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Delek US Holdings, Inc. (NYSE:DK)

Q2 2009 Earnings Call

August 6, 2009 12:00 pm ET

Executives

Noel Ryan – Director of Investor Relations

Ezra Uzi Yemin – President, Chief Executive Officer & Director

Frederec Green – President, Chief Operating Officer of Delek Refining, Inc. & VP Delek Marketing & Supply, Inc.

Lynwood Gregory – Senior Vice President, Executive Vice President & Chief Operating Officer of MAPCO Express, Inc.

Joane Walker – Chief Accounting Officer

Analysts

[Ben Brownlow]

[Blake Fernandez]

Paul Cheng – Barclays Capital

[Eric Alania]

Brian Shore – Avondale Partners

Paul Sankey – Deutsche Bank Securities

Jeff Dietert – Simmons & Company International

Operator

My name is Whitney and I will be your conference operator today. At this time I would like to welcome everyone to the second quarter 2009 Delek US Holdings 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) I will now turn the call over to Mr. Noel Ryan, Director of Investor Relations.

Noel Ryan

Welcome to the Delek US Holdings conference call for the second quarter 2009. 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; Lyn Gregory, COO of MAPCO Express; Joane Walker, Chief Accounting Officer of Delek US; and myself. 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 the 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 statement may be affected by important factors set forth in Delek’s filings at the Securities & Exchange Commission and in the second 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 publically update any forward-looking statements whether as a result of new information, future events or otherwise. Today’s call is being recorded and will be available for replay beginning today and ending August 20, 2009 by dialing 800-642-1687 with the ID number 20105981. An online replay may also be accessed for the next 90 days at the company’s website at www.DelekUS.com.

During today’s call I will begin with a high level financial overview of the quarter. Next, Fred Green President and CEO of Delek Refining will provide an update on our refining and marketing business segments. Then Gregory CEO of MAPCO Express will follow this discussion with an update on our retail business segment. Joane Walker, Chief Accounting Officer of Delek US will follow with a discussion of our capital spending, capital structure, liquidity and taxes at the conclusion of the second quarter 2009. Finally Uzi Yemin our President and CEO will provide some concluding commentary. At the conclusion of these prepared remarks we will open the call for questions.

Delek US reported net income from continuing operations of $26.3 million or $0.48 per diluted share in the second quarter 2009 versus net income from continuing operations of $3.3 million or $0.06 per diluted share in the second quarter 2008. Excluding special items, the company reported adjusted net income from continuing operations of $12.8 million or $0.24 per diluted share. On page four of the second quarter earnings release published earlier today, we provide a reconciliation schedule in calculating adjusted net income from continuing operations for the three months ended June 30, 2009.

Our total contribution margin increased from $28.6 million in the second quarter 2008 to $76.1 million in the second quarter 2009 supported by positive contribution margin from across each of our three business segments. Our second quarter results benefited from the receipt of more than $57 million in gross insurance proceeds, the continued benefit of a WTI contengo market structure in addition to a significant decline in commodity prices when compared to the prior year period.

With that introductory overview, I’ll hand the call over to Fred Green for a discussion of our refining operations.

Frederec Green

I’d like to begin by confirming that our Tyler refining returned to full operation during the second quarter positioning us to produce and sell a full range of finished products. The refinery, through a phased startup was fully operational on May 18th. We produced 53,103 barrels per day versus 52,517 per day in the second quarter of ’08. We sold 50,102 barrels per day during the second quarter of 2009 versus 51,731 in the prior period.

During second quarter we sought to optimize our product slate to take advantage of an improved gasoline crack. As a result, nearly 50% of our total production in the quarter was gasoline. Refining margin, adding back intercompany marketing fees of $1.97 per barrel was $14.52 per barrel sold compared to $10.49 per barrel sold during the same quarter last year. [532] Gulf Coast crack spread for the 91 days of the second quarter was $7.76 per barrel, [532] crack spread was $8.08 for the four days we ran during the quarter as indicated in today’s earnings release.

