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Executives

John P. Colling - Vice President and Treasurer

Ezra Uzi Yemin - President and Chief Executive Officer

Edward Morgan - Vice President and Chief Financial Officer

Lynwood Gregory – Chief Operating Officer, Retail Fuel and Convenience Store Operations

Analysts

Eric (inaudible) – William Blair

Dean Haskell - Morgan Joseph

Ben Brownlow – Morgan Keegan

Paul Sankey - Deutsche Bank

Doug Leggate - Citigroup

Jeff Dietert - Simmons

Delek U.S. Holdings Inc. (DK) Q4 2007 Earnings Conference Call February 26, 2008 10:00 AM ET

Operator

I would like to welcome everyone to the Delek US Holdings first quarter and full year 2007 earnings call. (Operator Instructions) I will now turn the call over to Mr. Colling, Vice President and Treasurer of Delek US Holdings.

John P. Colling

Good morning and welcome to the Delek US Holdings Conference Call for the Fourth Quarter and Full Year 2007. 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 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 full-year news release.

As a result, actual operations or 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 4 by dialing 706-645-9291. The confirmation number for the replay is 34931957. The replay can also be accessed for the next 90 days at the company’s website, www.delekus.com or at www.earnings.com.

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

Ezra Uzi Yemin

Thank you, John, and good morning, everybody. It is a pleasure to have you here with us to discuss our annual and quarterly results. 2007 was a great year for Delek in terms of performance and growth.

Before we begin a review of our financial results, I would like to highlight several significant accomplishments during the year that not only impacted 2007 but added to our foundation for future growth.

Our Refining segment had a tremendous year. We believe we have increased the reliability of our refinery with the completion of our electric substation, which has already demonstrated its value by preventing downtime during the second half of 2007.

We upgraded our Merox unit, which allowed us to produce up to 6,400 barrels per day of jet fuel, an increase of approximately 2,000 barrels per day and process more WTI crude. We completed site preparation and began the construction of our gasoline hydrotreater, which represents the final phase of our clean fuel capital program. We expect to complete this project during the second quarter of 2008.

We began engineering and construction of three crude optimization projects that are expected to allow us to process approximately 26% of our crude. We expect to receive some of the benefits from these projects in 2008 and anticipate receiving the full benefits of these projects in 2009.

We were able to partially offset higher crude oil costs by processing WTS crude at the rate of nearly 8% of our crude slate in 2007 and 11% in the fourth quarter of 2007. WTS traded annually at a discount of $5.70 a barrel to WTI.

As you recall, during 2006, we didn’t run any WTS at all. We began to diversify our refining holdings by acquiring 34.6% equity investment in Lion Oil Company, a privately held company which owns and operates a 75,000 barrels per day high conversation, crude oil refinery in El Dorado, Arkansas.

Much like our Refining segment, our Retail segment had a busy year of growth and preparation for future growth. We acquired and integrated 107 retail, fuel and convenience stores from Calfee Company of Dalton, Georgia heading to our new core market in Chattanooga and North Georgia.

Merchandise gross margins for 2007 increased 100 basis points to 31.6% on merchandise sales of over $411 million compared to 30.6% on merchandise sales of $330 million in 2006 supported by the Calfee acquisition and inclusion of the full year of the Fast stores acquired in the third quarter of 2006.

For the full year, same-store merchandise sales growth was 1.1% mainly in our dairy, sundry, cigarettes and food and pharma categories. We introduced several new private label products and began the process of refreshing our private label packaging within three tier product offerings.

Demand for our private label products continued to improve, with our private label sales totaling 1.4% of our merchandise sales in 2007 compared to 1.1% for the full year of 2006.

We introduced our first new concept store in our Alabama market and have been pleased with the early results. We expect to open similar stores in Memphis and Chattanooga in the first and second quarters of this year.

We introduced the new store redesign for our re-image program that we expect to implement in approximately 50 to 100 stores in 2008. And we transitioned to a new multi-year contract with Core-Mark, a new grocery supply vendor beginning January 1.

Our Marketing and Supply business continued to provide stable cash flows, while continuing to expand its areas of operations. We completed our first full year of operations in this segment and have been very pleased with the results. We increased our core owned market penetration and expanded into several new markets.

For the company as a whole in 2007, net income was $96.4 million or $1.82 per diluted share compared to $93 million or $1.94 per diluted share for 2006. Net sales were nearly $4.1 billion, an increase of 27% compared to $3.2 billion for 2006.

Total contribution margin increased 13% to $244 million from $216 million in 2006. For the full year of 2007, contribution from marketing and retail segments were nearly 38% of our total contribution margin.

