Delek US Holdings, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the DELA QF First Quarter 2020 Earnings Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. And to ask a question during the session, you will need to press star 1 on your telephone. And please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. And now I would like to hand the conference over to your speaker today, Mr. Blake Fernandez. Thank you. Please go ahead, sir.

Thank you, and good morning. I would like to thank everyone for joining us on today's conference call and webcast to discuss U.S. Holdings' first quarter 2020 financial results. Joining me on today's call is Uzi Amin, our Chairman, President, and CEO, Aki Ginsberg, EVP and CFO, Reuben Spiegel, incoming EVP and CFO, and Louis LaBella, EVP and President of Refining, as well as other members of our management team. Presentation materials used during today's call can be found on the investor relations section of the DELIC-US website. As a reminder, this conference call may contain forward-looking statements as the term is defined under federal securities laws. Please see slide two for the safe harbor statement. In addition to reporting financial results in accordance with generally accepted accounting principles for GAAP, we report certain non-GAAP financial results. Investors are encouraged to review the reconciliation of these non-GAAP financial measures to be comparable to GAAP results, which can be found in the press release, which is posted on the investor relations section of our website. Our prepared remarks are being made assuming that the earnings press release has been reviewed and we're covering less segment and market information than is incorporated into the first quarter press release. On today's call, Ossie will review financial performance. I will cover capitalization and guidance. Louis will cover operations and CapEx. Then Uzi will offer a few closing strategic comments. With that, I'll turn the call over to Ossie.

Thanks, Blake. On an adjusted basis for the first quarter of 2020, DELEC-US reported a net loss of $128 million, or $1.74 per share, compared to a net income of $129.4 million, or $1.64 per share, in the prior year period. Our adjusted EBITDA loss was $29.7 million in the first quarter of 2020, compared to $244.1 million gain in the prior year period. Adjusted results include $106.1 million of headwinds or back 44 per share. This is comprised of a pre-tax other inventory loss of $90.8 billion. I would like to point out that this is a separate from the LCM inventory charge that is already excluded from adjusted results. Additionally, there is a $36.1 million tax headwind resulting from applying the annual estimated effective tax rate to the quarterly results. On page four, we provide cash flow waterfall. In the first quarter of 2020, we generate cash flow of approximately negative $144 million from continuing operations. which included working capital benefit of $102 million. Finally, cash capital expenditures in the quarter were $190 million, including the big spring turnaround. With that, I will turn it over to Blake.

Thanks, Asi. Slide five highlights our capitalization. We ended the first quarter with $785 million of cash on a consolidated basis and $1.4 billion of net long-term debt. Excluding net debt at Delux Logistics of $936 million, we had net long-term debt of approximately $496 million at March 31, 2020. Moving to slide six, we provide second-quarter guidance for modeling. Based on actions taken to optimize operating costs and limiting overhead through a hiring freeze, we expect a 10% reduction or $100 million improvement in cost structure on a full-year basis in 2020 versus 2019 levels. This is comprised of 75 million reduction in operating costs and 25 million decrease in overhead. With that, I'll now turn the call over to Lewis to discuss operations and CapEx.

Thanks, Blake. During the first quarter, our total refining system crude oil throughput was approximately 240,000 barrels per day, which reflects the major turnaround at Big Spring and downtime at Tyler for reformer work. In the second quarter of 2020, we expect crude oil throughput to average between 230,000 to 250,000 barrels per day, approximately 80% utilization at the midpoint. On slide seven, I want to highlight our capital spending. Capital expenditures during the first quarter were $190 million, reflecting the major turnaround at Big Springs. As a result of a market volatility, we are lowering our full-year 2020 capital program to approximately $250 million. This represents a $75 million reduction, or 23%, from prior guidance. Recall, CapEx excludes JV investments like Red River, as well as the Wink to Webster Connector, where financing will be provided by joint venture. The bulk of the spending reductions are coming from retail, Permian gathering, and deferring or canceling discretionary projects. The 2020 capital program is broken down by segment as outlined in the slide. I would point out that roughly 75% of the full year capital program was completed in the first quarter, leaving minimum outlay for the balance of the year. Next, I will turn the call over to Uzi for closing comments.

