Good day and welcome to the Delek 2021 First Quarter Conference Call. Please note that today's event is being recorded. I would like to turn the conference call over to Mr. Blake Fernandez. Mr. Fernandez, the floor is yours, sir.

I would like to thank everyone for joining us on today's conference call and webcast to discuss Delek US Holdings' First Quarter of 2021 Financial Results. Joining me on today's call is Uzi Yemin, our Chairman, President and CEO; Reuven Spiegel, EVP and CFO; and Louis Labella, EVP and President of Refining, as well as other members of our management team. The presentation materials used during today's call can be found on the Investor Relations section of the Delek US website. As a reminder, this conference call may contain forward-looking statements as the term is defined under federal securities laws. Please see Slide 2 for the safe harbor statement. In addition to reporting financial results in accordance with generally accepted accounting principles, or GAAP, we report certain non-GAAP financial results. Investors are encouraged to review the reconciliation of these non-GAAP financial measures to the comparable GAAP results which can be found in the press release posted on the Investor Relations section of our website. Our prepared remarks are being made assuming that the earnings release has been reviewed and we are covering less segment and market information than is incorporated into the first quarter press release. On today's call, Reuven will review financial performance, I will cover capitalization and guidance, Louis will cover operations and CapEx, and Uzi will offer a few closing strategic comments. With that, I will turn the call over to Reuven.

Thank you, Blake. On an adjusted basis for the first quarter of 2021, Delek US reported a net loss of $125 million or a loss of $1.69 per share compared to a net loss of $119.7 million or a loss of $1.63 per share in the prior year period. Our adjusted EBITDA was a loss of $41 million in the first quarter of 2021 compared to a loss of $19 million in the prior year period. The second paragraph of the press release highlights $21 million of after-tax headwinds or $0.28 per share of items included in adjusted results. Page 9 of the release provides inventory hedging impacts and Page 12 provides other inventory impacts in the quarter. I would like to highlight the tax benefit in the quarter was lower than expected due to changes in estimated tax rates for the year. This was primarily driven by the upward revision and internal focus on performance for the full year 2021. While this created a headwind to earnings per share, in the first quarter, the underlying story is that the macro backdrop improved relative to our previous outlook. On Slide 4, we provide a cash flow waterfall. In the first quarter of 2021, we had a negative cash flow of approximately $34 million from continuing operations, which includes a working capital detriment of $21 million. Cash capital expenditure in the quarter was approximately $67 million. With that, I will turn it over to Blake.

Thanks, Reuven. Slide 5 highlights our capitalization. We ended the first quarter with $794 million of cash on a consolidated basis and $1.57 billion of net long-term debt. Excluding net debt of Delek Logistics of $970 million, we had net long-term debt of approximately $604 million at March 31, 2021. I would remind you that we expect a federal tax refund of approximately $156 million, of which $136 million is expected to be collected in 2021. Moving to Slide 6, we provide second quarter guidance for modeling. Due to improved market conditions, we decided to restart the Krotz Springs Refinery in March, which has been reflected in both cost and throughput guidance. Second quarter operating costs are forecasted to be in the range of $140 million to $150 million. This reflects post-turnaround restart costs at Krotz Springs and El Dorado, ongoing freeze-related repairs and expenses, and elevated energy-related costs. We expect expenses to trend lower in the second half of the year compared to the first half. With that, I will turn the call over to Louis to discuss our operations and CapEx.

Thanks, Blake. During the first quarter, our total refining system crude oil throughput was approximately 173,000 barrels per day. In the second quarter of 2021, we expect crude oil throughputs to average between 270,000 to 280,000 barrels per day, or approximately 91% utilization at the midpoint. We're currently back to normal operations at all four of our refineries. We've completed the Krotz Springs turnaround in March and the El Dorado turnaround in April. We have no major turnaround activities planned for the rest of the year. On Slide 7, capital expenditures during the first quarter were $67 million, reflecting the turnarounds at both Krotz Springs and El Dorado. The 2021 capital program is expected to be $175 million to $185 million, including turnarounds and net of estimated insurance proceeds. The increase from the original plan reflects a combination of freeze-related damages, the fire at El Dorado, and the capitalized costs from the Krotz Springs restart. The new capital budget is 25% lower than the 2020 actual spend. Next, I will turn the call over to Uzi.

