Delek US Holdings, Inc. (DK) Q1 2013 Earnings Report, Transcript and Summary

Good morning. My name is Cortliss and I will be your conference operator today. At this time, I would like to welcome everyone to Delek US Earnings Call. (Operator Instructions). After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions). Thank you. I will now turn the call over to Mr. Keith Johnson, Vice President of Investor Relations. Sir, you may begin your conference.

Thank you, Cortliss. Good morning. I would like to thank everyone for joining us on today’s conference call and webcast to discuss Delek US Holdings’ First quarter 2013 Results. Joining me on today’s call will be Uzi Yemin, our Chairman, President and CEO; Assi Ginzburg, our CFO; Fred Green, our Executive Vice President and President of Refining; and Danny Norris, Vice President of Finance; as well as other members of our management team. As a reminder, this conference call may contain forward-looking statements, as that term is defined under Federal Securities laws. For this purpose, any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the forgoing, the words believes, anticipates, plans, expects and similar expressions are intended to identify forward-looking statements. You are cautioned that these statements may be affected by important factors set forth in our filings with the Securities and Exchange Commission and in our latest earnings release. As a result, actual operations or results may differ materially from the results discussed in the forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. Today’s call is being recorded and will be available for replay beginning today and ending August 9, 2013, by dialing 855-859-2056, with the confirmation ID number 41606390. An online replay may also be accessed for the next 90 days at the company’s website at delekus.com. Last night, we distributed a press release that provides a summary of our first quarter 2013 results. This press release is available on our corporate website and through various news outlets. On today’s call, Assi will begin with a few opening remarks on financial performance for the quarter. Danny will cover additional financial details before turning it over to Fred to discuss initiatives in our Refining segment. Then Uzi will offer a few closing strategic comments. With that, I’ll turn the call over to Assi.

Thank you, Keith, and good morning. Our operations continue to perform extremely well. During the first quarter of 2013, we benefited from improved Gulf Coast refined product margins, discount in Midland sourced crude and improved performance in our Logistics segment. Our budget remains strong with over $590 million of cash and $242 million of net cash. Our strong balance sheet allow us to evaluate different ways to return value to our shareholders. For the first time in our company history, our Board approved a share repurchase program. Under this $75 million program, we purchased 1 million shares at a cost of $37.9 million from an affiliate of Delek Group concurrent with its secondary offering in March. In addition, our Board of Directors approved a 50% increase in our regular quarterly dividend to $0.15 per share from $0.10 per share previously. As a reminder, we have continued to pay special dividend as well. We will remain focused on returning value to our shareholders while evaluating opportunities to grow our business. Now, I will turn it over to Danny to discuss additional financial details.

Thank you, Assi. Good morning, everyone. For the first quarter of 2013, Delek US reported net income of $77.5 million, or $1.28 per diluted share. This compares to a net income of $46.2 million, or $0.79 per diluted share, in the first quarter last year. The improvement in company profitability in the first quarter was driven primarily by increased year-over-year margins in our Refining segment. This segment benefited from an improved Gulf Coast 5-3-2 crack spread of $26.68 per barrel in the first quarter this year compared to $23.87 per barrel in the first quarter of 2012. Also, results benefited as WTI Midland crude was $7.80 per barrel lower than Cushing for the first quarter 2013, which is a wider differential, as compared to $1.48 per barrel below Cushing in the prior-year period. I want to discuss a few items on the income statement. Total operating expenses increased by $14.3 million to $98.7 million in the first quarter when compared to the prior-year period. This increase was primarily due to necessary maintenance and repair-related expenses in our Refining and Logistics segments. General and administrative expenses increased to $32.6 million in the first quarter of 2013 compared to $27 million in the prior-year period. This increase was primarily due to employee-related cost and outside services. Interest expense was $9.2 million in the first quarter of 2013 compared to $12.4 million in the first quarter 2012. This decrease in interest expense was primarily attributable to the reduction in overall debt levels and utilization of our credit facilities. Our effective income tax rate was 34.5% in the first quarter 2013 compared to 36.4% in the first quarter 2012. If we take into account expense related to minority interest income, the income tax rate was 35.8% in the first quarter 2013 and it is…