Thank you, Luis. Good morning, everybody. Please move to slide eight. The energy industry is facing dual headwinds between demand impact from COVID-19 and access global oil supply. We're taking aggressive steps to improve our ability to compete to a lower cost structure and spending profile, leading to a $175 million reduction collectively. While macro conditions have been volatile, our niche product markets have remained somewhat insulated, and the economy is opening up in our regional footprint, mainly Texas. Street stock advantages have moved in our favor, especially with the steep contango curve, where we benefit on every barrel run through our system. These factors are allowing us to run our system above the industry average utilization rates near temp. in the midstream. DELEC recently sold the big spring gathering business to DKL. This transaction demonstrates our support for DKL and increases our ownership to 71% including the GP interest. We're committed to maintaining a strong balance sheet with ample liquidity and we are well positioned to withstand macro volatility. We're maintaining our quarterly dividend payment of 31 cents per share. At this point, I'd like to thank Arthur Ginsberg for his long term with us as a company. His 15 years with us as a company were full of dedication, smartness, and love. And I'd like to thank him again for everything he did for the company and emphasize our personal friendship with that. I'd like to welcome again, Ruben Spiegel, our incoming CFO, who I'm sure will do great for our company. Before we open the call for questions, I would like to acknowledge that CVR Energy has taken a position in our stock, and we welcome them as shareholders. We have no further comments in this regard, so we would appreciate you keeping your questions to the first word, results and outlook. With that, Lee, would you please open the call for questions?

As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. And your first question comes from the line of Ryan Todd. Your line is now open.

Okay, thanks. Good morning, everybody. Maybe if I could... start with uh something we've seen a lot of volatility in both midland differentials and crude contango structure over the past month or so uh could you talk a little bit about um one i mean i think whether you feel i think the market probably focuses too much on midlandist and maybe not enough on contango but can you talk about how you view the the dynamics of those playing out in the coming months uh how it relates to the export market um And then I have a follow-up question.

Well, good morning, Ryan. As discussed before, we believe that we need to look at the value chain all along from Midland to the export market. As we see in the marketplace, export today is anywhere between $7 to $9. So everybody can focus on one part, but in order to see the full picture, you probably want to look at Midland, Contango, as well as Brent TI, which depends on the size of the or which part of that value chain is in favor at any given moment. At this moment, Brent TI is, as we all know, around $6, $6.50, and Contango is around $2, a little more than $2. That brings immediately strength not only to Midland, but if you look at what happened in any grade in the United States, including the medium sour, including Maya, that is landed in the United States, all these grades are very, very strong. So Mark, I think yesterday was three and a half dollars before I didn't check this morning. And so the value chain, if you capture every part of the value chain, it doesn't matter actually where you get it. Now, in our case, we just need to remember that when we have Midland, our premium now is $2.50. This is on a portion of the barrels. we get the contango, the CMA, which is a little less than $3, maybe around $3, on every barrel. So overall, the current environment is actually very positive for Delacurus. Now, I don't know how long it will last, but between Brentii of $6 and Contango, $3, that more than offset the strength in the grades, including Midlands.

I appreciate the color there. And then maybe as a second question, I appreciate the guidance for the second quarter. I mean, it looks like you're going to be – you're targeting a utilization rate that's probably roughly around 80%, which, as you highlighted, is above the industry norm. Can you talk about what you're seeing and the strength that you're seeing in your niche markets, maybe what you're seeing locally in terms of gasoline and distillate demand, and how – in what ways you view those markets as being resilient, whether from a pricing or from a logistical access point of view relative to other parts of the country?

