Delek US Holdings, Inc. Q4 FY2025 Earnings Call

Thank you for being here. My name is Jayle, and I will be your operator for today's conference. I would like to welcome everyone to the Delek US Fourth Quarter Earnings Call. I will now hand the conference over to Robert Wright, EVP of Delek. You may begin.

Good morning, and welcome to the Delek US Fourth Quarter Earnings Conference Call. Participants joining me on today's call will include Avigal Soreq, President and CEO; Mark Hobbs, EVP, Chief Financial Officer; as well as other members of our management team. Today's presentation material can be found on the Investor Relations section of the Delek US website. Slide 2 contains our safe harbor statement regarding forward-looking information. As a reminder, this conference call will contain forward-looking information as defined under the federal securities laws, including statements regarding guidance and future business outlook. Any forward-looking statements made during today's call will involve risks and uncertainties that may cause actual results to differ materially from today's comments. Factors that could cause actual results to differ are included in our SEC filings. The company assumes no obligation to update any forward-looking statements. I will now turn the call over to Avigal for opening remarks. Avigal?

Thank you, Robert. Good morning, and thank you for joining us today. 2025 was a transformational year for Delek. We have made progress on all fronts, including improving the free cash flow profile of the company and increasing the economic separation between DK and DKL. The year also concluded with strong fourth quarter results. In Q4 2025, excluding SRE, Delek reported an adjusted EPS of $0.44 and adjusted EBITDA of approximately $226 million. These results highlight the accelerating momentum at Delek and the stability of our strategy. Now I will cover some of the achievements in 2025 in detail. Starting with EOP, I'm proud of how we have created a culture of continuous improvement through our enterprise optimization plan. EOP drove substantial value throughout the year with strong execution and measurable progress across all business units. As a result of continued success, we are once again raising our enterprise optimization plan target to at least $200 million on an annual run rate basis. Our sum of the parts initiatives continue to advance. 2026 is expected to have the highest economic separation between DK and DKL. 2025 was a record year for DKL with approximately $536 million in adjusted EBITDA. DKL continued to build on its premier position in the Permian Basin through its full suite of service and strong organic growth. Continuing the momentum, DKL today announced its 2026 EBITDA guidance to be in the range of $520 million to $560 million. DKL is close to the finish line on its industry-leading comprehensive sour gas solution, including gathering, treatment, processing, and acid gas injection, providing market access for residue gas and NGLs. These capabilities will provide DKL the ability to fully capitalize on its growth opportunity in the Delaware Basin and maintain its best-in-class EBITDA growth and yield. In 2026, on a pro forma basis, with continued growth in third-party cash flow, we expect DKL third-party EBITDA to exceed 80%. Achieving this level of economic separation has been a cornerstone of our sum-of-the-parts strategy. We are taking additional action to ensure the strength of DKL's third-party midstream services are fully reflected in the share price and unit price. As I always do, I will now give an update on our key long-term priorities. First, safe and reliable operations. We had a strong operational quarter in our refining system with solid performance from our four refineries. At Big Spring, our first quarter 2026 planned turnaround is progressing well and remains on track. The focus of this turnaround is to further enhance reliability and operational flexibility, positioning the refinery for improved cost structure and margin capture. We expect this enhancement to drive meaningful performance improvement once the refinery returns to full operations. This is our only planned turnaround in 2026, which sets our refining system up well for the remainder of the year. Second, I would like to add a little more context on our Enterprise Optimization Plan. As a reminder, we started EOP with an aim to improve DK cash flow by $80 million to $120 million on a run rate basis, starting in the second half of 2025. As a result of the strong buy-in from the organization, we have been able to continue to increase our EOP range. We are again increasing our expectation for EOP-related cash flow improvement to at least $200 million annually. During the fourth quarter of 2025, we estimate approximately $50 million of EOP contribution in our P&L. The success of EOP is clearly visible in the performance of El Dorado refinery supply and marketing results and G&A. These improvements are here to stay and have set us up for long-term success. I'm confident that EOP will remain a core strength well into the future. As mentioned last quarter, we pursued a proactive strategy to monetize the 2023 and 2024 RINs granted after the EPA cleared the backlog of pending 2019 to 2024 SRE petitions. I'm pleased to announce that we were able to monetize a large portion of our 2023 and 2024 RINs faster than our original plan and have been able to use the proceeds to reduce our inventory intermediation agreement. The restructuring of the IIA will improve our free cash flow generation on top of EOP by at least $40 million on a yearly basis. We remain actively involved in our effort to get full value for the 2019 to 2022 RINs for which we were provided invalid relief. Finally, we believe that the current administration, Senate, Congress, and EPA realize the importance of SREs, not only for the refineries which qualify under the program but also for the local communities they serve. We believe SREs will remain a core part of the current administration's energy policy as it advances its energy dominance agenda. The final piece of our strategy is being shareholder-friendly and having a strong balance sheet. During the quarter, we paid approximately $15 million in dividends and bought back approximately $20 million of our shares. Our strong balance sheet, improved reliability, and confidence in EOP enable us to undertake countercyclical buybacks in 2025. I'm proud to continue our strong shareholder return, dividends, and buybacks through the cycle. We remain committed to a disciplined and balanced approach to capital allocation and look forward to continuing to reward our shareholders. In closing, thank you to our team for their hard work and dedication through 2025. I'm proud of the progress at Delek over the last year and look forward to continuing this progress in 2026. Now I will turn the call over to Mark, who will provide additional color on the quarter.

