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Executives

Noel Ryan – IR, Lambert, Edwards & Associates, Inc.

Uzi Yemin – President and CEO

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

Ed Morgan – VP and CFO

Lyn Gregory – SVP

Analysts

Ben Brownlow -- Morgan Keegan

Guy Daver [ph] -- Simmons & Company

Brian Shore -- Avondale Partners

Eric Walania -- William Blair

Delek US Holdings, Inc. (DK) Q4 2008 Earnings Call Transcript March 5, 2009 11:00 AM ET

Operator

Good morning. My name is Christy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Delek US Holdings Fourth Quarter Year-end 2008 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 turn today’s conference over to Mr. Noel Ryan, Director of Investor Relations.

Noel Ryan

Thank you, Christy. Good morning and welcome to the Delek US Holdings conference call for the fourth quarter and full year 2008. Our host for today’s call is Uzi Yemin, President and Chief Executive Officer of Delek US. Joining Uzi on the call are Fred Green, President and COO of Delek Refining, and Ed Morgan, Chief Financial Officer of Delek US. 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 this call that 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 in its fourth quarter and year-end 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 March 19th, 2009, by dialing 800-642-1687 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.

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

Uzi Yemin

Thank you, Noel. Good morning and welcome to our fourth quarter 2008 earnings conference call. During today’s call, I will begin with a high-level commentary on our performance in the fourth quarter and the full year 2008 followed by strategic outlook for 2009. Fred Green, President and COO of Delek Refining will then provide an operational update on our Tyler refinery and the progress we are making there. Ed Morgan, our CFO, will conclude with a financial and operational update on our refining, retail, and marketing segments for the three and 12 months ended December 31st, 2008. At the conclusion of our prepared remarks, we will open the call for questions.

Delek US Holdings managed to maintain profitability for the sixth consecutive year in 2008 despite facing the perfect storm of commodity price volatility, tight credit market, a cautious customer spending involvement, and a down refinery. The tangible benefit of our diversified model were apparent in 2008 as each of our segments reported positive contribution margin even as the U.S. economy slipped into an economic downturn.

On an adjusted basis, our non-refining businesses, led by our retail segment, contributed more than half of our total contribution margin in 2008 versus approximately one-third of our total contribution margin in 2007 due in large part to record retail fuel margins in the second part of the year.

Entering 2009, macroeconomic conditions remain challenging. The current economic downturn has led many in our industry to view 2009 with a first degree of conservatism. At this time, we believe such conservatism is merited. Nevertheless, in a time of severe equity market volatility, I believe it is important to emphasize why Delek US remains an attractive investment opportunity over the longer term.

First, Delek US isn’t a pure refining or (inaudible) player. Our operation span across the (inaudible) energy markets. As a result, our revenues are not concentrated in one – in any one market or with any one customer. Essentially, we have created an investment vehicle that allows investors to participate in multiple emerging growth ventures.

Second, we remain asset rich. We own a 60,000 barrels refinery and minority equity interest in a second refinery. More than half of our real estate are the 458 convenience stores we operate and multiple terminal (inaudible). This is a strong collateral base from which to further build our presence in the downstream energy markets in coming years.

Finally, we have a proven track record as a disciplined operator. Although our industry may not be immune to the challenges facing the U.S. economy in the coming year, we remain committed to managing the business with an emphasis on efficient cost management and a conservative management of our capital structure.

Looking ahead to 2009, we have several strategic priorities, which remains top of the mind. First, we remain committed to capturing strategic opportunities without compromising balance sheet discipline. Moreover, when we do chose to employ capital for acquisitions or reinvestment in the business it will be for opportunities that positively impact our profitability in the future.

Second, in the coming months, we will seek to maximize current liquidity while reducing our outstanding debt. Despite the fact that we ended the year with a respectable net debt to capitalization of 33.6%, we are more focused than ever on deleveraging the balance sheet.

Third, our Delek Refining, we intend to facilitate a phased timely restart of the Tyler refinery. Leading up to the restart, our intention will be focused on several projects intending to enhance profitability in Tyler. Fred Green will speak more on this shortly.