Absolutely. Good morning, Ryan and Savigal. So three or four refineries are basically serving in each market. Obviously, across the U.S., we've seen less impact on rural area, which our refineries are working at. At the beginning, we saw most of the impact on the gasoline side. but starting two or three weeks ago, we have seen that decline starting to come back up. In the beginning, obviously, we saw some decline in diesel, which was less significant than the gasoline, but gasoline is obviously leading the chart, and that's kind of correlated with what we see with the EPA numbers. And at this point, we are serving the niche market, and the demand over there, mostly on the gasoline side, is working for our favor.

Thank you.

And your next question comes from the line of Brad Heffern. Your line is now open.

Hey, good morning, everyone. A question on inventory. So it looked like in the first quarter there were a lot of sales out of inventory. Can you talk, I guess, first of all, about how those contributed to profitability in the quarter and then sort of related. You guys did have a working capital benefit during the quarter, which is sort of at odds with what other people are reporting. So can you explain the dynamics of that and if that's something that we should expect to reverse? Thanks.

Hey, Brad. You know, in the quarter, we had the big spring turnaround. So that was obviously a big component and tends to throw things off in terms of the inventory. We also had some reformer work at Tyler. And so utilization there was a bit off. So I'm not sure specifically if you had something in mind, but those are two things I would point out that maybe skewed things a bit in terms of sales versus typical utilization rates. And then I think your second question was on working capital. Yeah, this is hybrid.

Working capital was impacted by two tax credits. One was a reversal of 52 million of fourth quarter, excess fourth quarter provision. And the other one was 85 million biodiesel tax credit. So the number that you see on slide four is 102 is reflecting of these tax credits.

Okay. That makes sense. Thanks for that. Um, and then just a question on DKL. So, you know, obviously it's, it's recovered a lot, but it's still trading into 20% yield. Um, you know, how do you see the value of that entity at this point? Is there a chance that if this continues on that you could buy it back in, or do you think that, um, ultimately with more scale and, and maybe wink to Webster, um, you know, that that'll solve the problem on its own. Thanks.

Well, uh, Strategically, we look at the midstream as something that we need to look at very carefully. That's the reason we continue to look into that. However, 20% cost of capital is very hefty. It's extremely expensive. So as we look at the capital structure of the company, we do need to think about if it doesn't recover over a longer period of time, it just happened. then we probably won't think if this thing makes sense. However, I want to make sure that we all understand. We have the DKL situation unfolding, if you will. Our target is around $400 million of EBITDA with the latest drop down and the results we're talking about now on an annual basis. $230, $240 million. We still have ideas how to drop down things to DKL, and we will continue to look at that as a tool to create value.

Okay, thank you.

And your next question comes from the line of Manik Gupta. Your line is now open.

Hey, guys. First of all, Hashi, you will be mentioned I think you were a second pillar of the company, and whenever we couldn't reach Uzi, you always helped us out, went out of the way to help us. So you will be dearly missed. We will really miss you. So with that, the first question, Uzi, we understand the contango benefit. I think in the past you have tried to provide some sensitivity. I don't remember the exact number, but if it stretches for like $1 for the entire year, it's like $80 to $100 million. Can you help us quantify that benefit? Sure.

Absolutely. It's a little more than $100 million for every dollar. Call it $100 million.

Okay, perfect. Second question, $75 million of CapEx reduction, can you provide where that came from and should we assume that as a run rate going forward, so should we assume Delic would be running at a lower $250 million kind of CapEx going ahead?

Hey, Manav, it's Fred Green. So the 75 cuts mostly came out of some of our growth initiatives for the year, including the Delic Permian Gathering and also retail where we're just not going to build new stores. I think we still look at our ongoing sustaining capital at roughly 20 to 25 million per refinery per year. And then you layer turnaround on that where we have typically one a year, but we're not changing our base capital levels going forward.

Okay. And the last one for me, Uzi, big spring is a very good asset. It's one of the best assets out there. That margin capture in this quarter did not reflect the quality of this asset. So I'm just trying to understand, was it just a turnaround or something else against you? Because I certainly don't expect that kind of capture rate going ahead. That's a much better asset than what was shown in 1Q results.

