Delek US Q3 2024 Earnings Report

Ralph Lauren EPS Results

• Actual EPS: -$1.45
• Consensus EPS: -$1.71
• Beat/Miss: Beat by +$0.26
• One Year Ago EPS: $2.02

Ralph Lauren Revenue Results

• Actual Revenue: $3.04 billion
• Expected Revenue: $3.23 billion
• Beat/Miss: Missed by -$183.55 million
• YoY Revenue Growth: -34.30%

Ralph Lauren Announcement Details

• Quarter: Q3 2024
• Date: 11/6/2024
• Time: Before Market Opens
• Conference Call Date: Wednesday, November 6, 2024
• Conference Call Time: 10:00AM ET

Ralph Lauren (NYSE:RL) designs, markets, and distributes lifestyle products in North America, Europe, Asia, and internationally. The company offers apparel, including a range of men's, women's, and children's clothing; footwear and accessories, which comprise casual shoes, dress shoes, boots, sneakers, sandals, eyewear, watches, fashion and fine jewelry, scarves, hats, gloves, and umbrellas, as well as leather goods, such as handbags, luggage, small leather goods, and belts; home products consisting of bed and bath lines, furniture, fabric and wallcoverings, floor coverings, lighting, tabletop, kitchen linens, floor coverings, dining, decorative accessories, and giftware; and fragrances. It sells apparel and accessories under the Ralph Lauren Collection, Ralph Lauren Purple Label, Polo Ralph Lauren, Double RL, Lauren Ralph Lauren, Polo Golf Ralph Lauren, Ralph Lauren Golf, RLX Ralph Lauren, Polo Ralph Lauren Children, and Chaps brands; women's fragrances under the Ralph Lauren Collection, Woman by Ralph Lauren, Romance Collection, and Ralph Collection brand names; and men's fragrances under the Ralph's Club, Purple Label, Polo Blue, Polo Red, Polo Green, Polo Black, Polo 67, Safari, Polo Sport, and Big Pony Men's brand names. The company's restaurant collection includes The Polo Bar in New York City; RL Restaurant in Chicago; Ralph's in Paris; The Bar at Ralph Lauren located in Milan; Ralph's Bar located in Chengdu, China; and Ralph's Coffee concept. It sells its products to department stores, specialty stores, and golf and pro shops, as well as directly to consumers through its retail stores, concession-based shop-within-shops, and its digital commerce sites. The company directly operates retail stores and concession-based shop-within-shops; and operates Ralph Lauren stores and stores and shops through licensing partners. Ralph Lauren Corporation was founded in 1967 and is headquartered in New York, New York.

Ralph Lauren Q3 2024 Earnings Call Transcript

Presentation

[Operator]

Thank you for standing by. My name is JL, and I'll be your conference operator today. At this time, I would like to welcome everyone to the DK Third Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

[Operator]

I would now like to turn the conference over to Robert Wright, Deputy Chief Financial Officer. You may begin.

[Robert Wright, Senior VP & Deputy Chief Financial Officer at Delek US]

Good morning, and welcome to the Delek U. S. 3rd quarter earnings conference call. Participants joining me on today's call will include Abigail Sorek, President and CEO Joseph Israel, EVP, Operations Ruben Spiegel, EVP and Chief Financial Officer and Mark Hobbs, EVP, Corporate Development. Today's presentation material can be found on the Investor Relations section of the Delek U.

[Robert Wright, Senior VP & Deputy Chief Financial Officer at Delek US]

S. Website. Slide 2 contains our Safe Harbor statement regarding forward looking comments. Any forward looking statements made during today's call 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 here as well as in our SEC filings.

[Robert Wright, Senior VP & Deputy Chief Financial Officer at Delek US]

The company assumes no obligation to update any forward looking statements. I will now turn the call over to Avigal for opening remarks. Avigal?

[Avigal Soreq, President and CEO at Delek US]

Thank you, Robert. Good morning and thank you for joining us today. During the Q3, our adjusted EBITDA was approximately $71,000,000 The current refining margin environment is $5 to $6 below mid cycle. As refining margin remain below mid cycle, we expect more refinery capacity to shut down. Refining product inventory remains low and oil demand continues to rise.

[Avigal Soreq, President and CEO at Delek US]

This factor will help digest the recent additions in the global supply and balance the market over the next 6 to 12 months. In the meantime, we are making good progress on the things we can control. 1st, lowering our cost structure. 2nd, executing on KSR turnaround. And 3rd, prioritizing our balance sheet and opportunistic buyback to support our shares.