Thank you, Avigal. For the fourth quarter, Delek had net income of $78 million or $1.26 per share. Adjusted net income was $143 million or $2.31 per share, and adjusted EBITDA was approximately $375 million. Moving to Slide 5, we show the breakout of adjusted EBITDA and adjusted EPS for the fourth quarter. Excluding SREs, adjusted EBITDA and adjusted EPS were approximately $226 million and $0.44 per share, respectively. This removes the reduction in the cost of materials of $75 million associated with prior year SREs and the impact of our RVO exemption recognition for the fourth quarter of $74 million. For the full year 2025, excluding SREs, our adjusted EBITDA was approximately $763 million. On Slide 19, the breakdown of adjusted EBITDA, excluding SREs from the third quarter of 2025 to the fourth quarter shows that there was one main driver for the decrease in EBITDA. The primary driver was in the refining segment, where adjusted EBITDA declined by $91 million, largely due to seasonality. Excluding SREs, supply and marketing contributed approximately $23 million in the quarter. Of that amount, approximately $35 million was generated by wholesale marketing. Asphalt contributed a loss of $4.2 million with the remaining contribution coming from supply. In the logistics segment, we continue to have another strong quarter, delivering approximately $142 million in adjusted EBITDA. Moving to Slide 20 to discuss cash flow. Cash flow provided by operations in the fourth quarter was $503 million. This includes our net income for the period adjusted for noncash items, monetization of SREs, and a net inflow related to changes in working capital of $26 million. When adjusting for working capital and SREs, cash flow from operations was $119 million. This was an improvement of $211 million when compared to the fourth quarter of last year. This improvement was driven by an increase in net margin in the quarter versus last year and the continued success we are having with our enterprise optimization plan. Investing activities of $117 million in the quarter include approximately $26 million for growth projects primarily at DKL. Financing activities of $391 million includes approximately $380 million related to the paydown of our inventory intermediation agreement and associated inventory financing, which will result in at least a $40 million reduction in annual interest expense. $20 million in share repurchases, approximately $15 million in dividend payments, and approximately $22 million in DKL distribution payments to public unitholders. On Slide 21, we outline our fourth quarter capital spending with $82 million invested at Delek stand-alone and $31 million at DKL, largely for growth projects. Our net debt position is broken out between Delek and Delek Logistics on Slide 22. Excluding Delek Logistics, our Delek stand-alone net debt remained largely in line with prior quarters. Moving now to Slide 23, where we cover first quarter outlook items. Our throughput guidance for the first quarter of 2026 is 70,000 to 74,000 barrels per day at Tyler, 66,000 to 71,000 barrels per day at El Dorado, due to the planned turnaround. Big Spring will run 22,000 to 28,000 barrels per day, and lastly, Krotz Springs will run 82,000 to 86,000 barrels per day. Our implied system throughput target for the first quarter is in the 240,000 to 259,000 barrels per day range. In addition to throughput guidance for the first quarter, we expect operating expenses to be between $210 million and $220 million. Our guidance for the first quarter incorporates increased operating expenses associated with preparing for winter storm Fern. G&A is expected to be between $47 million and $52 million. D&A is expected to be between $100 million and $110 million and net interest expense to be between $75 million and $85 million. With that, we will now open the call for questions.