Finally, at MAPCO, we have two areas of focus in 2009 – store reimaging and the extension of our private label product line. Since launching our reimaging effort in 2006, we have reimaged approximately 20% of our store base, and intend to continue this initiative given the positive results we are seeing in certain test markets. In addition to reimaging, an area of focus involves our private label initiative. Our private label products typically carry lower price points at significantly higher margins than their branded counterparts.

With that, I will hand the call to Fred Green for an operational update on the Tyler refinery.

Fred Green

Thanks Uzi. As many of you are aware, our Tyler refinery has been offline since November 20th, 2008, following a fire that damaged our sat gas plant, naphtha hydrotreater, and part of a control room. Although regulatory investigations into the events of November 20th remain ongoing, (inaudible) recently released the last remaining areas under investigation, allowing us to proceed unrestricted in the rebuild efforts. Clearly, this is good news, as it means we will remain on schedule for a May 2009 restart of the refinery.

Concurrent with the rebuild of the damaged units, we’ve moved forward with the turnaround and a series of crude slate optimization projects, both of which have been accelerated from the fourth quarter 2009 to the first half of ’09 to coincide wit the ongoing reconstruction efforts.

As discussed on the operational update call we held in mid-December Delek carries $1 billion in combined limits to ensure property damage and business interruption. A business interruption insurance policy went effective during the first week of January’09. This policy, which compensates us for lost revenue and expenses while we are offline, does take into account current market conditions when calculating the value of our total claim.

To that end, note that January and February were generally very good months for Tyler. Crack spreads were strong. We enjoyed a deepening of the contango market structure, which began in December of ’08. Allow me to provide a little more color on market condition early into 2009.

The Gulf Coast 5-3-2 crack spread has been relatively strong during the first quarter, supported by a significantly stronger gas crack and a still elevated diesel crack. To that end, the months of January and February supported Gulf Coast 5-3-2 crack spreads of approximately $10 and $12, respectively, up from the $3 to $4 in December. This improvement in the Gulf Coast refining margin benchmark during the first two months of the quarter will likely serve to increase the proceeds generated from our BI claim, above our initial expectations.

The second major factor, which stands to benefit Tyler’s business interruption claim is a deepening of the WTI linked contango market structure, which began in 2008 – in December of 2008 and continued into March. The differential between front, second, and third month futures in December began to widen, reversing the backward [ph] dated market structure evident for the better part of last year.

This contango market structure, which began at an average of $0.90 in December, increased to between $4 and $5 a barrel during the first quarter as inventory levels at Cushing began to rise and storage limits were met. As a refiner that processes mostly WTI, which is currently one of the cheapest sweet crudes in the world, our cost of crude has declined materially with the deepening of the contango structure, resulting in a direct positive impact to our estimate refining margins.

In summary, market conditions at the refinery have trended in our favor. Entering 2009, we believe these conditions will have a positive impact on the proceeds generated under [ph] the BI claim in the coming months.

To-date, we’ve received $18.3 million in combined proceeds on our property damage and business interruption claim of which $8.4 million was recorded during the fourth quarter of ’08 as part of our BI claim. We continue to work closely with our insurance carriers in this process, and anticipate additional payments in the coming weeks.

With that, I will hand the call over to Ed Morgan for a discussion of our financial results.

Ed Morgan

Thank you, Fred. Allow me to begin today by briefly discussing our consolidated financial results for the fourth quarter and then the full year of 2008. I will then discuss the performance by segment and end with a discussion of our capital spending, capital structure, and the liquidity position we are in at the end of the year.

Excluding special items, net income from continuing ops was $18 million, or $0.33 per diluted share in the fourth quarter of 2008. Including special items, Delek US reported net income from continuing operations of $0.5 million, or $0.01 per diluted share in the fourth quarter, compared to a net loss from continuing operations of $12 million or $0.23 per basic share in the fourth quarter of 2007.

For the full year of 2008, the Company reported a net income from continuing operations, excluding special items of $40.5 million, or $0.75 per diluted share, compared to net income from continuing operations of $95 million or $1.80 per diluted share in the prior year.

The special items excluded from the adjusted EPS are reconciled in the earnings release posted earlier today. On a net basis, these special items increased EPS from continuing operations by $0.32 for both the fourth quarter and the full year of 2008. These items include $11.2 million pre-tax expense associated with the goodwill impairment on our retail segment; a $10.9 million pre-tax expenses associated with the writedown of inventory to year-end market prices that were lower than the LIFO layer cost; a $2.5 million pre-tax expense due to the acceleration of depreciation on turnaround costs; and $1.6 million pre-tax gain associated with the early extinguishment of debt.

