Delek US Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 8, 2023

There are 13 speakers on the call.

Operator

Morning, and welcome to the Delek US Holdings 2023 First Quarter Conference Call. All participants will be in a listen only mode for the duration of the call. After today's presentation, there will be an opportunity to ask questions. We ask in advance that you please limit yourself to one question and one follow-up for today's call. And please also note that this event is being recorded today.

Operator

I would now like to turn the conference over to Rosie Zuklic, Vice President of Investor Relations. Please go ahead.

Speaker 1

Good morning, and welcome to the Delek U. S. First Quarter Earnings Conference Call. Participants on today's call will include Abigail Sorek, President and CEO Joseph Israel, EVP, Operations Ruben Spiegel, EVP and Chief Financial Officer Mark Today's presentation material can be found on the Investor Relations section of the Delek U. S.

Speaker 1

Website. Slide 2 contains our Safe Harbor statement. We'll be making forward looking statements during today's call and actual results may differ materially from today's Comments. Factors that could cause actual results to differ are included here as well as in our SEC filings. With that, I'll turn the call over to Avidol.

Speaker 2

Good morning and thank you for joining us today. We reported a strong first quarter. Adjusted EBITDA was $285,000,000 a first quarter record for Delek US. We generated $395,000,000 cash from operation. In addition, we reduced consolidated debt by $281,000,000 Our team executed well in the quarter.

Speaker 2

We generated significant earning in the refining segment. This was achieved despite the Tyler and Refinery major plant turnaround during the quarter. With this turnaround behind us, we are well positioned to capture market opportunities as they present themselves. We do not have a major turnaround in our system schedule until late Q4 of 2024. Our logistics segment delivered strong in adjusted EBITDA.

Speaker 2

This is the results Of the investments we have made in our Midstream businesses. As an example, compared with last year, we have more than doubled The volume in the Midland Gathering system. We remain focused on our key priorities. I will now take a few minutes to provide an update on each and every one of them. 1st, returning value to shareholders and optimizing our balance sheet.

Speaker 2

During the Q1, we used excess cash to do what we committed to do. At the Delek US Holding, we paid down $327,000,000 of debt. Given the strong performance, We started buying back our shares in the Q2. Today, we have up to today, we have repurchased $40,000,000 of DK shares. Also on May 2, our Board of Directors approved 4.5% increase 2nd strategic is the vision to create a long term value to our shareholders.

Speaker 2

Our team is dedicated. We are working night and day on the sum of the parts initiative. We continue to make progress. We are committed to make a long term good decision that drives shareholder value. A key focus area since becoming a CEO has been safe and reliable operation.

Speaker 2

We moved in the right direction during the Q1. The Tyler turnaround was completed with 0 recordable and on time and on budget. As of the end of March, DKL employees and contractors have worked combined 4,000,000 man hours with 0 lost time injuries. We are being proactive in our approach to improve safety. We are developing and implementing plans that will drive The improvements toward our long term goal of a top quartile safety and reliability performance.

Speaker 2

Our final key priority is improving efficiency in our cost structure. We remain focused on this goal. Rosy will provide additional updates on this effort. To accomplish our key priorities, we must make sure we have Right people in the right roles. Over the past several months, we have made strategic addition to our team that will position ourselves for future success.

Speaker 2

In March, we welcomed Joseph Israel as EVP of Operations. Joseph is a well rounded industry veteran with over 25 years of Energy experience and proving track records of driving safe and reliable operation. Please join me in welcoming Joseph to the call today. Patrick Reilly has joined us as EVP and Chief Commercial Officer. He brings wealth of experience from best in class businesses.

Speaker 2

His experience and background align well with our vision for future growth. We have also strengthened our team with Tommy Chavez joining us as SVP, Refining Operation. Tommy brings over 35 years of refining experience. Our team is strong and well positioned to execute on our strategic plans. In closing, I would like to thank our entire team of over 3,500 employees.

Speaker 2

Their hard work and dedication are driving our success. I appreciate their effort and look forward to a strong future together. I would also like to thank our investor And Board of Directors for their continued support. Now, I will turn the call over to Joseph, We'll provide additional color on our operation.