Looking forward to 2008 and 2009, I believe our Refining segment is well positioned to withstand higher crude prices due largely to our on going crude optimization project and our ethanol blending program, under which we are currently blending approximately two-thirds of our gasoline production.

At the Retail segment, I anticipate significant contribution from our ethanol-blending program. We are currently offering ethane at 280 retail stores in states that allow the sale of ethanol-blended gasoline.

Due to our proactive, aggressive approach to purchasing ethanol and the government blending credit, we should realize additional margin on each gallon of product we sell at each of our 280 stores.

In addition, we expect to offer ethane products at our West Texas operation starting in the second quarter of 2008. Together with the (inaudible) shortage in supply in the West Texas market, we believe that the Marketing segment will continue to generate increasing cash flows.

In summary, we were very, very pleased with our accomplishments and results during 2007 as we continue to build on Delek’s historical performance and prepare for 2008 and beyond.

At this time, I would like to turn the call over to our CFO, Mr. Ed Morgan.

Edward Morgan

Thanks, Uzi. Before I begin the review of our fourth quarter and year-to-date numbers, I would like to point out that Delek’s fourth quarter financial performance was impacted by, among other things, the sharp increase in crude oil prices and the backwardation in the crude market.

The selling price of residual products failed to increase in proportion to the cost of crude oil. We were able to partially offset the higher crude prices by continuing to optimize our crude slate, by processing approximately 11% West Texas sour crude during this quarter. This change in the refining market started at the end of our third quarter and continued through year-end.

In addition, I would like to bring to your attention that during the fourth quarter, we started to account for the results of our equity investment in Lion Oil two months in arrears.

This was necessitated for two reasons: first, because Lion Oil is a private company and has a longer close period than Delek and secondly, Lion Oil’s year ended April 30 and their fiscal quarters end on the last day of July, October and January.

Therefore, our results through December 31 include only one month of Lion Oil in the fourth quarter and two and a half months in our fiscal 2007 year-end results.

Now, let me return to providing you some highlights into our financial performance during the fourth quarter and fiscal year 2007. For the fourth quarter of 2007, on a consolidated basis, Delek achieved net sales of $1.1 billion, an increase of nearly 38% from the same period a year ago.

Driving our increase in sales for the quarter was the additional 107 Calfee stores acquired last April. For the quarter, we had a net loss of $12.1 million, or a net loss of $0.23 per basic share, compared to a net income of $11.6 million, or income of $0.22 per diluted share, in the fourth quarter of 2006.

Driving our loss quarter-over-quarter was the change in our operating margins at the refinery, which I’ll speak to in detail during my segment review. For the full year, Delek achieved net sales of $4.1 billion compared to $3.2 billion in the same period a year ago.

Net income for the year was $96.4 million, or $1.82 per diluted share, compared to $93 million, or $1.94 per diluted share, for the full year of 2006.

Contribution margin for the fourth quarter was $11.9 million compared to our $38.9 million for the same period a year ago. And for the full year 2007, our contribution margin increased nearly 13% to $244 million from $216 million.

In the quarter, it was our Retail business and Marketing segments that provided nearly $18 million of contribution margin, while our Refining segment had a negative contribution margin of $5.9 million for the first time under our ownership.

Year-to-date, our Retail and Marketing contribution margins were 38% of our total, which is consistent with our long-term target of averaging 40%.

Now, let me provide you some Refining segment level details, if I may. Net sales during the fourth quarter were $480 million compared to $353 million for the same quarter a year ago.

Our Refining contribution margin for the quarter was a loss of nearly $6 million compared to an income of $23.7 million in the fourth quarter of 2006. Driving contribution margin were two primary factors: our realized margin to the Gulf Coast 5-3-2 crack spread and our operating expenses per barrel sold.

Focusing on margin first, in the quarter our margin, including the marketing transfer fee, was $4.46, or 62% of the Gulf Coast 5-3-2. Driving our margin lower was the cost of crude, which was on average $30 per barrel higher over the prior year and had margin impact on residual products, such as slurry and coke.

These prices did not increase relative to the increase in crude costs. Looking forward, we have recently seen an increase in prices on residual product sales.

And finally, the market backwardation in the fourth quarter of 2007 was $1.20 per barrel compared to $1.90 contango in the prior year. Year-to-date, we enjoyed a $0.17 contango market versus a $1.46 contango for fiscal year 2006. Currently, we do see the market improving and only slightly backwardating, at around $0.20 per barrel.

Operating expenses per barrel sold during the quarter were $4.86 compared to $3.41 per barrel for the same quarter last year. Compared to Q4 2006, we did have one-time expenses of approximately $1 per barrel sold related to maintenance, contracture, chemical and environmental costs. We also settled the one-time sales tax adjustment equal to $0.25 per barrel sold.