Well, when you have a refinery that is down for 60 days for a major, major turnaround, including capital projects with no intent to touch it over the next five and maybe even six years, then it's a reflection of the situation. Even if you look at the capital or the capex of the company in the first quarter, most of the capital of this year was spent already in the first quarter. just because of the fact that we wanted to put one of our best assets in good shape for the upcoming challenges in the marketplace. I want to be clear. It is still our best refinery, and it is performing very well since we came up from turnaround. Actually, it's running pretty much full.

Perfect. So basically, it was all the turnaround which caused the capture to go haywire. and as the refinery runs much better in 2Q, it should go back to the historical good capture rate. Thank you. Absolutely. Thank you.

Absolutely.

And your next question comes from the line of Paul Sankey. Your line is now open.

Hi. Good morning, everyone. I'm sure there's a good joke about missing and whether I can miss as badly as Manav will, but I see all the best. I think it's about the 50th time we've We've tearfully bade you farewell, but anyway, thanks a lot, mate. Uzi, a specific question about the SPR. Can you just talk a little bit about that, just as a very detailed question?

Well, it was in the press, and I don't mind telling you that we bought some bears and put it in the SPR. This is about Manav's question from earlier. When you do that, you can actually play the contango. And that's the reason when he asked if it's $100 million, I said a little more than $100 million. We have other places that we can put inventory. That's one of the reasons why we are so comfortable with DKL and the fact that we changed the... We increased the dividend and also maintained the dividend here. We enjoyed the contango in several aspects. One of them is SPR, and we tapped our toe into that business. That business also supports, if you will, the pay line as well as the Red River pipelines that we have. that we own and some of it operates, some of it doesn't operate. So for us, it's a great business and a way to make money and another tool in our toolbox.

Great, thanks. And then a further follow-up to Manav's questions, which is a big and difficult and long question, which is, especially with Manav asking about Big Spring, but can you try and, obviously we drove off a cliff two months into Q1, difficult to make sense of Q1 results going forward. Can you try and do that? Can you talk to us about, firstly, the extent to which the world has changed and how we normalize? And secondly, something, if anything, you can say about where you feel that post-COVID, where your normalized earnings will end up? And I know there's 100 moving parts, but I'd be very interested by your perspective. Thank you.

Hey, Paul, it's Blake. I'll take a stab at it. But since the COVID impact began, we actually saw the market move in our favor in terms of pecking order relative to the group, I would just say. Obviously, we've seen an expansion in Contango. We've seen periods of Midland moving in and out. And then, of course, the crack spreads moved all around Without going too far on guidance, I would just say, looking forward, when I see 2Q estimates at a loss of 56 cents a share, I would just say we are very confident that that's a very achievable number. And I would probably leave it at that. The only thing I would just tell you and remind you is that, you know, historically, we look at a Gulf Coast 532 as a kind of a benchmark crack, and we normally realize about 70% to 75% of that. The difference is when you have contango or midland, that feedstock component, you actually capture 100% of that. So we would actually much rather a lower crack spread and an expanded contango market. That's going to help our capture rates going forward. So I hope that gives you some color.

Yeah, thanks, Blake. And obviously, thanks for the efforts you made last night to try and clear up the result. Please do get rid of this combination of LIFO and FIFO. It's insane. Uzi, can you talk a bit about where you think things will settle in without going specific to earnings? Blake's obviously handled that, but do you think we're in a world of more gasoline demand and wider spreads or whatever?

