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Executives

Noel Ryan – Director of IR

Uzi Yemin – President and CEO

Ed Morgan – VP and CFO

Fred Green – VP and COO of Delek Refining, Inc.

Lyn Gregory – SVP

Analysts

Ben Brownlow – Morgan Keegan

Mark Miller – William Blair

Brian Shore – Avondale Partners

Delek US Holdings, Inc. (DK) Q3 2008 Earnings Call Transcript November 6, 2008 12:00 PM ET

Operator

Good afternoon. My name is Terry, and I will be your conference operator today. At this time, I would like to welcome everyone to the Delek US Holdings third quarter 2008 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator instructions) Thank you. I would now like to turn the call over to Mr. Noel Ryan, Director of Investor Relations.

Noel Ryan

Thank you, Terry. Good morning and welcome to the Delek US Holdings conference call for the third quarter 2008. Our host for today’s call is Uzi Yemin, President and Chief Executive Officer of Delek US. Joining Uzi on the call is Ed Morgan, Delek’s Chief Financial Officer. Other members of the management team will be available during the question-and-answer portion of the call.

As a reminder, this conference call may contain forward-looking statements as that term is defined under the federal securities laws. For this purpose, any statements made during the call are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, 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 Delek’s filings with the Securities and Exchange Commission and then its third quarter news release. As a result, actual operations’ results may differ materially from the results discussed in the forward-looking statements. Delek undertakes 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 November 20, 2008, by dialing 706-645-9291 with the confirmation ID number 68742532. An online replay may also be accessed for the next 90 days at the company’s website, delekus.com, or at earnings.com.

At this time, I will turn the call over to Uzi Yemin.

Uzi Yemin

Thank you, Noel. Good morning and welcome to our third quarter 2008 conference call. During today’s call, I will begin with a high-level commentary on our performance in the third quarter followed by some remarks which will address how Delek has managed to grow profitability in one of the more challenging business cycles in recent memory. Ed Morgan, our CFO, will then provide a financial and operational update on our refining, retail and marketing segments for the third quarter 2008. At the conclusion of our prepared remarks, we will open the call for questions.

Allow me to begin with highlighting that our third quarter results reflect our strongest quarterly financial performance in three quarters, supported by double-digit contribution margin growth at our refining and retail businesses when compared to the third quarter of 2007. For the third quarter ended September 30, 2008, we reported net income of $25.4 million or $0.47 per diluted share on net sales of $1.46 billion compared to a net income of $20.4 million or $0.38 per diluted share on net sales of roughly $1 billion in the third quarter of 2007.

The company’s third quarter 2008 results were positively impacted by 25% increase in the 5-3-2 Gulf Coast crack spread compared to the year ago and a significant decline in the wholesale fuel prices in August, September and October, which contributed to higher fuel margins. In addition, for the three months ended September 30, 2008, we realized a $4 million pretax gain on the disposition of one real estate and an $8.7 million pretax gain primarily associated with a mark-to-market on ethanol swap agreements.

And now, I will share a few words on why Delek US remains an attractive investment opportunity as we look ahead to the fourth quarter and into 2009. Since our company is often viewed as a refinery above all else, it may come as a surprise to some of you that Delek US has generated nearly two-third of our contribution margin from non-refining businesses in the last 12 months to 9/30, positioning us to grow profitability in the current market environment. The benefits of our diversified model were clear in our third quarter performance as we were able to generate positive contribution margin across the segments, while also improving the strength of our balance sheet by paying down significant amount of debt with cash flow from operation.

For the benefit of everyone on today’s call, I will address some of the hard topics on everyone’s minds and in the process share with you why Delek continues to remain profitable in this challenging economic climate. First and foremost, allow me to address the current demand environment. Based on statistical data provided by the Federal government and all the research entities, it is clear that through the late summer, US consumers were driving less when compared to the year-ago period, although no one will dispute that demand conditions in the first three quarters of 2008 were severely impacted by weaker global economic conditions and higher gas prices, we do not believe that this trend toward lower consumption will continue at the current pace.