Speaker 3

Thank you, Avigail. I'm thrilled to join the Belek family And I have no doubt our strong talent and competitive position across the system are positioning us well for future success. Our safe and reliable operations in the Q1 allowed us to leverage Favorable market conditions and deliver strong results. I will now provide additional details about our operations in a slightly modified format with the objective to provide more visibility regarding our performance and plans going forward. Starting with our Otayla refinery, as Avigail mentioned, the team successfully executed 49 day Oil to oil major turnaround.

Speaker 3

Beyond routine maintenance and reliability upgrades, the scope included yield improvement projects mainly around the FCC and DHT, with an estimated $0.40 per barrel of margin capture improvement going forward. Turnaround cost was consistent with our plan At approximately $100,000,000 Due to the turnaround, total throughput in Tyler in the first quarter was approximately 35,000 barrels per day. Production margin in the quarter was $21.65 per barrel And operating expenses were $8.70 per barrel, including approximately $1.25 per barrel of accelerated maintenance due to the turnaround. In the Q2, the estimated total throughput in Tyler is in the 74,000 to 77 1,000 barrels per day range and OpEx is expected to go back to the normal range of $4.50 to $5 per barrel. In El Dorado, total throughput in the Q1 was approximately 77,000 barrels per day.

Speaker 3

Our production margin was $13.38 per barrel and operating expenses were $4.47 per barrel. Estimated throughput for the Q2 is in the 78,000 to 81,000 barrels per day range. In Big Spring, total throughput for the quarter was consistent with plan at approximately 73,000 barrels per day. Production margin was $18.33 per barrel and operating expenses were $5.80 per barrel, including approximately $0.60 per barrel of maintenance activities. The estimated throughput for the 2nd quarter Is approximately 70,000 barrels per day after completing maintenance work in the month of April.

Speaker 3

In Krotz Springs, total throughput was approximately 84,000 barrels per day. Our production margin was $15.47 per barrel and operating expenses were $5.21 per barrel, including $0.35 per barrel maintenance in our Reformer and ALK units. Plant throughput in the Q2 is in the 80,000 to 82,000 barrels per day range. Overall, estimated system throughput in the 2nd quarter is in the 301,000 to 311 1,000 barrels per day range compared with approximately 269,000 barrels per day in the first quarter. We continue to focus on safety, reliability and environmental compliance as our top priorities, And we expect margin capture and cost performance to follow.

Speaker 3

As far as market conditions, good day to be an Inland refinery in the U. S. Gasoline is tight going to the summer and specifically for Delek, crude oil pricing dynamics are favorable and demand for products is strong across our system. I will now turn the call over to Rosie for the financial variance.

Speaker 1

Thank you, Joseph. Starting on Slide 4. For the Q1 of 2023, Delek U. S. Had net income of $64,000,000 or $0.95 per share.

Speaker 1

Adjusted net income was $93,000,000 or $1.37 per share and adjusted EBITDA was $285,000,000 Cash flow from operations was $395,000,000 On Slide 5, we provide a waterfall of our adjusted EBITDA by segment from the Q4 of 2022 to the Q1 of 2023. The significant improvement over last quarter was primarily from Higher results in refining. As AVEGAIL and Joseph mentioned, during the quarter, we operated well and were positioned to capture favorable market conditions. In addition, corporate contributed a $16,000,000 benefit Over last quarter, primarily due to lower G and A costs. For your reference, we have provided a year over year waterfall slide Moving to Slide 6 to discuss cash flow.

Speaker 1

We built $24,000,000 in cash during the quarter. The $395,000,000 in operating activities reflects the strong cash from operations. In addition, it includes Approximately $180,000,000 of the $240,000,000 of cash associated with the 2 year end timing events disclosed during the 4th Quarter Earnings Call. Investing activities of $222,000,000 is primarily for capital expenditures, The majority being for the Tyler Refinery turnaround. Financing activities includes the debt pay down during the quarter, partially offset by approximately $60,000,000 cash inflow for the year end timing events.

Speaker 1

On slide 7, we show capital expenditures 1st quarter compared with our full year estimate. For 2023, capital expense will be heavily weighted to the first half of the year. We still estimate the full year to remain at approximately $350,000,000 Net debt is broken out between Delek and Delek Logistics on Slide 8. During the quarter, consolidated net debt improved $303,000,000 and Delek U. S, excluding Delek Logistics, improved $346,000,000 The last slide covers outlook items for the Q2 of 2023.