[Avigal Soreq, President and CEO at Delek US]

Now turning to our strategic priorities. As I've outlined in our previous calls, Delek's key focus area are 1st, space and reliable operations 2nd, unlocking the sum of the product value and third, being a shareholder friendly and having a strong balance sheet. I will now discuss each of these key priorities in detail. We have another strong operational quarter. I'm proud of the progress the team is making in Big Spring.

[Avigal Soreq, President and CEO at Delek US]

The Cote Spring's turnaround is progressing well. In El Dorado, we are actively working to fulfill the refinery potential. Joseph will provide more details on all of this. Next, I would like to talk about the progress we have made on our sum of the part efforts. On the Q2 earnings call, we announced a series of transactions related to our sum of the part efforts.

[Avigal Soreq, President and CEO at Delek US]

I'm pleased to announce that we have closed all of these transactions. We closed the drop down of Wink to Webster and other intercompany transactions between DK and DKL on August 5. This transaction make both DK and DKL stronger and we are happy with the result. We closed the sale of our retail asset to FEMSA on September 30. We are pleased with the outcome and timing which allow us to maintain a strong balance sheet as refining margins have turned below mid cycle.

[Avigal Soreq, President and CEO at Delek US]

Delek Logistics closed its acquisition of H2O Midstream on September 11. The next step in our sum of the power journey is to keep improving DKL while actively continuing the consolidation. We are making good progress on increasing the economic separation between DK and DKL. Recent amend and extend contract will bring additional $60,000,000 on an annual cash flow back to DK in exchange for the contract extensions which benefit DKL. DK is taking significant steps towards deconsolidation by lowering its ownership interest in DKL from 79% to 66% while maintaining its relative EBITDA.

[Avigal Soreq, President and CEO at Delek US]

DK is also getting more cash flow from DKL to rising DKL distribution. DKL continued to improve its permanent basin position by increasing third party cash flow, seizing attractive growth opportunities and increasing scale. We will complete the DKL deconsolidation in methodical manner and create value for both DK shareholder and DKL unitholder. Next, I would like to highlight our new cost reduction and margin improvement plan. Our new plan expect to achieve a run rate of at least $100,000,000 in incremental annual cost savings and margin increase by the second half of twenty twenty five, which is above and beyond the $60,000,000 we expect to come back to DK through intercompany transactions.

[Avigal Soreq, President and CEO at Delek US]

The plan currently has $30,000,000 to $40,000,000 in G and A and cost efficiencies along with $50,000,000 to $80,000,000 of margin improvement through commercial optimization and process improvement. Over the last 3 years, we have been investing in system which will allow us to further tighten our G and A and run efficient company. We recently started the execution phase on our market optionality plan. This strategy will allow us to produce and sell the right product from our refineries in the right markets in order to maximize value. These commercial efforts along with incremental cost efficiencies will increase our bottom line by at least $100,000,000 per year.

[Avigal Soreq, President and CEO at Delek US]

Our aim to these efforts is to ensure we can generate significant free cash flow in a mid cycle condition. The final piece of our strategy is our commitment to shareholder return and maintaining strong balance sheet. During the quarter, we paid $16,000,000 in dividend and bought back $20,000,000 of our shares. We remain committed to a disciplined and balanced approach to capital allocation. In closing, I would like to thank our entire team for their hard work and dedication.

[Avigal Soreq, President and CEO at Delek US]

Now, I will turn the call over to Josef who will provide additional color on our operation.

[Joseph Israel, EVP, Operations at Delek US]

Thank you, Avigal. We operated well in a low margin environment and remain focused on our strategic initiatives to support future capture and cash flow generation across our system. In Tyler, total throughput in the Q3 was approximately 75,000 barrels per day. Production margin in the quarter was $7.48 per barrel and operating expenses were $4.61 per barrel. For the Q4, the estimated total throughput in Tyler is in the 67,000 to 69,000 barrels per day range.

[Joseph Israel, EVP, Operations at Delek US]

In El Dorado, total throughput in the quarter was approximately 78,000 barrels per day. Our production margin was $0.66 per barrel, including an unfavorable estimated $0.65 per barrel impact from outages in the FCC and PENEX unit. Operating expenses were $5.01 per barrel, including approximately $0.35 per barrel of unfavorable impact related to those outages. Estimated throughput for the 4th quarter is in the 77,000 to 80,000 barrels per day range. On a strategic level, the El Dorado refinery is well positioned from a configuration standpoint to compete.