Thanks, Danny. I’d like to give you an update on our crude supply initiatives that we discussed during the fourth quarter conference call, as well as projects in our Refining segment. As expected, our Tyler Refinery began receiving Midland-sourced crude directly in April. This refinery can now receive 52,000 barrels per day of Midland-sourced crude. This is an increase from 35,000 barrels per day previously. Our El Dorado Refinery, which has access to 10,000 barrels per day, began receiving 20,000 barrels per day of Midland-sourced WTI and WTS in May. In June, El Dorado is expected to increase toward a rate of 35,000 barrels per day from Midland. In total, this initiative will increase our access to Midland-sourced crude in our refinery system by 42,000 barrels a day, up from 45,000 barrels per day previously. We completed our rail-offloading facility at the El Dorado Refinery in late April when the second rack was placed in service. As a reminder, the combined capacity of these two racks will give us the ability to offload approximately 25,000 barrels per day of light crude oil, or approximately 12,000 barrels per day of heavy crude oil, or some combination of the two. We averaged approximately 3,600 barrels per day of heavy Canadian crude offloaded during the first quarter 2013. We also have access to an additional 20,000 barrels per day of light crude oil offloading capacity through a third-party rail operation adjacent to the refinery. I’d like to provide some information related to the work we’ll be able to perform at each refinery during their respective planned turnarounds in 2014. We’re planning to replace the FCC reactors at each refinery with state-of-the-art technology. These FCC reactors have been fabricated and are awaiting delivery to each refinery site. On a combined basis, the expected cost…

Thank you, Fred. We have enjoyed a strong start to 2013 with a 62% increase earnings per share from the first quarter 2012 and a 21% increase from a solid fourth quarter 2012. We achieved record first quarter net income and our financial position remains strong. A secondary offering by an affiliate of Delek Group reduced its ownership position to approximately 36.6%, and as a result, we are no longer a controlled company and the public flow in our stock has increased. This should be beneficial to investors and also improve the ability for us to repurchase shares from time-to-time in the future. As Fred mentioned, we have improved our crude supply flexibility through our rail initiative at El Dorado. In addition, we are now receiving more Midland-sourced crude at both Tyler and El Dorado. With the improved pipeline access in place, by June 2013, we should have access to approximately 105,000 barrels per day of cost-advantage WTI-linked crude. Also we retain the ability to access Gulf Coast crude if they become attractive. We’ll remain optimistic going forward with increased supply flexibility and options through sourced cost-advantage crude. Our refineries should be better equipped to handle crude price fluctuations in the future. Our financial position remains strong and we will continue to focus on creating value for our shareholders. With that, Cortliss, would you please open the call for questions?

(Operator Instructions). And your first question comes from the line of Roger Read. Roger Read – Wells Fargo: Hey, good morning.

Good morning, Roger. Roger Read – Wells Fargo: Hey, I was just wondering, you mentioned the RIN, excuse me, the Tier 3 CapEx potential to do some of the upgrades at Tyler here in the 2014 timeframe. Nothing this time around about potential expansion really at El Dorado, which has been talked about previously maybe in the 2014 turnaround. Could you update us where you stand on that? Are you going to, do you still want to do it, permitting, that sort of thing?

I’m not sure we follow your question. Are we talking about Tier 3 or the expansion? Roger Read – Wells Fargo: Well, I’m saying you mentioned Tier 3 as something you may have to do, but you’ve also talked about the expansion on the prior calls. I was just wondering if you could give us an update on the potential for the expansion at El Dorado.

Hi, Roger. This is Fred. The expansion project that we have on the books is for heavy oil at El Dorado. It’s a 100,000 barrel per day case. When we look at current economics, we’re not sure if that’s the direction we necessarily want to go with the added asphalt production that goes along with that. We do have a study underway to look at expansion to 100,000 barrels per day but maintaining the flexibility we have now to process lighter crudes. I think to go all the way back to your question, the short answer is we’re not going to do the expansion to 100,000 barrels per day during the 2014 turnaround. Roger Read – Wells Fargo: Okay. And then could you give, I’m sorry?