With completion of the full turnaround in the bulk of our crude optimization projects during April, we’ve completed the vast majority of our ’09 capital projects at the refinery. With most of the work on our crude optimization projects finished, we’ve significantly increased our ability to process a wider range of crudes from light sweet to medium sour. A key competitive advantage for us as sweet sour spreads become more attractive over time.

Moving on to a discussion of insurance, as discussed last quarter our business interruption insurance policy which compensates us for loss revenue and expenses while we’re off line takes in to account current market conditions when calculating the value of our total claim. To that end, note that our business interruption claim was positively impacted by several factors during the second quarter which collectively should benefit future proceeds generated from our claim. First, we continue to benefit from the WTI contengo market structure which begin in December of last year and continued through the second quarter of ’09.

This contengo market structure which begin at $0.90 per barrel in December averaged $1.90 in the second quarter resulting in a direct reduction to our cost of crude. For the first six months of ’09 the contengo market structures averaged $3.22 per barrel. Second, due to the fact that Tyler’s a refinery that processes primarily West Texas intermediate crude, currently one of the most heavily discounted sweet crudes in the world, we’re very well positioned to experience the full benefit of the contengo market structure when compared to other refineries that run crude at prices linked to Brent or LLS.

Finally, note that crude prices remained at relatively low levels during the second quarter of 2009. In fact, for the full 91 days of the quarter WTI averaged just below $60 per barrel, more than 50% lower than where it traded in the same quarter last year. As we stated in the past, low crude prices benefit us in two ways as they serve to reduce the margin of loss on residual products and to minimize the financial impact of the refinery’s volume metric loss.

During the second quarter 2009 we received total proceeds of $57.6 million related to claims under our property damage and business interruption policies including $37 million from the business interruption and $17.3 million from the property damage net of a $3.3 million property damage expense. In total, net property damage expense the company booked $54.3 million in net insurance proceeds in the second quarter. Since the start of the third quarter we’ve received approvals for additional payments of $12 million and we anticipate additional insurance proceeds will be forth coming as we finalize claims in the second half of this year.

At present, we anticipate that the total combined cost of reconstruction and related expenses in 2009 to be approximately $58.6 million of which $11.2 million was expensed during the first half of ’09. During November 20th of last year and June 30th this year, we received total cash payments of $96.6 million related to the combined business interruption and property damage claims. In closing out my remarks on refining, market conditions at the refinery have improved in July supported by strengthening gas crack and the continuation of the contengo market structure with July ’09 contengo reported at just below $1 per barrel.

Turning to a brief discussion of marketing and supply, the marketing segment contribution margin was $7.7 million in the second quarter compared to $6.1 million in the second quarter of last year. Second quarter marketing segment contribution margin includes $4.3 million of intercompany marketing fees paid from refining to the marketing segment. As indicated last quarter, in late March we completed the intercompany transfer of certain pipeline and storage assets from the refining segment to the marketing segment. We anticipate this transactional shift approximately $6 million in contribution margin from refining to marketing on an annual basis subject to certain crude throughput levels on the pipeline.

As a result, the marketing segment received $2 million in intercompany fees during the second quarter of ’09 related to this transaction. With that, I’ll turn the call over to Lyn Gregory for an update on the retail.

Lynwood Gregory

Turning to the retail segment, second quarter 2009 contribution margin declined to $9.9 million compared to $15.6 million in the second quarter 2008. Several factors contributed to the year-over-year decline; first, retail fuel margins declined from elevated levels in the second quarter 2008 in part due to diminished ethanol blending economics when compared to the prior year period. Secondly, elevated unemployment in certain of our core markets has contributed to a reduction in discretionary consumer spending.