[Joseph Israel, EVP, Operations at Delek US]

And operationally, the team has demonstrated safe and reliable operations on a consistent basis. As Abhijar mentioned, the $100,000,000 run rate benefit generated by the sales help initiatives include $50,000,000 to $80,000,000 contribution in the refining segment. These initiatives are mostly around process optimization, product offering, as well as expanding the whole market footprint. All related upgrades are planned with minimal capital outlay. Approximately $50,000,000 of the expected benefits are in the Eldorado system with an estimated $20,000,000 in the refinery gross margin level, leaving approximately $30,000,000 for the products and commercial optimization.

[Joseph Israel, EVP, Operations at Delek US]

An incremental $2 per barrel of net margin will support El Dorado cash flow generation through the cycles. Timing as Avigail mentioned, we are expecting the improvements to be in place by mid next year. In Big Spring, total throughput for the quarter was approximately 73,000 barrels per day. Our production margin was $6.82 per barrel and operating expenses were $6.08 per barrel. We are proud with our progress in Big Spring as we achieve our goals and as importantly build this improvement in a sustainable manner.

[Joseph Israel, EVP, Operations at Delek US]

Estimated throughput for the Q4 is in the 71,000 to 74,000 barrels per day range. In Krotz Springs, total throughput was approximately 82,000 barrels per day. Our production margin was $4.80 per barrel and operating expenses in the quarter was $4.82 per barrel. We are executing our turnaround per plan and all units are scheduled to get back to normal operations by the end of the month. As a result, planned throughput for the Q4 is in the 50,000 to 53,000 barrels per day range.

[Joseph Israel, EVP, Operations at Delek US]

Our implied system throughput target for the Q4 is in the 265,000 to 276,000 barrels per day range. Moving on to the commercial front. In the Q3, supply and marketing contribution was $11,000,000 Of that, approximately $13,000,000 was generated by wholesale marketing, partially offset by Asphalt with a $2,000,000 loss. In summary, we continue to execute well on the fundamentals of our business. After successfully addressing reliability gaps, our teams continue to focus on operational excellence and commercial optimization initiatives for each one of our sites.

[Joseph Israel, EVP, Operations at Delek US]

I will now turn the call over to Robert for the financial variance.

[Robert Wright, Senior VP & Deputy Chief Financial Officer at Delek US]

Thank you, Joseph. I'll start by referring to Slide 13. For the Q2, Delek had a net loss of $77,000,000 or negative $1.20 per share. Adjusted net loss was $93,000,000 or negative $1.45 per share and adjusted EBITDA was $71,000,000 Slide 14 shows a comparison of adjusted EBITDA in the Q3 of 2024 to the Q2 of 2024. The primary variance between the quarters was a $32,000,000 decrease in refining, which is primarily due to a lower margin environment.

[Robert Wright, Senior VP & Deputy Chief Financial Officer at Delek US]

Absent Logistics segment, we had another strong quarter delivering $106,000,000 in adjusted EBITDA. Moving to Slide 15 to discuss cash flow. Cash from operations was a use of $22,000,000 Within this amount is our net loss for the period, an inflow of $33,000,000 relating to working capital movements and an outflow of $21,000,000 tied to transaction related expenses. Investing activities of $78,000,000 includes the proceeds from the sale of retail, partially offset by the addition of capital expenditures for the period of $119,000,000 and the acquisition of H2O. Financing activities of $323,000,000 reflects the 20 29 DKL tax on offering and timing of accruals.

[Robert Wright, Senior VP & Deputy Chief Financial Officer at Delek US]

This also includes $20,000,000 in share repurchases, dollars 16,000,000 in dividend payments and $14,000,000 in distribution payments. On Slide 16, we have the actual results of the 2024 capital program and full year 2024 forecast. 3rd quarter capital expenditures were $78,000,000 Approximately half of the spend was in refining, primarily addressing sustaining and regulatory projects, including the KSR turnaround that commenced in the Q4. For 2024, the original capital plan continues to track on plan at $330,000,000 excluding the Libbey II gas plant construction, which was announced earlier this year after our current year's capital outlook was set. Our net cash position is broken out between Delek and Delek Logistics on Slide 17.

[Robert Wright, Senior VP & Deputy Chief Financial Officer at Delek US]

During the year, we built $215,000,000 of cash primarily due to the sale of retail, which occurred on September 30. Consolidated long term debt increased during the year by $190,000,000 most of which was at the DKL level was used to finance the H2O acquisition, which closed on September 11. Moving now to Slide 18, where we cover outlook items. In addition to the guidance Joseph provided, for the Q4 of 2024, we expect operating expenses to be between $177,000,000 $188,000,000 G and A to be between $53,000,000 $58,000,000 G and A is expected to be between $95,000,000 $105,000,000 and net interest expense to be between $75,000,000 $80,000,000 We will now open the call for questions.