Turning to the refining segment, results for the three and 12-month period ended 12/31 were materially impacted by a fire at the Tyler refinery. As a result, should note the refinery was offline for a total of 42 days in the fourth quarter. Fourth quarter 2008 adjusted refining contribution, which excludes the previously LIFO inventory writedown, increased to $26.8 million compared to a loss of $5.9 million in the year-ago fourth quarter.

Refining margin, adding back inter-company marketing fees of $0.63 per barrel was $12.07 per barrel sold compared to $4.46 per barrel sold for the same quarter last year.

During the fourth quarter, we met most of our insurance deductibles on the business interruption and the property damage insurance policies. We currently anticipate the combined cost of reconstruction and business interruption will be substantially less than the $1 billion in combined limits as covered in our policies.

And, as Fred mentioned, during the fourth quarter, we recorded an $8.4 million insurance receivable against pre-tax losses related inventory that we sold at the refinery. This receivable offset losses on inventory sales realized during the quarter. Inventory we sold was disposed of immediately following the accident at the refinery, concurrent with our decision to unwind our November and December crude purchases.

Now as we turn to the retail segment, fourth quarter 2008 retail segment contribution margin increased nearly 64% to $19 million versus $11.6 million in the prior year fourth quarter. This improvement was primarily attributed to three things – growth in our retail fuel margin, favorable blending economics associated with our ongoing ethanol fuel program, and decline in credit card expense due in large part to lower retail fuel prices.

As many of your will recall, hurricanes disrupted many Gulf Coast refineries in early September. As a result, multiple markets throughout the southeastern United States experienced severe fuel supply shortages, which began late in September and lasted into the first week of November. As a result of these outages, pumps visits and store traffic were adversely impacted, contributing the negative same store fuel and merchandise sales in the fourth quarter of 2008. However, it’s important to note that store traffic has normalized during the first quarter of 2009.

Retail fuel margins increased to $0.249 per gallon in the fourth quarter of 2008 compared to $0.141 per gallon in the year-ago period. This substantial increase in fuel margin helped to more than offset a 6% same store decline in gallons sold during the period. Same store merchandise sales declined 8.2% in the fourth quarter of 2008 due to a combination of regional fuel supply shortages and a general reduction in discretionary consumer spending.

Total merchandise declined in the fourth quarter to $87 million, down from $95 million in the fourth quarter of 2007. Fourth quarter 2008 merchandise margin decline to 29.8% compared to a merchandise margin of 30.7% in the year-ago quarter. Fourth quarter merchandise margin was adversely impacted by the mark down of legacy and trial products in all of our markets, which have since been phased out of the Company’s new product marketing strategies.

Credit expense as a percentage of gross margin declined to the lowest levels we have seen since the third quarter of 2006, positively impacting contribution margin in the quarter. Generally, as you realize, the price to fill up a vehicle drops, so will our interchange fees. Credit expense as a percentage of gross margin declined to 6.6% in the fourth quarter of 2008, down from 9.3% in the fourth quarter of 2007.

And now for a few words on our decision to divest of our Virginia store operations. Management expects that during the next several years the supply of attractive retail assets for sale will increase. By exiting the Virginia market, which is geographically distant and smaller than our other divisions, we are positioning ourselves to pursue opportunities, which should be better strategic fit for us over the long term. As of the end of the year, we had sold 12 of the 36 properties located in the Virginia market. In 2008, the proceeds from the 12 sales, net of expenses, were $9.8 million.

To-date, we have also now closed an additional seven properties, bringing the total number of Virginia properties sold to 19. Results of Virginia stores have been reclassified to discontinued operations and the assets and liabilities associated with these remaining stores are reflected as held-for-sale for all periods.

At year-end, the Company operated 458 retail location, excluding 24 locations in Virginia that were classified as held-for-sale.