Retail fuel margin declined to $0.123 per gallon in the second quarter of 2009 compared to $0.174 per gallon in the second quarter 2008. Same store gallon sales declined less than 1% in the second quarter 2009 compared to a same store decline of 2.1% in the first quarter 2009 and a decline of 6% in the fourth quarter 2008. We have narrowed the margin of decline on same store gallons sold in recent quarters. We believe this is attributable to a combination of lower fuel prices, a general trend towards lower cost vacations in place of flight based travel as well as generally mild well trends for this time of the year.

In addition, we have had the positive early success on our summer fuel promotion which we began in early June. From a macro fuel demand perspective, we were encouraged to see that the recent Department of Transportation data for the months of April and May, according to the DOT the total number of vehicles miles traveled increased by .6% in April 2009, the first such increase since October 2007. The May 2009 DOT figure further affirms the positive April reading indicating a second consecutive month of positive year-over-year gains.

Generally, we believe that these data points have the potential to continue in a positive direction and that consumer demand will follow. Same store merchandise sales declined 1.3% in the second quarter 2009. A sales increase in the cigarette and other tobacco categories was offset by declines in the beer and dairy categories. Total second quarter merchandise sales declined to $98.6 million from $100.2 million in the second quarter 2008. Second quarter 2009 merchandise margin was 30.1% compared to a 31.8% in the second quarter 2008.

Although the federal excise tax on cigarettes implemented earlier this year resulted in an increase in sales and gross profit dollars, the overall gross profit margin carried by cigarettes declined serving to weigh on our overall merchandise margin. Given that the cigarette category has historically comprised of approximately one third of our merchandise sales mix, we expect that our overall merchandise margin may be slightly lower going forward.

Operating expense as a percent of merchandise sales plus total gallons declined to 15.8% in the second quarter 2009 versus 16.6% in the prior year period. This is the lowest level since the fourth quarter of 2007. This improvement in this statistic is largely the result of the credit card expense in that period. In the first six months of 2009, the retail segment reimaged 21 stores. Through June 2009 the retail segment has reimaged approximately 25% of the total store base.

Given the significant investment we’ve made in our reimaged locations, allow me to share some performance metrics on the 50 reimaged stores we have had in operation more than one year. For the six months ending June 30, 2009 the 50 reimaged stores opened one year reported a same store fuel gallon sales increase of 5% compared to a -1.4% for the entire store base during the same period. In addition, the 50 reimaged stores opened one year reported positive merchandise sales growth of 5% compared to a -2.8% for the entire store base during the same period.

With that, I’ll hand the call over to Joane for a discussion of our capital spending, capital structure and liquidity.

Joane Walker

Turning to a discussion of capital spending, based upon a broadening scope of project work related to the capital projects at the refinery, we increased our full year ’09 capital spending budget from $168.5 million to $172.3 million. The current total projected 2009 cap ex budget at the refinery has increased from $149 million to $152.8 million. There were two main reasons for the increase in our ’09 cap ex budget both of them refining segment related.

First, the estimate of the budgeted turnaround costs we provided last quarter didn’t include certain necessary work found during the project. This work add $10.2 million to the overall turnaround costs bringing the final costs of the turnaround to $46.5 million. Secondly, the cost associated with rebuilding the sat gas unit increased $1 million above the prior budget of $46.4 million. The increase of the sat gas rebuild was related to the increase in the scope of work and higher than expected instrumentation and electrical costs.

We expect to be reimbursed for most of the work related to the reconstruction of the units subject of course to the insurance adjustable. To help partially offset these increases, we have deferred several million in discretionary and other capital expenditures until 2010. The completion of approximately $135 million in capital projects at the refinery in May and June of ’09 will have an impact on our future depreciation expense. We estimate that third quarter depreciation will increase approximately $1.6 million.

For the full year 2009 we still plan to spend approximately $18 million in the retail segment, $14 million of which is expected to consist of one raze and rebuild and the reimaging of 35 to 40 of our existing stores. Through the second quarter of ’09 we spent $5.6 million on these projects including the completion of 21 reimaged stores. As in the retail segment, our ’09 capital budget for the marketing segment is unchanged at $1.5 million.

