Q1 2021 Delek US Holdings Inc Earnings Call

Conference call.

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After todays presentation, there will be and opportunity to ask questions.

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And please note that today's event is being recorded.

And 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 Delek US holdings first quarter 2021 financial results joining me on today's call of duty you mean, our chairman President and CEO, Reuven, Spiegel, EVP, and CFO and Louis Labella, EVP and president of refining as well as other member.

And of our management team.

And containing materials used during today's call can be found on the Investor Relations section of the Delek U S 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 and.

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 we are covering less segment and market information and then is incorporated into the first quarter press release on today's call Ruben will review financial performance.

And I will cover capitalization and guidance Louis will cover operations and Capex and then Uzi will offer a few closing strategic comments with that I'll turn the call over to Ruben.

Thank you Blake on.

On an adjusted basis for the first quarter of 2021, Delek US reported a net loss of 125 million or a loss of $1 69 per share compared to a net loss was $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 and the first quarter of 2021 compared to a loss of $19 million in the prior year period.

Second progress on the press release highlights $21 million of after tax headwinds or <unk> 28 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 that tax benefit and the quarter was lower than expected due to changes in estimated tax rate for the year. This was primarily primarily driven by the upward revision and internal forecasting of performance our full year 2021.

And 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 the cash flow waterfall and 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 five highlights our capitalization. We ended the first quarter was $794 million of cash on a consolidated basis and $1 $57 billion and net long term debt, excluding net debt at Delek logistics and <unk>.

$970 million.

We had net long term debt of approximately $604 million at March 31, 2021 and.

I would remind you that we expect the 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 krotz Springs refinery and March which has been reflected in both cost and throughput guidance second.

Second quarter operating costs are forecasted to be and the range of $140 million to $150 million. This reflects post turnaround restart costs at both Krotz Springs, and El Dorado ongoing freeze related repairs and expenses.

And elevated energy related costs, we expect expenses to trend lower and 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 and Capex.

Thanks, Blake during the first quarter, our total refining system crude oil throughput was approximately 173000 barrels per day, and and second quarter of 2021, we expect crude oil throughput to average between 270000 to 280000 barrels per day or approximately 91.

Percent utilization at the midpoint.

And we're currently back to normal operations at all four of our refineries, we completed the Krotz 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.

On slide seven capital expenditures during the first quarter were $67 million.

Reflecting the turnarounds at both Krotz Springs, and El Dorado.

And the 2021 capital program is expected to be $175 million to $185 million, including turnarounds and net of estimated insurance proceeds and the.

The increase from the original plan reflects a combination of freeze related damages to fire at El Dorado, and the capitalized costs from the Krotz Springs restart.

The new capital budget is 25% lower than the 2020 actual span.

Next I will turn the call over to <unk>.

Thank you Louis and good morning, everybody.

And we're optimistic about the improvement and refining margins into the second quarter.

This provided us an opportunity to restart the Krotz Springs refinery.

And with major planned maintenance for the year now complete we are positioned to run out the elevated utilization rate.

Our retail segment continued performing well with record first quarter results and logistics, we're pleased to announce an exclusive agreement with Baker Hughes utilizing technology to meet the IMF products pick to blending capability.

I will now turn the call over to Blake.

Thanks, Susie before moving to Q&A, we would like to ask that you keep your questions to earnings and the business environment. We appreciate all the support from our shareholders and we will not be making comments with regard to the CVR, where proxy contest situation you can find additional information on the Delek U S website under the Investor Relations tab by accessing the link titled proxy.

Material shareholder communication with that operator, please open the call for questions.

Yes, Sir.

And we will now begin the question and answer session.

I ask a question and you May Press Star then one on your Touchtone phone.

And using a speakerphone, please pick up the handset before pressing the keys and funding.

Any type of question has been adjusted like to withdraw your question. Please press Star then two again and Thats Star then one to ask a question at this time and we'll just pause momentarily to assemble our roster.

And the first question, we have and will come from Manav Gupta of Credit Suisse. Please go ahead.

Hey, Uzi.

Very strong recovery on Krotz Springs.