[Operator]

Thank you. The floor is now open for questions. Your first question comes from the line of Neil Mehta of Goldman Sachs. Your line is open.

[Neil Mehta, Head of Americas Natural Resources Equity Research at Goldman Sachs]

Yes. Good morning, team, and thanks for the rundown here. So the first question is really on Eldorado. And as you indicated, the margins did come in a little bit softer than expected. Is there anything more one time in nature?

[Neil Mehta, Head of Americas Natural Resources Equity Research at Goldman Sachs]

And can you talk spend more time talking about how you see this progressing from here and the path for improvement?

[Avigal Soreq, President and CEO at Delek US]

Yes. Anil, good morning. How are you?

[Neil Mehta, Head of Americas Natural Resources Equity Research at Goldman Sachs]

Hi, Fred. Thanks. Great.

[Avigal Soreq, President and CEO at Delek US]

Thank you for joining us today. So yes, Eduardo will answer that specifically. First of all, it's a very good complexity refinery from a Nelson standpoint and there is a lot of flexibility around that asset. I've been around that asset for a long time and this is the best I've ever seen it run from operational standpoint. And Joseph will provide more details about the exact specific action we are doing to improve that over time.

[Avigal Soreq, President and CEO at Delek US]

Please, Joseph?

[Joseph Israel, EVP, Operations at Delek US]

Yes. Thank you. Like Avigail mentioned, the El Dorado refinery is well positioned from asset configuration and also operations excellence 10.2 compete. So having this too, we feel now is the perfect time to address the market access gaps and take profitability really up to its potential. We have discussed those gaps in the past and more importantly took our time and to plan and design solutions, which we are already in full execution mode.

[Joseph Israel, EVP, Operations at Delek US]

As mentioned in our remarks, by mid next year, we will have in place new and robust process, logistics and marketing tools in our kit to support future cash flow contribution with an incremental $2 per barrel of net margins. And I want to be a little bit more specific. So on the refinery level, we will connect to existing times in our good unit to draw approximately 3,000 barrels per day of jet fuel. We have yield and liquid recovery initiatives mainly around the FCC, vacuum tower and asphalt. And then on the commercial front, the team is working really contracts to utilize the new logistics capabilities and move our products to additional markets for a better netbacks.

[Joseph Israel, EVP, Operations at Delek US]

I hope it helps.

[Neil Mehta, Head of Americas Natural Resources Equity Research at Goldman Sachs]

That's great color. The follow-up is you guys made a lot of progress since the last call in terms of getting cash in the door, the $390,000,000 And so the question we get a lot is the pace of the share repurchase program and how aggressive can you guys be, especially if you believe the slide in here, I think it's Slide 8 that talks about the discount that you trade at relative to what your illustrative value. So just talk about how you think about the pacing of the buyback and are you well positioned to take advantage of this dislocation and what are some of the factors that could slow down that pace relative to some of the upside scenarios?

[Avigal Soreq, President and CEO at Delek US]

Yes, absolutely, Nirav, we'll take it. So with your permission, I will answer the question more broad about capital allocation, right? So first, our priority is to maintain strong dividend toward the cycle, and we are committed to that. We have demonstrated. We will keep demonstrating that.

[Avigal Soreq, President and CEO at Delek US]

That's something we are committed. We feel very comfortable with that, and we are very pleased, Neil, with the sale of the retail on the right timing and the right value. I think everyone understand those two points now more than ever. The third point I would like you to make it come across, the EOP, which will bring us the $100,000,000 with a combination of a relatively strong market condition, right? We see the inventory low.

[Avigal Soreq, President and CEO at Delek US]

We see demand relatively strong. Get us to a point that we are comfortable where we are. As I said in the past, we have a balanced approach between balance sheet and buyback, and we're going to stick to the balanced approach around buyback. We see tremendous amount of value in our equity. Just to make it very clear, we did buyback in Q3, and we are doing actively doing buyback in Q4, and I will leave it to that.

[Neil Mehta, Head of Americas Natural Resources Equity Research at Goldman Sachs]

All right. Well, thanks team. Appreciate it.

[Joseph Israel, EVP, Operations at Delek US]

Thank you.

[Operator]

Your next question comes from the line of Manav Gupta of UBS. Your line is open.

[Manav Gupta, Executive Director at UBS Group]

Hi, guys. Help us understand a little bit, you are looking for multiple growth projects in the midstream space. So as we look at DKL, in your opinion, some I'm not asking for exact guidance, but how should we look at exit rate EBITDA maybe year 2025 for something like a DKL?

[Avigal Soreq, President and CEO at Delek US]

Manav, how are you? Good. So we didn't give guidance on DKL for 2025. We obviously have exciting time. We think we can have a good traction around the market, but we are not going to give guidance for the end of 2025.

