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Oxford Resource Partners, LP (NYSE:OXF)

Q2 2012 Earnings Call

August 7, 2012 10:00 AM ET

Executives

Karen Brown – IR

Chuck Ungurean – President and CEO

Greg Honish – SVP, Operations

Jeff Gutman – SVP, CFO and Treasurer

Analysts

David Feaster – Raymond James

Ron Londe – Wells Fargo

Good day ladies and gentlemen and welcome to the Oxford Resource Partners, LP earnings conference call. My name is Jasmine and I will be your coordinator today. At this time all participants are on a listen only mode. We will be facilitating a question-and-answer session before the end of today’s conference.

(Operator Instructions)

As a reminder this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today’s conference, to Miss Karen Brown. You may proceed ma`am.

Karen Brown

Thanks Jasmine. Hello and welcome everyone to our second quarter 2012 earnings conference call. We appreciate your continued interest in Oxford Resource Partners. I’m Karen Brown, Investor Relations Representative with Oxford. Participating on the call today are Oxford’s President and CEO, Chuck Ungurean, Oxford’s Senior Vice President of Operations Greg Honish and Oxford’s Senior Vice President and CFO Jeff Gutman. Oxford released its second quarter results earlier this morning and we will now review these results in more detail.

Following our prepared remarks we’ll open this call out to your questions. On today’s call we’ll be discussing our financial results for the second quarter including an update on strategic initiatives under way to improve our financial performance. Please be aware that some of our remarks may include statements which are not historical in nature and may concern expectations, plans and objectives of Oxford regarding its future operation.

These remarks are forward-looking statements and are subject to the caution regarding forward-looking statements contained in our press release. We’ll 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 included at the end of our press release. Our press release has been posted on our website at oxfordresources.com and furnished to the SEC in our Form 8-K filing.

With that I would like to turn the call over to Chuck for some opening remarks. Chuck?

Chuck Ungurean

Thanks Karen. When we last spoke we outlined the actions we were taking to restructure our Illinois Basin operations and to further strengthen our core Northern App position. As you can see, we are beginning to realize some positive results. Our Northern App operations grew their improvements and our profits and cash flows that were reviewed in our earnings release. In the Illinois Basin, we have optimized our mine plan to allow us to reliably serve our Illinois Basin customers who are producing coal at reduced cost levels. Greg will provide more detail on this in his remarks.

Improving Oxfords profitability is our main focus with our real opportunity for growth coming from higher sales volumes. On that account we have some good news. We have just reached in principle with one of our key customers that calls for the delivery of approximately 330,000 additional tons of coal in the second half of ‘12. As a result we expect to generate about $15 million in incremental revenue with a positive contribution to EBITDA and distributable cash flow.

Warmer summer weather has helped reduce the coal stock piles of utility customers. We’ve been encouraged by the improved demand we are seeing and our market area. The fact remains that coal is the primary fuel in our market. We sell our coal to scrubbed base-load power plants and we do this with a distinct transportation advantage over most of our competitors.

We continue to believe that our coal remains the most reliable and economical fuel for our long standing utility customers. Based upon the actions we have taken at our Illinois Basin operations coupled with increasing demand in Northern App, we expect to have a stronger second half of ‘12 in terms of sales, profitability and distributable cash flow. Looking ahead over 90% of our 2013 is committed and priced with the remaining production expected to be priced before the end of the third quarter.

Now I’ll turn this over to Greg to provide an update on our restructuring initiatives and mining operations. Greg?

Greg Honish

Okay I’m going to report on our progress in three key areas. First the status of our Illinois Basin restructuring plan. Second, improved performance at our Northern App operations and third our second quarter safety performance.

In regard to our Illinois Basin restructuring plan, we’ve nearly completed the relocation of excess equipment to our Northern App mines in Ohio. These equipment moves have contributed to improvements in our Northern App operations which I’ll discuss in a minute. We are continuing the right-sizing of our Illinois Basin operations to optimize performance under our current customer contracts. This includes deploying equipment and personnel in a manner that allows us to meet customer requirements from the lowest strip ratio mines with the resulting lower production costs. This will require the idling from time to time of various mines at our Illinois Basin complex.

For optimal flexibility in our operations, we will not be closing any of the idle mines. This will put us in the position of having an additional capacity to access as market and operational conditions dictate. In total we expect a reduction in our Illinois Basin production of approximately 1 million tons of 2012 compared to 2011.