As of June 30, 2009 our cash balance totaled $21 million and we had $288.7 million in debt. Aggregating these, our net debt position stood at $268.7 million. At the conclusion of the second quarter Delek US and its subsidiaries were in compliance with all debt covenants. With that, I’ll hand the call over to Uzi for some closing remarks.

Ezra Uzi Yemin

Entering the third quarter, refining economics have shown signs of modest improvement supported by a strong gasoline crack. Given that we purchase crude on a CMA basis in the future markets, the WTI contengo market structure experienced year-to-date has served to greatly reduce our costs of crude throughout 2009 much to the benefit of our refining margin. Fortunately, the market remains in contengo as we enter the third quarter.

At MAPCO, our retail visits are showing signs of improvement entering the third quarter as store traffic has picked up during the month of July relative to the first half of 2009. Finally, our CFO search remains ongoing. We have been in touch with some experienced talented individuals in recent months. We are currently in the interview process and we’ll provide more information once we have confirmed the hire of the new CFO.

With that, I’ll turn the call over to the operator so we can begin the Q&A session.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from [Ben Brownlow].

[Ben Brownlow]

I was hoping Lyn you could touch on the reimaged stores especially the 21 recent in Nashville and just what you’re seeing on early indications for what you’re seeing there?

Lynwood Gregory

The 21 that we reimaged in Nashville are all MAPCO branded and we did a little bit more of an extensive remodeling process on these as opposed to the first 51 which were primarily Major branded. To that extent, we totally renovated the floors, ceilings, bathrooms, countertops, exteriors, soffits, underneath the canopy lights and with all new graphics. They really look remarkable, all 21 of them look brand new. We’re very pleased with the early results. It’s definitely designed to pick up all various ages and it seems to be working very favorably for us.

Ezra Uzi Yemin

In regard to the results, one thing that we all need to remember is that the reimage project was going during the first quarter and the second quarter. That means that all of the stores suffered from less traffic while they were being renovated. We see early pick up but it’s a little early to talk about the results.

Lynwood Gregory

In addition to Uzi’s comments too, it was more of an extensive reimage program here where we actually put in new floors on the majority of them so we had two or three days of actual downtime on these facilities. But, things are going very well.

[Ben Brownlow]

The cigarette sales, can you break out if possible the impact to the gross margin and the comps?

Lynwood Gregory

Basically the effect on the margin percentage it’s affected us approximately 3/10ths of a percent. At the same time, the federal tax went in to effect the suppliers increased their prices to us approximately $7.10 a carton and we went ahead and increased them to $8.50 a carton. Therefore, our gross profit margin dropped as I previously stated but our gross profit dollars have continued to increase. At the same time this happened in April, the surrounding states of Tennessee, Arkansas, Kentucky and Mississippi raised their state excise tax up so we’re seeing a good positive trend on our carton sales as well as we’re seeing a good positive trend on our gross profit dollars in the category.

[Ben Brownlow]

So if you were to back out the cigarette sales and look at all the other merchandise within the store, what would the comp kind of run rate be for Q2? You kind of talked about an early pickup in July and I’m just wondering if you can give a little more color on that?

Lynwood Gregory

Are you talking comp rates on margin percentage or sales?

[Ben Brownlow]

Sales.

Lynwood Gregory

What we’re seeing out there is we’re seeing our cigarettes and other tobacco and our soft drink category pick up. Where we’re seeing the decline is primarily on the discretionary spending category of the general merchandise and at the same time the diary category. Then the diary category we have our energy drinks which are as you’re aware, they’re fairly expensive and we’ve seen a large reduction in the energy drink category which is moving that diary category down along with the GM.

So, you’ve kind of got a wash with the cigarette and other tobacco category moving up kind of offset by those other two. In addition, and I’ve been in the business quite a long time, when we go through these economic slowdowns, you have some tendency for customers to shop their beer at the supermarkets. What we’ve seen is over the last months is a gradual shift back to us but at the same time our beer category sales are down but that’s something that we are expecting to recover.

