Delek US Holdings, Inc.

and welcome to the DELAC 2021 First Quarter Conference Call. All participants will be in listen-only mode. If you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touch-tone phone. To withdraw your question, please press star, then two. And please note that today's event is being recorded. I would now like to turn the conference call over to Mr. Blake Fernandez. Mr. Fernandez, the floor is yours, sir.

Good morning. I would like to thank everyone for joining us on today's conference call and webcast to discuss Dellick U.S. Holdings' first quarter 2021 financial results. Joining me on today's call is Uzi Yamin, our Chairman, President, and CEO, Ruben Spiegel, EVP and CFO, and Luis Labella, EVP and President of Refining, as well as other members of our management team. The 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 or GAAP, we report certain non-GAAP financial results. Investors are encouraged to review the reconciliation of these non-GAAP financial measures to the comparable 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 release has been reviewed and that we are covering less segment and market information than is incorporated into the first quarter press release. On today's call, Ruben will review financial performance. I will cover capitalization and guidance. Luis will cover operations and CapEx, and Uzi will offer a few closing strategic comments. With that, I will turn the call over to Ruben.

Ruben Duran Thank you, Blake. On an adjusted basis for the first quarter of 2021, DELEC-US reported a net loss of $125 million, or a loss of $1.69 per share, compared to a net loss of $119.7 million, or a loss of $1.63 per share in the prior year period. Our adjusted EBITDA was a loss of 41 million in the first quarter of 2021, compared to a loss of 19 million in the prior year period. The second paragraph of the press release highlights 21 million of after-tax headwinds, or 28 cents per share, of items included in adjusted results. Page nine of the release provides inventory hedging impacts, and page 12 provides other inventory impacts in the quarter. I would like to highlight the tax benefit in the quarter, was lower than expected due to changes in estimated tax rate for the year. This was primarily driven by the upward revision in internal forecasting of performance of full year 2021. While this created a headwind to earnings per share in the first quarter, the underlying story is that the macro backdrop was improved relative to our previous outlook. On slide four, we provide a cash flow waterfall. In the first quarter of 2021, We had a negative cash flow of approximately $34 million from continuing operation, which includes a working capital detriment of $21 million. Cash capital expenditure in the quarter were approximately $67 million. With that, I will turn it over to Blake.

Thanks, Ruben. Slide 5 highlights our capitalization. We ended the first quarter with $794 million of cash on a consolidated basis and $1.57 billion of net long-term debt. Excluding net debt at Dallas Logistics of $970 million, we had net long-term debt of approximately $604 million at March 31, 2021. I would remind you that we expect a federal tax refund of approximately $156 million, of which $136 million is expected to be collected in 2021. Moving to slide six, we provide second-quarter guidance for modeling. Due to improved market conditions, we decided to restart the Crop Springs Refinery in March, which has been reflected in both cost and throughput guidance. Second quarter operating costs are forecasted to be in the range of $140 to $150 million. This reflects post-turnaround restart costs at both Crot Springs and El Dorado, ongoing freeze-related repairs and expenses, and elevated energy-related costs. We expect expenses to trend lower in the second half of the year compared to the first half. With that, I will turn the call over to Louis to discuss our operations in CapEx.

Thanks, Blake. During the first quarter, our total refining system crude oil throughput was approximately 173,000 barrels per day. In the second quarter of 2021, we expect crude oil throughputs to average between 270,000 to 280,000 barrels per day, or approximately 91% utilization at the midpoint. We are currently back to normal operations at all four of our refineries. We completed the Crotch Springs turnaround in March and the El Dorado turnaround in April. We have no major turnaround activities planned for the rest of the year. On slide seven, capital expenditures during the first quarter were $67 million, reflecting the turnarounds at both Crotch Springs and El Dorado. The 2021 capital program is expected to be $175 to $185 million, including turnarounds and net of estimated insurance proceeds. The increase from the original plan reflects a combination of freeze-related damages, the fire at El Dorado, and the capitalized costs from the Cross Springs restart. The new capital budget is 25% lower than the 2020 actual spend. Next, I will turn the call over to Uzi.

Thank you, Luis, and good morning, everybody. We're optimistic about the improvement in refining margins into the second quarter. This provided us an opportunity to restart the Quartz Springs refinery. With major plant maintenance for the year now complete, we're positioned to run at elevated utilization rates. Our retail segment continues performing well with record first quarter results. In logistics, we are pleased to announce an exclusive agreement with Baker Hughes utilizing technology to meet IMO product spec through blending capabilities. I will now turn the call over back to Blake.