Now turning to our Northern App operations, production increased by approximately 2,500 tons per day compared to the first quarter while production costs decreased. The improvements were driven by two principle factors. First, the transfer of equipment from our Illinois Basin operations and second having both high-wall miners and full production throughout the second quarter. The high-wall miners were moved during the first quarter and are expected to stay in their current locations through the third quarter. We do anticipate that we will move one of the high-wall miners again in the fourth quarter.

Before I turn the call over to Jeff, I would like to take a moment to review our second quarter safety performance. We finished the second quarter with fewer accidents than last year at this time and a higher number of them were classified by MSHA as reportable incidents. While we believe the number of reportable incidents was an aberration, we have nonetheless instituted further programs with our employees to heighten their awareness in identifying and avoiding hazardous situations. The safety and wellbeing of our employees continues to be our number one priority.

And with that I’ll turn the call over to Jeff. Jeff?

Jeff Gutman

Thanks Greg and good morning everyone. As both Chuck and Greg mentioned, our improved second quarter result demonstrates the benefits we are realizing from the actions being taken to better position our Illinois Basin operations and enhance the productivity of our Northern App operations.

Second quarter adjusted EBITDA of $14.6 million represented an increase of over 30% both year over year from the second quarter of 2011 and sequentially from the first quarter of 2012. This increase along with planned capital expenditure reductions contributed to our increased distributable cash flow of $3.2 million. This is a $4.5 million year over year and $3.1 million from the first quarter of 2012. And these increases came in the face of an overall decline in our coal revenue due to the reduction in our Illinois Basin operations.

When compared with the first quarter of 2012, we benefited from a $3.00 increase in our per ton production margin which was driven by both a higher net average sales price and a lower cost of coal sales per ton.

Our average sales price, net of transportation cost increased by 4% to $44.55 per ton and our cost of coal sales per ton was $1.42 less for the second quarter compared with the first quarter. This represents a 4% decrease as we benefited from reduced labor costs, lower required repairs and maintenance and lower diesel fuel expense.

While we work to further improve our coal margins, we are focused on increasing liquidity. During the second quarter we amended our credit facility to eliminate a step-down in our leverage ratio covenant. This was necessary because of the unplanned contract termination from one of our major Illinois Basin customers. In obtaining this amendment we’ve positioned ourselves to continue with full access to our revolver though it’s remaining term.

During the remainder of 2012, we expect to further enhance our liquidity through improved performance and through other activities which are expected to provide an additional $15 million to $19 million in liquidity. These other activities include $10 million to $14 million in estimated proceeds from the sale of excess Illinois Basin equipment that are no longer needed in our operations which we anticipate will be completed by the end of 2012. They also include $5 million in expected capital expenditure savings.

Regarding distributions, we expect to be able to continue paying the minimum quarterly distribution to our common unit holders for the remainder of 2012. Our board will continue to evaluate the level of subordinated distribution payments on a quarterly basis. To wrap up, we have taken aggressive steps to not only enhance our near term liquidity but also improve our competitive position. Our improved second quarter results underscores the progress we are making and the increase in demand being experienced by our Northern App business boards well for the remainder of the year.

With that I’ll open the call up for questions. Jasmine we are ready to take our first question.

Question-and-Answer Session

Operator

Thank you.

(Operator Instructions)

And your first question comes from the line of David Feaster with Raymond James. Please proceed.

David Feaster – Raymond James

You guys were able to book 330,000 tons of coal in the quarter which is great news and pretty impressive given the market environment. Can you give us any insight into what kind of pricing you were able to get and also how much open capacity you have in the region should the market continue to improve?

Chuck Ungurean

This is Chuck David. We were actually able to book this at our current contract price. I think it demonstrates our transportation advantage for this particular customer. And with this additional tonnage, we are approaching probably full production right now. We might be able to turn it up a little more but we are getting close where we’ll be for the second half.

David Feaster – Raymond James

Okay, now on the cost front. Can you give us some help, what are you looking for in the second half? And can you really kind of walk us how through – how you are going to get there. Through the equipment moves, the adjustments in the IOB as well as the higher tonnage in the Northern App region, how does that improve your cost profile?

Chuck Ungurean

Well, I think the big thing the higher tonnage does is it really reduced our fixed costs. Well we are averaging probably more tons. Some of the moves from the Illinois Basin to Ohio, just better equipment, newer equipment, more productivity which has had a big impact. I think those are the two drivers.

David Feaster – Raymond James

Okay, so costs should improve going forward and closer to what we saw in early 2011 or kind of stay and hover just more a slight improvement to the mid-30s?