The adjusted margin was 667 net neutral takes account other inventory adjustments and everything that's almost 10 90 so.

If you can highlight what what was what drove the positive rate of change and what's.

And on that continue and what all has been working for you at Krotz spring refinery quarter over quarter and this was a major improvement versus last quarter.

Well manav.

Morning, Alex.

Lewis and Blake I think the details here, but we told the market in the past the Cros.

Krotz Springs.

We have a way to go on some of the underlying issues and.

And Thats, what we did in the first quarter oil.

Obviously with the <unk> agreement that will help.

And the future.

Thinking about the numbers themselves Blake I don't know if you want to take it or Louie yes.

Manav I mean look I, just want to make sure and be clear, let's set the expectations correct us some margin games. So as you can see the cost 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 and $11 margin there going forward, but obviously, we restarted it with the <unk>.

And that it would be positive in.

In terms of our margin environment, So let us let us get another quarter behind us on a full quarter basis, and I think youll see that normalize.

Okay and second question was the I I think we have had this conversation I don't think you have that for and exposed you'll probably 15% to 25% rate and exposure, but if you could remind us the numbers on that I understand you lose out on refining, but you make it up and marketing, but whats the net rate and exposure of Delek at this point of time.

Manav range.

And as you know.

While in the past there was no exposure and neither.

Big spring, nor tighter and a little bit of exposure in.

And <unk>, obviously cross we have exposure.

Unfortunately, there is pressure.

For the wholesale side displace some of the operating cost now, we're not giving away the Buck 50, obviously, but.

And there is the customers are pushing pretty hard.

And to get.

And some kind of a discount over there and now we don't disclose exact number but obviously the niche market helped dramatically, but we just need to remember debt.

You talked about and I think the thing that we can keep on 100% of arena and this environment because of the wholesale or the wholesalers are demanding some discount to offset the cost per claim and youll see that and the decay and results in the west, Texas, how strong the results because of demand and you can see the pressure coming.

And from the wholesalers.

Okay last question was he 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 and it is concerned in yard and markets.

Well.

And we see it immediately and with fixed us with Texas is getting bear you'd see the number of ring of rig coming up you see the demand coming up retail had a very strong quarter.

Second was very strong as well for retail.

No.

Demand is getting there, especially when crude oil is.

60.

The other 6300 $64. So for us if it stays 60 364 demand will come back and I'll give explanation obviously helps a lot.

And you follow these numbers, even better and we do.

And I think that we should be optimistic that.

Second part of the year will be a bear one thing.

The rains.

He is a headwind for all of us and the industry, we're trying to mitigate that towards a niche market and order flow through the.

To export but in general the demand while it was a supply.

In the past now demand is picking up.

Thanks for taking my question and congrats on the crops coming on and rosy.

And.

And next we have Ryan Todd of Simmons energy.

Yeah.

Great. Thanks.

And you guys, maybe a follow up on one of your comments just now about.

How about retail I mean can you talk about some of the local market factors that drove this.

The strength in retail and you guys actually start fuel margin increase quarter on quarter.

But most of your peers.

The sequential deterioration and marketing margin, so any thoughts on that and sustainable sustainability do 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 or three quarters and we.

Sales at retail can improve without.

A major investment and still we are planning to invest more and new stores.

If you look at the three indicators same store sales are up four 2%.

Margins inside margins are up and Powerpoint from 31, 32, 7% and also margins going from 31 to 38.

On on the fuel side and.

Second one on fixing to be another great quarter, and so we feel that the.

Steps we took.

A year ago, two years ago to enhance.

And our stores the traditional stores not only fit.

The new stores.

And is coming to fruition and pay a dividend and we can and we expect this to continue.

And I said, it and the best I think that the 2021 would be a record year for for retail I hope I won't be wrong, but I think 2021, it will be a record year for retail.

Perfect. Thanks, Thanks, Susie and under.

On the refining side or I guess, as we think about overall kind of use of cash obviously.

Strong margins are high throughput guidance into the second quarter demand is recovering.

Think about capital allocation and and you use of cash as we see this rebound into the and <unk>.

And the last three quarters of the year and with the cross restart how how should we think about your priorities for the use of that debt cash flow.