Just one addition to that. The FCC expansion that Fred mentioned is part of the big project to go to 100,000 barrels per day. So when we say we’re not going to 100,000 barrels per day, there are some projects that are part of the 100,000 barrels per day, but we want to look at 100,000 barrels per day with the flexibility. So maybe it answers that in a different way, that the FCC, it is part of the 100,000 barrels per day expansion. Roger Read – Wells Fargo: Okay, that’s helpful. And then kind of tying back into your comments about being able to get a hold of more advantageously-priced Midland crude. I mean, obviously, we’ve seen prices move around here a little bit, and even today, Midland and Cushing not terribly different in price. Can you give us a little more flavor on what your flexibility is to switch between the various opportunities you have? And do you still have the opportunity to buy Cushing if Cushing happens to be cheaper? And how locked in are you on your crude purchases at any given moment?

Well, that’s the reason we’ve created a flexibility that we think we have. We have, as you well know, five pipelines leading all the way to Longview, and on top of that, we have the railcars capabilities. So we will switch between different types of crudes if the economics change one type to another. For example, Canadian heavy used to be very, very attractive beginning of the year. Canadian heavy is not as attractive now. So we shifted from Canadian heavy to something that is more beneficial. We want to maintain this flexibility and we will continue to improve that flexibility, probably we’ll notify the market in next quarter or two of other things that we’re doing in order to increase that flexibility. Roger Read – Wells Fargo: And in terms of your crude purchasing, is there anything you’re locked into in particular? Or is everything kind of 30 days, 60 days or just market-based?

Well, everything is market-based. There’s nothing that we have a clear long-term contract. Roger Read – Wells Fargo: Okay, all right. Thank you.

Thank you.

Your next question comes from the line of Blake Fernandez. Blake Fernandez – Scotia: Good morning. Congratulations on the strong results. I have, I guess, a couple of embedded questions here on buybacks and parent company ownership. I’m curious for one if you have any sense for if the parent company is comfortable with the existing ownership. Or if you think they’ll continue to dilute themselves. And then that kind of ties in with my question on buybacks. I know we’re finally getting to a point where the float’s been alleviated. Obviously, you’re repurchasing shares back. I’m just curious how you’re balancing that, if you’re concerned about ongoing repurchases potentially impacting that float issue?

Well, the parent company decision is their decision. And they are a public company. So they are not a parent anymore. They are one of the big shareholders. So that question should go to them. I don’t that I know to answer that question. It’s up to them to make a decision. The second question, as we see the float going up, we will obviously look at the situation and make a decision if you want to continue this repurchase program over and above the $75 million that we’re authorized already. To be honest, Blake, as you know, we were, over the years, being we were unhappy with the float and we felt that some investors avoided us honesty rightfully so because of the float situation. If it will continue to increase, obviously, that will change the situation. But we want to be on the sideline for now and watch it. Blake Fernandez – Scotia: Okay, fair enough. But it sounds, Uzi, like it’s fair to believe that you’ll continue to exhaust that $75 million program for the balance of the year. Is that kind of a fair assumption?

Well, it depends on how we see the market conditions and if we have projects that we think that will bring more value to the shareholders. The project that Fred just mentioned, the FCC project, investing $18 million and return of $30 million is much better use of that money for that thing. But at the same time, eventually, we’ll run out of projects and we need to look at places to put the money. Blake Fernandez – Scotia: Okay. A separate question for you, Uzi. Some of your, I guess, peers and even some integrated companies are – the new trend seems to be this spinoff of the Retail, and obviously, you’ve got a very strong presence in the Retail segment. I’m just curious if that’s something that’s hit your radar screen, if that’s under consideration?

Not at this point. Blake Fernandez – Scotia: Okay.

We believe in the business. We are building megastores. They perform, the megastores perform very well. We want to continue doing that. Blake Fernandez – Scotia: Okay. Final one for me. Fred, I know you covered the RINs. It sounds, if I heard you correctly, like you’re fairly balanced. Obviously, have a cost on the Refining side, but you’re making that up from blending. Do you have a sense of what 2014 could look like?