In fact, with crude oil recently finding support in the $60 to $70 range, we believe demand conditions will tend to improve as retail fuel prices decline in response to the sharp reduction in crude oil prices, which began early in the third quarter. As this downward trend continues, which we believe it will, if crude remains at current level, we anticipate consumers will not only be more inclined to fill up their tax, they will also be inclined to spend more money in our stores with the cost saving that they will enjoy at the pump. Therefore, while higher retail fuel prices may have contributed to demand destruction earlier this year, we believe a steady decline in retail fuel prices will be a net positive for demand heading into the fourth quarter, more at the pump and inside our stores.

Another important subject pertaining to how Delek may be impacted by this entire credit environment. Delek has been highly intentionally in efforts to maintain a conservative capital structure with a net debt capitalization of 27.3% at quarter-end. In fact, we have successfully reduced our debt outstanding for three consecutive quarters now, in keeping with our ongoing debt reduction initiative.

For the three-month ended September 30, we paid down a combined $43.7 million in debt at our MAPCO and Delek marketing and revolving facilities, bringing our net debt position to $197 million by quarter-end. At 9/30/08, we had a cash position of $80 million and dollar availability on our credit facilities of – excess of $200 million. We are pleased with the progress made so far and intend to continue to pay down debt, maintaining ample liquidity while also investing in select growth projects capable of contributing positively to our profitability in the immediate future.

Next, allow me to address the question of how our business has been impacted by the recent significant decline in commodity prices. A market environment where commodity prices are declining is generally very positive for refineries as Delek. First, as crude prices decline, the margin realized on the bottom of the barrel product sold at the Tyler refinery would tend to improve as well. In addition, recall that the falling crude environment, the economic impact resulting from volumetric losses at our refinery will decline. Importantly, the refinery isn’t the only area of our business that benefit from falling crude prices.

In our retail business, a decline in the price of crude typically results in a downward pressure on wholesale fuel prices, positioning us to realize higher fuel margins on the pump, as was the case in August, September, and mainly in October. Furthermore, in a market where crude is declining, retail fuel price tends to eventually follow suit, resulting in lower credit card interchange expense for our c-stores, a major cost for us earlier this year.

Finally, note that the falling crude environment also causes us to borrow less on our revolving credit facilities, as it requires us to use fewer letters of credit to purchase crude and other commodity inventories, freeing up capital for other uses. Keep in mind, however, that the recent decline in crude, should it stay at depressed [ph] level would really begin to benefit us in the fourth quarter, more so than it did in the third quarter given the magnitude of the recent price decline.

In summary, while uncertainties in the global financial market continued to weigh heavily on investor sentiment, we believe there are clear reasons for optimism as we progress into 2009. As one of the few truly diversified downturn [ph] energy plays in the market today, our model has been able to successfully generate consistent earnings growth in a challenging economic climate. In addition, we continued to maintain a conservative balance sheet as illustrated by our ongoing reduction efforts.

Looking ahead to the fourth quarter, the retail business has gotten off to a good start, as wholesale prices have generally stayed lower than retail pump prices in many of our markets, resulting in a favorable fuel margins throughout October. As retail prices catch up with the declining wholesale prices, we expect consumer demand to improve as well. A net positive for fuel and in-store merchandise sales. At the refinery, lower crude prices have benefited residual product margins earlier on the quarter reversing the negative pricing dynamic, which existed in the first half of the year.

Overall, we are pleased with the opportunities for growth as we see ahead of us for the remainder of the year and we remain confident in the fundamental strength of the company. With that, I will now hand the call over to Ed Morgan, our CFO, to comment on our financial results.

Ed Morgan

Thank you, Uzi. Let me begin today by discussing third quarter results by segment in more detail and then I will briefly discuss our consolidated financial results for the quarter. Let’s first turn to Refining segment. Delek Refining reported strong third quarter results supported by improved crack spreads, a short decline in crude oil prices, and favorable Gulf Coast pricing in the aftermath of hurricanes Ike and Gustav.

