Parkland Corporation

Dean Morrison - Director, Investor Relations Bob Espey - President and Chief Executive Officer Mike McMillan - Chief Financial Officer

David Newman - Desjardins Capital Markets Michael Van Aelst - TD Securities Sabahat Khan - RBC Capital Markets Vishal Shreedhar - National Bank Derek Dley - Canaccord Genuity Kevin Chiang - CIBC

Good morning, everyone, and welcome to Parkland Fuel Corporation's Q1 Results Conference Call. My name is Dean Morrison and I'm the Director of Investor Relations for Parkland Fuel Corporation.

With me this morning are Bob Espey, President and Chief Executive Officer; and our Chief Financial Officer, Mike McMillan. This morning we will provide you with an update on our Q1 results and performance as well as update you on the integration of our acquisitions.

Before I begin, I'd like to draw your attention to the cover page of today's presentation. It can be downloaded from our Web site at www.parkland.ca.

On the cover, you'll see a picture of our recently rebuilt fuel station located in Winchester, Ontario. I direct you to this because I think it is a good example of the implementation and exterior branding of our new On the Run store concept.

This would be one of our larger formats which would include several comps reimage to match the On the Run concept, a full size On the Run convenience offering, a car wash and a well-recognized quick serve restaurant offering. In this case, Tim Hortons.

I'd now like to point everyone to Slide 2. During the call today, Parkland may make forward-looking statements related to expected future performance.

Such statements are based on current views and assumptions and are subject to uncertainties, which are difficult to predict, including expected operating results, industry conditions, et cetera. Certain financial measures, which do not have any standardized meanings described by GAAP, will be referred to during this presentation.

These measures are identified and defined in Parkland's continuous disclosure documents, which are available on our Web site or on SEDAR. Please refer to our continuous disclosure documents as they identify factors which may cause actual results to differ materially from any forward-looking statements.

I will now turn things over to Bob and Mike, who will highlight key takeaways from our first quarter results. We will then take any questions you may have at the end of the call.

Bob?

Great. Thanks, Dean, and welcome everyone, to our first quarter earnings call.

I'm pleased to report that Parkland has just delivered a record adjusted EBIT of $153 million for the first quarter, an increase of 119% versus the comparable quarter in 2017. Based on the strength of these results and the considerable progress we have made with respect to the integration of both CST and Chevron, I'm pleased to say that we are revising our 2018 adjusted EBITDA guidance upward by 8%, from $600 million, plus or minus 5%, to $650 million, plus or minus 5%.

Q1 was a busy quarter for the Parkland team. Delivered fuel volumes increased 53% to 4.2 billion liters, driven primarily from the incremental volumes associated with our 2017 acquisitions.

And by the end of the first quarter, we had completed initiatives that are expected to result in annual synergies for 2018 of approximately $44 million. On the financing side, we completed the issuance of US$500 million 8-year 6% senior unsecured notes on March 23.

Through this action, we sought to mitigate our exposure to rising interest rates and strengthen our capital structure for future growth. And speaking of growth, let's turn to Slide 4.

Our adjusted EBITDA for our Base Business grew 19% in the first quarter, well exceeding our organic growth target of 3% to 5%. Our Retail segment achieved its ninth consecutive quarter of positive company convenience store, same-store sales growth of 4.1%.

Our Commercial segment saw 16% growth in propane volumes from its Base Business. And the Parkland USA year-over-year adjusted EBITDA grew 33% from increased market share of Bakken resellers achieved through new customer wins on organic growth from existing customers experiencing growth in their business.

On the supply side, we executed a significant turnaround at the Burnaby Refinery that was successfully completed in early April. This was a meaningful achievement given the scale of the project, and we are proud of the team's accomplishments in this regard.

We also demonstrated our ability to reliably source and maintain uninterrupted fuel supply for customers during the Burnaby Refinery turnaround. Our supply team leveraged our meaningful improved supply economics and optionality as illustrated by the 209% growth in supply adjusted EBITDA in the first quarter of 2018 compared to the same period in 2017.

Further, our supply team capably generated an incremental one-time benefit of approximately $30 million of adjusted EBITDA in the first quarter of 2018 through the execution of a variety of supply improvement and optimization initiatives. Our acquired businesses have performed well since their respective closing dates and our acquisition synergy targets continue to pace above our original expectations.

As mentioned earlier, as at the end of the quarter, we have completed initiatives that are expected to result in annual synergies for 2018 of approximately $44 million. We now expect the annual synergies on the acquisitions will reach approximately $80 million by the end of 2020.