Your first question comes from the line of Doug Leggate of Wolfe Research.

It's great to see these SREs showing up. I have a couple of questions regarding what you've booked. I'm looking for information on the cash inflow and what's left to be recognized for the SREs you've already received. Could you explain how you plan to get the pre-2023 SREs recognized? My second question pertains to the future SRE value, which is obviously significant. There are other topics we could discuss, such as the EOP, but we believe the main concern is the value of the '25 through '28 RINs and any risks from potential legislative changes. Can you provide any insight on why you continue to take risks with the 2025 RINs specifically?

Yes, absolutely, Doug. And with your permission, I will try to start with the future. And again, this is one person's opinion about what the situation exactly. But when we are talking about the future, first of all, we need to understand it's not a Delek topic. It's a way broader topic than that. It's directly impacting close to 40 refineries and indirectly impacting half of our industry. So it's a huge, huge topic. And I want to make it even more clear than that. The whole point of SRE is disproportionate economic harm. And the essence of the law behind it is to maintain high-paying jobs, support local communities, and ensure affordable fuel for those communities. So it's very, very important. SRE and small refineries are critical to meet the energy dominance policy, crucial in our mind, and are here to stay. About the 2019 to 2022, you asked that as well. I want to say something that relief and eligibility are coming together. So we are obviously eligible for those SREs but we received invalid RINs. There is an acronym for those RINs lately, it's called zombie RINs. That's what people just refer to them as. And since those trends of relief and eligibility come together, we believe in our case around that, and we believe that we'll get full value for what we already paid. So Mark, why don't you touch on the proceeds?

Yes, sure, Avigal. And Doug, I appreciate the question. And as Avigal mentioned in his prepared remarks, look, we're extremely excited and proud of the progress we made during the quarter. We saw an opportunity during the quarter to restructure and pay down our inventory intermediation agreement, and our team did a great job, and they were actually able to monetize a vast majority of the RINs from our prior year SREs from 2023 and 2024, that $400 million that we mentioned on last quarter's call, much earlier than our original estimate of six to nine months, raising approximately $360 million during the fourth quarter. And at the end of the quarter, near the very end, we used these proceeds and available cash to pay down approximately $380 million under the IIA and associated inventory financing, which was a large portion of what we actually had outstanding under the program. And these activities are going to reduce our annual interest expense associated with the IIA by at least $40 million. This further enhances our free cash flow generation. And as Avigal also mentioned in his prepared remarks, this is on top of and beyond everything that we've discussed to date with regards to our EOP initiatives.

And Doug, just to add one more thing. I just wanted to point out that if you look at the mid-cycle basis, pre-inventory intermediation agreement restructuring, we would have made $150 million of free cash flow. Mark just talked about another $40 million on top of that. If you take that $190 million of value at 10% free cash flow, that's $32 a share. And if you look at the value of DKL, that's another $32 a share. So that's at least $65 a share that's missing. And that's got nothing to do with SREs at all. So we definitely agree with you that there's a lot of value that's still not reflected in our shares. And to answer one last piece of your question, yes, there's some more left to monetize beyond what we have done for the 2023 and 2024 RINs, still left to be done, which we expect to be monetizing in the first half of 2026, most likely in the first quarter.

Guys, I don't want to hog the question here, but I want to make sure you understood my question about the forward. Slide 18, you're showing a range of 50% to 100%, $468 million on a 100% basis. But you're also giving us guidance that all four refineries are going to be under 75,000 barrels a day. So why should we risk that number in '25 or for that matter, '26 through '28?

Yes, Doug, that's a very good question. I want to emphasize that the point about disproportionate economic harm is crucial. You are correct that these RINs are not a windfall. For refiners like us who stay compliant, we pay for these RINs, and then the cost is reimbursed a year later. We can't determine how the EPA will respond to these petitions; that's up to them. However, so far, the EPA has done a commendable job addressing the backlog created between 2019 and 2024, and they have provided strong forward-looking guidance. We expect them to continue this good work, and we will see the outcome of our 2025 petitions as it unfolds. For now, we wanted to highlight our $468.4 million RVO obligation for 2025, which we have communicated. The percentage of that which is approved is in the hands of the EPA.