[Avigal Soreq, President and CEO at Delek US]

We're in a comfortable and great situation, and Mohitai can give more color around it.

[Mohit Bhardwaj, SVP - Strategy & Growth at Delek US]

Hey, Manav, how are you? So what we have said in the past, if you remember on our last earnings call, that based upon the investments that we are making, a net addition of $70,000,000 in midstream EBITDA. And I think that should give you some color on how based upon our EBITDA is today and that net addition of $70,000,000 in EBITDA where that will take DKL to you. But as Avigal mentioned, DKL has not provided a 2025 guidance just yet.

[Manav Gupta, Executive Director at UBS Group]

Perfect. My follow-up is on Slide 7. Obviously, this $100,000,000 target looks pretty good. I'm just trying to understand, like, let's say, the margins remain depressed for some time, using this $100,000,000 benefits, would you be very close to cash breakeven even if margins are below mid cycle because you are pushing through all these initiatives?

[Avigal Soreq, President and CEO at Delek US]

Yes, absolutely right. And I can give you some more color around what we call here EOP, the enterprise optimization plan, Manav. So let me be very clear. The EOP plan is not related to market condition. It's self help.

[Avigal Soreq, President and CEO at Delek US]

It's an area that we feel that we can do better. And it's prompting few we have few front lines with that project. 1, on the G and A side, the team was doing a great job over the last 3 years in order to build system and processes around it. That and that now we are basically taking that to the next level and bringing that to the bottom line. That's $30,000,000 to $40,000,000 of efficiencies we're going to create around all of those processes.

[Avigal Soreq, President and CEO at Delek US]

2nd is OpEx. Safe and reliable operation will bring and is bringing efficiencies on operation and that's key. Once we are doing that, we see our ability to drive more value from there. And third is the margin. Once we have safe and reliable operation, we can move from defense to offense and to plan accordingly and to sell the right product on the right market.

[Avigal Soreq, President and CEO at Delek US]

We believe that all of that will bring us at least $100,000,000 on a combined basis and all of that is going to go to the free cash flow. On the top of that, we reduced our CapEx guidance, as you probably see, for next year versus this year by around $80,000,000 to $100,000,000 That's a huge number.

[Manav Gupta, Executive Director at UBS Group]

Thank you, guys.

[Operator]

Your next question comes from the line of Matthew Blair of TPH. Your line is open.

[Matthew Blair, Managing Director at TPH&Co]

Thank you and good morning. Maybe we could stick on the CapEx cut for 2025. Could you talk about what's rolling off relative to this year? And then that mid point $160,000,000 should we think of that as your minimum level going forward? Or would you expect to have some catch up in 2026?

[Avigal Soreq, President and CEO at Delek US]

No. So we are not going to change our overall guidance for the year. Obviously, we are putting management that we see them a low margin environment and we have opportunity to have a low CapEx here on the refining side and that's what we are doing. On a sustainable basis, the way I think about it, Matt, is that we are seeing around $25,000,000 in each one of our refineries in a year that we don't have turnaround. Turnaround costs around $100,000,000 and we are doing that on our 4 assets every 5 years.

[Avigal Soreq, President and CEO at Delek US]

So that's a good way to look about the long term CapEx of refining.

[Matthew Blair, Managing Director at TPH&Co]

Sounds good. And then I wanted to touch on the improvement in supply and marketing in the Q3 relative to the Q2. It looks like a lot of this came from the wholesale marketing. You mentioned it was up $13,000,000 in Q3. I believe it was down $17,000,000 in Q2.

[Matthew Blair, Managing Director at TPH&Co]

What exactly changed there? Was that just a function of falling crude prices? Or was there some, like regional product basis differentials that helped you out? And also what's the outlook for supply and marketing into the Q4? Thanks.

[Avigal Soreq, President and CEO at Delek US]

Absolutely. So first of all, I'm pleased with the progress we are making with the commercial team. We see that we saw the benefit in Q3 in some of our actions. We also had some seasonal benefit over the quarter and what we saw in Q3 is a good combination of those 2. I expect to see more progress in the future and I'm going to let Joseph give some more comments around it.

[Joseph Israel, EVP, Operations at Delek US]

Yes. Thank you, Avigali, and thank you, Matt. We have shifted gears with new strategies to enhance our commercial business and leverage some new tools in our kit, right? So the improved reliability from refining will help to eliminate some of the noise. The new logistics optionality is helping us accessing brand new markets, mainly from El Dorado and Tyler with improved netbacks and then products offering.

