free cash flow?

So as we are thinking about what those would be, we probably -- we’re not in position to tell you exactly right now because there’s so much uncertainty as to what the price is going to be next year. When you look at most of the curves there, may heavily back-weighted. For next year, I just mentioned, we think they are going to be higher than what the different indexes are showing, but until we see more certainty in that regard, it’s hard to respond exactly what our cash flow capital allocation is going to be, going into next year. So we will be prepared at our next call to have better clarity on that and we’ll be able to address that at that time.

Okay, I appreciate that. I guess, just really quickly, if we're looking at the cost side, fantastic half quarter for you guys, especially in Appalachia, so you tightened your full year cost guidance looked like, but that does seem to imply some cost creep in the second half and also combine that with the looks like your shipments should be up in the second half versus the first half based on your guidance, so maybe give some color on that potential increase in costs?

We have experienced some pressure, inflationary pressures with steel, with oil, labor, availability so there is some pressure from an inflationary standpoint in the second half and we also have long haul move at our Mettiki operation in the next quarter that is built into that. We got some mid shipments next quarter that are higher costs, than what we experienced in the second quarter in Mettiki, so that's weighing on the cost side, but on the flip side with the increased production, that production is primarily coming from the our lowest cost mines. So you are seeing at a blend to where we’re still able to maintain our cost at levels consistent with what we projected, but again a year notwithstanding some of the inflationary pressures that we’re experiencing. The main question are those transitory or not, we’ve had some feedback on the steel side they were suggesting that the steel surcharge that we have been living with now for a month or so and will follow through, will continue through the end of the year will more than likely be lifted sometime in the first quarter based on current projections of next year.

Great, and just to clarify Joe, when you mentioned long on the Mettiki next quarter are you saying fourth quarter or are you saying…?

No, third quarter.

Got it, appreciate it guys and just one last final question. I mean I noticed you raised your CapEx budget by . Can you just elaborate maybe on what’s driving that small increase? That’s all, thanks.

Yes, I think Brian, you have details on that.

Yes, I think the fact that our production is increasing, maintenance capital will be a bit higher over the back half of the year than we originally anticipated, but to your point Nate, that’s irrelevantly minor increase and we’re just trying to reflect that increased production level.

Perfect. All right guys, again always I appreciate the time and best of luck in the third quarter.

Thank you, Nate.

Our next question is from Matthew Fields with Bank of America. Please proceed.

Hey, everybody. I appreciate that you’re sourcing a little bit about uncertainty in futures prices to clock up to detailed about capital allocation, but you've historically kind of talked about one time’s leverage as kind of a comfortable level for you all and you hit it this quarter. So just wondering kind of where you think about leverage going forward? Are you comfortable kind of here or do you want to take that one time’s leverage and maybe take it lower or are we going to see increased use for investment or shareholder returns now that you've hit that bogie?

Yes, I mean we're continuing to focus significantly on growth. There are several opportunities we're pursuing as we speak. So I think growth continues to be front of our mind. I think that paying down debt we pay down more than we anticipated based on our strong performance for the first half and we'll continue to do that. I think we will relook at the distributions, as we think about what our cash flows will be in 2022 starting probably at our next meeting, so we'll have more clarity on that. But, our target has always been at one time level. If we do these acquisitions, everyone that we're looking at are accretive. However, they could pop up our coverage ratio for small time, but we would be focused on maintaining or getting back to one time level target. And so the question, again is back to what our commodity price is going to be, and what kind of volume can we bring to the market in 2022 going forward? So we're, again, labor is short, and it's tight. I don't know when the federal additional benefit is removed in September, whether that's going to help this Infrastructure bill, if that's passed, and then there's more stimulus, what that's going to do to labor demand, it's -- I've never seen anything like it in my career to where you get plenty of jobs, and yet, you still have people that are on the unemployment rows, not wanting to work. So hopefully we'll get back to encouraging people to make an economic contribution to our country and get back into the labor pool so we can take advantage of these opportunities.

Thanks. Speaking of labor, we've seen a kind of a pickup in kind of union activity in the steel sector, one of your fellow coal miners in Alabama is going over 100 days on a strike now. Can you just talk about kind of when you have collective bargaining agreements coming due, what are the -- how are the relations with your union workers and kind of what you expect to see for continually your labor force in the mine?

So we’re a non-union operator. So we've been union free since inception, 1971. So, we do not have any labor contracts. We're very focused on having a culture that focused on trying to have great relationships with their employees and we continue to do that by constant communication and so as I mentioned, there is a shortage where we would like to be able to grow. And unfortunately, it's tough finding people who want to enter the coal business right now. And in large part because of all the news headlines I believe, and we're trying to convince our customers to come forward and enter into longer term contracts, or at least give a shout out to our employees to let them know that they're needed for the next two decades. And we were able to have one of our customers do that last Friday, and it was very well received. So from a labor perspective, our key issue is just trying to ensure to our employees and any prospective employees that they've got a future in coal industry for the next 20 years, and I believe they do, but it would be nice if we can get some further commitments from our customer base that reinforces that long-term view for our employees.

Great, that's very helpful, and good luck in the rest of the year.

Thank you,

Our next question is from Bill Gushard with Atlas Merchant Capital. Please proceed.

Hey, guys, congrats on a great quarter.

Thank you, Bill. Good Morning.

Good morning. Can you discuss a little bit about the investment you've made historically into the royalty portfolio, specifically oil and gas? I think you added to that exposure, the end of 2019 and I don't think we've really seen the full EBITDA or free cash flow potential and maybe discuss also what you think the standalone value of that might be just based on what you're seeing in the market for valuations?

Yes, standalone value. If you look at the other pure play oil and gas royalty companies, you're seeing trading multiples in the high single digits, low double digit type area. So if you look at our current expected cash flow out of our royalty business, you can do the math, and we're clearly not, in our view, getting the full value for the cash flow that those assets are bringing to the table. You know, that our current EBITDA this quarter of $22.2 million run rate, close to 80, 85 million. The math is pretty compelling in terms of what the overall value is. And you're correct, we have not made additional investments in the sense of late 2019. Obviously, with the market collapse during the pandemic, cessation of drilling, shutting up production, et cetera, availability of assets at that point in time really destroyed us. We are beginning to see increased activity as commodity prices have improved. As we mentioned in our prepared comments, drilling activity, while not back to pre-pandemic levels, have certainly picked up. And we're hopeful we are seeing opportunities come across our desk that may make some sense. And we're hopeful as that market continues to reopen that we'll be able to transact.

Good stuff. Thanks.

You bet, Bill. Thank you.

We have reached the end of our question-and-answer session. I would like to turn the conference back over to Brian Cantrell for closing comments.

Thank you, Sherry. We appreciate everyone's time this morning, as well as your continued support and an interest in Alliance. Our next call to discuss our third quarter 2021 financial and operating results is currently expected to occur in late October and we hope you'll join us again at that time. This concludes our call for today. Thanks to everyone for your participation.