It’s going to depend on what the overall obligation is, but with the turnarounds during the year, I don’t think we’re going to see a huge difference in 2014 relative to 2013. Blake Fernandez – Scotia: Perfect. Okay. Thank you very much.

Your next question comes from the line of Paul Cheng. Paul Cheng – Barclays: Hey, guys. Good morning.

Hey. Good morning, Paul. Paul Cheng – Barclays: A number of very quick questions. El Dorado, Assi or Fred, the total margin that you site, I presume that is including some reduction in inventory. If I – excluding the inventory impact, just looking at the operation, is that unit margin better or worse than what you report here?

I’m not sure I understand the question, Paul, but... Paul Cheng – Barclays: If you look at El Dorado, your product sales is much higher than your throughput in this quarter. So that means that you probably draw down inventory I presume. And then my question is that if I excluding the profit from the inventory drawdown and just looking at your actual barrel that you produced, and that if your unit margin for those barrel is better or worse than what you report in the first quarter?

It should be more or less the same. Paul Cheng – Barclays: It would be about the same, okay. The second question, that on the same-store sales, do you have a rough number you can share so far in the second quarter? In the first quarter, you’re up 1.7%. Are we seeing momentum improve in your market? Or that is deteriorating?

It’s about the same, 1.5%. Paul Cheng – Barclays: Okay. And Uzi, I think – and Assi – the in the past, I think you guys in your presentation have talked about the increase in the West – Midland crude supply to Tyler, say, based on the March data or March pricing, is an annualized EBITDA improvement about $80 million, and for El Dorado will be about $174 million. Do you have an updated number based on the current pricing metal?

We didn’t run it as of today, Paul. We will probably do it in the next couple of days as we update the presentation, and that will be public information. Probably early next week we’ll have that number. Paul Cheng – Barclays: Okay.

It takes time to calculate that. Paul Cheng – Barclays: Okay, that’s fine. Do you have an estimate on how much is the benefit for the Canadian heavy oil loads to El Dorado in the first quarter, you’re around, say, 3.6 thousand barrel per day. Any rough estimate that what may have contributed to earning?

We can probably run it and give you that number, right Assi or Fred? Paul Cheng – Barclays: Okay. We can do it offline if you don’t have the number right away. On the RIN benefit, that when you say RIN, is all the RIN profit is being reported in the Logistic? Or some of them you’ll see in the Retail?

Some of those RINs values are in the Retail. It was, I believe, $800,000 in the Retail. Paul Cheng – Barclays: And that we should assume that for the remainder of the year that that kind of split is still roughly the same between the Logistic and the Retail?

Obviously, Paul, and we spoke about that in the past. We are doing everything we can to increase the blending. As we started the first quarter, we didn’t – the economics weren’t $0.70. Now, they are $0.70. So obviously, we are moving in that direction. You can assume that it will not be more than this. Paul Cheng – Barclays: No, no, no. I’m talking about that the profit you record, is that – should we assume that the split where you report is roughly about the same in the – between Logistic and Retail into the future?

That’s what I actually – I just answered that. I said that we are trying to increase blending in every segment. So what we recorded for the first quarter was based on market conditions that existed in the first quarter. So that number, obviously, or the blending, we are trying to increase it as much as we can. So you can assume that going forward, it won’t be less than this. It may be – the benefit may be bigger, but not less than what you just saw. Paul Cheng – Barclays: Okay. Two final question. One is on the balance sheet. Assi, do you have a number for your market value of your inventory in excess ARPU? And working capital excluding your LP and long-term debt excluding LP?

So when you look at the long-term debt, the LP has $90 million of long-term debt and $19 million of cash. So if you look at the $242 million net cash position that we reported, it’s actually $313 million net cash position at Delek US, excluding the LP. The market value of inventory of excess of the book value was $49.8 million. And the working capital of the LP, I don’t have it in front of me, but we can look later at the balance sheet of DKL and look their working capital. Paul Cheng – Barclays: Okay. Fred, on El Dorado, with the North Line is up and running, is there any reason we should not assume it could run closer to about 80,000 barrel per day in the second quarter?