Net sales for the full year at our Refining segment were nearly $1.7 billion compared to $1.6 billion for the full year 2006. Refining contribution margin for the year was nearly $152 million compared to $153 million for the full year of 2006.

Our lower contribution margin was impacted primarily by a net increase of $11.3 million in service fees paid to the Marketing segment, as well as there were 1800 barrels per day fewer sales than 2006, partially offset by a 13% increase in our margin per barrel.

Turing to the Retail side of our business, we reported a segment contribution margin for the quarter of $12.1 million compared to $9 million for the same quarter last year. Net sales for the quarter increased $147 million to $477 million. Driving this increase were the sales provided by the Calfee Store acquisition and a slight increase in comparable store merchandise sales.

Retail fuel gallons for the quarter increased more than 16% to nearly $121 million gallons compared to $104 million gallons sold in the fourth quarter of last year. Recent acquisitions did add $15 million gallons to the increase. As well, we had a same-store gallon increase in the fourth quarter of 1.3%.

We were encouraged by our ability to realize a higher fuel margin over the prior year, which was nearly $0.05 per gallon higher, and increase our fuel gallons even with gas prices at average more than 32% over the prior year, at $2.90 per gallon.

Despite the increase in average retail fuel prices during 2007, we were able to maintain a Retail fuel margin for the year $0.144 per gallon, which was flat compared to last year.

We believe current economic conditions and rising energy prices are exerting pressure on our customers. We also believe that our culture of customer service and creative marketing will continue to differentiate ourselves from the competition.

In our Wholesale Fuels business, our sales were flat quarter-over-quarter at $7.8 million gallons. For the full year, wholesale fuel gallons were $31.9 million gallons. We also realized the margin of $0.05 per gallon for the quarter compared to $0.04 for the quarter last year. On an annual basis, the Wholesale Fuel margin was consistent versus the prior year, at $0.06 per gallon.

Included in merchandise sales, our private label soft drink sales represented 2.7% of our soft drink category. Private label water represented 5.7% of our dairy category and private label candy has grown to 5.3% of total candy sales.

As Uzi mentioned, we are refreshing our private label brand image and plan to offer our customers three levels of product to meet different customer demographics. The new label products and advertising to support this image should start to arrive in our stores by the end of the first quarter.

Operating expenses at the Retail segment as a percentage of merchandise sales in gallons sold increased in the fourth quarter to 15.7% versus 13.5% in the prior year. We continue to see an increase in credit card usage by our customers, which in the fourth quarter equated to a 50-basis point increase as a percentage of gross margin.

We were also negatively impacted during the quarter by approximately $0.5 million of environmental costs associated with cleaning our store fuel tanks and preparation to sell ethanol-blended gasoline.

On a consolidated basis, our G&A expenses for the quarter were $14.6 million and $54.6 million for the full year, compared to $11 million in the fourth quarter of last year and $38.2 million for the full year 2006.

The quarter-over-quarter increase was primarily due to higher salary and related costs due to the Calfee acquisition, as well as audit costs due to Sarbanes-Oxley testing, an increase we had in property taxes at the refinery and flare studies we performed at the refinery. In total, these costs were approximately $2.2 million.

Depreciation and amortization expense for the quarter was $2.3 million at the Refining segment; $700,000 at Marketing and Supply; and $6.7 million at our Retail segment, for a total of $9.7 million, an overall increase of $1.7 million compared to the fourth quarter of last year.

The increase in depreciation and amortization expense is associated with the DHT and SRU projects at the refinery, an increase in store count related to the Calfee acquisition. For the full year, depreciation and amortization expense was $33.1 million compared to $22.9 million for the full year 2006.

Interest expense for our quarter increased slightly to $7.3 million from $7.1 million in the previous year. This increase is associated with a 2007 borrowing for the purchase the Calfee stores, alongside higher short-term borrowing rates during the comparable periods.

We’ve also been moving our excess cash balances from mini-market risk associated with the current credit crisis. As of year-end, we did not have any investment impairment as a result of investments in option rate securities and our current option rate investment today totaled approximately $6 million, with the rest invested in short-term U.S. treasuries and treasury funds.

Our effective tax rate for the quarter was just over 40% and 27% for the full year 2007. For 2007, our effective tax rate benefited from the tax credit associated with our production of ultra-low sulfur diesel.

Through the fourth quarter of 2007, we have realized over $16 million in tax credits associated with that project. In 2008, we do anticipate a more normalized tax rate of between 35% and 36%.

In regards to capital spending for 2007, for the full year, we had a capital spend at Delek US of $88 million. Capital spending broken down by segment is as follows: $24 million at the Retail segment; $62 million at the Refinery, and $2 million at Delek US.

