Good morning and welcome to the Natural Resource Partners First Quarter 2019 Earnings Conference Call. My name is Lori and I will be facilitating the audio portion of today's interactive broadcast. All lines have been placed on mute to prevent any background noise. [Operator Instructions] And as a reminder, this call is being recorded. At this time, I would like to turn the show over to Tiffany Sammis, Manager of Investor Relations. Ms. Sammis, you may begin.

Good morning and welcome to the Natural Resource Partners first quarter 2019 conference call. Today's call is being webcast and a replay will be available on our website. Joining me today are Craig Nunez, President and Chief Operating Officer; Chris Zolas, Chief Financial Officer; and Kevin Craig, Executive Vice President of Coal. Some of our comments today may include forward-looking statements, reflecting NRP's views about future events. These matters involve risks and uncertainties that can cause our actual results to materially differ from our forward-looking statements. These risks are discussed in NRP's Form 10-K, and other Securities and Exchange Commission filings. We undertake no obligation to revise or update publicly any forward-looking statements for any reason. Our comments today also include non-GAAP financial measures. Additional details and reconciliations to the most directly comparable GAAP measures are included in our first quarter 2019 press release, which can be found on our website. I would like to remind everyone that we do not intend to discuss the operations or outlook for any particular coal lessee or get into detailed market fundamentals. In addition, I refer you to Ciner Resources' public disclosures and commentary for specific questions regarding our soda ash business segment. Now I would like to turn the call over to Craig Nunez, our President and Chief Operating Officer.

Thank you, Tiffany, and welcome everyone to our quarterly call. I am pleased to once again announce the achievement of significant milestones, since our last conference call. In early April, we closed on a new $100 million bank credit facility with a four-year maturity. Shortly thereafter we completed a private placement of $300 million of bonds with 9.125 coupon in a six-year maturity. We will use the proceeds from the bond offering along with a portion of cash on hand to redeem the $346 million of our outstanding 10.5% bonds. Combined, these transactions will produce almost $9 million of annual interest savings, bolster and extend the partnership's liquidity and working capital, reduce the amount of debt outstanding by $46 million and substantially increase our financial flexibility and margin of safety by providing a longer financial runway for us to execute our deleveraging strategy. As we stated on our last call, we believe the successful management of the timing of debt maturities is an essential element when it comes to de-risking the balance sheet. The culmination of these transactions represents significant strides in that regard. Giving effect to these transactions, we currently have approximately $154 million of liquidity, comprised of $54 million of cash and $100 million of committed borrowing capacity. And our leverage ratio is down to 2.7 times from a peak of 5.3 times, even after excluding discontinued operations and one-time beneficial items. While we are pleased with the results of these transactions, our experience navigating the refinancing process solidly confirmed our previously expressed view that the bank and bond markets are challenging for companies that derive a substantial portion of revenues from coal-related sources. We also believe it will become increasingly more difficult over time for companies such as NRP to obtain debt financing in the future. Therefore,…

Thank you, Craig, and good morning everyone. During the first quarter, we generated $23 million of operating and free cash flow and $36 million of net income from continuing operations. Net income was up $9 million and free cash flow was up $3 million over the prior year quarter. These results were driven by the steady performance and strong cash collections from our coal royalty segment, and having lower debt and paying less cash for interest compared to the prior year quarter. Basic and diluted earnings per common unit for the first quarter were $2.26 and $1.75 respectively. I'll next move to our segment results. As a reminder, after the sale of our construction aggregates business in December 2018, we have two business segments; coal royalty and soda ash. Our coal royalty segment continues to perform well, generating $43 million of net income, and $43 million of operating and free cash flow during the first quarter of 2019. These results were driven by continued stable performance from our metallurgical and thermal coal properties with our lessees producing 6 million tons of coal in the first quarter of 2019. Global demand for steel remained strong and metallurgical coal from our properties continue to make up approximately 55% of our total coal royalty production, and approximately 65% of our coal royalty revenue during the first quarter. Additionally, stable thermal coal sales volume and pricing from our lessees resulted in steady overall first quarter performance from our thermal coal properties. In addition to this continued overall consistent performance from our coal royalty properties, we recorded $2.8 million of revenue from our Hillsboro property in the first quarter of 2019 related to the $11 million annual non-recoupable minimum amount owed to us following the settlement of our litigation with Foresight in the fourth quarter…

[Operator Instructions] We have a question from the line of Mark Levin from Seaport Global. Please ask your question.

Hey, thank you for the time this morning and congratulations on another good quarter and all the refinancing activity. In that vein, let me ask two questions. The first has to do with the cash flow cushion metric. Is there a level, Craig, where – or is there an optimal level, a level that you think makes sense for that cash flow cushion to be given what you just mentioned with regard to the business and the volatility, et cetera?

Good morning, Mark. No, we don't have a target set on what that cash flow cushion needs to be but it needs to be materially higher than the $32 million that has been over the last 12 months. If you look at our coal segment revenues for instance, in total, let's just say, they are around $195 million and you look at volatility of that top line over the last five years for instance. You'll see that the variability of that could easily have much greater than a $32 million impact on our free cash flow. And so therefore the cushion is going to have to be something significantly greater than $32 million. We're just not at that point yet where it really makes sense to define what that number is because – we're still a ways out from it.