We’ve got a lot of exciting promotions going on right now. As I mentioned in my part of the script, we’ve got a daily gas giveaway going on throughout the company which began on June 8th and we had one winner per day that will win $1,200 which is equivalent to a year’s supply of free gasoline. We’ve had more than 750,000 entries, we’re having tremendous excitement in the communities, we’re putting the winners in our stores and in the local newspapers, we have billboards out there. This is all part of our savings is simple marketing strategy and it’s really increasing our customer traffic.

[Ben Brownlow]

Just one last question for me on kind of moving over to the cap ex side, for the refinery if you can just kind of refresh my memory, you spent $135 million cap ex year-to-date on the refinery, what dollar of that was for the rebuild versus the other projects?

Ezra Uzi Yemin

Well, I’m going by memory, but I think $58.7 million excluding expenses, less expenses it’s $47 million. So $58.7, $11 of it was expensed already it’s in the P&Ls and $47 is cap ex.

[Ben Brownlow]

Then of that $12 million that you’ve already been approved for what kind of ballparkish percent is for BI versus property and damage?

Ezra Uzi Yemin

Well, we haven’t made the decision yet. One thing I’d like to mention here in regards to the insurance policies, we do expect a more significant amount to be arrived. So, we’ll make a decision as we see how the claim proceeds and how the cash coming in. We haven’t made a decision yet.

Operator

Your next question comes from [Blake Fernandez].

[Blake Fernandez]

Maybe a question for Fred, I’m curious now that Tyler’s back up and running you’re seeing obviously industry wide a lot of economic run cuts and I’m just curious is that something that you guys are entertaining or are you planning to run pretty much full out?

Frederec Green

We’ve been working since we came back up to get all of our marketing channels, sales channels back up to speed. So, we’re basically running as much as our sales channels can accommodate.

[Blake Fernandez]

I guess is that an indication that the Tyler Texas market demand seems fairly robust?

Ezra Uzi Yemin

Well, what we see is basically growing customer base, every week is a better week. Every week we look to increase our production. As you know, Blake we don’t give guidance but I don’t think that we see what the industry has seen. We don’t want any [inaudible] question.

[Blake Fernandez]

The next question maybe for Lyn, I’m curious with the recent increase in minimum wage, do you expect that to have a material impact on the retail business on your expense side?

Lynwood Gregory

No, it will have a diminuous impact, our average salary runs between $7.50 and $7.75 so the minimum wage going to $7.25 really has no affect.

[Blake Fernandez]

The final one for me is on the potential for maybe a logistics MLP if you will down the road. I’m wondering if there are any acquisition opportunities on kind of a standalone basis in order to get to the scale that you need in order to spin that out or would it really be in conjunction with kind of a broader M&A package?

Frederec Green

The answer to that is they are both, the standalone opportunities tend to be a little bit pricier than the opportunities that may get tacked on to say a refinery acquisition. Usually if you buy a refinery it’s going to have a terminal or a pipeline associated with it and you’re usually not having to pay MLP multiples for those assets. The answer is both, I think from an economic standpoint we’d rather see it as part of a broader package.

Operator

Your next question comes from Paul Cheng – Barclays Capital.

Paul Cheng – Barclays Capital

Several quick questions, first usually I note that you guys probably by now to have submit all your BI claims, can you share with us what is the total amount that you have submit?

Ezra Uzi Yemin

We’re still calculating that and I prefer to keep these numbers to myself to be honest just because of the fact that we don’t give guidance. We’re still calculating that with formulas but I’m going to share with you Paul, as I told you in the past, the amounts are significantly higher than what we see right now.

Paul Cheng – Barclays Capital

For 2010, can you share with us what maybe the cap ex looks like?