This is a reflection of the hard work and effort our team has put into successfully integrating the Ultramar and Chevron acquisitions to truly come together as one Parkland team. To add to their accomplishments, we're pleased to announce that we recently exited the Ultramar Acquisition transitional services agreement and are well underway to exit the Chevron TSA later this year.

I will now turn it over to Mike to walk through the growth by business segment.

Great. Thanks, Bob, and thanks for joining us this morning.

I'm now going to spend a few minutes talking to the factors impacting adjusted EBITDA by business segment as depicted on Slide 5. Retail adjusted EBITDA grew $44 million or 176% to $69 million for the first quarter of 2018.

This was primarily due to the acquisitions as well as improved fuel margins and strong company convenience same-store sales growth in the Base Business. This was offset modestly by slight Base Business volume declines due to site divestitures required to close the acquisition.

In commercial, we saw adjusted EBITDA growth of approximately $9 million or 31%, primarily due to the acquisitions. Excluding the impact of acquisitions, the Commercial Base Business saw slightly softer results, primarily driven by tighter margins as well as warmer-than-expected weather conditions in the Maritimes in March, which, on a heating-degree-day basis, was approximately 15% warmer this year and negatively impacted the residential home heating business.

Commercial experienced 16% growth, however, in the Base Business propane volumes, resulting from large customer wins and favorable weather conditions for propane demand in Ontario as well as improvements in marketing, general and administrative expense and operating costs on the cents per liter basis due to effective cost management initiatives. Supply adjusted EBITDA increased $48 million to a record $71 million in the first quarter of 2018.

This represents more than a 3-fold increase from the same quarter of 2017. This exceptional growth was primarily driven by contributions from the Chevron acquisition, profitable supply sourcing initiatives and incremental one-time benefit of approximately $30 million of adjusted EBITDA generated from supply improvement and optimization initiatives around our infrastructure and improved supply economics in the Base Business.

Parkland USA adjusted EBITDA increased 33% for the first 3 months of 2018, primarily due to increased market share of Bakken resellers through new customer wins and organic growth from existing customers experiencing demand growth in their businesses. On the corporate front, adjusted EBITDA expense increased as expected by approximately $19 million.

This was primarily driven by an increase in marketing, general and administrative expenses of $16 million related mainly to the merging of the corporate functions of the acquisitions with that of the Base Business. I'll now turn it back to Bob, so he can take you through some of the KPI results for the quarter, which are shown on Slide 6.

Thanks Mike. On the retail front, net unit operating costs or NUOC was 68% higher for the trailing 12 months ended March 31, 2018, as compared to the equivalent period for 2017.

This was primarily due to the acquisitions which moved our mix towards a higher percentage of company owned and company operated retail locations, which as expected bring with them a higher NUOC structure. We also saw modest upward pressure due to higher credit card transaction fees driven by higher street pump prices.

Volume of same-store sales growth was plus 0.1% compared to minus 1.4% for the same period in 2017. This improvement was driven mainly by the positive results of our marketing initiatives.

Company convenience store same-store sales growth was very positive at 4.1%. Our results are supported by the ongoing marketing programs, including the implementation of our new On the Run/Marche Express store concepts, the rollout of our proprietary private label brand 59th Street Food Co.

and backcourt convenience store optimization, which resulted in higher forecourt to backcourt conversion rates. With 9% consecutive quarters of positive growth, we remain encouraged that our marketing initiatives will continue to have their intended effect as they are fully implemented across the network.

Our pilot program to implement our refreshed On the Run/Marche Express stores concept has been highly successful and early results are pacing above expectations. The new concept helps to elevate the customer experience and support our shift to higher margin categories while growing basket size and forecourt to backcourt conversion rates.

We are also seeing strong results and margin lift from the introduction of our private label brand 59th Street Food Company. We look forward to expanding the offering as we move forward with the rollout.

Average volume per site decreased 7% for company sites and increased 15% percent for dealer site. This change is primarily attributable to the Ultramar acquisition, which is lower volumes per company site and higher volumes per dealer site due to the nature and location of the sites acquired.

Overall, the Ultramar volumes are relatively strong. However, they are lower than our Base Business, which includes Pioneer, a volume leader in Ontario.

In the Commercial segment, diesel and gas volumes increased by 145% year-over-year to 788 million liters, while propane volumes increased 17% due to large customer wins and favorable weather in Ontario. In the trailing 12-month operating ratio, which is a ratio of operating costs and marketing, general and administrative expenses to adjusted gross profit, improved 73.3% to 73.1%, primarily due to the impact of the different operating models currently in place for the acquired business.