Thank you. Well, without being too optimistic here, we just need to make sure that we do have some data already coming from the state of Texas. And while in Texas, which is one of the first to open, while it was at the bottom 40% decline, today we are in an environment of less than 20% decline in gasoline demand in Texas, or at least in the areas that we serve. We don't serve all the areas in Texas. So as states start to open up, we will have more data. One thing that I don't want to be too optimistic, but I saw your note, Paul, the other day, saying that gasoline will be winning, and we saw already, at least API yesterday showed another draw of gasoline. That will be driven by several factors, as you mentioned yourself. The fact that people don't want to use mass transportation, the fact that people don't want to fly, the fact that people probably won't use pool cars will be offset some, by people not going back to offices as much as they used to. But in general, I think gasoline can be winning here pretty quickly. And as I said, Texas used to be minus 40%. As of two days ago, it is on a weekly basis minus 20%. So we already cut and Texas only opened or started to open a few days ago. So we may be too optimistic here, but we do have that data coming from Texas.

Thanks, Izzy. Thanks, guys.

And your next question comes from the line of Sarah Fitchin. Your line is now open.

Hi. Thank you for taking my questions. I guess just to follow up on the discussion around the deceleration and the pace of decline. Uzi, you mentioned the 20% is in your market specifically relative to the 40% at the trough in decline. Can you talk about just in terms of your markets, are there any qualifiers or factors that we should consider why that maybe be better than industry or national average? Does it have to do with population density or consumer behavior? Is there any color you can share?

Well, absolutely. And again, I'm not sure that we have the data for New York City or for LA. We don't. So we're just talking about our areas. We mainly serve rural areas. And in these rural areas, as you well know, people, in order to do something, they need to get into their cars. And we see it in Texas, as we mentioned, and also in Arkansas, which Arkansas was never minus 40%. It's actually in the area that we're in, minus 27%, 28%, and now it's improving. And that's the reason we are saying that we are comfortable with 80% utilization rate for the core. I want to remind everybody, many of us were here during 2008, 2009, and that was the case at the time as well, that rural areas didn't get hurt as much, or less. I shouldn't say, it's still very strong, but less. We had some data on big cities. We see that in big cities, the decline is a little more severe, But that's, again, one of our strategies. Also, I want to emphasize one more thing. The impact of the virus, and I know most people are not interested in our convenience stores, but the same store sales inside the store jumped significantly over the last four to six weeks as people don't want to go and stand in lines in big boxes. And people really don't want to be exposed to a lot of people, so they come in and out to these stores. Now, this is data only for four weeks or six weeks. We shouldn't take it to the bank. We need to be very cautious. But we do see a change in behavior in people inside the store.

Got it. That leads to my follow-up and conclusion. In terms of your retail strategy, so you're seeing better things or sales related to changing consumer behavior in this pandemic. I think on the DKL call, there were some comments about West Texas demand being down 15% or so. And then, you know, your earlier comments about this post COVID world, yes, people are going to stop taking flights and using mass transit, perhaps driving more, but also balanced with the consideration of social distancing being a social norm going forward, and maybe people stop driving to work as much. How do you think about your retail strategy going forward in light of all of that?

Well, it's a combination of factors, and I'm going to take it very shortly here. We just need to remember this. In some area, the big box retailers stop accepting customers 24 hours. And we see it in West Texas. We see it in Arkansas. I don't know. We didn't check every area in the country, but in these areas, the other retailers, because of social distancing and because of different parents of their decisions, Now all of a sudden we see after hours, 9 p.m., 10 p.m., 11 p.m., much more traffic than it used to be in the past. Now I don't know if big boxes retailers will change their mind in the next two weeks, or two years or two months or whatever it is, I really don't have a clue. But as long as their behavior is their behavior, we are the beneficiary. So I'm going to be bold here because I'm a little surprised. In terms of enjoying the traffic, we are, we don't, We're not afraid to put our neck, if you will, outside there and say, we are going to see a bear demand. And that's the reason we say we're going to run the refineries a little better than the industry average. We think that retail will be a big beneficiary. And also, as I mentioned earlier, the contango, which I don't know of any company, or maybe there are companies that enjoy 100% of the contango in their crude slate. So I'm a little surprised how it's not being looked at a little better. But maybe this is me just being naive.

Well, I'm not surprised at your boldness at all, Uri. Thank you very much.