Yes, very good quarter. Avigal, just curious, what's left in the consolidation of the DKL and in terms of timeline? And also ultimately, what is the ownership that you think you need or want to have in DKL? And second question is that in the Big Spring refinery, you're going to have a full plant turnaround currently ongoing. So what initiative, other than the normal turnaround, that you are taking that will lead to the improvement of the performance going forward? What other than, say, the normal full plant turnaround that you typically would do every four or five years? What else are you doing in this turnaround?

Thank you. I’d like to start with a broader discussion about sum-of-the-parts and deconsolidation. It's important to highlight that the purpose of the sum-of-the-parts approach is to ensure that the value of our midstream business is accurately represented in both the unit price and the share price. We've made significant progress in the last 18 months on this front, which is visible to the market. We've previously sold retail assets that contributed to this effort, and we have made two acquisitions of a midstream company before the market fully recognized its value, purchasing it for roughly half of its current worth. We've also built a gas plant in a prime location with excellent capabilities and have developed this business successfully, which we take pride in. Furthermore, we have decreased our ownership from nearly 80% to about 60%, all while increasing distributions. We have accomplished many objectives to create value for both unitholders and shareholders. Currently, we are exploring four avenues, some of which may overlap. One option is to sell the entire asset for an appropriate value. If you examine the intrinsic value of each business unit in DKL, it suggests a significant potential for the DKL unit. We can monetize any of DKL's assets at the right price and utilize the tax-free relationship between DK and DKL to facilitate unit buybacks. We can also consider mergers and acquisitions and further reduce our ownership as we've done previously. There are numerous strategies at play, and while the absence of announcements may seem concerning, it does not reflect a lack of effort or progress. As for the Big Spring refinery, we are pleased with the team's performance there, which is evident in the Q4 numbers. The team has made great strides, focusing on reliability, optimizing our crude slate, and enhancing the product slate following the turnaround. We are eager to see how Big Spring will perform post-turnaround, so let's keep an eye on that.

Avigal, for Big Spring, is there any new technology being introduced or new unit being added, or anything that we should be aware of in this full plant turnaround?

No. It's a cyclical turnaround. The last turnaround we underwent in Big Spring was in 2020. So that's on the cycle. We are not doing any huge capital projects but we are ensuring that those three boxes that I've said are being very clear: the operational reliability, the crude slate and the product mix after that. And Mohit, do you want to chime in, please?

No, Avigal, I just want to add to what you just said. And Paul, you're asking the right question. For us, the most important piece about Big Spring is to improve its reliability. Once we improve reliability, our cost structure is going to improve, and we have been making great progress in improving its cost structure, and we expect after the turnaround that cost structure will improve even more. And if you look at the product side, that will help with margin capture as well. So I think we are very excited about this turnaround, as Avigal just mentioned, and we look forward to updating you about this at our next earnings call.

We wanted to ask a follow-up on the cash flow profile. Can you unpack the drivers of the raised cash flow guidance? And then how do we think about potential upside from that number, just given you've raised it a few times?

Yes, that's a great question. I want to provide some broader context because the real focus is on EOP, which centers around free cash flow. This is the core of the program, and it has everyone's attention. It's not merely about projects; it's a way of life and a common language within the organization that everyone understands. It's encouraging to see it taking root in our company culture, and I'm very proud of that. Reflecting on where we began 1.5 years ago with our initial guidance of around $100 million, we are now projecting at least $200 million. This represents more than a doubling of that figure. It's uncommon for a company to consistently raise guidance over time. I also want to emphasize that we're not done yet, as we have significant plans for the future of EOP that will enhance gross margin, G&A, supply, marketing, and many other business areas, which we are very excited about. There is still more to come.

Okay. That's helpful. And then a follow-up on that. You've got EOP, SREs, and IIA. As we think about the implications of incremental free cash flow, how should we think about the capital allocation priorities? Should we expect you to lean more into buybacks? Or any thoughts there would be helpful.