Excluding the effect of the adoption of IFRS 9 in the first quarter of 2018, the trailing 12 months operating ratio would have improved to further 40 basis points to 72.7%, a meaningful improvement over the 73.3% reported in 2017. On the supply side, during the turnaround, the Burnaby Refinery was shut down, resulting in a refinery utilization rate for the first quarter of 32.2%.

With the turnaround completed in early April and the refinery running well, we expect high utilization rates for the balance of the year. During the first quarter, we incurred $76 million of turnaround costs of which $64 million were capitalized within maintenance capital expenditures and $12 million were expensed within operating costs.

Additional minor turnaround-related costs are expected to be incurred in the second quarter of 2018. Overall, we expect the overall turnaround cost to be materially within our previous guidance.

Moving to Slide 7. We can see that Parkland USA volumes increased 6% to 219 million liters, led by the gas and diesel and lubricant volume increases, which helped drive an 18% increase in sales and operating revenue to $181 million.

Retail volumes saw an increase of 3%. Despite the increase in volume and business, Parkland USA operating costs remained stable and the trailing 12-month operating ratio improved from 77.6% to 74.2%, reflecting our commitment to successfully implement cost-control measures while driving business growth.

I'll now turn it back to Mike, who will discuss the results related to a number of our corporate KPIs.

Thanks Bob. Looking at our corporate KPIs, also detailed on Slide 7, you can see that on a consolidated basis, corporate, marketing, general and administrative expenses as a percentage of Parkland's adjusted gross profit increased from 5.4% to 6%.

This was again due primarily to the merging of the corporate functions as well as the impact of the Burnaby Refinery turnaround, which had an effect of lowering Parkland's adjusted gross profit for the quarter. This metric is expected to improve in the second quarter of 2018 due to economies of scale as the refinery assumes full production and the teams continue to focus on cost management initiatives.

The dividend payout ratio increased 59 percentage points to 131% for the first quarter of 2018, which was actually lower than expected, given the higher maintenance capital expenditures related to the turnaround as well as higher integration costs, both of which were anticipated. Adjusted dividend payout ratio improved by 25 percentage points to 35% for the first quarter of 2018.

This was primarily due to the increase in adjusted EBITDA, driven by the acquisitions, strong contribution of the supply initiatives noted earlier and the organic growth in the Base Business. Distributable cash flow per share decreased by $0.18, primarily due to the additional EBITDA contributions being more than offset by the expected turnaround costs and higher weighted average shares outstanding.

Our total funded debt to credit facility EBITDA ratio for the trailing 12-month period increased by 0.12x to 2.74x. This small increase was due to the expectedly higher debt levels resulting from our 2017 acquisition activity, being largely offset by the strong EBITDA performance in the quarter, which given the refinery turnaround and its related cash requirements, came in favorable to our initial expectations.

Our first quarter lost time injury frequency measure for the 12 trailing months period increased modestly year-over-year from 0.17 to 0.30. We continue to put safety at the forefront of all of our operations and have inherited some exceptional safety processes and culture within our acquisitions.

We will continue to work hard to bring this measure down over time. I'd now like to turn it over to Bob, who will outline some of the assumptions and factors related to our new refinery business and to touch on our revised 2018 guidance, as noted earlier in the call.

Bob?

Thank you, Mike. Looking at Slide 8.

We have outlined our annualized utilization expectation for 2018. As expected, our first quarter refinery utilization was relatively low at 32.2%.

However, this was higher than we had originally expected given the shutdown of the refinery during the turnaround, while we expect refinery utilization to normalize in a more typical range of approximately 90% with the turnaround now complete. When combined with our utilization rate in the first quarter, we currently expect full year utilization to continue as guided at approximately 80%.

The PNW 3:2:1 benchmark, shown here, was strong throughout 2017. While the PNW was softer at the start of the year, it strengthened through Q1, and we expect it to remain relatively strong for most of Q2 due to significant level of capacity offline for turnarounds in the Prairies and in the Pacific Northwest, most of which should be completed by the end Q2.

As a result, we expect margin at the Burnaby Refinery to remain relatively robust as well. As previously guided, we expect the refinery margins to normalize during the second half of the year when the Prairie turnarounds are complete.

Turning to Slide 9. I just wanted to reiterate once again that we have raised our 2018 adjusted EBITDA guidance upwards, about $600 million, plus or minus 5%, to $650 million, plus or minus 5%.