Speaker 1

In addition to the throughput guidance Joseph provided, we expect Operating expenses to be between $195,000,000 $205,000,000 G and A to be between $70,000,000 $80,000,000 D and A to be between $80,000,000 $90,000,000 and we expect net interest expense to be between $70,000,000 $80,000,000 For interest expense, we have updated our guidance to include non cash deferred financing costs. Prior to the Q4 of 2022, When we refinanced various debt facilities, the impact of deferred financing costs was less significant. Before we move on to Q and A, a few updates. As Abigail mentioned, we have made progress on our cost reduction and process improvement effort. During the quarter, we completed the first phase of this initiative.

Speaker 1

We realized $3,000,000 of G and A cost savings, which is $12,000,000 on a run rate basis. The next phase is scheduled to start in the second quarter, and we expect to see G and A improvements in the second half of this year. Part of our assessment on costs has been a deep dive to drive industry standard on G and A and OpEx classification. This quarter, we made an adjustment of Approximately $6,000,000 between these costs. This adjustment was retrospective.

Speaker 1

We have provided 2 years of history in our supplemental slides. Finally, during the quarter, we changed the benchmark for Krotz Springs Refinery to better reflect its product mix. This was also a retrospective change. We have provided 2 years of history in our supplemental slides and detailed disclosures in the supplemental tables of the earnings release. We will now open the line for questions.

Operator

We will now begin the question and answer session. At this time, we will take our first question, which will come from Neil Mehta with Goldman Sachs. Please go ahead with your question.

Speaker 4

Yes. Thanks so much and congrats on some good progress here this quarter. And that's where I want to start off on the refining segment. It looks like even when you adjust For the G and A, it was better captures than expected. And our model in particular was at Kratz, And Tyler as well.

Speaker 4

And so just curious on anything you could talk about in terms of the refining business, If you're seeing underlying improvements and now that we're in a little bit of a tougher margin environment than where we were in Q1, do you think that strength in capture can flow through?

Speaker 2

Hey, Neil. Good morning. It's Avigal. Thanks for the question, and thank you for the support. Yes, we have experienced Good progress with our initiatives.

Speaker 2

First of all, we had a safe reliable operation always It's a key driver, and I think that the team we have is extremely focused around that. So that was the focus. The execution of the turnaround was a great success and a focus And a few small projects that help us as well. That's a good opportunity for me to welcome Joseph live And allow him to give some more color around it. Please go with that, Joseph.

Speaker 3

Thank you, and good morning, Neil. Yes, the system executed well from a safety And reliability standpoint, like Avigail mentioned, throughput capture OpEx for the 4 refineries were in the planned range With Tyler obviously under turnaround, we sourced our domestic crude oil efficiently with The more favorably Midland differentials and the right market structure, we blended low cost butane in our Gasoline. And then on the distillate side, we all know the jet fuel was a good capture component this Quarter for all refiners, including ourselves, HSD and Octane priced well to support our capture. So good quarter all in all, and we're looking forward for the next one.

Speaker 4

And welcome, Joseph, thank you. And then that's the follow-up. You talked a lot about the path towards some of the parts realization And there's no update here. So can you talk a little bit about where we stand on the plan and what are

Speaker 2

Hey, Neil, again, thank you. So listen, I can tell you that the team and Mark is here as well, And you can chime in after I finish. He's extremely focused on working on the very extensively. We continue to make in our mind great progress, meaningful progress, but we all understand that those type of transaction Take time and more than anything we want to get it right. We do not want to make something quick and which is not right.

Speaker 2

I'm very optimistic about it. The progress is being done very, very, very well, and we are very satisfied with that. And we'll keep you posted. I don't know, Mark, you want to say anything? No, I think

Speaker 5

that was well articulated. We continue To work on it, we see opportunities out there for us that we're evaluating. And as I said on our Q4 call, The thing that we're focused on is positioning all of our businesses to pursue accretive growth and have financial Flexibility, so that continues to be a focus on anything and everything we do.

Speaker 4

Just a quick follow-up on that, Mark. Is it fair to say that the area Where you see the best opportunity to unlock value is still around logistics assets. Is that what you believe the market is undervaluing?