Thank you.

And your next question comes from the line of Roger Reed. Your line is now open.

Yeah, good morning. Thank you. And obviously, like some of the other guys, I'm happy to say thanks for all the help along the way and good luck in your next endeavors. With that, I'll kick down to the question. Uzi dividend, we've seen a few companies in the space make some cuts. You know, results like Q1 obviously are not indicative of the future, but if they were to continue at that level, I think we'd all wonder about the dividend. So I was just wondering how you think about dividend sustainability going forward and how that fits within the overall capital allocation.

Well, Roger, First quarter was horrendous for everybody, including us. We took it a little harder just because of accounting issues with FIFO and LIFO, and I know that it's hard to explain that to all of you, and maybe one day we need to clean this thing. But ignoring the inventory, which is pretty much in line with everybody else, first quarter was a loss of, call it, 30 cents. And I know that there was a lot of noise around it, and it's hard to get to that number, but it is minus 30 cents. Now, with the capital, like Fred mentioned, the capital project behind us, and from now on to the end of the year, we're talking about probably $60 million of capital with the combination of Contango, which is very strong in the second quarter, and I know Midland is out of favor. All the greats are out of favor right now, but until a week ago, Midland was very weak, and we took advantage of that for the quarter. And also, the fact that we see DKL doing much better in terms of coverage as well as leverage. and the convenience stores performing, I'm not afraid to say the system will be above everybody's expectation for this quarter, for the second quarter, I'm not afraid of, or we're not afraid to continue the dividend. There's no reason not to continue the dividend. Obviously if this continues, first quarter will continue and some negativity, we will need to look at it. But second quarter doesn't show any indication of cash burning. So I'm, we don't think that dividend should be touched at this time.

All right. Thank you. Very clear defense. The only other question I had was a kind of a follow-up modeling thing to understand the Contango crude storage play that you were referencing. I believe it was with Paul's question. But is that going to be something classified inside of DKL, inside of DK, or is it split between the two? Or there are opportunities that both entities will do and some of them involve the SPR storage and some of them other options.

Well, SPR is not the only inventory play that we can play. As we all know, we have a lot of tankage. And especially when you don't run 100%, you have capability to enjoy the contango. So it's a combination between DK and DKL. Obviously, we own 71% of DKL and own 100% of the GP. So we look at DKL as something that we need to protect as well. So the inventory play will be between the two entities, and that should be looked very carefully over the next few months if Contango continues to play itself the way it is. Great. Thank you.

Do we have any further questions? Operator?

Operator? Operator?

This is the operator, sir. We have a question coming from Neil Mehta. Your line is open.

Hi, good morning. This is Carly on for Neil. Thanks for taking the question. My first one was just around the midstream growth strategy. How, if at all, have your views evolved on increasing exposure to the midstream business given how expectations around the U.S. production growth trajectory have changed in the last month?

That's a great question, Carly. And we need to look at it over a longer period of time. We still believe that the United States will need that oil. Our assumption is that export won't be as cheap anymore because the outside countries like Russia or OPEC won't allow the United States to export as many barriers as it used to be, but at the same time, oil will be needed inside the United States. So we are going to look at that business model in light of not only export, but oil that is needed in other places of the country and how other people will modify their behavior.

Got it. That's helpful. Thank you. And then the follow-up is just around the split between gasoline and diesel, we've seen some pretty dramatic swings between the strengths and the margins for those two products. Can you just remind us what flexibility exists in the DK system to shift between gasoline and diesel production, and then any thoughts on your views on relative demand for those two going forward?

Yes. Thanks, Carla. This is Louis. Currently, we've been in max-discipline mode for a while now. And I typically range between 38% to 40%. And we can probably swing toward gasoline, about 10%, if the economics dictate.

Great. Thank you.

Your next question comes from the line of Doug Legate. Please ask your question.