Now, looking at our marketing and supply segment, the segment contribution margin was $3.7 million in the fourth quarter compared to $5.8 million in the fourth quarter of 2007. Under the existing business interruption insurance policy, which covers operations at the Tyler refinery, the marketing segment will recover lost revenues that would have been earned in its East Texas business had the refinery been online. East Texas business generates approximately $1 million per month in contribution margin for the marketing segment.

As previously announced in an 8-K on February 23rd, we received permission from our lending group at the refining segment to sell certain crude delivery and store system assets to our marketing segment for a total consideration of not less than $27.5 million. Upon completion of the sale, the marketing segment will assume the operation of two pipelines in addition to 11 storage tanks, with 900,000 barrels of storage capacity.

This transaction serves two purposes. First, the transfer of assets takes us closer to realizing our goal of having the Delek marketing and supply segment become the ‘the logistics arm’ of Delek US Holdings. And secondly, this deal allows us to help finance the capital projects, which will be completed at the Tyler refinery between now and May of this year.

Now, let me briefly comment on a change in accounting for the investment in Lion Oil Company. During the fourth quarter of 2008, Delek US began accounting for its minority investment in Lion Oil under the cost method. Under this method of accounting, Delek US will no longer its proportionate share of Lion Oil’s income or loss. Instead, Delek US will periodically evaluate the fair value its investment in Lion and adjust the carrying value of the investment, accordingly.

Turning to a discussion of capital spending in 2008 and 2009, total capital expenditures in 2008 were approximately $1.2 million in which nearly $83 million was spent in our refining segment; just over $18 million was spent in our retail segment; and $900,000 in our marketing segment.

During 2008, we spent $45.4 million on regulatory and maintenance projects at the refinery with the bulk of the spending going towards our completion of the gasoline hydrotreater project. In our retail segment, we spent $11.6 million on our ongoing reimaging campaign, which did include several raise and rebuilds.

Looking into 2009, we anticipate total capital expenditures of the Company of $143.5 million of which $124 million is related to the refinery. Do note that approximately $40 million of this planned refinery CapEx in 2009 is related to the rebuild of the fire damaged units. We will be reimbursed for all but $5 million of this expense under property damage policy.

We expect the crude optimization projects will account for approximately $28.5 million of the refining CapEx budget in 2009. Maintenance related CapEx, which does include the $24 million in turnaround costs should account for approximately $30 million of the refining CapEx budget in the coming year as well. Collectively, the rebuild of the fire damaged units, a complete turnaround, and the crude optimization projects are expected to account for approximately 80% of the capital spending at the refinery in 2009.

At retail, we anticipate capital spending of approximately $18 million in 2009. Approximately $11.5 million will be related to our ongoing reimaging campaign while approximately $4 million will be maintenance related. And as in years past, our marketing and supply segment is anticipated to require a minimal CapEx of approximately $1.5 million in 2009. However, do note that marketing’s CapEx budget may increase upon the purchase of pipeline assets from Delek Refining.

When we look at our capital structure as of the end of the year, our cash and cash equivalents totaled $15.3 million and we had $286 million in debt. In the aggregate, we had a net debt position of just over $270 million at year-end. At the conclusion of the fourth quarter, Delek US and its subsidiaries were in compliance with all debt covenants. Excess availability under our four revolving credit facilities was approximately $164 million through 12/31.

Financial flexibility is a key advantage in the current economic climate. In the coming months, we do intend to improve the strength of our balance sheet through a combination of debt reduction and refinancing efforts, many of which are already underway.

Finally, based on our projections, we believe we had ample liquidities to support the ongoing operations and to meet our upcoming debt maturities while also financing the ongoing capital projects at the refinery in the retail business.

Now, at this time, I will turn the call back over to Christy so we can begin a question-and-answer session.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of John Brownlow [ph] of Morgan Keegan.

Ben Brownlow -- Morgan Keegan

Good morning. Ben Brownlow. I guess first off, can you talk about what drove the refining margins versus the industry?

Uzi Yemin

Yes. Good morning, John, this is Uzi. I guess for us, if you recall during the first quarter and second quarter of last year we entered into two hedging structures, if you will, that will last from – through 2009 and some of it 2010, two hedging initiatives. The two hedging initiatives were the ethanol hedging and the ultra low sulfur diesel hedging. The ultra low sulfur diesel was hedged for $24 during the first half of 2008 – second half of 2008 and it was $20 for 2009. So, we see this going on and that brought some money to the table.