Thanks, Uzi. Before moving to Q&A, we would like to ask that you keep your questions to earnings in the business environment. We appreciate all the support from our shareholders, and we will not be making comments with regard to the CBR or proxy contest situation. You can find additional information on the DELIC US website under the Investor Relations tab by accessing the link titled Proxy Material and Shareholder Communication. With that, operators, please open the call for questions.

Yes, sir. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touch-tone phone. If you're using a speakerphone, please pick up the handset before pressing the keys. If any time a question has been addressed and you'd like to withdraw your question, please press star, then 2. Again, it is star, then 1 to ask a question.

At this time, we will just pause momentarily to assemble our roster. And the first question we have will come from Manav Gupta of Credit Suisse.

Please go ahead.

Hey, Uzi, very strong recovery on cross-spring. I think the adjusted margin was 667, and if you take into account other inventory adjustments and everything, that's almost 1090. So if you can highlight what drove the positive rate of change and what can that continue, and what all has been working for you at CrossSpring Refinery quarter over quarter? I mean, this was a major improvement versus last quarter.

Well, Manav, good morning. I'll let Luis and Blake take the details here, but we told the market in the past that CrossSpring, we have a way to go around some of the underlying issues And that's what we did in the first quarter. Also, obviously, with the Baker Hughes agreement, that will help court in the future. Speaking about the numbers themselves, Blake, I don't know if you want to take it or Luis.

Yeah, Manav, I mean, look, I just want to make sure and be clear. Let's set the expectations correct. It's a margin game. So as you can see, the costs there are elevated as well. Think about the timing of the startup, which was late March when the margin environment was very strong, and then, of course, we were selling intermediates throughout. So I don't want to set the expectation that we're going to have an $11 margin there going forward, but obviously we restarted it with the idea that it would be positive in terms of a margin environment. So let us get another quarter behind us on a full quarter basis, and I think you'll see that normalized.

Okay. And a second question, Uzi. I think we have had this conversation. I don't think you are that well-exposed you're probably 15%, 20%, 25% rain exposed. But if you could remind us the numbers, as I understand, you lose out on refining, but you make it up in marketing. But what's the net rain exposure of Delic at this point of time?

Manav, rains are about 50%, as you know. While in the past, there was no exposure in neither Big Spring nor Tyler, and a little bit of exposure in... Eldorado, obviously, of course, we have exposure. Unfortunately, there is pressure from the wholesale side to split some of the rinse costs. Now, we're not giving away the buck 50, obviously, but the customers are pushing pretty hard to get some kind of a discount over the rinse. Now, we don't disclose exactly. number of rings, but obviously the niche market helps dramatically, but we just need to remember that it's not realistic to think that we can keep 100% of the rings in this environment because of the wholesale or the wholesalers are demanding some discount to offset the cost of rings. You see that in the DKL results in the West Texas, how strong the results are because of the rings, and you see the pressure coming from the wholesalers.

Last question, Uzi. In your markets, we know as oil moves up, activity moves up, the demand moves up. So what are you seeing as far as the end market demand for refined products is concerned in your end markets?

Well, you know, we see it immediately in West Texas. West Texas is getting bare. You see the number of rigs. Coming up you see the demand coming up retail. I had a very strong core second world be very strong as well for retail so Demand is getting there, especially when crude oil is 60 something dollars 63 64 dollars so for us if it stays 63 64 demand will come back now the vaccination obviously helps a lot and you follow these numbers even better than we do, Manav. And I think that we should be optimistic that the second part of the year will be a bear. One thing, the rains is a headwind for all of us in the industry. We're trying to mitigate that through the niche market and also through export. But in general, the demand, while it was a supply side, in the past now demand

is uh picking up thanks for taking my questions and congrats on the crotch turnaround busy next we have ryan todd of simmons energy uh great thanks uh good morning guys maybe a follow-up on one of your comments just now about uh about retail i mean can you talk about some of the local market factors that drove uh the strength in retail. You guys actually saw fuel margins increase quarter on quarter. Most of your peers saw sequential deterioration in marketing margins. So any thoughts on that and sustainability as you think about moving into the second quarter?