Hey, good morning, guys. This is for Doug. I've got a follow-up question on the strong utilization rates. Wondering if you can talk about how you see the cadence trending from April to June, provide any regional color, and also let us know if any of this product that you're producing is being put into tanks rather than being sold.

Well, I don't know that we are breaking that down by month. If the question, if we are building inventory, absolutely not. We're not building inventory.

Okay. We aren't given any, yeah, we're not given regional details by refinery or throughout, but I think a fair assumption would be just, you know, somewhat similar utilization across the board for the system.

Okay. That's very fair. And Clay, I'd like to say one more thing. I mentioned that obviously one of our best assets is is Big Spring, and with the fact that demand over there is coming back, it's fair to assume that Big Spring will be running very close to capacity.

Got it. Okay. Also, just wondering if you can provide any details around the OPEX cuts that you had announced yesterday and confirm whether or not these will be sustainable post-recovery.

I'll kind of cover that. I think the best way to look at it as a reference point for 2019 OpEx was about 682 million. We're looking at roughly 75 million coming off of that. If you look at the first quarter actual and then the guidance we're providing for 2Q and kind of extrapolate that for the second half of the year, that gets you right in the zip code of kind of where we think we're going to land for the full year. I would just say this, the only thing embedded in that is a little bit of downtime. Obviously, at 80% utilization, you're running the system a bit below normal. That's probably about a $5 million impact from a variable cost standpoint. I would just say that maybe 2Q is about $5 million lower, and that might come back up a little bit in the second half of the year. On the overhead side, again, similar reference point last year was 275. If you take the 1Q actual and then 2Q guidance, and again, extrapolating that second half of the year, I think that gets you in a good landing point there, and that should definitely be sustainable, both of those going forward.

Got it. So, when do you expect to hit run rate on those savings plans?

Well, like I say, if you take the 2Q guidance, all we really need to do is maintain that level for the rest of the year, and we'll be at the full-year guidance. Got it. Thanks, Blake.

Yep.

Your next question comes from Jason Gabledman. Please ask your question.

Yeah, hey, morning. I wanted to circle back on the refining utilization guidance, which is, a bit stronger than peers. First, if you can give any insight into what you're running at right now, and then in terms of strength in your individual product markets, are you insulated from other competitors from selling barrels into those markets? I understand that demand in your more rural markets are strong, but I guess the question is, do competitors have an opportunity to ship products by pipeline into those markets? And have you seen that happening, potentially eroding some of the margin benefit you're seeing from stronger demand? And I have a follow-up.

Thanks. Hey, Jason. Good morning to you guys. Obviously, we have a cost advantage of supplying ourselves to our refineries. Some of them are isolated. Some of them have some supplies that are coming into the area, but having a refinery in a rural area always presents an advantage. As we mentioned earlier in the call, on those areas, the options that people have to move is very much dependent on the gasoline demand. And we have seen in the beginning some decline in demand, but we obviously see some very strong trend that shows us that the demand is coming back. We see that in Arkansas, East Texas, and West Texas, all of them. So we are very optimistic about the demand coming back in our area, and we have a very strong customer that rely on us, and we are happy to serve them as much as we can.

Got it. Is there optimism baked into that 80% utilization rate you got it to?

Jason, I would say that's actually fairly conservative. Obviously, at this point, we have some data in hand, and we are trying to be fairly conservative in terms of the way we're guiding you.

Got it. And thanks for that, Collar. My follow-up is on the results, specifically on the cash flow. There was a lot of noise because of the inventory movements, and it seems like those inventory movements flow through the income statement, whereas for some competitors, because of the way their accounting is done, it flows through working capital and maybe gets kind of taken out of underlying earnings. So can you just discuss how those – different accounting policies kind of impacted your underlying earnings and cash flow. And specifically, I noticed the lower cost or market adjustment wasn't classified as non-cash, and I think it typically is. So just if you could elaborate on what happened there and if that was, in fact, a non-cash item. Thanks.