The second part is the ethanol hedging and the – that was (inaudible) hedging related to ethanol and same thing we see going on in 2009 as well. Overall, we have – we benefited out of these two $7 per barrel.

Ben Brownlow -- Morgan Keegan

So, if the container market continues and oil prices stay where they are, so you don’t have those volumetric losses, would you expect that $7 spread to continue?

Uzi Yemin

Well, I don’t know if the $7 spread will continue, but I do expect very good effective on the first quarter – second quarter, just because of the simple fact that if you look at ultra low sulfur diesel crack, it’s $6 or $5.5 today. As I said, we have it for $20 for the entire year.

Ben Brownlow -- Morgan Keegan

Okay. And then the product sell through at the refinery, was that due to just cleaning out product or--?

Uzi Yemin

No, no. No, hold – I don’t know that we sold two – we did sell some of the products, but we still hold almost one million barrels of inventory at the refinery, mostly crude, but it doesn’t matter, we do have the inventory.

Ben Brownlow -- Morgan Keegan

Okay. And then going to an accounting question here, on Page Nine of your release, you have a $9.7 million reduction to COGS and the corporate and other eliminations. What is that?

Uzi Yemin

Hold on for one second, John.

Ben Brownlow -- Morgan Keegan

Alright, thanks.

Uzi Yemin

We are trying to find the nine – that Page Nine.

Ben Brownlow -- Morgan Keegan

It’s under the segment data.

Uzi Yemin

Oh, I know what it is. We had our hedging at Delek US plus we have a crude put. When crude went to $100, we hedged some of the crude prices and then it collapsed, and we gained almost $3 million out of that.

Ben Brownlow -- Morgan Keegan

Okay--

Uzi Yemin

For ethanol and crude put.

Ed Morgan

That were at Delek US, Ben

Ben Brownlow -- Morgan Keegan

Okay, great. And then just a couple of quick questions on the retail side. The selling of the Virginia stores, what will you use the capital for and are you going to sit on that until the environment improves or are you pursuing acquisitions right now?

Uzi Yemin

I am not sure I understand the question. Can you repeat that question, please?

Ben Brownlow -- Morgan Keegan

With the selling of the Virginia stores--

Uzi Yemin

Yes, sir.

Ben Brownlow -- Morgan Keegan

What will you use that capital for? Are you pursuing acquisitions right now?

Uzi Yemin

We paid debt with that – with the amount we got from the Virginia sales. However, the market condition are very favorable, if you will, to somebody that has what two times our debt to EBITDA is roughly two times. And some of our peer don’t enjoy that balance sheet. So we do see ourselves looking into opportunities. However, I must be cautious with that. The market is very trendy, as you know. And we want to be careful when we make an acquisition to protect our balance sheet. Do you want to add something to that, Ed?

Ed Morgan

I just was going to add to, Ben, we do have the ability under our credit agreement to set aside some amount of those proceeds for future reinvestment. Over the course of a couple of years those transactions are taking place that could total up to $10 million.

Ben Brownlow -- Morgan Keegan

Okay, great. And then one last question, I will jump back into queue. The fuel shortages that you saw in the – earlier in the quarter, is there anyway to quantify the impact to comps and you made a comment that store traffic is normalized. Just wondering if you can elaborate on that?

Fred Green

Yes, thinks have gone back to normal. You know, we had some supply issues late September through October and early into November. DOT statistics showed miles driven were down 6.1. For the quarter, we came down about 6, so we were basically in line. And gas prices today, things are getting back to normal.

Ben Brownlow -- Morgan Keegan

And care to elaborate on what you would qualify as normal?

Uzi Yemin

Well, we don’t give guidance, but I don’t think that we will see a 6% reduction in the first quarter.

Ben Brownlow -- Morgan Keegan

Okay, great. Thank you very much.

Operator

Your next question comes from the line of Guy Daver [ph] of Simmons & Company.

Guy Daver -- Simmons & Company

Good morning guys.

Uzi Yemin

Good morning.

Guy Daver -- Simmons & Company

Just another quick followup on the demand side of things. Any leading edge indicators maybe dwell into demand trends that you are seeing for gasoline and for diesel in the markets that you serve?