Yes. So that's a great question. Thank you for asking that question. We are very proud of our capital allocation strategy. We said that we're going to maintain dividends through the cycle. We can check the box around that. We said that we're going to do a balanced approach between the balance sheet and buyback. We can definitely check the box around that. We did in 2025, countercyclical buyback. And actually, our total return to shareholders is higher by 4% than the average of our refining peers. So our philosophy of capital allocation did not change. And we are very consistent about that. We communicate to investors very clearly, and we always take the opportunity to reward investors. So that's the goal we have, and we'll keep doing it.

I wanted to ask on the supply line because it's now been two consecutive quarters where that supply and other part of the supply line has been above $50 million. And I know it includes a variety of items. So could you just talk about what drove the strength in Q4? How much of it was EOP versus any one-time benefits? And how we should think about that subline item within the overall supply line moving forward?

Yes, absolutely, and thank you for joining our call this morning. We appreciate you. In reality, as I said in my prepared remarks and you probably heard, it's very visible that the EOP progress in the supply and marketing. We see that very clearly. We see that in other places. We've seen that in G&A, basically cutting the cost by close to half versus what it used to be. You've seen that in El Dorado, that we were able to increase - to improve our capture by $2 a barrel on top of the crack. So a great team over there, very proud of the progress. We still see more opportunities over there. And I will let Mohit touch on the specific question about DKTS.

It's great to hear from you, Jason. Regarding supply and marketing, I've mentioned this in the last quarter as well. The two key areas within supply and marketing are wholesale and asphalt, and we are making significant strides in both. We've been enhancing the wholesale business in three phases. The first phase focused on ensuring we had the right products to meet market demands. The second phase involved renegotiating contracts and enhancing logistics, which has improved our market access. Currently, we are in the second phase, optimizing our market participation. In some areas, we are increasing our product supply, while in other regions, we are pulling back. This is the main factor behind the reduced seasonality in the supply and marketing sector. While we won't eliminate seasonality altogether, we are working to lessen its effects. Market conditions will also play a role in our progress. For instance, later this year, Magellan will bring its pipeline online, which will begin clearing the group and increase product availability in PADD 4. Once the West Coast pipelines are operational, the supply will come from both the group and the Mid-Continent. The market developments will assist us, and we welcome that support.

I appreciate the detail. The question was more about not the wholesale or asphalt but the third part of that supply and marketing business, which has been above $50 million for a couple of consecutive quarters. And I was wondering if you think that's a good rate moving forward or if you expect it to be kind of volatile quarter-to-quarter?

Yes, Jason. So we did call out a $43 million one-time impact for the last quarter. That's for Q3. This quarter, that line item is more in line with what we expect. But there would be some volatility in that line item, but that's not a reflection of the core business. So I just want to focus on what our core business is and where most of the improvements are coming. And if you want to talk more about it, we can take it offline.

Absolutely.

Yes, thank you. That's a great question. What we have accomplished is furthering the economic separation of the two public companies. DKL now has 82% of its EBITDA derived from third parties. The key achievement is that DK has successfully aligned the right assets under the appropriate entity. Overall, these transactions do not significantly impact EBITDA. On the topic of timing, we have outlined the two phases, which pertain to the cash flow transition between the two parties.

Congratulations on the results. I have a question. I know you've already touched on this, but margin capture was very strong across multiple regions. You've highlighted some of this regarding EOP drivers. Can you discuss what has gone well and how you view sustainability moving forward, particularly in distinguishing between structural drivers and transient impacts, as well as your outlook on margin capture ahead?

Yes. I believe our strategy is reflected in the results. Our approach emphasizes a safe and reliable operation along with EOP. To achieve optimal capture, three key elements are necessary: a safe and reliable operation, robust commercial activity led by our Chief Commercial Officer Israel, who is with us today, and a strong EOP. The synergy of these three components enhances capture over time. We take pride in our results, as evident in both Tyler and KSR, which have shown significant improvement in capture following their turnaround, ahead of our expectations. Mohit, would you like to add anything?

Yes, Avigal, you pointed out EOP as the reason for it. Because of EOP, we have been able to produce more high-octane products and sell them all year round, which is helping as well. We also have a very high distillate deal, which contributed, and we have increased our total liquid volume yield, which is also part of our enterprise optimization plan, and that is showing results in our capture.

Yes. So I want to just say thank you to the team here that did a very good job to our Board of Directors that helps and guides us, and to our investors that like the story and stay with the story, and most importantly, to our great employees that make the company that great company. Thank you, and we'll talk again next quarter.

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