[Joseph Israel, EVP, Operations at Delek US]

We now have a jet fuel in El Dorado to work with and we have some great ideas around the high octane products mainly in Big Spring and Tyler that we can work with. So we believe this strong momentum and improved positioning will help us to reduce volatility and improve future netbacks through the cycles and seasonal trends. We also think it's sustainable. We can't control obviously the market impact, but we are confident the controllable piece of our improvement will remain there.

[Matthew Blair, Managing Director at TPH&Co]

Great. Thanks for the color.

[Joseph Israel, EVP, Operations at Delek US]

Thank you, Matt.

[Operator]

Your next question comes from the line of Joe Leach of Morgan Stanley. Your line is open.

[Joe Laetsch, Analyst at Morgan Stanley]

Hey, good morning team and thanks for taking my questions. So I wanted to ask on Slide 8, which is mid cycle EBITDA slide. Can you just unpack the path to achieving that around $550,000,000 of mid cycle refining EBITDA number. Cracks are, of course, a driver, and it looks like a piece of that is also running better. I'm getting to an implied throughput of around 315,000 barrels a day.

[Joe Laetsch, Analyst at Morgan Stanley]

So if you could just touch on some of the steps to realize that outlook, that would be great. Thank you.

[Avigal Soreq, President and CEO at Delek US]

Yes, absolutely, Joe. Thank you for joining us today. So obviously, a key part of that understanding that slide that we are wanting to demonstrate the cash flow generate on DK Solar and to show the combination between Delek Solo and DKL and enhance our great position. EOP going to be a key part of that. We gave some color around EOP.

[Avigal Soreq, President and CEO at Delek US]

EOP is a combination of what we can control, which is market agnostic. We got the team behind this idea, and we are well in the execution phase, and we are very optimistic about that. Around exactly modeling and etcetera, I would like maybe you have a post call with Mohit and go over the details that you can model all of that to your benefit. But that's the essence of that slide.

[Joe Laetsch, Analyst at Morgan Stanley]

Great. And then I just wanted to ask on Big Spring. So it looked like it ran well during the quarter from a throughput margin and OpEx standpoint. Could you just remind us what's left to execute on to reach that $5.50 per barrel OpEx target, recognizing that it's close to being achieved here? Thank you.

[Avigal Soreq, President and CEO at Delek US]

Thank you, Joe. And I'm very pleased with Joseph and his team of the progress they are doing there. And maybe Joseph, you want to give some more color around it.

[Joseph Israel, EVP, Operations at Delek US]

Yes. We told you last year, it's going to be a journey and recovery is going very well. We have done what we said in the past year and the results have been very consistent with the guidance. Operating expenses are trending down toward the $5.50 per barrel target in the 4th quarter with improved reliability and throughput consistently in our guidance range really all year long. The focus now is ensuring sustainability of the improved positioning and optimize from here profitability.

[Joe Laetsch, Analyst at Morgan Stanley]

Great. Thanks for the time.

[Joseph Israel, EVP, Operations at Delek US]

Thank you.

[Operator]

Your next question comes from the line of Doug Leggate of Wolfe Research. Your line is open.

[Doug Leggate, Managing Director - Senior Research Analyst at Wolfe Research]

Thanks guys. I've got 2, if I may. 1, I'm sorry to be up on the Slide 8, but I have some clarification questions around this just to make sure we understand what's going on. So the €100,000,000 EOP looks like that's the entirety of the standalone mid cycle free cash flow. In other words, without the EOP, there is no free cash flow.

[Doug Leggate, Managing Director - Senior Research Analyst at Wolfe Research]

I just want to make sure that we're interpreting that correctly. Because ultimately, if we look at the equity value, you're putting a 4 to 5 times EBITDA multiple, dollars 100,000,000 of free cash flow at 10% annuity discount rate is $1,000,000,000 So I'm curious how you get the valuation that you're showing on this slide for $100,000,000 of free cash flow. That's my first question. And my second question is, at least on our numbers, the entirety of large part of your value is your interest in Delek Logistics. And as you know, there's been some transactions, particularly around sour gas injection wells, amongst other things.

[Doug Leggate, Managing Director - Senior Research Analyst at Wolfe Research]

It seems there's a lot of embedded value potentially in DKL that could be released. And I'm just curious, strategically, I think you've talked about it as the bazooka option. What are your options to release value from DKL? So two questions, please.

[Avigal Soreq, President and CEO at Delek US]

Yes. So I will start with the first one, then I will Mohit will give some more color around that page, and then Marc and I will give some more understanding of the market. So we see a lot of value in our asset. You can see the capture rate that we have demonstrated is relative to our peers is improving on a relative basis, and we are very optimistic around that. EOP is a key part of what we are doing and EOP is going to happen.