I mean, no reason not to make that assumption. But when we do our crude purchasing, we’re buying it relative, obviously, to the crude differentials in the market at the time. So I mean you just have to factor in delivered cost and where the crack spread is to see if those barrels make sense coming up from the Gulf. Paul Cheng – Barclays: Okay, very good. Thank you.

Thank you, Paul.

Your next question comes from the line of Stuart Zimmer. Stuart Zimmer – Zimmer Partners: Hi. Good morning, everyone. I have two – three questions really. One is on the Midstream side, we’re seeing more possible pipeline projects that would bring crude to Longview. And I was curious if you could comment on the developing market of Longview increasingly as a more important hub and how it benefits Delek. The second thing is, if you could just briefly – you touched on it before – but comment on potential benefits of rail? And my third question relates to the strategic value of having the Paline Pipeline, and especially with it coming off of contract in a year and a half, does the benefits of that only ensure to DKL? Or are there benefits at DK as well?

Good morning, Stuart. I think that the question number one and three are related to each other, so I’ll try to give you an answer for both – for these two questions together. And then if we need further clarifications, we’ll be happy to do that. The Longview situation is actually improving much more than what we thought would be the situation only four months, five months ago. The outburst in Longview and we are very happy with the things that are going on over there, more drilling, more barrels coming to Longview and not too many places to go with them. So we are very, very pleased and are very optimistic about Longview. That’s the reason that when we speak about crude supply, we see Longview as key and we continue to believe that the situation in Longview will continue to improve in the next 12 months to 18 months. That, obviously, will affect Paline because of the barrels don’t have any place to go. So as you mentioned, rightfully so, our barrels or our contract for the 30,000 barrels that are leaving Longview is up for renewal by the end of 2014. As you know, DK is holding 62% of DKL, and every dollar of that differential change will relate to $10 million on an annual basis. Stuart Zimmer – Zimmer Partners: Right.

So very optimistic about Longview and very optimistic about Paline. As a matter of fact, probably the most optimistic we were for a long time. Thus, in regard – did I answer these two questions? Stuart Zimmer – Zimmer Partners: Very well. Thank you.

Okay. Now, if you can clarify your second question, that will be wonderful. Stuart Zimmer – Zimmer Partners: Oh, I just want you to think about the strategic value of railcars and your ability to access crude from other places and what benefits that could potentially bring to the EBITDA of Delek.

Well, obviously, the crude by rail situation is changing by every day. And that’s the reason we’ve built – or Fred and his team build two racks that allow us to get all the way to 45 light or 25 light or 20 light plus 12 heavy. We are looking at it on a daily basis. One thing that makes us very happy is that we control many of the railcars, but we can get off that idea almost immediately if we want to. So we are looking for opportunities around the country and outside the country in Canada to bring both for us and in the near future for others. Stuart Zimmer – Zimmer Partners: Right.

Did I answer your question? Stuart Zimmer – Zimmer Partners: Yeah. That’s terrific. You probably – you might not be comfortable discussing the EBITDA sensitivities of being able to pick up cheaper Northern crudes by rail. Maybe that’s not something you want to talk about on the call?

Well, that is correct. Stuart Zimmer – Zimmer Partners: Okay. Thank you very much and great job. Keep up the great work

Thank you, Stuart.

(Operator Instructions). And your next question comes from the line of Jeff Dietert. Jeff Dietert – Simmons & Company: Hi. It’s Jeff Dietert with Simmons. I was hoping that you could talk a little bit about the 2Q outlook at both El Dorado and Tyler for crude throughputs and total sales volumes given the increase in access to WTI-based crudes and the rail facility being fully-up. What do you expect those increases to look like, especially at El Dorado?