Speaker 6

Yes, I think that's a fair

Speaker 5

statement, Neil. I mean, we obviously have a value benchmark, A marker, if you will, out there, the trades sort of every day and we feel like that Just given how we're structured right now, we're not getting adequate look through value to our midstream business. Thanks,

Operator

team. And our next question will come from Manav Gupta with UBS. Please go ahead with your question.

Speaker 7

Guys, a little bit of a follow-up here. Crops used to be one of your weaker assets. It's clearly one of the stronger assets at this point of time. Help us understand what has changed in the last one and a half or two years to make this a much more competitive asset than what it used to

Speaker 2

Yes, absolutely. Josh, you want to take it?

Speaker 3

Yes, I'll start. Talking about reliability again, Krogs is a very unique special place. It was just certified as VPP plant and I think the story is right there. So 1Q, We have seen a great reliability, which was reflected in our yield. In addition, We have new catalyst in the reformer that really helps our yields and Providing us more gasoline components, butane blending is very efficient, Krotz Springs and we make a lot of jet fuel in our crude unit.

Speaker 3

So when jet is strong and recovering, Krotz Springs is going to do well. So Great team. Favorable market conditions gave us good results.

Speaker 2

And we cannot undermine the improvement of the alky over the last few years. Potts used to have to be refined without ALK, ALK pricing were good and we see a nice return to our investment we did years ago.

Speaker 7

Makes sense guys. A quick follow-up here. You mentioned a little bit of this, but looks like you have made some improvements at Tyler At and during the 1Q turnaround, which is giving you more confidence of a higher capture, help us understand what was executed And what gives you confidence that the capture at Tyler will improve and make it more competitive?

Speaker 3

Thank you, Manav. Like we said in our prepared remarks beyond just reliability projects and addressing risk, we have Done some upgrades. I think the most significant one is a revamp of our vacuum Power, which helps the feed quality to the FCC. So the FCC is performing Much better with better conversion, better yields. In addition, we replaced the catalyst in the DHT that gives us a much better liquid recovery and better swell.

Speaker 3

So we think this 1Q story It's just a snapshot. We are here for to capture those benefits in the future. And I think personally, dollars 0.40 is probably On the conservative side.

Speaker 7

Perfect, guys. I'll leave it there, but I do want to say one thing. We are seeing the way you report earnings It's improved a lot. There's a lot more consistency. And I think the feedback we're getting from shareholders is that this is exactly what they wanted.

Speaker 7

So All those who are involved in making it a lot more consistent and easier to understand reporting would like to congratulate them. Thank you.

Speaker 2

Manav, point taken. Thank you.

Operator

And our next question will come from John Royall with JPMorgan. Please go ahead with your question.

Speaker 3

Hi, good morning.

Speaker 6

Thanks for taking my question. I'd also like to echo Manav's comments on the reporting. I think It's been much easier to get through on earnings days. So my first question is on capital allocation And specifically, being out of the buyback market in 1Q, despite a big quarter from a cash flow perspective, I assume it had to do with the turnaround, but any color on that. And then, the $40,000,000 pace for 2Q to date is pretty robust.

Speaker 6

Is there some catch up there? Should we think of that as a good pace going forward? And I think $75,000,000 to $100,000,000 was Something you had said for the full year and maybe if you could just comment on that, if that's still a good number.

Speaker 2

Yes. Thank you, John, for the question. Obviously, I will take a bit broader look on our capital allocation. Obviously, we cannot lose sight from the fact that we are increasing dividend 3 or 4 quarters in a row now. So we see that dividend going through the cycle, and we are committed as As much as we can to continue that through the cycle, so that's point number 1.

Speaker 2

Point number 2 around the buyback, we obviously wanted to make sure that we are clearing any risk From our profile this year, a major pretty significant risk with the Tyler Tehran behind us. And as you probably can know, we are taking ourselves as a 1st tier return to shareholder company. We are there, right? You can see us there on the 19% last 12 months, which is where we want to be. We want to be very competitive and to give a good return to our investor, both on the short term And on the long term, I'm not going to change the guidance we gave today on 75 to 100, but I'm going to say that we're actively looking on that And we are using the buyback as a flex, if I can say, as a flex tool.

Speaker 2

When we have a solid Sight for margin and operation, we're still going to do it. So that's something we are keep looking at. And obviously, if something changed, we'll come back.