[Avigal Soreq, President and CEO at Delek US]

Just to make it very clear, on the G and A side, we are well into the execution phase and also in the OpEx and the commercial. So the EOP plan is going to execute. And as I said on my prepared remarks, and you probably saw that, Doug, that the $100,000,000 is at least I expect to see a higher number than that. So you can expect to see a higher free cash flow than that while we are on the execution phase, so more to come. And some of that is already coming in place very quickly.

[Avigal Soreq, President and CEO at Delek US]

So we are optimistic around our action, and we are confident around the market. So we are very optimistic about the ability of DK SOLO to generate significant free cash flow on a mid cycle basis. Regarding the question of the midstream, we obviously are very encouraged by the transaction we've seen around us. Let's put a very high mark on our asset. I know that Mark is very close to that, so I will have Mark maybe give you some more color.

[Mark Hobbs, EVP, Corporate Development at Delek US]

Yes, sure. Thanks, Apigol, and thanks, Doug, for the question. Deconsolidation, we spoke about deconsolidation quite a bit over the past year plus, and that remains our top strategic priority, and we are actively pursuing that as a key component of our sum of the parts efforts. And you mentioned appropriately so the recent transactions and the acquisitions on the midstream side specifically targeting the Permian Basin and look we see that as well and those have been going for in our estimation very attractive and premium valuations. And as you know, at Delek Logistics, we've over the years, we've built a strong third party midstream business in both the Midland Basin via DPG and our recent H2O transaction as well as in the Delaware Basin where we continue to see attractive growth opportunities given significant activity of our upstream customers.

[Mark Hobbs, EVP, Corporate Development at Delek US]

And so we are in a good position. We think that we've built a very attractive and valuable midstream business as you duly noted through Delek Logistics. And we think this market backdrop really supports the value that we've built. And as we pursue deconsolidation efforts on Slide 5, we put a list of what we see those options potentially available to us and available to us in the market. We believe that this market backdrop really positions us well to maximize value for really all our stakeholders.

[Mark Hobbs, EVP, Corporate Development at Delek US]

And what I would say about the actual actions that we might take and look at all options around the table and we continue to evaluate all those options.

[Doug Leggate, Managing Director - Senior Research Analyst at Wolfe Research]

Great stuff. Thank you, fellas. I appreciate the time.

[Operator]

Your next question comes from the line of Roger Read of Wells Fargo. Your line is open.

[Roger Read, Senior Energy Analyst at Wells Fargo Securities]

Yes. Thank you. Good morning. Could we come back to the $100,000,000 of the EOP? Like how did you come up with that number?

[Roger Read, Senior Energy Analyst at Wells Fargo Securities]

And what I'm curious is, was it top down, bottom up, combination of the 2? You've talked obviously about some additional flexibility in it. So if you were to think of a low level of, hey, this would be successful at $80,000,000 over the next 18 months to 24 months or it could be $140,000,000 should we think about it as a percentage of total costs as one of the ways to think about success here? I'm just curious kind of in the end, dollars 100,000,000 is a nice round number, but how do we know it's a solid number based on a real solid foundation?

[Avigal Soreq, President and CEO at Delek US]

Yes. So thank you, Roger, for the question. Obviously, the ERP is a bottom up project. It's not something that obviously we rounded. It didn't end up 100 exactly, just to be clear.

[Avigal Soreq, President and CEO at Delek US]

As I said in my prepared remarks, the number is saying at least. So that's gave you the comfort level around that. EOP is market agnostic. As I said in the previous one of the questions, the G and A is $30,000,000 to $40,000,000 of that is based upon systems that we already did in the past. And the other $50,000,000 to $80,000,000 is a combination of OpEx and commercial optimization.

[Avigal Soreq, President and CEO at Delek US]

The idea basic idea of EOP is the free cash flow and how to generate more free cash flow and agnostic to market condition. That's the essence of that. And obviously, if you need some more help about modeling that, I'm sure that Mohit would love to help you on that, but we have those combination of those 2. Ruben, do you want to add into that, Mohit? Just one clarification that the EOP projects are and do not include the initiatives or the benefits that we got from other initiatives like the net initiatives, operation initiatives, G and A initiatives, and they do not include other benefits like intercompany transactions.

[Avigal Soreq, President and CEO at Delek US]

Thank you for your question, Woden.

[Roger Read, Senior Energy Analyst at Wells Fargo Securities]

Well, could I ask

[Roger Read, Senior Energy Analyst at Wells Fargo Securities]

a quick clarification on that? One, is the retail just closed, right? Is any part of this $100,000,000 related to retail? And then as we think about the commercial synergy part, is there a CapEx component or is that all pretty much with just using the existing system better?