Yeah, we're very proud of retail. That was part of our discussion over the last two, three quarters as we said that retail can improve without major investment And still we are planning to invest more in new stores. If you look at the three indicators, same-store sales are up 4.2%. Inside margins are up an entire point from 31.5% to 32.7%. And also margins are going from 31% to 38% on the fuel side. And second quarter is fixing to be another great quarter. So we feel that the steps we took a year ago, two years ago, to enhance our stores, the traditional stores, not only the new stores, is coming to fruition and pays dividends. And we expect this to continue. I said it in the past, I think that 2021 will be a record year for retail. I hope I won't be wrong, but I think 2021 will be a record year for retail.

Perfect. Thanks, Izzy. And on the refining side, or I guess as we think about overall kind of use of cash, obviously strong margins, high throughput guidance into the second quarter, demands recovering. I mean, as we think about capital allocation and your use of cash, as we see this rebound into the second quarter, into the last three quarters of the year and with the crops restart, how should we think about your priorities for the use of that cash flow?

As we said, our first priority is to pay down debt and to make sure that the balance sheet is strong enough. Then, obviously, as we said, resuming the dividend and returning cash to shareholders. But let us get to the point that free cash flow is coming in on a sustainable basis and then we'll start acting in that regard.

Okay, thanks. Congrats, Suzy.

Thank you.

Next, we have Roger Reed of Wells Fargo.

Yeah, thank you. Good morning. Hey, Roger. Just curious, you mentioned at the beginning of the call the tax issue and an improved outlook for 2021. I was wondering if you're willing to give us any specifics on, you know, relative to the initial budget, what improved and maybe what you see from here that could surprise you a little bit more relative to sort of your baseline budget.

Hi, it's Ruben. When we originally entered the year, we had obviously a worse forecast as far as margins are concerned. And as the year progressed, we had a better outlook for the year. So the first quarter tax rate is really determined by your outlook for the entire year, and that fluctuates the number for the first quarter. We don't disclose the forecast, but we definitely see with the improved margin better anticipated results than the original projected forecast.

Yeah, I want to give some color to that, Roger. Obviously, we started the year with something worse than what we see today. And now that we see it, we start to project what can be the profitability of the company. That equates to 15 cents. If we used 22% or 21%, the normal 21%, 22%, the result would have been bear by 15 cents. So instead of the so-called buck 41, it would have been buck 26. So if you look at the results of the company, the EBITDA is a beat. The tax rate drags it down a little bit, but it's something that if we come profitable as margins approved, then that will come back and be offset in the coming quarters. It's a little bit technical, but that's just how accounting works.

Thanks for that. I guess I was just trying to maybe understand, was it, The fact that you restarted crop springs, was it, you know, margins, particularly for gasoline or particularly for diesel, you know, just what the drivers of the improvement were?

The drivers, basically, the drivers outlook for the year. When we started the year, it was one outlook, and now it's a different outlook.

Okay. That's really all I had. Thanks, guys.

Thanks, Roger.

And next, we have Kalai Ackerman of Bank of America.

Hey, good morning, guys. Thanks for taking my question. I want to talk about refining first. So, refining, I've just turned a corner in the quarter. Wondering if you can help us understand what the profitability looked like in March as they get a sense of what the 2Q run rate could look like and address whether all the winter storm repairs have been made. and also whether there was any cost in restarting the Crot Springs refinery.

Let's go one by one, and then Luis will give the technical aspects of it. All the winter storm aspects have been repaired with the exception of one thing, the algae unit at Big Spring, which we expect to start over the next few days. That obviously enhanced the profitability of Big Spring, not Crot Spring. That's in Big Spring. We just completed the turn around in El Dorado and we are about to be in full rate over the next few days. Cross Springs is in full rate, Tyler is in full rate, and Big Spring is in full rate. So pretty much the winter storm should be, I hope I'm not saying something that I'll regret, but the winter storm effect should be behind us. There will be Because of the El Dorado turnaround that lasted in the month of April, there will be impact on April from El Dorado. But you should expect basically close to full rates in May and in June. Luis, I don't know if you want to add anything to that.

The next question we have will come from Phil Gresh of J.P.

Morgan.

Yes, hey, good morning. I just want to follow up on the OPEX side of things and tying things back to the original guidance of 70 million of OPEX saved this year, and 45% of those I think were supposed to come from crowd springs if it was going to be down. So just to put a little bit more detail around how you see things progressing with the residual savings.

