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    Delek US Q4 Suffers Net Loss on Refining

    Company executives detail future retail strategies, including a $24 million investment on new stores, rebuild and remodeling efforts in 2008.

    BRENTWOOD, Tenn. -- Although Delek US Holdings Inc., petroleum marketer and refiner, and operator of the MAPCO and Favorite Markets convenience chains, ended fiscal 2007 with an increase in net income, reaching $96.4 million, the company's fourth quarter suffered from a net loss of $12.1 million, compared to net income of $11.6 million, for the year-ago quarter, the company stated.

    The company's lower fourth quarter financial performance was primarily due to refining industry factors during the quarter, including a sharp increase in crude oil prices and backwardation in the crude market, the company stated. The higher crude prices were partially balanced by a continued optimization in its refining segment and increased contributions from its retail segment, which were bolstered by ethanol blending in the month of December, according to the company.

    "[Fiscal 2007] was a great year for Delek, in terms of performance and growth," Uzi Yemin, president and CEO of Delek US, said in a conference call to investors. "Our retail segment had a busy year of growth and preparations for future growth."

    During the quarter, the company introduced its first new concept store in the Alabama market. To date, the company has been pleased with the early results, said Yemin, noting the company plans to open similar stores in Memphis and Chattanooga, Tenn., in the first and second quarters of 2008.

    In addition, the company unveiled a new store design for its reimaging program, and expects to implement it in approximately 50 to 100 stores in 2008, he added.

    Meanwhile, the company rolled out several new private label products, and began the process of refreshing its private label packaging with a three-tier product offering, Yemin said during the conference call. The levels will meet differing customer demographics, according to company CFO Ed Morgan, who noted new labels, products and merchandising to support the effort will arrive in stores by the end of the first quarter.

    "Demand for our private label products continues to improve, with our private label sales totaling 1.4 percent of our merchandise sales in 2007, compared to 1.1 percent for the full year of 2006," he said.

    The retail segment contribution margin reached $12.1 million in the fourth quarter of 2007, compared to $9 million in the comparable quarter, according to the company. Within the division, net sales increased 44 percent during the quarter, to total $477.3 million, the company stated.

    During the quarter, the company's retail segment also began offering E-10 blended fuel at approximately 180 of its retail gas and convenience stores during the quarter, and as of Jan. 1, 2008, was offering E-10 blended fuel in its refining and retail segments, as well as working toward offering of E-10 in the marketing segment, according to Yemin. To date, the company offers E-10 products in approximately 280 stores and is blending ethanol with two-thirds of its gasoline production at its Tyler refinery, the company stated.

    Same-store gas gallons increased 1.3 percent in the fourth quarter, and retail fuel margins for the fourth quarter reached 13.7 cents per gallon, compared to 8.8 cents per gallon in the same period last year. The increase was attributed to the introduction of E-10 blended fuel in the fourth quarter, according to the company.

    However, the company noted the U.S. economy's slowdown is impacting its customers.

    "We believe current economic conditions and rising energy prices are exerting pressure on our customers," Morgan told investors in a conference call. "We also believe that our culture of customer service and creative marketing continues to differentiate ourselves from the competition."

    He added: "We continue to see an increasing credit card usage by our customers, which in the fourth quarter equated to a 50 basis point increase as a percentage of gross margin."

    Despite this, the company plans to spend $24 million on its retail segment in 2008, $17 million of which will be spent on new construction and rebuild projects, including eight raze and rebuild stores and 50 to 100 store remodels, Morgan said during the conference call.

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