Third quarter 2008 refining contribution margin increased 10.4% to $29.6 million compared to $26.8 million in the third quarter a year ago. Refining margin adding back inter-company marketing fees of $0.93 per barrel was 12.16 per barrel sold compared to 10.45 per barrel sold for the same quarter last year.

Barrels sold per day increased to 55,800 barrels per day in the third quarter of 2008 compared to the 53,200 barrels per day in the third quarter of 2007, due primarily to increased ethanol blending. Third quarter 2008 refining margins benefited from a number of factors when compared to the year-ago quarter, including a 25% increase in the 5-3-2 Gulf Coast crack spread, a 2,700 barrel increase in daily sales in addition to the more than 2,600 barrels per day of ethanol blended at our Tyler fuel rack.

Operating expense per barrel increased 32% to $5.46 per barrel sold in third quarter 2008 compared to $4.13 per barrel for the same quarter last year due primarily to increased natural gas costs, electricity costs, and maintenance expense associated with running this refinery. Fortunately, the refinery faced no major additives during the quarter resulting in a capacity utilization of 86% in the period. Utilization was limited only by the inability to receive certain types of crudes following the hurricanes in September. Obviously, the combined impacts of hurricanes Ike and Gustav were of great significance during the quarter.

Multiple Gulf Coast refineries representing more than 20% of the US refining capacity went offline as a result of these storms and stayed offline at reduced rates for the better part of September. Given the sudden, sharp reduction in refining capacity, Gulf Coast pricing rose to near record levels in the final weeks of the quarter, driving record crack spreads in this period. Given our inland location, Tyler stood apart as one of the few refineries that remained fully operational following the hurricanes, allowing us to benefit from the rise in Gulf Coast pricing.

As we look ahead to the fourth quarter, investors should pay particular attention to the favorable impact of higher residual prices on our refining margin in a declining crude market. Recall that earlier this year when crude prices reached $147 per barrel and residual product prices remained stationary, our margin of loss on bottom of the barrel products grew dramatically putting a drag on profitability at that time.

Now that crude has pulled back and prices on residual products are improving, we have seen a reversal in the earlier trend, which should benefit refining margins going forward.

Turning to the Retail segment, third quarter 2008 retail segment contribution margin increased 12% to $23.7 million compared to $21.2 million in the prior year third quarter. This improvement was primarily attributable to growth in our retail fuel margin, which benefited from a favorable spread between wholesale and retail fuel prices; in addition, to favorable blending economics associated with our ongoing ethanol fuels program.

The story in our retail segment during the third quarter was our ability to successfully manage through the hurricane related supply shortages, which impacted many areas of the southeastern United States, in the better part of September and into early October. In retrospect, we made several key decisions early on in this crisis, which took what might have been a challenging quarter in retail and turned it into one of the strongest quarters in MAPCO’s history.

In the first days of September, immediately after Ike made landfall, wholesale unbranded product prices spiked above the $5 level on fears of a pending supply disruption. In the five days following Ike, we made the conscious decision to not purchase unbranded fuel at these elevated prices, choosing instead to let the wholesale price hysteria calm. Given our recent experiences with Katrina and Rita in 2006, we knew the spike in wholesale gas prices was likely to be short-lived. We believe we made the right management decision.

As wholesale prices began to decline in the weeks following the hurricanes, we reentered the unbranded wholesale fuel market. Unfortunately, with down to Gulf Coast refineries unable to fill the colonial pipeline with refined product for supply, inventories dwindled in the last two weeks of the month creating severe supply shortages. Given the reliance on the colonial pipeline for fuel supply in the southeastern US, these hurricane-related shutdowns created fuel shortages for many retailers in our core markets during the latter half of the month of September.