Hey, Phil, it's Blake. I'll take that. So, as you know, in the beginning part of the year, there's a lot of moving pieces in terms of the winter storm impacts in 1Q. And then, of course, in 2Q, we have some residual impacts in terms of the winter. And then, of course, the fire at El Dorado, post-turnaround restarts at both Crotz and El Dorado. You see the guidance for 2Q at 140 to 150. What I would suggest to you is if you look at the original guidance, which was back in 3Q of last year, that would suggest something on a per quarter basis of about $130 some odd million per quarter with crotch running. And I think as we kind of move into the second half of the year, I think we're still probably toward that zip code, maybe in the high 130 range. Technically speaking, natural gas prices have moved up a bit. We have some electricity contracts coming up for renegotiation, et cetera. So I think we're still within about 5% of that original guidance. So if I'm you, Phil, just, you know, again, this isn't hard guidance, but from a modeling perspective, something in the upper 130 per quarter range I think feels about right with crotch running. So, again, I think a little bit lower second half of the year compared to what we were looking at in the first half of the year.

Okay, great. That's helpful. A second question just on retail, Uzi. I think I asked you this one last quarter, so I just thought I'd follow up again. You know, how do you think about the importance of retail to the overall company, the value you could get externally versus obviously the very strong cash flow that it's delivering for the company today?

Phil, we have not changed our mind. Everything should be measured in terms of value. Now, on one hand, we see the retail market being still at, I call it, 10, 11 times multiples. On the other hand, our EBITDA continues to grow and continues to improve. We are not shy being in the market for retail either way. As you remember, we sold MAPCOT 13 times. We believe and I believe that if EBITDA continues to grow, then we probably want to have a little bit more of that. there is an offer that reflects a better value to somebody else and gives us value for the future growth, then we probably, not probably, we should consider it. So at this point, we are very confident that the EBITDA will continue to grow. And if somebody is willing to pay for that growth, then we're not trying to be in the markets.

Okay, very clear. If I could sneak one last one. What would be the future normalized CapEx to be thinking about in light of the higher spend this year? Just any kind of bottoms-up detail there would be helpful. Thank you.

Yeah, we've talked about that in the past. The refining sustainable CapEx should be around $100 million. corporate is around 30, DKL around 20, and the rest is retail. Now, if we decide to build more stores, then every store that we build is $5 million. Sustainable capital for retail is $15 to $20 million. Great. Thank you.

Next, we have Nel Meda of Goldman Sachs.

Hi. Good morning. This is Carly on for Neil. Thanks for taking the questions. Just on the logistics side, could you update us on the progress around Wing to Webster and kind of when we should start to see the contribution ramp there?

Yeah, Wing to Webster, as a couple of our partners mentioned, will be starting to ramp up. It's already in operation, but starting to ramp up by the end of this year, early the fourth quarter. And It's a ramp-up period, but as we all know, it's a fully subscribed pipeline, close to 95% subscribed. So in terms of cash flow, strong cash flow starting in 2022 and for sure 23 and 24 as we get 100% or close to 100% utilization.

That's great. Thank you. And then the follow-up is just kind of around the energy transition. Can you talk a little bit about the lower carbon fuel strategy? Are there you know, any updates on considerations around renewable diesel, whether that's at Bakersfield or elsewhere, and then, I guess, longer term, if you view the current biodiesel operations as a core part of the portfolio.

Carly, I'll start on that. It's Blake, and if Uzi wants to follow in. So, on the biodiesel part of it, look, it's a small part of the portfolio, but at the end of the day, it's nice in terms of generating some RINs for us, and, you know, at the end of the day, we're exploring a lot of different opportunities. We're a member of the Hydrogen Council. We have a decarbonization committee internally that's constantly evaluating opportunities. We have the Bakersfield renewable diesel option. So at the end of the day, we want to participate in the global transition. At this point, we have not committed a substantial amount of capital to anything, which I think has served us well. And we'll continue to explore where we think the best rate of return is going to be.

Next, we have Paul Sankey of Sankey Research.

Hi, everyone. Uzi, you've kind of addressed this, but could you just do a top-down on the outlook for your projects? I've slightly lost track of where you're going. You know, with the various gathering and pipeline projects that we're looking at going forward, I heard you on the CapEx outlook. I heard you on the maintenance CapEx. So if you could just sort of layer on on top of that where you see additional spending. over the next couple of years. That would be helpful. Thanks. Hi, by the way.

Hey, Paul. Great to have you back. I just want to make sure that I answer your question. Are you asking about growth projects, or are you asking about something else?

No, basically pipes and stuff, anything big.