Of the $62 million spent at the Refinery, $38 million was spent on the gasoline hydrotreater project to produce low sulfur gasoline by the end of the second quarter of 2008. We anticipate spending an additional $42 million on this project to bring it to completion.

When we look forward to 2008, we anticipate spending $150 million for capital expenditures. Of this, we expect that approximately $125 million will be associated with the Tyler refinery operations.

Within the $125 million, we anticipate spending another $59 million in 2008 to complete our deep cut on the vacuum unit and revamp of the coker, the first two aspects of our crude optimization projects. We don’t anticipate finishing the FCC upgrade until the end of the first quarter of 2009.

In our Retail segment, we expect to spend $24 million, of which we anticipate spending $17 million on new construction raze and rebuild projects. This includes eight new raze and rebuild stores and 50 to 100 store remodels.

At this time, I’d like to turn the call back over to the operator to open the floor for questions.

Question-and-Answer Session

Operator

Your first question comes from the line of Jeff Dietert - Simmons.

Jeff Dietert - Simmons

I was hoping you could talk a little bit about adding the blending capacity at Tyler and how that’s influencing profitability there. The $0.50 credit that historically was passed back to the ethanol producer, I would assume you’re keeping that at this point and perhaps tell us how you expect that to evolve going forward.

Ezra Uzi Yemin

Just to make sure that we heard the first part of the question, I suspect that you were asking about economy in Tyler, right?

Jeff Dietert - Simmons

Yes, in Tyler. But I would be interested in the impact on profitability at the retail outlets as well.

Ezra Uzi Yemin

We’ll give you both of them then. What we did during the fourth quarter of last year, if you recall, there was a period of time that crude oil jumped almost to $100 and ethanol didn’t follow it; now, it’s a little different.

But when the time came and there was like a $0.50 difference between the price of ethanol and price of gasoline, between the price of (inaudible), if you will, what we did, we locked in that differential for the entire year of 2008.

I’m giving you exact numbers so that will help you do your own calculations; in Tyler, we are selling around 2,000 barrels. It’s going to be probably a little higher than that but you can call it now 2,000 barrels per day of ethanol at a discount of 41% to (inaudible) plus the $0.51 of the governance, so basically $0.92.

Obviously, we need to give some to the customers; you can assume that between $0.02 to $0.03 are going back to the customers. So you’re selling about between $0.06 to $0.07 in Tyler per gallon for 2,000 barrels per day. That’s the Tyler area.

In regard to the macro side, we locked in the entire year with approximately another 1600 to 1700 barrels per day for macro. And that number is around 30; it depends on the market, it depends on different markets, but call it between 25 to 30 under (inaudible) plus the $0.50, which makes it around $0.75 under or $0.075 under, if you take into account the 10%. And in that regard, we probably need to give the customers between $0.025 to $0.03, so we keep to ourselves forward to $0.05 per gallon on those 280 stores.

Jeff Dietert - Simmons

Very good, I appreciate the detailed answer.

Ezra Uzi Yemin

Just to build on that, you can do the calculation. I think that we’re trying to set up the ethanol deal in West Texas as well. As you probably can see on the screen yourself, the [inaudible] jumped up dramatically in the last three weeks. There’s, again, good difference between ethanol and gasoline, so we are trying to lock in the West Texas market.

Operator

Your next question comes from the line of Doug Leggate - Citigroup.

Doug Leggate - Citigroup

Uzi, a small follow-up, on that last question. You’ve basically locked in all your ethanol requirements for the whole year, is that a fair representation; is that basically what you’re saying?

Ezra Uzi Yemin

I would say 85% to 90%, that’s right.

Doug Leggate - Citigroup

And did that feature in the fourth quarter?

Ezra Uzi Yemin

Yes, that’s including the fourth quarter of this year.

Doug Leggate - Citigroup

Okay. So how much of the Retail margin in the fourth quarter...

Ezra Uzi Yemin

Are you talking about 2007?

Doug Leggate - Citigroup

Yes.

Ezra Uzi Yemin

No, there’s nothing in 2007. It’s very nominal, like $0.5 million.

Doug Leggate - Citigroup

Okay, so this is an upside basically.

Ezra Uzi Yemin

Yes.

Doug Leggate - Citigroup

Okay, great. The main question for me was actually on Lion and I am a little confused about the way you’re going to report it going forward. And maybe an update as to where you are in terms of potentially acquiring additional interests and obviously this long-awaited disclosure would be of a great help at some point. So maybe just some color on Lion, if that’s possible.

Ezra Uzi Yemin

There are two parts to that; the technical part or the accounting part, I’m sure Ed will be more than happy to share with you what we did. In terms of acquiring new interests, I’m not going to comment anything about future acquisitions of anything specific.