And we said our first priority is to pay down debt and to make sure that the balance sheet gives us.

And then obviously as we said.

Resuming the dividend and returning cash to shareholders, but.

Let us get to deploy that.

Free cash flow is coming in on a sustainable basis, and then we'll start acting.

In that regard.

Okay. Thanks, Congrats Susan.

Thank you.

And next we have Roger read of Wells Fargo.

Yes, Thank you and good morning.

Hey, Roger.

And.

Just curious you mentioned at the beginning of the call the tax issue and proved outlook for 2021 I was wondering if youre willing to give us any specifics on relative to the initial budget, what improved and and maybe what you see from here that could surprise you a little bit more relative.

And it sort of your baseline budget.

Hi, it's Reuben.

What when we originally entered the year, we had obviously.

Worse forecast as far as margins are concerned and as.

As the year progressed, we had.

Better outlook for the year.

So.

The effects of the first quarter tax rate is really determined by your outlook for the entire year and that fluctuate the number for the first quarter.

We don't disclose.

On the forecast, but we definitely see with improved margin better.

<unk> results than the original.

And for US I want to give some color to that Roger obviously.

With us a year with something more than what we see today and now and we see it we start to project what.

And what can be the.

The profitability of the company that equates to 15 thing if we used 22% on 'twenty one preferred the normal 21 and 22%. The result would have been.

And bear by $50 instead of the so called <unk> 41, it would have been <unk> 2000, and so if you look at the results of the company to EBITDA.

Beat.

Tax rate.

And it down a little bit, but is there something and something that if we kept profitable.

Margins improved.

And.

And that will come back and be offset in the coming quarters.

<unk>.

Technical <unk>.

Just how it comes on board.

Thanks for that I guess I was just trying to maybe understand was it.

The fact that you restarted Krotz springs was it margins, particularly for gas and.

So just what the what the drivers of the improvement rather us basically the drama and the outlook.

For the year when we started the year it was one outlook and now and for different outlook.

Okay.

And that's really all I had thanks guys.

Thanks Roger.

And next we have coli alchemy of bank of America.

Hey, good morning, guys. Thanks for taking my question.

I wanted to talk about refining for us. So we're finding that <unk> turned the corner in the quarter.

And you can help us understand what the profitability it looked like in March as they get a sense of what the <unk> run rate could look like and address whether all the winter storm repairs have been made and also.

Whether there was any cost and restarting the Krotz Springs refinery.

Let's go one by one and then Louis will give the technical aspect.

Aspects of it.

All of the winter storm on.

I've been referred with the exception on one thing the Alky unit.

At our Big Spring, which we expect us to US talk over the next few day, that's obviously enhance the profitability of trial Im sorry of our big spring not crossing nothing victory.

We just completed the turnaround in El Dorado, and we are about to be and full rate over the next few days.

Krotz Springs, and full rate toddlers and full rate and big spring even flow rate.

So pretty much the winter storm should be on <unk>.

And I'll say something that a regret, but then I went to some effects should be behind us.

There will be.

Because of the and the.

Alright.

Total debt losses, and the loss of the amount of effort there would be impact on Apple from.

And Dorado, but you should expect basically close to full rate in may and June and those have enough. If you want to add anything to that.

And the next question, we have will come from Phil Gresh of J P. Morgan.

Yes, Hey, good morning, I, just wanted to follow up on the Opex side of things and and tying things back to the original guidance.

$70 million of Opex sales this year and 45% of those I think were supposed to come from Krotz Springs, if it was going to be down so just to put us a little bit more detail around how you see things progressing.

And with the.

And the residual savings.

Hey, Phil It's Blake I'll take that so.

So as you know and the beginning part of the year. There is a lot of moving pieces in terms of the winter storm impacts and <unk> and then of course and <unk> we have.

Some residual impact in terms of the winter and then of course, the fire at El Dorado post turnaround restarts at Crocs and El Dorado.

And you see the guidance for <unk> of 140 to $1 50, what I would suggest to you is if you look at the original guidance, which was back and <unk> of last year.

That would suggest something on a per quarter basis of about 130, some odd million dollars.