Okay, I got it. So first of all, DKL, the outlook for DKL continues to be very strong with three projects that will come to fruition. This year, we already spent more... the vast majority of the capex, that's the Red River expansion, the pay line new shipper, if you will, that starts in May 1st, already started, if you will, and with the Baker Hughes project. These three projects are organic growth, organic growth projects that will give us cash flow with not much investment. Now, the threshold for us is obviously much lower now because of what's happening in the marketplace. We don't want to be in a position that we invest based on seven or eight, nine times EBITDA. We need to be prudent about it. Honestly, the gathering expansions now, the returns are around four to five times even now. And we would like to continue to explore that. Our main goal right now is to pay debt and look at opportunities. So I wouldn't expect us to invest hundreds of millions of dollars in gathering and parks in this environment. With that being said, if retail stores continue to perform the way they are, and we are, the mega stores, we are investing roughly $5 million or $5.5 million and get $1.2, $1.3 million EBITDA, we will probably resume that in the future if we decide to stay put with the retail investment.

Got it. And I know you said that you're not going to make any comments on the proxy, but just to make it easy for us, could you, as a matter of fact, just repeat the dates, the relevant dates for when the deadline for votes is and, you know, when we can see some sort of resolution of this situation? Thanks.

Hey, Paul. It's Blake. So the shareholder meeting is tomorrow at 1 o'clock Central Time. So you should have results imminently.

Excellent. Thank you. And next, we'll have Jason Gabelman of Cowen.

Yeah, hey, thanks for taking my question, guys. I wanted to first follow up on the retail strategy moving forward. Clearly, the store seems to have pretty attractive returns. Can you just discuss, I think you have a slide in one of your presentations showing a desire to grow these big format stores by 50 to 2025. Is that kind of going to be rateable growth, or can you see more of that in the near term, understanding that 2021 will not be a big year of growth for that business? And I have a follow-up. Thanks.

Jason, if you remember, when we grew Mapco, we built them, we started with two, then we went to five, then we went to 10, then we went to 15, and so on. You want to practice. You don't want to break your legs. You want to learn. We built three NTIs. They are very successful. So we want to take it slowly. Invest in these stores and make sure that we are not – you learn from each store you build. So you want to take it slowly, and then as you ramp up, all of a sudden you have a whole department – looking for a good piece of property. We are efficient in how we build things and efficient in how we operate them. So I wouldn't look at it relatively. I look at it as something that we ramp up because we want to learn from our own mistakes.

Okay. Got it. That's helpful. Thanks. And secondly, on shareholder returns, you discussed last quarter's last quarter's earnings call that you could explore restarting the buyback program after a few months of positive free cash flow certainly with restarting crop springs it seems like you have an outlook that you will achieve that positive free cash flow in the near term so can you just discuss the outlook around timing of restarting a shareholder return program whether at these levels or you prefer a dividend or buyback, and if it's the former, if that dividend level could be around where it was prior to COVID. Thanks.

So the steps we're going to take are, first, to make sure to show up the balance sheet and make sure that we are, with the balance sheet, it's getting healthier or healthy, or and pays out debt. Then the second part is restore the dividend and then the buyback. These are the steps.

Yeah. What level of debt are you looking to get back towards?

Well, it depends on what normalized EBITDA is. Obviously, with $16, $17 cracks, we used to think that everything is great. However, with the RINs eating, what, $6, $7, $8 into that, or $7, then we need to see what happens with the RINs. And then if RINs are dropping, then our confidence level will go higher. So we'll wait to see what the Supreme Court says. We're very... looking at it very carefully, and let's see what they do, and we take it from there.

Okay. I'll leave it there. Thanks.

Again, as a final reminder, if you'd like to participate in today's Q&A, please press star, then 1 on a touch-tone phone. Again, that is star, then 1 to ask a question.

Again, we will just pause momentarily to assume our roster. Well, it looks like we have no further questions at this time.

We'll go ahead and conclude today's question and answer session. I would now like to turn the conference back over to the management team for any closing remarks. Gentlemen?

I'd like to thank my colleagues who are on the table. I'd like to thank the board of directors for our confidence in us. Obviously, I'd like to thank each one of you investors for taking the time to learn about our company and our giving us the confidence to run the company the way we think we should run it. But mainly I'd like to thank obviously each employee of this company that make it the great company it is. Have a great day. We'll talk to you soon. Thanks.

And we thank you also, sir, and to the rest of the management team for your time also today. Again, the conference call is now concluded. At this time, you may disconnect your lines. Thank you again, everyone. Take care and have a wonderful day.