Chuck Ungurean

I’d say slight improvement to the mid-30s.

David Feaster – Raymond James

Okay. In the Illinois Basin you mentioned that you are not going to be closing any of the idle mines. Are you getting any interest to book more coal for this year from there and in that region, how much excess capacity do you have or is there and given that you are moving some of the equipment in the region and potentially selling some?

Chuck Ungurean

To the first part of your question I don’t believe the market is robust down there as we are seeing up here in the Northern App. As far as capacity, we do have some additional capacity just by working more hours. We have one mine, we’re only running one shift so we do have additional capacity if the market warrants.

David Feaster – Raymond James

Okay. Now in terms of your liquidity, you are expecting to increase your liquidity by $15 million to $19 million primarily through asset sales. Does that imply that you are expecting normal operations to be roughly casual and neutral with roughly one times coverage?

Jeff Gutman

This is Jeff. What we are expecting out of the – for the second half of the year is that we should be able to fully fund, to cash flow our CapEx. We are very light in the second half of the year on our CapEx. All our equipment CapEx purchases have already been made so we have no planned equipment purchases for the second half.

David Feaster – Raymond James

Okay, now – Also on the, just real quick on the EBITDA at interest expense covenant. Were you able to extend the terms of that in the amendment or is that still four times?

Jeff Gutman

It still remains at four times.

David Feaster – Raymond James

Okay. As far as your oil and gas acreage, you sold that and retained a 20% interest. Do you have any of that left and do you know what its drilling schedule looks like? Given that they haven’t drilled any wells I would assume it’s more of a 2013 story.

Greg Honish

David this Greg. We do have additional acreage that hasn’t been leased but the clear majority of it was leased in this first go around. We do not have a drilling schedule that has been presented to us at this point in time.

David Feaster – Raymond James

Okay. Now the last question from me, your minority interest, can you remind us what that is and what are your expectations for that for the rest of the year.

Jeff Gutman

This is Jeff. The minority interest, we have a joint venture with CONSOL which is our Harrison Resources activities. We own 51% of the joint venture, CONSOL owns 49%. And the venture expectations, during the first half of the year were reduced by some higher strip ratio costs. We moved into a higher ratio area that actually increased the mining fee out in that but for the second half we are going to see some improvement not so much on the cost side but we’ve got a high priced order that we’ll be serving on in the second half that should improve the profitability.

David Feaster – Raymond James

Okay, great. Thanks guys.

Jeff Gutman

Thank you.

Operator

(Operator Instructions) And your next question comes from the line of Ron Londe with Wells Fargo. Please proceed.

Ron Londe – Wells Fargo

Yes thank you. As I recall you said that incremental 330,000 tons in the second half would generate about $15 million in revenue. Debt seems to be around $45.00 a ton. Is that net of transportation cost and do you think you can hold like a $3.30 per ton margin on those kind of tons?

Chuck Ungurean

This is Chuck, I will yes to both. Now that is net of transportation and gas on the margin.

Ron Londe – Wells Fargo

Okay. Also have you experienced any problem with river levels this year?

Chuck Ungurean

No we’ve – I know it’s opposite of what people think. Its low water levels now but being on the upper Ohio we’ve been, so far we’ve been okay.

Ron Londe – Wells Fargo

I assume that given your have idle mines that you are not going to purchase any new reserves for the remainder of the year.

Greg Honish

No Ron this is Greg, we have been active in reserve acquisition this year and have a number queued up through the rest of the year. What we’ll do is, our target is to replace what we mine every year.

Chuck Ungurean

There [inaudible] and Ron we have no idle mines in Northern Apps or reserve acquisitions targeted for Northern App.

Ron Londe – Wells Fargo

Okay. Also what kind – well you and the others say the coin is – what kind of capital spending do you think you’ll have for the full year?

Chuck Ungurean

I think what we’ll have in our guidance range is like 27% to 32% for the whole year.

Ron Londe – Wells Fargo

Okay, also the – too adjustment part of your pricing kind of moves around. What was that like in the most recent quarter and what do you anticipate going forward?

Chuck Ungurean

It was essentially flat in, Ron, for the second quarter and going forward we don’t’ expect significant change.

Ron Londe – Wells Fargo

Okay, thank you.

Operator

And at this time there are no further questions. I would like to turn the call back to your CEO, Chuck Ungurean. Please proceed.

Chuck Ungurean

Thanks again everyone for your continued support of Oxford. We look forward to sharing our continuing progress with you on our next earnings call.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a wonderful day.

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