Ezra Uzi Yemin

2010 as we told you in the past, we are looking around $65 to $70 million on the refining side plus $15 to $17 million on the MAPCO side. The fact that we need to complete the [inaudible] project but [inaudible] 2011 end to that or it’s part of that number. Otherwise, we see going forward after we completed the turnaround between $25 and $30 million on a regular basis cap ex. So, you can model $25 to $30 million.

Paul Cheng – Barclays Capital

$25 to $30 just for refining right?

Ezra Uzi Yemin

That’s right but this is going forward after 2010, we’re talking about 2011 and forward.

Paul Cheng – Barclays Capital

In the special items there’s a $5.2 million inventory gain, what’s the nature of this one and why would that be treated as a special item?

Ezra Uzi Yemin

What we did in the past and Joane can add to that if she finds my answer not complete, but what we did in the past was we had LIFO losses, we classified them as special items. As we restored our LIFO and as crude went up above $50 and we mentioned in the past that we bought the crude around $50, as crude moved up over $50 we restored back our [inaudible]. We wanted to be consistent with our past practice if you will when we treated LIFO losses as special items, we didn’t want to show a gain which is not special items when we restored the LIFO.

Paul Cheng – Barclays Capital

This is just very simple on the LIFO that tells me the market has probably dropped below your layer and then you’re taking a markdown on that and so now you restored that back to your original cost level?

Ezra Uzi Yemin

That’s exactly the calculation.

Operator

Your next question comes from [Eric Alania].

[Eric Alania]

A couple of questions here, I guess the first one to start maybe with Lyn, Lyn you talked about some of the gas promos that you’re doing, have you actually seen the store traffic in July go back positive or is it still negative?

Lynwood Gregory

Yes, most definitely and we’re seeing increased momentum. We’re going to run this promotion until the middle of September and again, like I said we’ve had 750,000 registrations to date and it’s just creating a lot of excitement and we’re seeing a lot of new faces in our stores.

[Eric Alania]

From what you can tell are people going in to the store as well or are they just standing in line at the pump?

Lynwood Gregory

They’re going in to the stores as well. That was one of the main purposes of running this is to get them in to the store. They’re registering on our system so they need to come in and actually register on the laptop and it goes in and we have that random pick once a day. It’s working well pulling them from the pumps in to the store.

[Eric Alania]

Last question for you Lyn is have you seen in the last month or two any change in the gas mix? Are people buying more premium now or are they still sticking with the regular? Any change in behavior?

Lynwood Gregory

I’d say it’s basically about the same. I haven’t seen any unusual switch.

Ezra Uzi Yemin

We can check that for you and get back to you Eric if you need that.

[Eric Alania]

My next question is actually for Fred, Fred obviously with the refinery back up running full steam now how do you think about the refinery or I guess a more near term strategic questions is as we head in to hurricane season how are you positioning the refinery? How are you thinking about the refinery differently this year versus prior years or not at all?

Frederec Green

I mean obviously since we bought the refinery in two years we’ve benefitted from an active hurricane season. One of the things that we heard loud and clear from customers after November, a key for them was reliability of supply. So, we’re rearranging our base inventories if you will inside the refinery towards less intermediates and more finished products in the tanks so we’ll be able to take advantage of that. We’re also looking at pushing some of that inventory back in to crude from intermediate feed stocks as well just so we might be in a position to take advantage of price opportunities from a hurricane.

[Eric Alania]

Can someone maybe comment quickly in terms of what your expectations are for free cash flow in ’09 and 2010? I know you made some comments about depreciation earlier but I’d like to get my arms around what you could potentially generate in terms of free cash in ’09 and 2010.

Ezra Uzi Yemin

Eric, obviously we don’t know the [inaudible] but based on our projections and obviously we have more insurance proceeds to come, we as you saw in the last three quarters our debt, even though we invested almost [$150] million, didn’t go up. Now, as these projects are basically completed our expectation is to generate more and more free cash flow that will serve us for other purposes. If you need exact numbers I guess after the call the guys here would like to help you with it.

[Eric Alania]

My last question for you Uzi is maybe just comment quickly about the Virginia stores that you sold, have you been happy with the price you’ve received?