In response to the shortages, MAPCO made a number of arrangements to truck supply for less affected areas such as Western Tennessee, Kansas, Kentucky, Ohio, and Florida to affected areas such as Alabama, Georgia, and middle Tennessee. This allowed us to service demand in markets where supply remained relatively low. Although the supply shortages obviously had a negative impact on traffic volumes in many of our stores in September, we did benefit from a steady decline in wholesale fuel prices throughout late September resulting in stronger fuel margins in the period.

Retail fuel margin increased $0.087 to $0.239 per gallon in the third quarter 2008 compared to $0.152 per gallon in the year-ago period. This substantial increase in fuel margin helps to more than offset an 8.9% same-store decline in gallons sold during the period. Same-store merchandise sales declined 7.6% in the third quarter 2008 due primarily to a decline in store traffic following hurricane-related fuel supply shortages.

As Uzi alluded to earlier, our credit card expense is relatively flat in the third quarter. Generally, as the price to fill up a vehicle drops so will our total credit costs. This alongside higher margins caused our credit expense as a percentage of gross margin to decline to 9.2% in the third quarter down from 10.5% and 10.3% in the first and second quarters of 2008 respectively. We anticipate MAPCO will continue to benefit from this trend should products stay at lower price levels.

Turning to Marketing and Supply, our Marketing segment performed well during the third quarter selling at least 500,000 barrels per month throughout the quarter. September was a particularly strong month for West Texas due to additional sales of diesel products. The business continues to generate steady contribution margin, continues to require minimal CapEx, and remains extremely well capitalized. We remain pleased by the consistency in profitability of this business segment.

Turning now to our consolidated financial results, third quarter general and administrative expense increased by $2.5 million to $16.5 million compared to the prior year period. The increase was principally the result of a compensation accrual made during the third quarter based on the company’s performance year-to-date, whereas such accruals were distributed evenly across multiple quarters in the prior year.

Depreciation and amortization expense was $3.9 million at the refining segment, $700,000 at marketing and supply, and $6 million at our retail segment. On a consolidated basis, depreciation and amortization was $10.6 million, an overall increase of $2.2 million compared to the third quarter of 2007. This year-over-year increase was mainly driven by several capital projects at the refinery that were brought on line during 2008 in addition to increased depreciation in the retail segment related to newly completed MAPCO Marts.

Our projected tax rate for 2008 is 37%. Delek US exhausted certain credits related to the production ultra-low sulfur diesel during 2007 resulting in the higher effective rate in 2008. We are currently reviewing the potential benefits of the Economic Stabilization Act of 2008, which extends the eligibility period for qualified assets to be depreciated on an accelerated basis. We are hopeful that the provisions in this act will position us to recognize incremental tax savings benefits in 2008 and 2009.

Turning to capital expenditures, our total capital investments in the third quarter were $19.9 million. Of this $15.8 million was allocated to refinery segment, while $3.9 million was allocated to our retail segment. The majority of the refining CapEx was related to engineering and equipment purchases associated with our ongoing crude optimization project in addition to some regulatory work associated with our gasoline hydrotreater.

On a year-to-date basis, our capital expenditures are $91.4 million, of which approximately 81% is related to capital projects at the refinery. Given current market conditions, we have reduced our full year 2008 CapEx target to $110 million. This reduction is mainly due to our decision to delay various discretionary projects at the refinery in addition to various C-store related capital projects.

In regards to our derivative contract exposure, we continue to monitor counterparty risk associated with these agreements and currently believe the risk of execution failure is minimal. To that end, note that we have no exposure to the recent bankruptcy filing of Arison [ph].

Turning to our capital structure briefly, as of the end of the quarter, our cash and cash equivalents totaled $79.4 million and we had $276 million of outstanding debt. Aggregating these, we had a net debt position of just under $197 million. At the conclusion of the third quarter, Delek US and its subsidiaries were in compliance with all of our debt covenants. Although we had a banking relationship with Lehman Brothers in the past, their recent bankruptcy filing has not and will not have a meaningful impact on our liquidity. The year-over-year decrease in our cash and cash equivalents was due primarily to an increase in working capital requirements at the refinery in addition to ongoing debt reduction efforts within our retail segment.