I just would say though that we are looking on opportunities in the marketplace and that’s it. But I don’t want to be specific on anything, especially not in regard to Lion. If there were something specific in regard to Lion, I would have already mentioned that; the moment it happens, we’ll announce that.

Edward Morgan

Just to clarify what I mentioned on the call, in regards to Lion’s closed period, we had to start accounting for them two months in arrears, so that’s the reason in the fourth quarter of 2007, the month of October is all that’s in our operating performance.

So when you think ahead, our first quarter of 2008 will have the three months ending January 31 in that period of time of their performance. That’s due to a couple things: their closed period as a private company is not nearly as aggressive as Lion is today.

As well as the fact that their year-end period is April 30, so October 31 was a natural quarterly cut-off for us, that’s all.

Doug Leggate - Citigroup

Right. Can you give us the explicit contribution from Lion in the quarter?

Edward Morgan

For the quarter, it was a $1.4 million loss.

Doug Leggate - Citigroup

And that was just one month?

Edward Morgan

That’s correct. For the year, it was a $600,000 loss and then there’s $200,000 of depreciation expense in our numbers, so it’s $800,000 for the 2 ½ months of 2007.

Doug Leggate - Citigroup

There’s no operating metrics you can give us at this point? In terms of realized margin and so on.

Edward Morgan

No, I can’t speak to that, Doug.

Doug Leggate - Citigroup

All right, we’ll look forward to that some time in the future. Thanks.

Operator

Your next question comes from the line of Paul Sankey - Deutsche Bank.

Paul Sankey - Deutsche Bank

Just a follow-up from Doug. I realize you just said you weren’t giving out any more operational data on Lion, but is it possible to get a throughput number on that or anything else at all in terms of what the performance was there, apart from the finances you just gave?

Ezra Uzi Yemin

I would mention that at this point, and several reasons why we don’t want to do that, we don’t want to share any more information in regard to Lion. And I know that you’re anxious to hear about it and I understand why, but at the same time, we would like to keep it very low-key at this point.

Paul Sankey - Deutsche Bank

Okay. A follow-up on corporate action. Firstly, on the Wholesale business, have you even thought about an MLP there; is there anything to add on that subject?

Ezra Uzi Yemin

As we discussed that in the past, our claim by the end of the day is to take the Marketing segment and create an MLP out of that segment. Obviously, we don’t have the capacity at this point, but we are very pleased with the performance of that segment. That segment produced tremendous amount of valuation for us in the last year.

With the credit crunch and especially in light of the fact that we are well positioned, we have not leveraged at all, as you know, we think that there will be assets that will come to the market sooner than later.

Paul Sankey - Deutsche Bank

Okay. And you were quite specific that you don’t want to speak about any more specifics about acquisition potential; obviously, there’s several major assets for sale right now. Could you talk about your financing capability and a little bit about your balance sheet power?

You specifically referenced in the release that you believe you have the capability to finance strategic acquisitions. Can you talk a little bit about how high you can go in terms of what you can pay for and what leverage you’d be prepared to take? Thanks.

Ezra Uzi Yemin

We do think that, obviously, we are underleveraged with our balance sheet. Of course, we do have the support of the main shareholders that we got. And on top of that, we already demonstrated the market that if there is something important, we’ll go to the market and get money.

In terms of the leverage, we feel comfortable leveraging our EBITDA, up to 2.5 times EBITDA. So if we are talking about around $200 million of EBITDA, we are talking about another $500 million of leverage on an existing balance sheet.

And then on top that, obviously, you could leverage up a little bit your target. So we do feel that 2.5 times EBITDA is something that we live very safe with.

Edward Morgan

And, Paul, if I may add just one point to that. Although the markets appear to be very tight currently, we are in the energy space where deals are getting done, so we feel confident that that will aid us as well if we have a transaction in the near-term.

Ezra Uzi Yemin

And just as a point of reference, during the credit crunch, just the fourth quarter of 2007, we were able to basically cut a deal with a syndication of banks to finance our Marketing segment and we got a new credit facility put together with $75 million. So deals are being done and you just need to make sure that the numbers work for you.

Paul Sankey - Deutsche Bank

Uzi, what’s the sense at the parent level of appetite for more acquisitions?

Ezra Uzi Yemin

If anything, they want to grow the business. And as we said in the past and I’m going to say it again, they are going to dilute themselves for the right opportunity, so there’s no magic number around their holdings at this point.

Paul Sankey - Deutsche Bank

Great. And then a final one from me, the old boring question that we always ask about, product sales and market weakness and just through the gasoline pump. Can you just talk a bit about how high prices are affecting consumers of gasoline from your perspective?

Ezra Uzi Yemin

Are you talking about the Retail side?