Ezra Uzi Yemin

Well basically it was a wash, that wasn’t a market that we felt comfortable with. It’s a market that we didn’t have enough stores, enough presence and if you ask me if we needed to do that, yes sir we don’t regret that decision.

[Eric Alania]

Then I guess just more broadly speaking in terms of the multiples you’re seeing out in the marketplace today for convenience stores, how have they trended?

Ezra Uzi Yemin

Call it between five and six. One notch below what it used to be a year ago or two years ago. Two years ago it use to be six to seven, now we’re talking about five to six.

Operator

Your next question comes from Brian Shore – Avondale Partners.

Brian Shore – Avondale Partners

Just following up on that question there, I guess maybe comment a little bit on the assets that you’re seeing out there potentially today and what you’re thoughts are for the next 12 months or so on how active you plan to be?

Ezra Uzi Yemin

Are you talking about C stores or refineries or both?

Brian Shore – Avondale Partners

All of the above.

Ezra Uzi Yemin

Well, refineries you’ve probably seen the multiples yourself, you heard about the latest deal that was done and we basically think right now when everybody is trading $3,000 per barrel more or less for a daily basis, this is at the lower range of the cycle so we think prices are pretty attractive. It doesn’t mean that we’re going to jump as we didn’t in the last two years in to an acquisition that won’t have synergies or will add value to the shareholders. We are cautious about it but you see that we’re talking about between $2,500 and $3,500 per barrel. In regards to the C stores, I’m going to just repeat what I said earlier, we’re talking about five to six times EBITDA as a general rule.

Brian Shore – Avondale Partners

I guess I just meant more, and maybe just on the C store side, are you guys seeing assets out there that look attractive or are in markets that you might want to get in to?

Ezra Uzi Yemin

As we all know, the C store market or C store segment if you will is under pressure in the last six to nine months, actually 12 months. So, multiples are coming down, EBITDAs are coming down so yes we see more and more opportunities in the market place.

Brian Shore – Avondale Partners

Fred, on the refining side understanding that the contengo contributed about $1.90 per barrel in the quarter, what other factors played in to your operating margin compared to the benchmark track and how you were able to outperform it so well?

Frederec Green

I think there are a couple of things to look at there, the lower crude price helped significantly. This is something that we’ve stressed that hurt us last year when crude got up to almost $150 a barrel. We have about a 2.5% volume metric loss at the refinery so lower crude prices dropped the financial impact of the volume metric loss. Then the other factor was the gap in price between the residual products that we make, the propanes and butanes relative to the price of crude. Lower crude price helps us in terms of comparing versus the benchmark.

Ezra Uzi Yemin

Another factor Brian, if you don’t mind me adding, as we drop below $50, as I mentioned earlier we drop below the LIFO layer and then as crude went up over $50 we restored almost, I think, I’m going by memory but almost all our LIFO layer maybe except one or two and obviously now crude is going up even above that. If you look at our financials, obviously what’s reflected in the P&L is because we used the LIFO method but we have another $11 million of differential between where the LIFO layer stands and the actual market price by the end of the quarter. By the end of the quarter crude stood around the same number it stands right now, $69 right now, I think as of this morning it was $71 so that helped our quarter as well.

Brian Shore – Avondale Partners

I guess on the operating expense side, has there been any sort of impact from I guess the work you’ve done on the refinery and assuming a normalized quarter where you’re operating 90 or so days, any impact that you can foresee on the operating expense side from the work that’s been done?

Frederec Green

Other than the fact that with the turnaround everything is cleaner and a little bit more efficient, you might see a slight drop in utility consumption. The work that we did was modifying existing equipment so we’re not really going to see any change there. Now, one thing I will point out, energy, electricity and natural gas prices are significantly lower this year than they were last year so that’s helped us quite a bit.