Speaker 6

Great. Thanks, Abigail. And then maybe on the cost reduction program, Maybe just a little more detail on the $12,000,000 captured of the $30,000,000 to $40,000,000 you expected this year and What are the key sources of what you've captured so far and this year's portion of the program in general?

Speaker 2

Yes, absolutely, John. I will let Ruben, our CFO, to comment on that if it's fine.

Speaker 8

Thank you, Abigail. First of all, our guidance that we gave in the quarter for the year was $30,000,000 to $40,000,000 savings and on a run rate of $90,000,000 to $100,000,000 based on Q4Q1 24. That number is divided around 65% between OpEx and 35% between G and A. The $3,000,000 that we have materialized in the Q1 that we took late in Q4, early in Q1 and will impact obviously the run rate Of 30 to 40 for this year. There are additional I mean, the program goes throughout the year.

Speaker 8

We have additional Segments that we're going to implement in the Q2 and in the Q4, some of them are IT related, some of them are not. The initial effort was around G and A org and structure. As we progress in the

Operator

And our next question will come from Doug Leggate with Bank of America. Please go ahead with your question.

Speaker 9

Thank you. Thanks for taking my question. Let me add my welcome to Joe. It's nice to see you back, Joe.

Speaker 10

Thank you.

Speaker 9

I wonder if I could just hit 1st of all, I'll have to go the sum of the parts question again. To the extent you can, if midstream is the As seen as the problem, what are the range of options that you are considering in terms of obviously, the balance sheet It's one question mark, but how do you see that playing out to the extent you can share at this point of your review?

Speaker 2

Yes. So Doug, it's a great question, but I'm not going to give too much color about it. All I'm going to say We have a line of sight that is going to be very accretive to both DK and DKL. And I'm sure that you're going to be very happy.

Speaker 9

Okay. And the retail, is that part of the discussion as well or no?

Speaker 2

So we want to tackle first what moved the needle the most, right? So we have priorities. And the priority is to do what is the most meaningful As first priority, and that's how we work here to make sure that we are being as meaningful as we possibly can with Creating value to shareholders.

Speaker 9

And just one last one on this topic, timing. When would you expect to be able to reveal to the market your plan?

Speaker 2

So I'm more aggressive than you, and I wanted badly more badly than you are. So we are on the same side of the equation. But this is not a simple plain vanilla. It requires some work and planning and details. So We are on the same camp and we want it sooner than later.

Operator

So I will let you repeat that.

Speaker 9

We will watch with interest. My follow-up is maybe for Reuben. It's I guess it's a housekeeping question that we already tried to walk through with Rosie. But I think it would be good for everyone to hear this. Your cash flow was obviously pretty strong, but you don't break out, at least not on the release, The working capital moves.

Speaker 9

So we're trying to understand what the I guess the underlying cash flow was in the quarter. More importantly, How much of the working capital is will reverse in the future? In other words, is this a one time benefit? Or is it something we can look to as more of an underlying improvement. So what the underlying cash flow, I guess, is a question on the nature of the working capital.

Speaker 8

Right. So thank you for the question. I think the one number to remember is on the Q4 call, we mentioned that we had a timing issue with the intermediation Agreement with Citi and $180,000,000 are supposed to come in, in January and they did come in. And I think that is the number that probably Should be taken out of the reported number because that was a 4th quarter event that reconciled itself in the Q1. Other than that, what impacted the working capitalcash flow was the Tyler turnaround.

Speaker 8

And on the negative side, the capital expenditure, which was higher in the Q1 as expected.

Speaker 2

And below the operating line, Ruben.

Speaker 1

140, the difference ends up in the financing activities, Right.

Operator

Yes.

Speaker 1

Yes. That makes up the full 2.40. Right. Yes.

Speaker 9

Got it. Okay. Thanks so much. Yes.

Speaker 2

Yes. Thank you. Appreciate it.

Operator

And our next question will come from Matthew Blair with Tudor, Pickering, Holt. Please go ahead with your question.

Speaker 11

Hey, good morning. Thanks for taking my questions. Joseph, it looks like Southwest cracks are still New 5 year highs, whereas most other regions are roughly around 5 year averages or even a little bit below. Could you talk about the drivers that are supporting the strong margin environment in the Southwest? And is that something that you can capitalize on in Q2?

Speaker 11

Or does the big spring Maintenance in April, take you out of the picture there.