Paul Sankey - Deutsche Bank

Yes, just demand. I’m just trying to get a sense, as we always do, for demand for gasoline in this country and how robust it is to high prices, whether or not you’re seeing significant declines in volumes?

Ezra Uzi Yemin

I’ll let Lyn brief you on that if you want; at this point, I don’t see a big difference. However, with the inside sales, there is a little slowdown; we still maintain positive growth, but there is a little slowdown.

Paul Sankey - Deutsche Bank

There’s no dramatic fall-off or anything in volumes?

Lynwood Gregory

As you can see from the fourth quarter, we were showing a 1.3% increase. Rolling into the first quarter, yes, the economy’s a little soft, but our volumes are holding on fuel. What we are seeing on our Retail side, on our merchandise sales, is people are consolidating some of their trips; however, the average purchase has gone from 4.15 to 4.50. So our merchandise sales are in a good situation because of the increase in the basket size.

Paul Sankey - Deutsche Bank

Interesting. Okay, thanks.

Operator

Your next question comes from the line of Ben Brownlow – Morgan Keegan.

Ben Brownlow – Morgan Keegan

Just to touch on the refinery costs, that one-time dollar charge per barrel, can you give a little bit more color on that and what you expect going forward?

Edward Morgan

You want more color on the dollar first?

Ben Brownlow – Morgan Keegan

Yes, please.

Edward Morgan

During the course of the quarter, we had a few issues with the DHT, which were some of the maintenance contractor costs that we incurred. As I mentioned, we had some flare study expenses, which also tied to my contractor expense, some road paving, very miscellaneous things of that nature which I don’t see on a continuing basis.

The key thing in Refinery in the quarter, the $0.25 that I mentioned, was the one-time sales tax true-up. We self-reported to the State of Texas some sales and use tax matters that we incurred back when we first bought the asset a couple of years ago primarily, and that all flowed through in the fourth quarter.

Ben Brownlow – Morgan Keegan

Okay. And then, going over to the Retail side, looking at the gallons per store and that decline year-over-year, does that relate to the recent acquisition of Calfee?

Ezra Uzi Yemin

What we got out of the Calfee stores are much lower fuel volume, as well as merchandise volume. While it was reflected in the purchase price, we are in the process of actually re-imaging 50% of those stores at this point; it will be completed, the first part April 1 and then the second part June 1.

And like we saw with the other acquisitions that we did, we would expect tremendous growth out of these stores. So hopefully by the end of the second quarter or early third quarter, we’ll be able to report to the market that we’re seeing the growth we expect.

Lynwood Gregory

If I could add to that, we had that test store that we talked about on the last call that we opened up in November that we call our re-image store and we spent approximately $80,000 completely redoing the interior and exterior and redoing the graphics, product selection, gondolas, rest room, floors, ceilings, etc.

And now we’ve had some time to look back, we’re showing a good 15% increase on that particular store. And as Uzi just mentioned, we will have 24 of them done by April 1 and trailing in with another 26 by June 1.

We’re showing great increases in especially the cigarette, snacks, general merchandise and fountain categories and we’re extremely excited about these 50. And we picked 50 that were up in the Chattanooga, Georgia area in that corridor with the Fast and the Favorites, so we can combine those 50 units and change the name and get some brand equity at the same time.

So that’s an exciting situation going on for us right now and at the same time, we’re also looking at the second 50 that we’re going to pick, hopefully picking for the big next 50 for the future growth.

Ben Brownlow – Morgan Keegan

Wonderful, that’s good to hear. And then on the Merchandise margins, is there any way to quantify the benefits that you expect from the deal with Core-Mark and can you comment just on your outlook on the Merchandise margins?

Lynwood Gregory

Yes, I can. If you look back at the fourth quarter, you can see we dropped and the reason we dropped was, we just dropped a tenth of a point, was the changeover from McLane to Core-Mark. During the changeover period, we saw a reduction in our private label shipments going from one warehouse to the other.

At the same time, our shippers were delayed from the grocery changeover. And we took it upon ourselves to do a good clean-up in all of the backrooms with any merchandise that we felt like was not saleable and we took a discount, so we did a lot of markdowns too at the same time.

So we saw a slight dip in the first quarter; that’s over with now. We’ve got our private label rolling again; we’ve got three tiers, like Uzi was saying. Our low-end tier now is going to be called Crave; we’re looking for the name for the middle and the upper label; it’s going to be called (inaudible) What’s Best.

But we’ve got bulk snacks coming in, chips coming in, bulk candy, energy supplements, isotonic and private label fountain coming in this quarter. Everything is back on target.