On a year-to-date basis, our retail segment has reduced its debt obligations by $47 million. And in total, the company has reduced its debt by nearly $79 million year-to-date.

With that, I’ll turn the call back over to Terry for questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from the line of Ben Brownlow with Morgan Keegan.

Ben Brownlow – Morgan Keegan

Hi, good afternoon, guys. Can you give a little color on the refinery upgrade projects? It sounds like you are pulling back CapEx this year. What are the thoughts on this upgrade projects for Q1 ’09?

Uzi Yemin

Fred, do you want to take that?

Fred Green

Sure. Ben, what we’ve done is basically delay our refinery turnaround activities that were originally scheduled for October of this year and January/February of next year, pushed those back into the September/October timeframe next year. That was the schedule for our original four-year turnaround cycle. By doing that, we are able to push some of that capital out a little forward. We’ve still – obviously we’ve purchased all the long lead equipment, and really all we’ve pushed off is the construction effort for the projects.

Ben Brownlow – Morgan Keegan

And then on the retail side, can you discuss a little the gross margin improvement, what your outlook there is?

Uzi Yemin

Are you talking about fuel or merchandise?

Ben Brownlow – Morgan Keegan

I’m sorry, the merchandise.

Uzi Yemin

Well, merchandise is primarily due to better pricing. Obviously the private label continuing – enjoying better contract with vendors. Do you want to add anything to that, Lyn?

Lyn Gregory

Yes. In addition, we decided not to really promote our soft drinks as heavily as we did in the past, and in the same way on our case water. And again, this year wasn’t quite as hard as last year, so we really didn’t see the need. So we kind of – we picked up 50 basis points on our margin and at the same time, we do have a continued margin focus. Our private label business now is up to 1.69%. The Belly Bubble introduction, it’s in our juice category, is 30% of that sub-category, doing extremely well. And as we mentioned on the last call, our Bodytonics [ph], which is our sports drink, which is a no sugar, no carb drink, is 15% of our isotonic sub-category.

Ben Brownlow – Morgan Keegan

Great. And then you had stated that traffic was improving as oil prices are coming down or that you expect the traffic to improve. Can you give a little color on what you are seeing through October, whether that’s kind of in the flattish range or where that is, and then just CapEx thoughts – initial CapEx thoughts for 2009?

Uzi Yemin

Well, let me start with the second question, the 2009, we don’t give guidance yet on 2009. We will finalize that as we go to our Board during the month of December. Obviously, they will announce that to the market. In regard to the traffic, if you will, in consumption in the market, you probably saw target numbers today. They were very disappointing. We did see at the beginning of October a much bigger decline than one we see by the end of October, both outside and inside. Prices of gallons went down from 3.50 at that time to roughly 2.20, 2.30. And you see people filling up more. If you will, the issue around filling up more than during the weekdays, but during weekends on trips that people don’t need to take. And we see our weekends are getting much better every day – or every week, if you will. On the inside side, again same story, people I think fill a little there. Obviously, they are left with another $2.50, or every family left with more than $2.50 in their pocket compared to early July on a monthly basis. And they are – some of it goes to saving, but some of it goes to spending inside the store that we do see the recovery.

Ben Brownlow – Morgan Keegan

Great. Thank you, and good luck.

Operator

Your next question comes from the line of Mark Miller with William Blair.

Mark Miller – William Blair

Hi, good morning, everyone. Could you I guess elaborate a little bit further on the experience in the third quarter on the retail comp? So, if we look at the markets where we did not have a supply disruption, how much better was the comp, fuel and merchandise? And – I guess that’s the first question.