Brian Shore – Avondale Partners

I guess just lastly switching over to the retail side line, I think I’ve participated in the promotion so I expect some free gas here. But, I guess I just wanted to talk about the fuel margins you’ve seen thus far in July and where they were compared to what you saw in the second quarter?

Lynwood Gregory

Well, you know the second quarter coming in to April the margins were kind of slim but they gradually restored themselves to full historic trends through June. As a matter of fact, the OPIS average now that’s been reported for July shows that the average margin for the Southeast was $0.206 per gallon. I think that’s not only for the Southeast but that’s for the entire country so things are back to historic normal levels.

Operator

Your next question comes from Paul Sankey – Deutsche Bank Securities.

Paul Sankey – Deutsche Bank Securities

As a follow up to the earlier question about really your ambitions for Delek, you’ve spoken in the past about I think doubling normalized EPS or a similar target. Can you just remind us what that was? I realized you’ve part addressed this already but can you also just talk about the relative preference you’d have for C stores over adding more refining? Then finally, you mentioned that you think the assets are cheap, I guess that’s saying they are cheap against their history as opposed to perhaps a view that there are too many refineries and therefore some of them might actually be overvalued if they have any value at all.

Ezra Uzi Yemin

First of all I guess the three questions I’ll try to address all of them in one answer, the first on, in the past we said that we want to keep a ratio of 35% to 40% non-refining assets out of our mix, out of our EPS. This hasn’t changed, we still think this is the right mix. Second, in regard to C stores, we prefer as always C stores with land so as we move forward on purchasing C stores, our preference would be to pay the same multiples we spoke of earlier of five to six times however, at the same time to make sure that we get the land with it and we think there’s a lot of value to the land.

The third part or if you will, the most important one, is in regards to the refining aspect. As you well know, right now the industry is running at 84% to 85% capacity and we’re in the summer so it may drop even lower than that in the winter if it doesn’t pick up. However, we do think that and to your comment, I do think personally that there will be maybe topping refineries, maybe other refineries that will be shutdown. However, I do think we are at the bottom of the cycle if you will and you may be right that the current valuations reflect EPS however as we all know US is short refining and even if the US drops some of the refining capacity in our mind will go, or some of the import to the US and exports from other places will go to places like China and India.

So as China and India will pick up what the US drops you’ll see shifting of barrels that are coming from Europe to China and India. By the end of the day maybe it’s zero, maybe by 2012, 2013 we’ll see pickup in the amount of refining capacity. But, in the long run we do think we are at the bottom of the cycle and we want to look at opportunities as they come to the market place.

Paul Sankey – Deutsche Bank Securities

Are you finding that there are interesting assets out there?

Ezra Uzi Yemin

I think there are like probably that I know of a dozen or more assets that are for sale, yes sir.

Operator

Your next question comes from Jeff Dietert – Simmons & Company International.

Jeff Dietert – Simmons & Company International

Just one short question, you’ve hedged some diesel I believe, 5,000 barrels a day, any changes, additions or closures of hedging?

Ezra Uzi Yemin

Well, we took advantage of that at the top of the market I guess, we were very lucky or just some experience, I don’t know. But, we closed the position at the top of the market, you know what I shouldn’t say so we have [inaudible] 100 to 150 barrels a day for three months, something very minimal but basically the positions, all ethanol, all positions are closed. By the way, one thing to remember, on the distillate position we didn’t collect the cash, the P&L reflects the profit but the cash wasn’t collected yet.

Jeff Dietert – Simmons & Company International

The cash flows through 3Q?

Ezra Uzi Yemin

Through the end of the year.

Operator

At this time there are no further questions.

Ezra Uzi Yemin

That concludes our conference call today. We look forward to speaking with you during our third quarter 2009 conference call. If you have any discussions please call our Director of Investor Relations Noel Ryan at 615-435-1356. Thanks and have a nice day.

Operator

Thank you for joining today’s conference call. You may now disconnect.

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Source: Delek US Holdings, Inc. Q2 2009 Earnings Call Transcript
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