[Avigal Soreq, President and CEO at Delek US]

Yes. So 2 easy questions. Retail is not related to that. We are not trying to do a left pocket, high pocket exercise. We are trying to make our company better in free cash flow.

[Avigal Soreq, President and CEO at Delek US]

And the second question, there is no capital intensive project here. Everything is in the numbers.

[Roger Read, Senior Energy Analyst at Wells Fargo Securities]

Thank you.

[Avigal Soreq, President and CEO at Delek US]

You bet.

[Operator]

Your next question comes from the line of Jason Gabelman of TD Cowen. Your line is open.

[Jason Gabelman, Analyst at Cowen]

Good morning. Thanks for taking my questions. My first one is on the balance sheet. I just wanted to get an updated view of what your target net debt and cash balances are at the parent following the divestment of the retail sale and all the other recent transactions that you've done?

[Avigal Soreq, President and CEO at Delek US]

Yes. So Jason, thank you for the question. Again, our capital strategy is very simple, right? We want to maintain a strong dividend throughout the cycle. We want to make sure that we have a balanced approach between the buyback and improving the balance sheet.

[Avigal Soreq, President and CEO at Delek US]

We have mentioned in previous calls that our target is around $600,000,000 if memory serves me right, but that's a longer term view, and we're going to stick to the capital allocation program that we outlined.

[Jason Gabelman, Analyst at Cowen]

Okay. So I mean, I guess the heart of the question is, I would think you'd want to have higher cash balances moving forward if you than prior target if you got rid of the steady retail earnings stream, but it doesn't seem like there's much of a change.

[Avigal Soreq, President and CEO at Delek US]

Yes. So Jason, the EBITDA of the retail over the quarter was around $8,000,000 I don't think it's moved the needle significantly. And we are sticking to over time on a long term basis to what we had. Okay.

[Jason Gabelman, Analyst at Cowen]

And then my other question on Slide 16 where you provided an update on CapEx. You've excluded capital spending related to the gas processing plant. So is that 330 for full year 2024 really supposed to be closer to 430?

[Avigal Soreq, President and CEO at Delek US]

No, we have not finished spending the capital on the gas plant. The gas plant was something that was done over the years, as Robert said on his prepared remarks. The gas plant is extremely good project, and we're starting to look at the DKL CapEx and the DK CapEx separately. That's the reason we gave guidance on the DK CapEx now and we'll give more guidance about the DKL CapEx in Q4 earning call.

[Jason Gabelman, Analyst at Cowen]

Okay. But so is that gas processing plant CapEx that's not necessarily all

[Jason Gabelman, Analyst at Cowen]

spent in 2024?

[Mohit Bhardwaj, SVP - Strategy & Growth at Delek US]

So Jason, hi, this is Mohit. So you

[Mohit Bhardwaj, SVP - Strategy & Growth at Delek US]

are right. So our $330,000,000 does not include the $90,000,000 to $100,000,000 of spending on the gas processing plant for 2024.

[Jason Gabelman, Analyst at Cowen]

Okay. All right. Thanks for those answers.

[Avigal Soreq, President and CEO at Delek US]

You bet.

[Operator]

This concludes our Q and A session. I will now turn the conference back over to President and CEO, Avigal Sadek, for closing remarks.

[Avigal Soreq, President and CEO at Delek US]

Yes. Thank you for my colleagues around the room for a great quarter. Thank you for the execution of our strategy, the deconsolidation, the EOP, the return to shareholders. Thank you to the entire the investor that joined the call, our Board of Directors and mostly our employees that make our company what it is. We'll see you again in the next quarter.

[Avigal Soreq, President and CEO at Delek US]

Thank you.

[Operator]

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

Participants

Analysts

• Robert Wright, Senior VP & Deputy Chief Financial Officer at Delek US
• Avigal Soreq, President and CEO at Delek US
• Joseph Israel, EVP, Operations at Delek US
• Neil Mehta, Head of Americas Natural Resources Equity Research at Goldman Sachs
• Manav Gupta, Executive Director at UBS Group
• Mohit Bhardwaj, SVP - Strategy & Growth at Delek US
• Matthew Blair, Managing Director at TPH&Co
• Joe Laetsch, Analyst at Morgan Stanley
• Doug Leggate, Managing Director - Senior Research Analyst at Wolfe Research
• Mark Hobbs, EVP, Corporate Development at Delek US
• Roger Read, Senior Energy Analyst at Wells Fargo Securities
• Jason Gabelman, Analyst at Cowen