Speaker 2

Yes. Thanks for the question. Actually, we are very optimistic about We see a strong netbacks and a strong pull from our racks and demand in our Our side of the world looks solid as this could be. There is a different discussion between the macro and the micro. And the MECO in our inland is a solid and robust and we see that on the results.

Speaker 3

Yes. And if I can add, the Southwest market, you're right, is probably the strongest in the country these days. And fortunately, this is where a lot of our businesses, so you can see it in the office, Iraq versus Gulf Coast and we capture that and it's coming back to the refining, not through the big spring number, but Definitely through our profitability. As far as the Q2 dynamics and I'll say specifically in Big Spring, Look, we think the fundamentals are favorable from inventory standpoint, right? I mean, gasoline is tight going to the summer.

Speaker 3

Global economic trends are still a concern, but we don't have a crystal ball to predict future trends. But the great thing about our system, we are well insulated within our niche markets. We have seen strong demand going into April And the marketing uplifts really reflect our relocation advantage. We continue to leverage our Advantage the crude pricing, octane capabilities and now asphalt capabilities as we move to the 2nd

Speaker 11

quarter. Okay. Sounds good. And then on the retail side, it Looks like your same store volumes were down 1.7% in Q1. Do you have a rough number on what that's looking like so far in Q2?

Speaker 2

So we are not going to give a forecast for Q2, but we are going to say on the other side, merchandise was higher. So all in all, retail is doing good.

Speaker 11

Okay. Thank you very much.

Operator

And our next question will come from Paul Chen with Scotiabank. Please go ahead with your question.

Speaker 10

Hey guys, good morning. Two questions, please. One, hopefully, that's simple. Maybe it's for Ruben. Trading and supply, in the Q1, you saw loss about $18,000,000 and last year is $105,000,000 Is it a real loss or it's just The one side of the two trade that you lost on, we put a loss there and then you actually have the We are not hedged gain on the other side on the physical market, in the physical barrel.

Speaker 10

So just trying to understand whether it is So real loss or that is just sort of like accounting how you report it? Maybe it is a real loss, what contribute to the loss? The second question maybe is for Eragon that how important is M and A Acquisition for your strategy over the next 3 years in refining, Logistics and Retail. And if it is important or even if it is not, what kind of financial matrix You will be using when you're looking at potential targets. Thank you.

Speaker 2

Yes. So Paul, with your permission, I will start with the Strategic question and then we'll talk we'll go to the tactics. So M and A is obviously a tool that served Delek in the past very successfully and very good. But M and A, we're going to do it only if we're going to be disciplined, right? And when I mean disciplined, it's need to be accretive for investor.

Speaker 2

We are not We're going to do M and A just to check the box. We're going to do it when it makes sense, strategic, synergetic, and we can drive value to shareholder. End of story. That's what's going to drive us. Obviously, on the refining side, it's more accretive versus Retail, which is 10 times, so we are not probably going to do M and A on the retail side because it's not accretive.

Speaker 2

And so that's on the strategic strategic side, but we are obviously looking. And if we find something that will make sense on the short term and on the long term, We were not shy about it. We were not shy about it in the past. But again, it seems to be accretive. It makes sense.

Speaker 2

Around the split between refining, I don't have all the technicalities in front of me, Paul, but it's there is nothing weird in those in that. It's mainly The way we split between refining and the different assets. So I can ask Ozi to look into that and come back to you with more color. I don't have it in front of me.

Speaker 10

Can I ask that on refining, if you do Go into any acquisition, is there a particular regions that you would be interested or that You are not really focusing on the region?

Speaker 2

So again, we are not going to be specific, but I think the rules That we have, it's we need to have add value to any assets, need to be accretive, and we are not going to rush ourselves, right, Paul? We're going to make something that's going to make sense for the long term And can bring and going to be accretive for our share price. So there is no rush, but if something going to come up, we'll do it right.

Speaker 10

Okay. Will do. Thank you.

Speaker 2

You bet. Thank you. Thank you, Paul.

Operator

And our next question will come from Jason Gabelman with Cowen. Please go ahead with your question.

Speaker 12

Good morning. Thanks for taking my questions. Good morning. I want to first go back to capital allocation and pay down a lot of debt in 1Q. Does that get the parent balance sheet in an appropriate place excluding MLT Debt?