Uzi Yemin

Well, unfortunately, I don’t think that we had any market with no disruption. As you probably remember and know, the colonial shutdown and the fact that 17 refineries at the peak were shut down, caused huge supply destruction during the third quarter. So I don’t think that we can say that – I don’t even know that we had any – even one store that didn’t have sometimes an outage or a shortage or whatever. So I don't know that I can say something about that. In regard to the recovery from that, if you will, the recovery from that outage probably lasted through the early days of October. And that’s the reason you saw those high margins everywhere. And then as wholesalers got a little better and the refineries went online, we see the destruction going away and the retail prices going down as well.

Mark Miller – William Blair

I mean, you seem to be very optimistic about the fourth quarter retail outlook and these margins have been sharply higher obviously. Is there a way first to think about the puts and takes, Uzi, across the business fourth quarter versus third quarter obviously with utilization, the production down that helped the refining margins, but also more optimistic about the residual margin? So, I mean, could the fourth quarter be nearly as good as the third quarter, or is that going to be a tough one to compare against?

Uzi Yemin

Well, it’s early to conclude the third quarter, especially in light of the fact that you see the volatility in the crude market. And I think crude today is down another $4. So I don’t know that I can sit here and predict what would happen 60 days from now. However – and that’s a strong statement. Never in my life-time I thought I will see the market we saw on the retail side during October. And it continues as we speak, as the crude prices keep falling. With that being said, generally speaking, crude prices going down is very, very good to our business compared to crude prices going up. So I don’t know that I can sit here and give you a promise that the fourth quarter will be better than the third quarter, especially in light of the fact that we are only, what, 36, 37 days into the fourth quarter. But we are off to a great start.

Mark Miller – William Blair

Okay. I have one final question and I think you are not going to like it. But – I mean, given your optimism and mainly and particularly given the cash generation of the business, if my math is correct, the book value of the company is around $10, nearly $10 per share and with the stock so much lower than that, would you consider deploying some of this cash into buying back some of your stock? I know liquidity is a factor, but just if you can tell us how you think about that. Thanks.

Uzi Yemin

You should never say never. My view on the market, to be honest, Mark, has changed a little bit. When I see companies that are traded with almost no debt, that are traded 40% to their comp, and when I see – take us, for example, we are traded ten times our quarter’s bottom line, I think that there is something that – I don’t know, it’s overshooting. Now, it just happened in the last six months. And we are a young company, if you will. They are probably much better experts than me to sit here and then highlight the stock market. But I think that the opportunities that exist today in the stock market are almost unheard of. And if we look at our EBITDA on the quarter, it’s $57 million. So if we calculate the numbers, we are traded – I don’t know, three times EBITDA on an annual basis. Something that – 2.5 times. I’m willing to buy anything for 2.5 times EBITDA long-term. So my view on this buyback idea is I was against it dramatically. In the past, it was not as negative today. We didn’t announce anything, we didn’t decide anything, we obviously need to go to our Board. But I do think that the stock market – the opportunities that exist in the stock market and our stock, somehow we need to give consideration to that idea.

Mark Miller – William Blair

You know value. I appreciate that.

Uzi Yemin

Thank you.

Operator

(Operator instructions) Our next question comes from the line of Brian Shore with Avondale Partners.

Brian Shore – Avondale Partners

Good morning, guys. Great quarter.

Ed Morgan

Thank you, Brian.

Brian Shore – Avondale Partners

Just a quick question on the refining side, Uzi, you mentioned with falling crude prices and the impact of the bottom of the barrel pricing, is there any way you can sort of quantify what you’ve seen thus far maybe in the fourth quarter and how much – maybe how much of a difference that may have made or may make?

Uzi Yemin

Well, I don’t know that I’m willing to sit here and give you numbers again just because of the simple fact that we are only one month into the quarter. However, if you remember four, five months ago when we were talking about our business, there were two big factors that influenced our results. First of all, the volumetric loss on $147 crude is much smaller when crude is $50 or $60 or $70. That’s one thing. The second is the bottom of the barrel, the same 8% we were talking about all the time. Obviously, the gap has closed dramatically. And we – the benchmark, if we were $2 below the benchmark – for the third quarter, $2.50, we expect this gap to be much smaller to the positive side during the fourth quarter. Fred, do you want to add something to that?