Uzi Yemin

Again, as I said, we don’t give guidance. However, we think that when price point is below $2 reduction of over 5% or 6% that we saw in the past – and we said it earlier, this year, we are going to back normalized, call it between to 1% to 3% reduction. In some areas, even better than last year.

Guy Daver -- Simmons & Company

And that’s for both gasoline and for diesel?

Uzi Yemin

No, mainly gasoline --

Guy Daver -- Simmons & Company

(inaudible).

Uzi Yemin

Yes.

Guy Daver -- Simmons & Company

What were you saying about distillate?

Uzi Yemin

Distillate is still – would the (inaudible) suffering the way they suffer. We still see a reduction bigger than 1% to 3%.

Guy Daver -- Simmons & Company

Okay, thank you. And then one other question. Just as a remainder on you crude optimization project, could you kind of quantify what type of benefit you expect to see on your feedstock side and also on the product yield side, moving forward?

Fred Green

Sure, this is Fred Green. The projects, we are not going to complete everything this year, the FCC reactor and sulfur capability will be early next year. But we think we’ll see – be able to recognize roughly three gravity point reduction in the quality of our crude. And then in this year that should translate into roughly say $20 million or two-thirds of the – our total expected benefit for the projects. Yield structure will be fairly similar to what it is currently.

Guy Daver -- Simmons & Company

Okay. Thank you guys for the comments.

Operator

Your next question comes from the line of Brian Shore of Avondale.

Brian Shore -- Avondale Partners

Hi, good morning, guys. Thanks for taking my questions here. Just one quick question I guess on the accounting – the change in accounting treatment for Lion Oil. Can you kind of give some color there on the rationale for that change and I know you’ve been sort of limited in what you can say about operations there historically, any color on the quarter?

Ed Morgan

Well, we changed the – and Brian, this is Ed – we changed the accounting for Lion effective October 1st, so there is no impact of Lion in the fourth quarter at ll. But from our perspective, the accounting at the cost method is really more appropriately reflecting kind of our involvement in that business just at this time today.

Brian Shore -- Avondale Partners

That just means you don’t have a – as much of a controlling stake in the operations?

Ed Morgan

It is tied to that. That is one reflection point, correct.

Uzi Yemin

Obviously, Brian, we – what we see ourselves doing with -- and with Lion Oil is since we are at this point not as involved as somebody that should consolidate numbers should be, I don’t think that we should consolidated that on an equity method. And that gives us a flexibility as well not to explain every quarter something that we don’t know.

Brian Shore -- Avondale Partners

Okay. You know obviously fuel margins were outstanding in the quarter and any I guess forward-looking – I know you don’t give guidance, but any sort of forward-looking comments there? I mean are you able to sort of retain the stickiness on pricing?

Uzi Yemin

Are you talking about the retail side or the refining side?

Brian Shore -- Avondale Partners

On the retail side.

Uzi Yemin

Well, $0.24 per gallon is not normalized. And we – if you look at our numbers in the last four, five years, besides last year, we are usually $0.14 to $0.16 per gallon. I don’t see any reason to think that this is going to be different this year.

Brian Shore -- Avondale Partners

Okay. The seven stores in Virginia that you’ve sold since the end of the quarter, is it fair to say the – I guess the proceeds you are getting there are about the same as you got for the others?

Uzi Yemin

Well, I don’t know that we give guidance on that. However, let me tell you when we decided to sell the Virginia stores, we had a target that we are not going to have a write-off [ph] if you will of – something significant. So we keep that target.

Brian Shore -- Avondale Partners

Okay. And then just lastly, the insurance recoveries that you got in the fourth quarter, where did that fall on the income statement? Was that in the refining cost line?

Uzi Yemin

I don’t know that we got any proceeds. We did have a receivable that after a lot of inventory, yes, but it goes to the refining side. Go ahead.

Ed Morgan

Yes. It is in cost of sales, Brian.

Brian Shore -- Avondale Partners

Okay. Alright. Great, thanks so much guys.

Operator

(Operator instructions) Your next question comes from the line of Eric Walania of William Blair.

Eric Walania -- William Blair

Good morning gentlemen.

Uzi Yemin

Good morning, Eric.