Per quarter with cross running and.

As we kind of move into the second half of the year I think we're still probably toward debt ZIP code, maybe and 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 feel just.

Again, this isn't hard guidance, but from a modeling perspective, something and the upper $1 30 per quarter range I think feels about right with cross running so again, I think a little bit lower second half of the year compared to what we were looking at and the first half of the year.

Okay, Great that's helpful.

A second question.

Just on retail.

And I asked you this last quarter.

Sorry, just on follow up again, how do you think about the importance of retail to the overall company the value.

Externally versus obviously, the very strong cash flow to us delivering for the company today.

Phil.

We have not changed our mind.

And everything is there.

Should be measured in terms of value now.

On one hand, we.

We see the retail market being steel.

10, and 11 times multiples.

On the other and our EBITDA continues to tick.

And to grow and continues to improve.

We are not shy being in the market for retail either way.

As you remember, we sold and therefore 13 times.

We believe and I believe.

Dot.

<unk>.

EBITDA continues to grow then we'd probably want to have.

Little bit more of that.

There is an offer that reflect.

The.

Bill.

And for somebody else and gives us value for the future growth than we've probably not probably we should consider it and so at this point we are very confident.

EBITDA growth continued to growth and if somebody is willing to pay for that growth day, and we're not shy to be and the market.

Okay very good.

If I could sneak one last one what would be and the future normalized capex to be thinking about in light of.

The higher spend this year just any.

And it kind of bottoms of detail there would be helpful. Thank you.

Yes.

We spoke about that and divested the refining sustainable capex should be around $100 million copper.

Cooperative around 30 decay and around 20, and the rest of the suite and now if we decide to build more stores that every store that we built with $5 million.

Sustainable Capex, where we go from $15 million to $20 million.

Great. Thank you.

Next we have no matter of Goldman Sachs.

Hi, Good morning. This is Charlie on for Neil Thanks for taking the questions.

And just final logistics side could you update us on the progress around linked to Webster and kind of when we should start to see the contribution ramp there.

Yes, a winter with us.

A couple of our partners mentioned, we'll be starting to ramp up its already in operation, but starting to ramp up.

By the end of this year early.

Fourth quarter, and it's a ramp up period, but as we all know it's a fully subscribed.

Pipeline and close to 95% are subscribed, so and depth of cash flow strong cash flow and starting in 2022 and for sure 23, and 24 and we get 100%.

Growth to 100% utilization.

That's great. Thank you and then the volume is just kind of around the energy transition can you talk a little bit about the lower carbon fuel strategy are there.

Any updates on considerations are on renewable diesel and whether that's at Bakersfield or elsewhere, and then I guess the longer term at these view the current biodiesel operations, that's a core part of the portfolio.

Carla I'll start on that as Blake and if it is he wants to follow and so on the biodiesel part of it look at the small part of the portfolio, but at the end of the day. It's it's nice in terms of generating some returns for us.

And at the end of the day.

And we're exploring a lot of different opportunities, where a member of the hydrogen council. We have a de carbonization committee internally that constantly evaluating opportunities we have the Bakersfield renewable diesel option.

So at the end of the day, we want to participate and the global transition at this point, we have not committed to substantial amount of capital to anything.

Which I think has served us well and will continue to explore where we think the best rate of return is going to be.

Next we have Paul Sankey of <unk> research.

Hi, everyone.

Susie.

You've kind of addressed this but could you just do a top down on the outlook for your projects.

Slightly less lost track of where you're going.

With the various gathering and pipeline projects, we're looking at going forward I heard you on the Capex outlook I heard you on the maintenance Capex. If you could just sort of layer on on top of that where you see additional spending.

And the next couple of years that would be helpful. Thanks.

Alright, great.

Great to have you back on just want to make sure that answer. Your question are you asking about growth.

Project, or you're asking for but something else no basically pipes and stuff anything big.

Okay I got so first of all Dk and the outlook for Dk continues to be very strong.

And three projects that will come to fruition. This.

This year, we already spend more.

The vast majority of the Capex debt.

Red River expansion the pay line.

And.

New ship, if you will that starts in may 1st already started if you will and.