Thank you, Louis, and good morning, everybody. We're optimistic about the improvement in refining margins into the second quarter. This provided us an opportunity to restart the Krotz Springs Refinery. With major plant maintenance for the year now complete, we're positioned to run out at an elevated utilization rate. Our retail segment continues to perform well with record first quarter results. In logistics, we are pleased to announce an exclusive agreement with Baker Hughes, utilizing technology to meet IMO product specs for blending capabilities. I will now turn the call back over to Blake.

Thanks, Uzi. Before moving to Q&A, we would like to ask that you keep your questions to earnings and the business environment. We appreciate all the support from our shareholders and we will not be making comments regarding the CVR or proxy contest situation. You can find additional information on the Delek US website under the Investor Relations tab by accessing the link titled Proxy Materials and Shareholder Communication. With that, operator, please open the call for questions.

The first question we have will come from Manav Gupta of Credit Suisse.

Uzi, very strong recovery on Krotz Spring. I think the adjusted margin was $6.67 and if you take into account other inventory adjustments and everything, that's almost $10.90. So if you can highlight what drove the positive rate of change and can that continue and what all has been working for you at Krotz Springs Refinery quarter-over-quarter, and this was a major improvement versus last quarter?

Well, I'm going to let Louis and Blake take the details here, but we told the market in the past that at Krotz Springs, we have a way to go around some of the underlying issues. And that's what we did in the first quarter. Also, obviously, with the big agreement, that will help Krotz in the future. Speaking about the numbers themselves, Blake, I don't know if you want to take it or Louis.

Yes, Manav, I mean, look, I just want to make sure I'm being clear. Let's set the expectations correct. It's a margin game. So, as you can see, the costs there are elevated as well. Think about the timing of the startup, which was late March when the margin environment was very strong. And then, of course, we were selling intermediates throughout. So I don't want to set the expectation that we're going to have an $11 margin there going forward, but obviously we've restarted it with the idea that it would be positive in terms of the margin environment. So let us get another quarter behind us on a full-quarter basis and I think you'll see that normalize.

Okay. And the second question, Uzi, I think we have had this conversation, I don't think you are that RIN exposed. You're probably 15%, 20%, 25% RIN exposed, but if you could remind us the numbers. As I understand, you lose out on refining but you make it up in marketing, but what's the net RIN exposure of Delek at this point of time?

Manav, RINs are significant, as you know. While in the past, there was no exposure in neither Big Spring nor Taylor and a little bit of exposure in El Dorado, obviously Krotz has exposure. Unfortunately, there's pressure from the wholesale side to split some of the RIN cost. Now we're not giving away the significant amount obviously, but the customers are pushing pretty hard to get some kind of a discount over the RIN. Now we don't disclose the exact number of RINs, but obviously, the niche market helps dramatically, but we just need to remember that we talked about listing the thing that we can keep 100% of the RINs in this environment because of the wholesalers demanding some discounts to offset the cost of RIN. You see that in the DKL results in West Texas, how strong the results are because of the RINs, and you see the pressure coming from the wholesalers.

Okay. Last question, Uzi. In your markets, we know as oil moves up, activity moves up, the demand moves up. So what are you seeing as far as the end market demand for refined products is concerned in your end markets?

Well, we see it immediately in West Texas. West Texas is getting tight. You can see the number of rigs coming up. You see the demand coming up. Retail had a very strong quarter. The second quarter will be very strong as well for retail. So demand is getting there especially when crude oil is in the $60s, $63, $64 range. So for us, if it stays at $63, $64, demand will come back. Now the vaccination obviously helps a lot. You follow these numbers even better than we do, Manav. And I think that we should be optimistic that the second part of the year will be strong. One thing, the RINs are a headwind for all of us in the industry. We're trying to mitigate that through the niche market and also through export, but in general, the demand, while it was supply side in the past, is now picking up.

