HollyFrontier Corporation

Welcome to the Holly Frontier Corporation's second quarter 2020 conference call and webcast. Hosting the call today from Holly Frontier is Mike Jennings, President and Chief Executive Officer. He is joined by Rich Balaba, Executive Vice President and Chief Financial Officer. Tim Goh, Executive Vice President and Chief Operating Officer. And Tom Creary, President, Refining and Marketing. At this time, all participants have been placed in a listen-only mode, and the floor will be open for your questions following the presentation. If you would like to ask a question at that time, please press star, then the number one on your touchtone phone. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. If you should require operator assistance, please press star zero. We ask that you please limit yourself to one question and one follow-up. Additionally, we ask that you pick up your handset to allow optimal sound quality. Please note that this conference is being recorded. It is now my pleasure to turn the floor over to Craig Beery, Director of Investor Relations. Craig, you may begin.

Thank you, Calandra. Good morning, everyone, and welcome to Holley Frontier Corporation's second quarter 2020 earnings call. This morning, we issued a press release announcing results for the quarter ending June 30, 2020. If you would like a copy of the press release, you may find one on our website at HolleyFrontier.com. Before we proceed with remarks, please note the safe harbor disclosure statement in today's press release. In summary, it says statements made regarding management expectations, judgments, or predictions are forward-looking statements. These statements are intended to be covered under the safe harbor provisions of federal security laws. There are many factors that can cause results to differ from expectations, including those noted in our SEC filings. The call also may include discussion of non-GAAP measures. Please see the press release for reconciliations to GAAP financial measures. Also, please note any time-sensitive information provided on today's call may no longer be accurate at the time of any webcast replay or rereading of the transcript. And with that, I'll turn the call over to Mike Jennings.

Thank you, Craig. Good morning, everyone. Before we discuss the quarter's results and updates, I'd like to briefly address the COVID-19 pandemic. Along with the rest of the Holly Frontier team, I want to wish each of you and your families and loved ones good health and well being during these trying times. Companies across the country are adapting to this new normal to ensure the sustainability and continuity of business. And it's no different for us here at Holly Frontier. With the health and safety of our employees as a top priority, we've continued several initiatives, including limiting onsite staff at our facilities to essential operational personnel only, while using a work-from-home policy for certain employees and restricting travel. These actions, along with the hard work and dedication of our employees, have enabled safe and reliable operations across all of our business segments. We will continue to monitor COVID-19 developments to properly address these policies going forward. Turning to our second quarter results, Today, we reported a net loss attributable to Highly Frontier shareholders of $177 million, or a loss of $1.09 per diluted share. These results reflect special items that collectively decreased net income by $136 million. Excluding these items, net income for the second quarter was a negative $40 million, or a loss of 25 cents per diluted share, versus adjusted net income of $372 million or $2.18 per diluted share for the same period in 2019. Adjusted EBITDA for the period was $100 million, a decrease of $547 million compared to the second quarter of 2019. The weakness in earnings was driven by the decline in global economic activity caused by the COVID-19 pandemic, which reduced both volumes and unit margins across our business segments. The refining segment posted adjusted EBITDA of $25 million compared to $556 million for the second quarter of 2019. Weak demand for refined products resulted in lower utilization rates and product margins across our refining system. Consolidated refining gross margin was $8.44 per produce barrel, a 57% decrease compared to the same period last year. Our lubricants and specialty products business reported adjusted EBITDA of $15 million, compared to $29 million in the second quarter of 2019. Rack forward adjusted EBITDA was $23 million, representing a 7% EBITDA margin. Here, we saw demand improve over the course of the second quarter as compared to the depressed levels at the end of the first quarter. Our rack forward volumes were down 40% year over year in April and May. but showed significant improvement in June and were only down 7% year-on-year during that month. This volatility was driven by demand in our industrial and automotive end markets, and demand continues to run slightly below normal in our personal care end markets. And in our industrial end markets, we expect demand to rebound with the broader economy. Within the RACBAC portion, we did see small improvement in base oil markers versus this time last year. and we continue to expect base oil demand to rebound with the reopening of its primary transportation-related end markets. Similar to our refining segment, we intend to match production to market demand. In June, we welcomed Bruce Lerner to the Holly Frontier team as President, Holly Frontier Lubricants and Specialties. Bruce has spent almost 30 years of his career in the materials science and specialty chemical sectors. His experience and leadership will help us improve the profitability of our lubricants and specialties business. Holley Energy Partners reported EBITDA of $113 million for the second quarter, compared to $89 million in the second quarter of last year. The second quarter of 2020 includes a non-cash gain on sales type leases of $33 million. At HEP, we have seen an improvement in demand for transportation and terminal services during the second quarter of 2020, consistent with trends in refined products. During the quarter, we announced plans to further expand our renewables business through the construction of a pretreatment unit located at the Navajo Refinery and conversion of the Cheyenne Refinery to a renewable diesel plant. Along with the previously announced renewable diesel unit at Navajo, these projects will have the capacity to produce over 200 million gallons of renewable diesel per year and generate 165 million in free cash flow, excluding the blender's tax credit. We're excited about the opportunity to enhance both the profitability and the environmental footprint of Holly Frontier through these investments in our renewables business. Our focus remains on the safety of our employees, contractors, and communities as we continue to face the COVID-19 pandemic. Despite this challenging environment, Highway Frontier continues to demonstrate its financial strength by maintaining a disciplined approach to capital allocation. Our strong balance sheet and superior quality of assets provides us with a competitive advantage through the cycle. And it's now my pleasure to introduce you to our new Chief Operating Officer, Tim Goh. Tim brings with him more than 30 years of experience in the refining segment, having served in various leadership roles in our industry. Tim's initial focus will be on operational excellence within our refining system. He has a strong track record of business improvement and value creation, and we're really excited for his contributions across our company. Welcome, Tim. Thank you for the warm welcome, Mike.