And I guess again to that backdrop, you've exceeded your three times leverage or you're better than three times leverage target, you're at 2.7 times. Is there an updated leverage target? I think you referenced debt-to-cap at 50% but which is – I haven't heard you reference that before, but is there either a new leverage target as it relates to debt-to-EBITDA or debt-to-cap or something that you think makes more sense going forward?

Well, let me just remind that the three times was never a target. The three times was a goal that we had set out that we want to be below three times. And at the moment, we are below three times, you're correct in that. I think the focus is now – we're now changing focus to this cash flow cushion because without that cash flow cushion, we don't have the cash necessary to stay current with our amortizations on our private placement notes, for instance, or to pay our preferred distributions, or to continue with the common distribution that we're currently paying, which we think is necessary to – at a minimum compensate investors for taxes that they have to pay. So our focus is now primarily on the cash flow cushion and it's not as much setting a target or another goal for leverage ratio.

Got it. Okay. And then the third question which I realize was completely off the whole deleveraging topic or improving the – I mean, not – it could improve the free cash flow cushion but I want to talk a little bit about growth. Are there opportunities on the coal reserve side that you see out there that can provide you – that are attractive from a risk adjusted return perspective? Are there things out there that you see that – when you look at the remainder of 2019 and into 2020 that you could see – we could actually see some M&A or some growth opportunities or you just – are you more internally focused or is 2019 likely to be more internally focused?

Well, as you've said at the end of your question, I think you're sort of answering it yourself. I think 2019 is likely to be more inwardly focused. I will comment that there's not a robust pipeline of coal royalty-type acquisitions that we see on a regular basis out in the marketplace. It's completely unlike, say, oil and gas royalty, the market for oil and gas royalties, which is a very vibrant robust market. We don't see a lot of those opportunities coming around the coalfield. Secondly, any acquisitions we would do, any growth we would do has to be balanced against our objective of deleveraging, which is our primary focus. And with the minimal cash flow cushion that we currently have, it's difficult to imagine scenarios where we could make meaningful acquisitions and continue with our deleveraging focus.

Got it. No, that makes sense. And then just finally, and I know you guys don't give guidance. So I'll try to phrase this in a way that doesn't necessarily get to that. The coal business has been relatively stable for an extended period of time. Is there anything that you look at over the next several quarters and net prices are still kind of hanging around 209, they've been above 200 for a while now. Is there anything that you look at over the next quarter or two? Anything that we should be aware of in modeling Q2, Q3, Q4 that would be – that we should be aware of that might change the tenor of the stability that we've seen so far or recently?

Two things that I think are important to note are and we've we talked about two things. First I think the weakness in API 2 is key, those could potentially be storm clouds on the horizon. We've not seen that come through our financials yet at all. In fact, just the opposite, we've had very, very strong pricing with our lessees through Q1. But, again, we suspect that many of them have locked up prices for a good portion of 2019 back in late fourth quarter last year. I would say with our soda ash business, as we disclosed last quarter and we're disclosing again this quarter, there are increased capital expenditure requirements that our partner has been telling the market that are likely to be coming down the pike. And so there could be growth expansion there that could have an impact on distributions out of that soda ash investment, of course, by the same token those investments should, in theory, reap good rewards down the road.

Hey, Craig, last question for me and then I'll get off and let someone else ask a question if there is anyone. Any idea how much of your total lessee tons goes into the export steam market or did in 2018?

Yes. Gas is 25%.

So 25% of the total lessee tons of all of your tons not just the steam but steam plus met, everything together, 25% went into the export steam market?

25% of our steam tons, we believe...

Of your steam tons, okay, not your met, 25% of the steam tons, not the total combined. Got it. Okay, great.

Yes. I think, this time, we don't have – we're not directly privy to the marketing efforts of our lessees.

Absolutely, totally understand. Thanks again, Craig. Appreciate it.

Thank you, Mark.

We have a question from the line of Patrick Malayter from CPA Growth Partners. Please ask your question.

Yes. Good morning and congratulations on a good quarter. I'm curious a number of publicly-traded partnerships are evaluating conversion to a C corporation. Are you folks contemplating that or at least analyzing what the impact would be of that?

We are not contemplating that. We have evaluated it in the past, in the recent past. The fact is that unlike many publicly-traded partnerships, we do actually generate taxable income for our limited partners, each year. And as a result of that if we were to convert to a C corporation, in addition to the one-time upfront tax hit that the majority of our unitholders would have to bear, there would also be a double level of taxation. And even though, corporate tax rates have been lowered dramatically with recent tax reform that still results in a higher level of taxation when it's taxed twice before it eventually gets to the limited partner than it would under our current partnership structure.

Thank you so much.

You bet.

[Operator Instructions] There are no further questions at this time. Speaker, you may continue.

Thank you everyone for joining our call this quarter. And we look forward to speaking with you again next quarter and have a great day.

This concludes today's conference call. Thank you everyone for your participation. You may now disconnect.