Congrats on the Krotz turnaround, Uzi.

Next, we have Ryan Todd of Simmons Energy.

Maybe a follow-up on one of your comments just now about retail. I mean can you talk about some of the local market factors that drove the strength in retail? I mean you guys actually thought fuel margins increased quarter on quarter. Most of your peers saw sequential deterioration in marketing margin. So any thoughts on that and sustainability as you think about moving into the second quarter?

Yes, we're very proud of retail. That was part of our discussion over the last two or three quarters. As we said, retail can improve without major investment. And still, we are planning to invest more in new stores. If you look at the three indicators, same-store sales are up 4.2%, margins inside are up by an entire point from 31% now to 32.7%, and also margins are going from 31% to 38% on the fuel side. The second quarter seems to be another great quarter. So we feel that the steps we took one year ago, two years ago to enhance our stores, the traditional stores, not only the new stores, are coming to fruition and paying dividends. And we expect this to continue. I said it in the past, I think that 2021 will be a record year for retail. I hope I won't be wrong, but I think 2021 will be a record year for retail.

And on the refining side, or I guess as we think about overall kind of use of cash, obviously strong margins, high throughput guidance into the second quarter, demand recovering. I mean as we think about capital allocation and your use of cash, as we see this rebound into the last three quarters of the year and with the Krotz restart, how should we think about your priorities for the use of that cash flow?

As we said, our first priority is to pay down debt and to make sure that the balance sheet is strong enough; then obviously, as we said, resuming the dividend and returning cash to shareholders. But let us reach the point that our free cash flow is coming in on a sustainable basis, and then we'll start acting in that regard.

Okay. Congrats, Uzi.

Thank you.

Next, we have Roger Read of Wells Fargo.

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

It's Reuven. When we originally entered the year, we had obviously a worse forecast as far as margins are concerned, and as the year progressed, we had a better outlook for the year. So the first quarter tax rate is really determined by your outlook for the entire year and that fluctuates the number for the first quarter. We don't disclose the forecast, but we can definitely see with the improved margin, better anticipated results than the original budget.

I want to provide some insight on that, Roger. We began the year with a different outlook than what we see now, and as we assess the situation, we start to envision the company's profitability. This results in an estimate of $0.15. If we apply a tax rate of 22% or 21%, which is the standard, the outcome would have been 50% better; instead of the back 41, it would have been back 26. When reviewing the company's results, the EBITDA exceeded expectations. The tax rate had a slight negative impact, but if we achieve profitability as our margins improve, we anticipate it will be compensated in future quarters. It will be a technical matter, but that is the current scenario.

Thanks for that. I guess I was just trying to understand if it was the fact that you restarted Krotz Springs? Was it margins, particularly for gas or for diesel? Just what the drivers of the improvement were.

Basically the driver is the outlook for the year. When we started the year, it was one outlook, and now it's a different outlook.

And next we have Kalei Akamine of Bank of America.

I want to talk about refining first. So refining obviously turned the corner in the quarter. Wondering if you can help us understand what the profitability looked like in March as we get a sense of what the 2Q run rate could look like and address whether all the winter storm repairs had been made. And also whether there was any cost in restarting the Krotz Springs refinery.

Let's go through the updates one by one, and then Louis will cover the technical details. All winter storm damages have been resolved, except for the alky unit at Big Spring, which we expect to start in the coming days. This will obviously improve the profitability for Big Spring, not Krotz Springs. We have just finished the turnaround at El Dorado, and we expect to reach full capacity there in a few days. Krotz Springs is currently operating at full capacity, as is Tyler, and Big Spring is also at full capacity. Therefore, we should be moving past the impacts of the winter storm. There will be some effects in April due to the El Dorado turnaround, which took place in that month, but we anticipate being close to full capacity in May and June. Louis, do you have anything to add?

No.

The next question we have will come from Phil Gresh of JPMorgan.

I just want to follow up on the OpEx side of things and tying things back to the original guidance of $70 million of OpEx saves this year, and 45% of those I think were supposed to come from Krotz Springs if it was going to be down. So just to put a little bit more detail around how you see things progressing with the residual savings.