Well, when price of inventory or when you have inventory at one price and it comes down, then you have different ways to treat it from an accounting standpoint in different ways. Some do FIFO, some do LIFO, some do moving average, whatever they do. It doesn't change the fact that all refineries, including us, are long working capital. We have many more payables versus receivables. it's not unique to DELEC, it's everybody we pay for crude on the 20th of the following month, that's on average 35 days of payables, while receivables are usually between four to five to seven days. So when prices come down, the working capital, the entire working capital, because we are long working capital, everybody is, then the working capital is coming down. That obviously changes, and we already see it, when prices recover. When prices are coming down, working capital is shrinking. When prices are coming up, working capital is expanding. It's not unique to DELEC. It's 100% of the refineries, regardless of the accounting methods that we use. Regarding our accounting method, we are using some FIFO and some LIFO. And that's the reason we tried to call out both the LIFO and the FIFO within the other inventory as well as LCM. If you combine these two numbers, and I'm sure you can do it much better than we do, you will see that compared to our peers, we're pretty much in line. and everybody has the same LCM. In our case, some of it is other inventory. But the accounting method doesn't change the fact that we're all long working capital.

Got it. Okay, thanks for the color on that.

Your next question comes from the line of Matthew Beer. Your line is now open.

Hey, everybody. Glad to hear you're all safe and sound here. I had a question on the valuation of the big spring gathering drop. Could you just talk about this from DK's perspective? Looks like the multiple came in maybe a little bit less than five times. And then on the DKL call, you mentioned to expect another drop in the near future. What kind of valuation or multiple do you think would be appropriate there? Thanks.

Hey, Matthew, it's Blake. So on the drop for the gathering business, I would remind you, we took about 5 million shares or so. And the implication there was we thought DKL was a very good value. And if you look at it, DKL has basically doubled since that time. So in essence, that went from calling $150 million transaction to $250 million and would have brought the multiple in line with kind of industry averages. So I guess I would just answer it in terms of a big component of that was taking equity in DKL, which we felt was a very depressed price. And I don't think we're going to get into any kind of alluding to multiples on future drops, but obviously I think we've demonstrated that DK is very supportive of DKL, and I think we'll probably just leave it there.

Sounds good. Thanks. And then, Asi, could you explain that $36 million drop tax hit a little bit more? And if your earnings improve, does that get reversed out in future periods?

Well, Asi is here, but we are trying to give him some vacation time as he is transitioning out. So Ruben will take that question, if this is okay with you, Matthew. Sure. Sure.

Well, the $30 million in change was based on our outlook for the remaining of the year and the prorated tax rate that derived from that. So I think that shows our anticipating for improved results over the next quarter. And that will reverse the amount.

Okay. Thank you.

And the next question comes through the line of Paul Chang. Your line is now open.

Hi, good morning. It's Davis on for Paul. Thanks for taking the question. Can you tell us what was the realized hedging gain for the quarter? Hey, it's Blake. Yeah, it was $68 million. Okay, thank you. And my follow-up is just regarding the cost reductions that you highlighted. Has any of this been realized in 1Q or will we kind of see it come through over the next three quarters of the year?

It's really more of progressively kind of 2Q and beyond. I think you'll notice the guidance for 2Q is starting to indicate a downward trend, although I would point out 1Q, I believe, came in pretty much lower than 4Q had, so the trend had started, but I think you're looking at additional steps in 2Q, and like I say, in order to achieve guidance for the year, we really just need to maintain that 2Q level, and I think we're trying to bake in some conservatism there, so.

Okay, thank you, that's all I had.

Again, if you would like to ask a question, please press star one on your telephone keypad. And there are no further questions at this time. Presenters, you may continue.

Well, first I'd like to apologize for the power interruption during the call. I'd like to thank my colleagues around the table, board of directors, you investors for your confidence in us, but mainly I'd like to thank each one of our employees who make this company the great company it is. These are challenging times, and I'm very happy that we had very minimum interruption within our business during these tough times, and this is because of the dedication of our employees. Have a great day, and we'll talk soon.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.