And with the Baker Hughes.

Project This project our organic growth organic.

Growth project debt.

We will give us cash flow with not much.

Investment now.

The thresholds for US is obviously much lower now because of what's happening in the in the marketplace. We don't want to be in a position that we invest based on seven or eight nine times EBITDA, we're going to be.

Prudent about it honestly the gathering.

Exploration now are on at the returns are up 4% to five times EBITDA.

And.

And we would like to to continuing 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 and gathering and pod in this environment.

That being said.

Retail stores continue to perform the way they are and we are the mega stores.

Investing roughly $5 million of a $5 5 million doesn't get one to $1 $3 million EBITDA.

Bob will review on that in.

In the future if we decide to 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 does this matter of fact, just repeat the dates the relevant dates for when the deadline for votes as and when we can see some sort of resolution of this situation.

Hey, Paul It's Blake.

And the shareholder meetings tomorrow, and one o'clock central time.

You should have results imminently.

Excellent. Thank you.

Okay.

And next we'll have Jason and enablement of Cowen.

Yeah. Thanks for taking my question guys.

And once and our first follow up on the retail.

Strategy and moving forward clearly the stores seem to have pretty attractive returns can you just discuss.

Thank you have a slide on one of your presentations showing a desire to grow these big.

Format stores by 50 to 2025 is that kind of got it would be ratable growth or can you see more of that in the near term understanding that 2020, one we'll 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 build them, we started with tools and we went to five and and we went to 10 and then we went to 15 and so on and you want to practice you don't want to break your leg.

I want to learn and we built a three ACI they are very successful.

So we want to take it.

Slowly invert.

And these are stores and make sure that we're not you learn from each store you Bill So you want to.

And to take it slowly and debt as you ramp up all of sudden and you have a whole department.

And looking for a good.

P for properties.

We are efficient and how we built inc. And I appreciate how we operate them. So I wouldn't look at it Ratably I look at it as something that will ramp up because we want to learn from our mistakes.

Okay.

Got it that's helpful. Thanks, and secondly on shareholder returns you discussed lag.

Last quarter on.

On last quarter's earnings call that you could explore.

Restarting the buyback program after a few months and positive free cash flow certainly with restarting Krotz Springs, and it seems like you have and outlook that you will achieve that positive free cash flow and the near term. So can you just discuss the outlook around timing of restarting our shareholder return program.

And whether at these levels, you prefer a dividend or buyback and and if it's the former.

And if that dividend level could be.

Round, where it was prior to COVID-19.

So first of all going to take our first to make sure that to show up the balance sheet and make sure that we are on.

And with the balance sheet.

And getting healthier or healthy.

Ill.

And phase out debt then the second part is restored the dividend and then the buyback.

These are this debt.

Yeah.

The level of debt are you looking to get back towards.

Well it depends on what normalized EBITDA is obviously with $60 and $17 crack spreads.

The thing that everything is great.

However, with the rains eating what six seven and $8 into that or $7 then.

We need to see what happened with the Rins and then.

And raise them dropping our confidence level.

We will go higher and so we'll wait and see what the Supreme Court says we're looking.

Looking at it very carefully and.

And that's a.

Let's see what they do and we take it from there.

Okay.

I'll leave it there thanks.

And again as a final reminder, if you'd like to participate and today's Q&A. Please press Star then one on it touched on strong again that is star one to ask a question again, we will just pause momentarily to assemble our roster.

Well it looks like we have no further questions at this time and I will go ahead and conclude todays question and answer session on.

And I'd like to turn the conference back over to the management team for any closing remarks gentlemen.

I'd like to thank my colleagues around the table and Thats pink.

The board of directors for our confidence in us obviously I'd like to thank each one of you investors.

For taking the time line about our company and.

Giving us.

The confidence throughout the company the way, we think we should run it but mainly I'd like to thank obviously each employee of this.

Companies that make it the great company it is.

Have a great day, we'll talk to you soon thanks.

And we think you'll also served to the rest of the management team for your time also today again the conference call has now concluded at this time you may disconnect. Your lines. Thank you and everyone take care and have a wonderful day.

[music].

Okay.