Phil, it's Blake. I'll take that. So as you know, in the beginning part of the year, there's a lot of moving pieces in terms of the winter storm impacts in Q1. And then, of course, in Q2 we have some residual impact in terms of the winter. Then, of course, the fire at El Dorado, post turnaround restarts at Krotz and El Dorado. You see the guidance for Q2 of $140 million to $150 million, what I would suggest to you is if you look at the original guidance, which was back in Q3 of last year, that would suggest something on a per quarter basis of about $130-some-odd million per quarter with Krotz running. I think as we move into the second half of the year, I think we're still probably toward that figure, maybe in the high $130 million range. Technically speaking, natural gas prices have moved up a bit. We have some electricity contracts coming up for renegotiation, etc. So I think we're still within about 5% of that original guidance. So if I'm you, Phil, just again this isn't hard guidance, but from a modeling perspective, something in the upper $130 million per quarter range I think feels about right with Krotz running. So again, I think a little bit lower second half of the year compared to what we were looking at in the first half of the year.

Okay, great. That's helpful. The second question, just on retail. Uzi, I think I asked you this one last quarter, so I just thought I'd follow up again. How do you think about the importance of retail to the overall company, the value you could get externally versus obviously the very strong cash flow that is delivering for the company today?

Phil, we have not changed our perspective. Everything should be evaluated in terms of value. Currently, the retail market is sitting at about a 10 to 11 times multiple. Meanwhile, our EBITDA continues to grow and improve. We are open to being active in the retail market regardless of the circumstances. As you recall, we sold Mapco at a 13 times multiple. We believe that if growth continues, we may want to increase our stake. If there’s an offer that reflects the value for someone else and provides us with future growth potential, we should definitely consider it. At this moment, we are confident that EBITDA will keep rising. If someone is willing to pay for that growth, we are certainly open to engaging in the market.

Okay. Very clear. If I could sneak one last one. What would be the future normalized CapEx to be thinking about in light of the higher spend this year? Just any kind of bottoms-up detail there would be helpful.

We've discussed before that the sustainable capital expenditures for refining should be around $100 million, with corporate expenses at about $30 million, DKL at around $20 million, and the remainder for retail. If we opt to open more stores, each store will cost approximately $5 million. The sustainable capital expenditures for retail are estimated to be between $15 million and $20 million.

Next, we have Neil Mehta of Goldman Sachs.

This is Carly on for Neil. Just on the logistics side, could you update us on the progress around Wink to Webster and kind of when we should start to see the contribution ramp there?

Yes. Wink to Webster is a couple of our projects mentioned will be starting to ramp up. It's already in operation, but starting to ramp up by the end of this year, early the fourth quarter. It’s a ramp-up period, but as we all know, it's a fully subscribed pipeline, close to 95% subscribed. So in terms of cash flow, strong cash flow starting in 2022, and for sure '23 and '24 as we get to 100% utilization.

That's great. And then the follow-up is just kind of around the energy transition. Can you talk a little bit about the lower carbon fuel strategy? Are there any updates on considerations around renewable diesel, whether that's at Bakersfield or elsewhere? And then I guess longer term, if you view the current biodiesel operations as a core part of the portfolio?

Carly, I'll start on that, it's Blake, and if Uzi wants to follow up. So on the biodiesel part of it, look it's a small part of the portfolio, but at the end of the day, it's nice in terms of generating some RINs for us. And at the end of the day, we're exploring a lot of different opportunities. We're a member of the Hydrogen Council. We have a Decarbonization Committee internally that's constantly evaluating opportunities. We have the Bakersfield renewable diesel option. So at the end of the day, we want to participate in the global transition. At this point, we have not committed substantial amounts of capital to anything, which I think has served us well. We'll continue to explore where we think the best rate of return is going to be.

Next, we have Paul Sankey of Sankey Research.