We’ve also added a new Director of Food Service that has tremendous experience and was also experienced in all his previous jobs with R&D, so he can hit us now with an extended selection on our GrilleMarx, which we have 11 of our GrilleMarx stores up and running with three under construction.

So we have a lot of things going with private label with food and with Core-Mark. And one addition with Core-Mark, they have refrigerated trucks, so they have this VIP program, which is a vendor consolidation.

So we’re going to take other companies, that is, bread companies, snacks, milk companies, consolidate those with Core-Mark to reduce the delivery charge and at the same time, grow our margin through that consolidation.

Ben Brownlow – Morgan Keegan

They’re going forward, all else holding, you would expect margins to still show improvement?

Lynwood Gregory

Absolutely.

Operator

Your next question comes from the line of Dean Haskell - Morgan Joseph.

Dean Haskell - Morgan Joseph

Staying on the Core-Mark, the opportunity of having the refrigerated trucks, will that lower the frequency of delivery to the store, making it easier in the back of the house?

Lynwood Gregory

No, actually, that’s going to better; it’s going to increase the deliveries. We’ll go from one delivery to two deliveries, so we can get fresher products since they will be bringing in milk, bread, sandwiches, etc.

Dean Haskell - Morgan Joseph

Okay. And on the remodeled stores, the 50, where are those being done; are they being done in one market, are they being done in a variety of markets as further tests?

Lynwood Gregory

They’re basically being done in the Chattanooga, North Georgia market, a combination of the Fast and Favorites.

Dean Haskell - Morgan Joseph

Okay. And that 15% number that you gave, that’s an inside sales increase; that’s not fuel-related?

Lynwood Gregory

No, that’s just inside sales only and it’s comparable to a store that we picked, another Favorite market with similar demographics, just as a comparison figure. Fuel volume at this particular store is also on the increase.

Dean Haskell - Morgan Joseph

Okay. And refresh for me the 2008 development plan in terms of new stores, remodeled stores and GrilleMarx stores, please.

Lynwood Gregory

We have three GrilleMarx stores under construction right now we’ll be opening first and second quarter. We have the building permits for the next three coming right after and we also have three more permits coming within the next 45 days.

So again, our target is six to eight. We have the 50 reimage stores; half of them roughly will be done April 1; the other half will be done by June 1. So we’re very excited on the opportunities that we have on re-imaging and the raze and rebuilds.

Dean Haskell - Morgan Joseph

And new unit development?

Lynwood Gregory

The new unit development is the raze and rebuild. Right now, we’ve got two actual raze and rebuilds and one ground-up. And again, we’ve got three more getting ready to go under construction, followed by two or three.

Dean Haskell - Morgan Joseph

So about six to eight new a year?

Lynwood Gregory

Yes, sir.

Dean Haskell - Morgan Joseph

And is that the same with the GrilleMarx, about six to eight a year?

Lynwood Gregory

That is the same; that is the GrilleMarx captured into the new unit.

Dean Haskell - Morgan Joseph

Okay. Are you not adding GrilleMarx to appropriate existing stores?

Lynwood Gregory

We are looking at a different program on the GrilleMarx at existing stores and it’s in the test stage right now; it’s called a GrilleMarx Express, which is more of a grab-and-go, increased fountain, increased grab-and-go offering with reduced labor. And we will be able to give you some results on that probably in the next quarter.

Dean Haskell - Morgan Joseph

Where is that in-test, please?

Lynwood Gregory

Here in Nashville, at one of the BPs we bought in 2005.

Dean Haskell - Morgan Joseph

Okay. I’m in Franklin, so I’ll give you a call and get an address later.

Lynwood Gregory

Absolutely. Love to show it to you.

Operator

Your next question comes from the line of Eric (inaudible) – William Blair.

Eric (inaudible) – William Blair

Couple questions here. First, on the Merchandise gross margins, you had mentioned, obviously, some disruption of the private label, also some of the markdowns. Can you quantify how much those particular items cost you in gross margin percentage in the quarter?

Ezra Uzi Yemin

Just of the markdown?

Eric (inaudible) – William Blair

Yes, and also the lower private label.

Lynwood Gregory

The overall difference, we went from a 30.8% to a 30.7%; we’re talking $80,000 to $90,000 worth of adjustments. And at the same time, we had to hold off transportation of our private label switching warehouses and the same thing with the shippers.

So it’s just a one-time change. I’ve been with MAPCO since 1990; this is our first major supply change. So we did have items in the backroom that we felt like we should go ahead and just totally clean up and had some adjustments.

But if you look at the DSD, the stuff that was brought in by direct store delivery, actually, our margins were up for the quarter. So you can clearly see it was just in those backroom items that we decided to clean and the private label offering.