Fred Green

No, I think you called it. The real issue is that when crude got to $147, we were looking at spreads of $50 from that for a (inaudible) slurry and those numbers have narrowed in to closer to $20 in the current price environment.

Brian Shore – Avondale Partners

One of my next questions was actually going to be the performance against the benchmark and the outlook for the fourth quarter with the lower credit. So I’m assuming you guys think you should be situated better there.

Uzi Yemin

Absolutely. Obviously, there was another market structure change during the fourth quarter. We went back to contango. If you look at the screen for December, we are talking about CMA or contango of $0.80, $0.90, while in the third quarter, we were talking about – if I’m going by memory, roughly $0.50 over (inaudible).

Brian Shore – Avondale Partners

Okay. And then on the operating expenses, obviously at the refining segment, I noticed, you know, with natural gas prices having come down, I guess maybe I would have expected per-barrel operating expense to be a little bit lower. Can you talk a little bit about what went into that in the quarter?

Uzi Yemin

Absolutely. I’ll let Fred complete this. I’ll just say that we didn’t break it down by month, but if you look on the quarter, the third quarter by month you see that July was much higher than September. And obviously we expect – we know October was much similar to September than to July. So, the trend is going down actually. Fred, do you want to add something to this?

Fred Green

Yes. It’s just that our utility costs and primarily electricity and natural gas tend to lag the decline in the market by a month to 1.5. So, as you see those prices drop, you shouldn’t expect an immediate effect.

Brian Shore – Avondale Partners

On the – quickly on the retail side, you guys – obviously the fuel margins were fantastic in the quarter. How much can you guys push that into the fourth quarter considering crude prices having come down and wholesale prices having come down? How much are you going to be able to push that into the quarter?

Uzi Yemin

I’m going to repeat what I just said to Mark. The October month was our best month from a retail standpoint since we opened the business. And I’ll leave to that since we don’t give guidance. But the margins in October were unheard of for the retail side.

Brian Shore – Avondale Partners

Okay. And then just lastly, you guys have grown the business with a lot of opportunistic M&A in the past. With the way the credits and liquidity markets are, I know your balance sheet is set up pretty well. But are you guys still looking at M&A, are targets still coming available, or are more targets becoming available?

Uzi Yemin

Well, we keep looking up. Again, I was very bullish toward M&A six, eight months ago. We – I don’t know that I changed my mind. I didn’t change my mind, but I think that we want to be conservative with our acquisitions. If the market is traded 2.5, three times EBITDA, then we don’t want to be too aggressive and pay six times. Our balance sheets, Brian, as you surely know, we are – our net debt-to-EBITDA is roughly two times. We expect this number to be even lower by the end of the year, actually much lower than two times. That’s our expectation. And if the refinery is not leveraged at all, if there is no borrowing at the refinery whatsoever, marketing is very low leverage. And obviously MAPCO compared to other retailers, the outstanding debt by the end of the third quarter for MAPCO was $150 million and EBITDA of roughly $50 million or $47 million. So, call it three times. I don’t know that there are a lot of retailers that are on real estate and still have three times EBITDA. So, that’s the platform for growth. At the same time, the financial market, it is where it is. And we know that the cost of money went up dramatically. So we will need to wait by acquisition as they come.

Brian Shore – Avondale Partners

That’s great. Well, thanks, guys. Appreciate your color.

Operator

We have no further questions at this time.

Uzi Yemin

Well, thank you, Terry. And that concludes our conference call today. We look forward to speaking with you during our fourth quarter 2008 conference call. Should you have any questions in the interim, please contact our Director of Investor Relations, Noel Ryan. He will be more than happy to help with any questions. Thank you and have a good day.

Operator

This concludes today's call. You may now disconnect.

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