Speaker 12

Or do you want to pay down additional debt and kind of on the topic of the balance sheet and capital allocation, you had previously discussed A one to one ratio between buybacks and debt pay down, is that kind of the right Split moving forward or do you have a different allocation plan going forward? Thanks.

Speaker 2

Yes. So thank you for the question. I will start and Ruben will continue. So On the DK side, we probably have the best balance sheet among our peers with only $200,000,000 of debt. Most of our debt, as you well know, is on the DKL side and have a completely different level of Income against it.

Speaker 2

So it's 2 different ballgame and we cannot lose sight out of that. And obviously, we have a very high level of third party income. So that's the philosophy behind it. So we said in the past and we are sticking to it, especially on a higher interest environment that we are at, That we will have a balanced approach between reducing debt and buyback. We demonstrated in the last 4 months that We are not shy of doing buyback and the market continue to be good.

Speaker 2

We will use that tool in the future like we used it in the past. Ruben, maybe you can walk around if you want to.

Speaker 8

Yes. As you recall, during the Q4, we had to increase our debt as a result of The intermediation agreement timing. So going into the Q1, we had two priorities. 1 is to pay down back that debt And the other one was to support the elevated capital expenditure level of the Q1, which are mainly as a result of the Tyler turnaround. Once we realize we can accomplish that and it's a very strong quarter, we did additional $60,000,000 of debt

Speaker 12

Got it. And just one clarifying question on that. So going forward, do you expect to be balanced between Buybacks and debt pay down or does it swing back the other way just given 1Q debt pay down was so high?

Speaker 2

Yes. So we didn't change the philosophy, but it doesn't mean that if the market condition change, we'll not change versus what we do. As we said, the philosophy is to have a great return to shareholder, and we have a 1st tier around that, and we'll So we are taking a buyback as a priority. Obviously, interest rate is where it is. So We're going to do both as effective as we possibly can.

Speaker 12

Okay, understood. And my follow-up is on corporate expenses. Those came in a lot lower Then expected, in 1Q, what drove that? It doesn't seem like you expect that To repeat in the Q2, so just wondering what the variance was in the Q1. Thanks.

Speaker 2

Yes. Ruben, do you want to take that?

Speaker 8

Yes. Thank you. So, it's actually a composition of three numbers. As part of our cost Our reduction efforts, we review every line item and we reclassified $6,000,000 from G and A to OpEx, which is in line with industry practices and our peers. In addition to that, there were $3,000,000 of timing expense.

Speaker 8

And The last component, which is the $3,000,000 that is directly related to the cost efficiency steps that we have taken late in Q4, early in Q1, Which will impact the G and A for the remainder of the year with about $12,000,000

Operator

Great. Thanks.

Speaker 2

Thank you.

Operator

And our next question will be a follow-up from Paul Chen with Scotiabank. Real quick.

Speaker 10

I think when you're looking at logistics, have you guys ever consider I've done similar to what some of your peers that to roll up that to and Yinzhou. They spin it over doing other things that actually Take out my royalty public unit holder. And secondly that, do you have a number you can share what is the VNI gain And the wind expense in the quarter, whether those are any meaningful number? And also that If you can talk about what is your hedging strategy going forward?

Speaker 2

Yes. Thanks, Paul, for the follow-up. Let's start 1 by 1. Around buying back the asset, we said that we believe that we have a good vehicle. I understand we understand why other peers did what we did, what they do.

Speaker 2

And we'll come back to you again when we have something meaningful to share. We believe that we have much more accretive way for everyone going forward with that. We have seen other that did it and was not as successful as they expected. So We have we believe we have a more meaningful way to do it that's going to be better from a leverage And accretive for both to DK and DKL. Regarding the RIN, we historically didn't Provide special guidance or information around it.

Speaker 2

But this quarter, I'm sure that we are very pleased from all the new information we got. So we are Moving very fast on the right direction to give a lot of clarity.

Operator

And that concludes our question and answer session. I'd like to turn the conference back over to Avigal Sorek for any closing remarks.

Speaker 2

Yes. So thank you, the investor, the Board of Directors and mainly our employees for a great cooperation and great execution. Our first priority is to have safe and reliable operation and to have a great return to shareholders, and we are committed to do so. Thank you for your time and effort. Appreciate it.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your

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Earnings Conference Call
Delek US Q1 2023
00:00 / 00:00
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