Uzi, you've kind of addressed this, but could you just do a top-down on the outlook for your projects. I've slightly lost track of where you're going with the various gathering and placement projects that we're looking at going forward. I heard you on the CapEx outlook. I heard you on the maintenance CapEx. If you could just sort of layer on top of that where you see additional spending over the next couple of years, that would be helpful.

Paul, it's great to have you back. I just want to confirm what you're asking about—are you inquiring about growth projects or something else?

Basically pipes and stuff. Anything big.

The outlook for DKL remains very strong with three projects expected to be completed this year. We have already invested most of the capital expenditure in the Red River expansion and the pay line new shipper that started in May, along with the Baker Hughes project. These three initiatives are focused on organic growth and will generate cash flow with minimal investment. Given the current market conditions, our investment threshold has become much lower. We want to avoid investing based on high multiples like 7 or 8, or even 9x EBITDA, so we have to be cautious. The returns on gathering expansions are currently around 4 to 5x EBITDA, and we want to keep exploring that. Our main priority now is to reduce debt and seek out opportunities, so we do not anticipate investing hundreds of millions in gathering and pads in this environment. However, if retail stores continue to perform well, we are investing about $5 million to $5.5 million with the potential to achieve $1.2 million to $1.3 million in EBITDA; we may continue that in the future if we commit to the retail investment.

Got it. I understand you won't comment on the proxy, but could you please repeat the relevant dates for the voting deadline and when we might see a resolution to this situation?

Paul, it's Blake. The shareholder meeting's tomorrow at 1:00 Central Time, so you should have results imminently.

And next we'll have Jason Gabelman of Cowen.

I want to first follow up on the retail strategy moving forward. Clearly, the stores appear to have attractive returns. Can you discuss your plans for growing the large format stores by 50 by 2025? Will this be gradual growth, or do you anticipate seeing more progress in the near term, knowing that 2021 won’t be a significant growth year for that business? I have a follow-up.

Jason, if you recall, when we expanded Mapco, we started with 2 locations, then progressed to 5, followed by 10, and then 15, and continued from there. It's important to practice and learn gradually to avoid mistakes. We established 3 NTIs that have proven to be quite successful. Our approach is to invest in these stores wisely, ensuring we learn from each one we build. As we increase our pace, we simultaneously have a team focused on finding quality properties. We are effective in both our construction and operational processes. Therefore, I see this as a gradual ramp-up where we can learn from our experiences rather than a regular growth pattern.

Okay. Got it. That's helpful. And secondly, on shareholder returns, you discussed on last quarter's earnings call that you could explore resuming the buyback program after a few months of positive free cash flow. Certainly with restarting Krotz Springs, it seems like you have an outlook that you will achieve that positive free cash flow in the near term. So can you just discuss the outlook around timing of restarting a shareholder return program? Whether at these levels, you prefer a dividend or buyback; and if it's the former, if that dividend level could be around where it was prior to COVID?

The steps we are going to take are first to strengthen the balance sheet and ensure it becomes healthier while reducing debt. The second part is to restore the dividends and then initiate the buyback. These are the steps.

What level of debt are you looking to get back toward?

Well, it depends on what normalized EBITDA is. Obviously with $16, $17 crack spreads, we do think that everything is great. However, with the RINs eating, what, $6, $7, $8 into that, or $7, then we need to see what happens with the RIN. And then if RINs are dropping, then our confidence level will go higher. So we'll wait to see what the Supreme Court says. We're looking at it very carefully, and let's see what they do and we take it from there.

It looks like we have no further questions at this time. Now we'll go ahead and conclude today's question-and-answer session. I would like to turn the conference back over to the management team for any closing remarks.

I'd like to thank my colleagues around the table. I'd like to thank the Board of Directors for the confidence in us. Obviously I'd like to thank each one of you investors for taking the time to learn about our company and giving us the confidence to run the company the way we think we should run it. But mainly I'd like to thank obviously each employee of this company that makes it the great company it is. Have a great day. We'll talk to you soon. Thanks.

And we thank you also, sir, and to the rest of the management team for your time today. Again, the conference call is now concluded. At this time, you may disconnect your lines. Thank you again, everyone. Take care and have a wonderful day.