Delek Upbeat on Downstream

Retailing side buoys profits, while refiner-marketer hints at growth

Angel Abcede, Senior Editor/Tobacco, CSP

FRANKLIN, Tenn. -- Noting a substantial boost from unusually healthy fuel margins in the last half of the year, Delek US Holdings Inc. said that its strong liquidity and the potential for good buys brought about by today's ailing economy is making acquisition an attractive option. But executives on a quarterly investment call yesterday fell short of declaring themselves in a buying mode.

"Conditions are favorable to somebody with two-times debt to EBITDA [earnings before interest, tax, depreciation and amortization] and some of our peers don't enjoy such a balance sheet, " [image-nocss] said Uzi Yemin, president and CEO of Delek US, Franklin, Tenn. "We do see ourselves looking, but with caution....[We want to] protect our balance sheet."

In fourth-quarter 2008, net income from continuing operations was $18 million, compared to a net loss of $12 million in fourth-quarter 2007. In a statement, the company said retail-segment contribution margin increased 63.8% to $19 million in fourth-quarter 2008, compared to $11.6 million in fourth-quarter 2007. Retail segment contribution margin for the full-year 2008 increased 10.4% to a record $66 million, compared to $59.8 million in 2007.

Although hurricane-related supply shortages in the fourth-quarter results adversely affected fuel sales, the company benefited from higher fuel margins during October and early November. That financial tide "more than offset" lower sales volumes in the period. Credit expense also declined from 9.3% of gross margin in fourth-quarter 2007 to 6.6% in fourth-quarter 2008, which was due in part to a decline in the average retail price per gallon of gasoline when compared to fourth-quarter 2007.

But the big story was fuel margins. For two consecutive quarters, retail fuel margins achieved record levels, hitting 24.9 cents per gallon in fourth-quarter 2008-an increase of 10.8 cents per gallon when compared to fourth-quarter 2007. The increase in fuel margin served to partially offset a 6% same-store decline in the total number of retail gallons sold in the quarter.

Delek US reported an 8.2% same-store merchandise sales decline in fourth-quarter 2008, attributable to regional fuel supply shortages and a falloff in discretionary consumer spending. Merchandise margin for the three months ended Dec. 31, 2008, declined to 29.8%, compared to a merchandise margin of 30.7% last year. Fourth-quarter merchandise margins were adversely impacted by the markdown of what the company defines as "legacy and trial products" in all markets which have since been phased out of the company's new product-marketing strategy.

"The benefits of our diversified downstream business model were evident during 2008, positioning us to maintain profitability in a period of challenging market conditions and prolonged commodity price volatility," said Yemin. "Our retail segment reported record contribution margin in 2008, due principally to elevated retail fuel margins during the second half of the year."

A fire at Delek's Tyler, Texas, refinery, which occurred on November 20 of last year, also had a negative impact on earnings. The refinery has been offline since the incident and is currently anticipated to resume operations in May 2009.

"Delek US is covered by business-interruption insurance, which went into effect on Jan. 4, 2009, 45 days after the date of the incident at the Tyler refinery," said Yemin. "The proceeds received from the business-interruption claim will recognize current market conditions, thereby allowing the company to benefit from the favorable 'contango crude-oil market' structure and improved Gulf Coast crack spread that the refinery would have enjoyed during January and February had the refinery been online."

The company was also in the process of selling retail stores in Virginia as part of a move to shed what it called "remote" properties that were not within its current growth markets. During the fourth quarter, the company's Virginia stores were reclassified to "discontinued operations" and at year end, it had sold 12 of the 36 Virginia-based stores for $9.8 million. Officials added that since then, it has closed on seven additional properties.

Of the approximately $18 million set for retail spending in 2009, the company said $11.5 million will go toward the company's re-imaging and another $4 million for "maintenance." During 2008, the company's retail segment reimaged 54 stores, bringing the total percentage of reimaged stores to approximately 20% of the chain's 458 stores.

"Entering 2009, our executive team has established a number of strategic directives designed to improve the efficiency, competitive positioning and profitability of our core assets," Yemin said. "In our retail segment, the brand reimaging and private-label initiatives remain key areas of focus as we look ahead to the remainder of the year."

Delek's retail segment markets gasoline, diesel and other refined petroleum products and convenience merchandise through a network of company-operated retail fuel and c-stores, operated under the MAPCO Express, MAPCO Mart, East Coast, Discount Food Mart, Fast Food and Fuel and Favorite Markets brand names.

Angel Abcede, CSP/Winsight By Angel Abcede, Senior Editor/Tobacco, CSP
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