Well, as we mentioned, El Dorado will start to get 20,000 of Midland in May and we expect to have 35,000 of Midland in June. We need to look at – I don’t remember the economics for Gulf Coast crude for June, but so far, the incremental barrels that came to El Dorado were Gulf Coast crude. So we need to look at the economics to give you an outlook for El Dorado. The situation in Tyler is obviously much simpler. We didn’t have any major hiccups so far between the two refineries. So there’s no reason to assume that there’ll be too much of maintenance being done in the second quarter for each one of the refineries. And I’m sure that Assi can walk you offline with some economics, if needed. Jeff Dietert – Simmons & Company: Very well. Thank you.

Next question comes from Robert Kessler. Robert Kessler – Tudor Pickering Holt: Hi, good morning. I wanted to see if I could clarify a little bit just the accounting around the RINs. I think you said $1.8 million of RINs sold in the quarter. It sounds like a little more than half of that was in Logistics. Just a technical point, is that 100% consolidated basis? Or is that net of the minority interest there?

Just to be clear, and good morning, Robert, $1.8 million was sold from the Logistics business, and that was 100% of the number. Robert Kessler – Tudor Pickering Holt: Okay.

$800,000 was sold from the Retail business. And as you know, we own 100% of that. Robert Kessler – Tudor Pickering Holt: And is there any intercompany agreement with regard to the transfer of RIN value from DKL to Delek?

We are doing it right now. Basically, we’re trying to establish a program we rely on which is the El Dorado Refinery will buy from the Retail and the Logistics business all of the RIN based on monthly average prices. Robert Kessler – Tudor Pickering Holt: Okay. Great. Thanks for that. And then I was interested to see if you could just provide some color around what you’re seeing for Bakken economics by rail and netbacks? And I guess the backdrop for me is with the ramp-up of the East Coast receiving capacity for that Bakken rail, seems that that capacity add is outpacing the Bakken production growth. And I was just curious if you’re seeing any increased competition and reduced margin on the Bakken deliveries by rail in the last quarter.

Great question and great comment. Absolutely. And we do see increased competition for the Bakken. That’s the reason we have the flexibility to move to other crude. We mentioned, Fred mentioned and we’ve mentioned in the press release our flexibility to go to different places to get crude by rail, we have one big advantage that we control most of our cars, as well as we are small enough to go and get barrels from different sources so that we need to get shooting trains everywhere. So to answer your question, yes, we do see competition going up. We do see the margins going down. And we are shifting to other places. Robert Kessler – Tudor Pickering Holt: Understood. Thanks for the comments.

Thank you.

(Operator Instructions). And your next question comes from the line of Cory Garcia. Cory Garcia – Raymond James: Hey, fellas. Just sort of I guess as a follow-up to this whole crude flexibility theme, recognizing that the Canadian heavy diesel have been pretty volatile lately and it sounds like you might not be sourcing or bringing in too much today. If the LP model does justify it, do you guys have the coal, railcars in place, to bring in the 12,000 of heavy into that facility?

That is correct. Cory Garcia – Raymond James: And how much, I guess, capability would that be if you’re just looking at a pure bitumen?

Pure bitumen is actually what we’re bringing in. It’s anywhere from 12 to 15 ABI. So it’s not pipeline spec crude that we are bringing in; it is bitumen unblended we’re dealing. Cory Garcia – Raymond James: Okay. Great. Thanks for the clarification.

Your next question comes from the line of Rakesh Advani. Rakesh Advani – Credit Suisse: Just a clarification I just wanted to get on the performance of Tyler. It was particularly strong in the first quarter and I’m just wondering, is anything special that kind of stood out over there that would explain the high capture rate relative to benchmark or?

Yes, two components. That’s the reason we are so optimistic. First, Midland, and second, the pressure in Longview. Rakesh Advani – Credit Suisse: Okay. So then, I guess, has your Midland differential thus collapsed in the second quarter? Like are you – like what else are you going to try and do to kind of maintain that kind of a capture rate?

The market is already doing it for us in Longview. Rakesh Advani – Credit Suisse: Okay. All right. Thank you.

There are no additional questions. And do we have any closing comments at this time?

Just closing comments, obviously, I would like to thank my colleagues here, our employees, and you, the investors, and the analysts that cover us for the great confidence. We will talk to you again soon.

And this concludes today’s call. You may now disconnect.