Eric (inaudible) – William Blair

In the past, you’ve talked about 50 to 100 basis points of gross margin improvement every year. I’m assuming now we’ll probably see something more to the higher end of that range in 2008. And then, are you still expecting 50 to 100 per year in 2009, 2010, 2011?

Ezra Uzi Yemin

Absolutely.

Eric (inaudible) – William Blair

And then, what is the total CapEx number that you’re expecting for 2008? I know you gave some of the breakouts, but I just want to make sure I got the right all-in CapEx number?

Ezra Uzi Yemin

Are you talking about 2008 or 2007?

Eric (inaudible) – William Blair

2008.

Edward Morgan

The number was $150 million, $125 at the refinery.

Eric (inaudible) – William Blair

Got it, okay. And then, Uzi, the ethanol, if I understand you correctly, you have about 280 stores now that you have ethanol at the retail. Can we expect that number to creep up additionally as the year progresses in 2008?

Ezra Uzi Yemin

Absolutely. It’s up to the states to approve that. We were the first to do it in Tennessee; I don’t think that anybody else does it in Tennessee, maybe a little bit here and there, but nothing major.

And we want to be the first one to do it with the other markets when the states approve that. So we’re anxious for the states to approve that, especially in light of the fact that the market has improved since the (inaudible) went higher now. And absolutely, the number of store should go higher.

Eric (inaudible) – William Blair

If things go well and things flow through quickly, is it unrealistic to think that maybe you could have almost all your stores?

Ezra Uzi Yemin

Some of them are branded, so it depends on the majors to approve that. However, we do already, since we see how successful this program can be in 2008, we do already think about 2009 and started to look into 2009 and locking in some of those Fast margins if we can.

Eric (inaudible) – William Blair

How are the conversations going with those majors; are they receptive to your idea or are you getting much push-back?

Ezra Uzi Yemin

To be honest, I’m not sure which interest we have here because if you think about that, once the majors approved us, everybody will get it and then you may lose some of the benefit. So being unbranded helps us. Now with that being said, obviously, with the Energy Bill and the way it was presented and the way it was signed by the President, that Energy Bill makes it mandatory for everybody to blend eventually, so everybody needs to prepare himself.

Eric (inaudible) – William Blair

Okay. And then two quick questions here. The Alon incident, I think the last time I saw something that they were talking about the refinery being down roughly two months or so; is that the correct timeframe? Do you see in your mind in terms of your Marketing division and other pressures from that incident, how long can this impact on your business last?

Ezra Uzi Yemin

To be honest, I don’t have a clue; I didn’t visit their site. The one thing though, it’s a tragic event and my heart today, obviously, not only they are in our sector, but we know these people very, very well and we’ll try to help them as much as we can, especially in light of the fact that, if you recall, our West Texas market is right across the road from them.

So we see the shortage in the market already and we see that we are trying to inch-up our production and our capabilities over there as much as we can, not only to help them, but to help the customers. And obviously, for us, this is a tragic event and I wish it didn’t happen at all. But I don’t have a clue if two months is realistic or not.

Eric (inaudible) – William Blair

Ed, the D&A in the fourth quarter obviously came up quite a bit from where it had been the prior quarters in 2007. What is the new run rate that we should think about for D&A?

Edward Morgan

I think, obviously, taking into account our capital spend, we spent $88 million in 2007, so it will be higher as a result of that. A lot of those were some longer-term projects, but that run rate at the end of the year, it’s probably a good place to start in the first quarter of 2008.

Of course, increasing for the capital spend that we’re expecting in 2008, I think it’s fair to assume those will occur ratably over the course of the year.

Ezra Uzi Yemin

Obviously, one more thing that will come good out of our aggressive CapEx program, part of this stimulation package, if you will, that just passed the Congress and the President just signed, include some kind of stimulation for companies to spend some money with accelerated depreciation.

And obviously, we didn’t see the details yet because they didn’t show up, but it can bring some benefit in terms of cash flow and in terms of our tax rate, during the 2008, 2009 years. I’m assuming in the next 50 days we’ll know more and once we know more, we’ll get back to you. But we feel that there will be a benefit coming out of this stimulation package.

Operator

(Operator Instructions) There are no further questions. I will now turn the call over to Mr. Uzi Yemin for any closing remarks.

Ezra Uzi Yemin

I’d like to thank our employees for dedication and hard work in 2007. This was a very successful year; the best year we had since we opened the business. And also, I would like to thank all of you for attending this morning’s call and for your past and future support of our company. If you have any further questions, obviously, don’t hesitate to call us and we look forward to hear from you in the near future. Thanks and good morning, everybody.

Operator

Thank you for participating in today’s teleconference. You may now disconnect.

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Source: Delek U.S. Holdings Inc. Q4 2007 Earnings Conference Call
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