Eric Walania -- William Blair

A couple of questions here. I guess first one is maybe either for Ed or Lyn. Could you just maybe talk a little bit about what the impact was to your merchandise margins here in the fourth quarter from the inventory adjustments? And if I recall correctly, you had something similar last year in the fourth quarter. Is this something that will occur in the fourth quarter every year, going forward?

Lyn Gregory

No, this was something quite different. We utilized our scanning data and redid all our planograms for our stores and we actually went in and we removed items that we call legacy items that have been there for a while and were not really moving at the rate that we would like. And at the same time, we had some trial items that were not moving very rapidly. So, in effect, what we did is we marked those items down. In total it was about $2 million. Effectively it was about 2% hit in margin, probably 0.5% for the year. But now we have our stores freshly set with items now that are going to turn a little bit faster, and it was just one -- kind of a -- what we would call a one-time cleanup.

Eric Walania -- William Blair

Got you, great. Thank you, Lyn. And this next one is actually for Fred. Heard all your comments, Fred, about the outlook for the refinery. If I read the press release correctly, though, there was still some regulatory investigations going on. What is the risk that these regulatory investigations continue to the point where you can't open the refinery in May? How would you handicap that risk?

Fred Green

I would put that risk as fairly low. It’s been a pretty cooperative effort with Osher [ph] and CSB who are the two primary regulatory investigators at this point. Osher has completed their work in the unit itself and they are now back to working on additional interviews and data collection. But I think so far everything has gone well there. Their investigation, we expect it to conclude somewhere early to mid-May and that at this point, we don’t think will impact our ability to start up.

Eric Walania -- William Blair

Okay, great. Actually, if I can jump back to the retail side here. Lyn, the reimaging that you’ve done so far in the stores what kind of lift have you seen to gas comps or merchandise comps from – at the store pre- and post reimaging?

Lyn Gregory

Let me just tell you, in total for the year 2008, from the time that the reimaging was complete, they performed better than our other stores by 7% in merchandise and approximately 20% in fuel. So we are very pleased with the performance and the continued performance.

Eric Walania -- William Blair

Those are all the stores that – I think it was 40% of the stores you reimaged since you--?

Lyn Gregory

No, those were the original 51 that we did converted to our MAPCO Mart brand and the reimage last spring.

Eric Walania -- William Blair

Okay. And the more recent ones, have they been as good or--?

Lyn Gregory

We are currently underway with 21 in the Nashville market and they have not been completed as we speak.

Eric Walania -- William Blair

Got you. Great. Okay then my last couple of questions are for Uzi. I have been hearing about some of your competitors are possibly looking at acquiring ethanol assets. Is that on your list of assets that you would consider?

Uzi Yemin

To be honest, no. I do think, I told you that in the past, Eric, that the idea of producing energy out of food is not the smartest idea in our mind. But there will be other assets as people unwind their balance sheet that we will look into.

Eric Walania -- William Blair

Okay, great. And my last one is just regarding some of the comments made about balance sheet strength and liquidity. You guys pay a dividend. Has there been any re-evaluation of why we should continue to have that paid? You are – you talk about being a growth company. I would think that that capital could be better employed.

Uzi Yemin

Dividend payment or evaluating of dividend payment is an ongoing process. At this point, our liquidity allowed us to pay dividend. To be honest, I don’t see any reason why we won't pay dividend in the future. But with that being said, if there will be an acquisition or the capital will be needed inside the Company then we will look into that.

Eric Walania -- William Blair

Okay, great. That’s all I have. Thank you very much.

Uzi Yemin

Thanks, Eric.

Operator

There are not further questions at this time. I will now turn the call back over to Mr. Uzi Yemin for any closing remarks.

Uzi Yemin

Well, thank you, Christy. I would like to salute our employees for their outstanding efforts on behalf of our stakeholders during 2008. In addition, I want to extend my sincere thanks to all of our partners, vendors, customers, and shareholders for their continued support in the past, present, and future. That concludes our conference call today. We look forward to speaking with you during our first quarter 2009 conference call. With any further questions, just call Noel Ryan and you know his number. Thank you.

Operator

Thank you again for participating in today’s conference call. You may now disconnect.

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Source: Delek US Holdings, Inc. Q4 2008 Earnings Call Transcript
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