Our decision to increase guidance was predicted on the strength of our first quarter results. These results were driven by strong Base Business performance, the realization of a one-time supply adjusted EBITDA benefit of $30 million and the realization of significant synergies in relation to our integration efforts, which continue to pace both above and ahead of expectations.

I also wanted to draw your attention to the fact that based on our meaningful progress to-date; we have now raised our annual synergies guidance upward from our previous estimate of $68 million by the end of 2020 to approximately $80 million by the end of 2020. Before we open up for questions, I'd like to proactively address an issue that's been in the media for the past few weeks and that is the expansion of the Trans Mountain pipeline.

We've spoken with both the government of British Columbia and the government of Alberta about the pipeline and fuel supply issue. Our company's view is that any measure that restricts the supply of oil to British Columbia would be negative for both the economies of British Columbia and Alberta.

We remain hopeful that this issue can be resolved in a way that is beneficial to Canada and both provincial economies. We are confident that we can continue to serve our customers, and we'll monitor the issue closely.

We will also continue to make ourselves available to discuss this matter with government officials as they work towards a resolution. With that, I would like to wrap up our formal remarks and invite the operator to open the line for questions.

That would be Desjardins. Thanks guys.

Maybe you can provide some color just on the $30 million of supply improvement and optimization initiatives. Just a little bit more granular as to what exactly happened on the $30 million, how you achieved it and why it might be one-time in nature?

And is it the case of there is a differential between you pre-buying the inventory and then the rapid increase in wholesale rack prices that you actually realized?

Yes. Thanks, David, and welcome to the Parkland story.

Thank you. You make me look good this quarter.

Thank you very much.

Delighted with the results that the team produced. In terms of the one-time nature, so, as we've grown our business and added -- so just to quickly answer your question, it isn't as a result of inventory adjustments, it is only the fact that as we've grown our business and increased our supply optionality, we've been able to take advantage of price dislocations and moved product around that benefited Parkland as a net whole, but we don't see those as repeatable opportunities on a year-over-year basis.

Okay. Very good.

And is it at all related to the fact that you had the refinery down for a couple months or is that just something that was unique to the supply after that?

The opportunities were both east and west. They weren't necessarily related to the refinery being down.

What we did focusing on the west was making sure that we have reliable and available product for our customers, which I'm quite pleased that we had no interruption in our fuel service to our customers during that period.

Okay. And just outside of the politics that are going on obviously between the 2 provinces with the Pacific Northwest crack spreads you talked about, but when we look at the unique market with obviously high-end refined product prices, the white crude differentials and kind of the unique market that you have in the vertical integration, I'm just trying to imagine what changes at all short of actually adding on more infrastructure?

In other words, could these crack spreads for you prevail into the second half, and why do you think there might be some normalization of those crack spreads as we head into the later part of the year?

Yes. So as we discussed in the call, I mean, the Vancouver crack spread correlates tightly with the PNW, so that's why we're referring to the PNW, which is publicly available.

And what we do internally then as we layer on sort of what's happening in the local area to formulate a view, and there are a number of positive drivers here in Q2, including the Western Canadian crude discounts, there is still -- rail car capacity is still constrained, and there is a heavy Prairie turnaround schedule and then the Brent WTI differential continues to persists. So those would be tailwinds.

There are certain headwinds as well, but we believe that the tailwinds will prevail over the headwinds in the near-term. And then what we do when we look at the final 2 quarters, we just assume a reversion back to a lower average crack spread for that period.

Okay. And then the last one from me, and I'll let somebody else grab the line.

Maybe just a bit of color on the synergies and the timing, what prompted the increase, where do the delta arise, and you're growing confidence in being able to nail down higher synergy level, which is great, but maybe just a bit more color on why?

Yes. So we're very pleased with the progress the team is making on synergies.

I would say the incremental increase in the year, and again, that's not a sort of run rate, its $44 million for the year, so a lot of the stuff starting to ramp, it's a combination of items. The first would be, we continue to work with our non-fuel vendors to look at how we leverage our scale across the country, and it had some improvements there that were a bit quicker and a bit larger than we anticipated.

The second thing is, we have factored in some Ultramar's supply, which we hadn't initially put into our business case. So we have made some improvements there that are starting to assist the P&L.

And then the third thing, internally, the team's just doing a great job making sure that we're managing our cost base effectively.

Okay. And did you -- have you setup the commodity swap tests that you're sort of talking about with the other refiners?

So we do work with our refining partners across the country. We do buy off every refiner and with different contracts and there are opportunities at times to trade volume between locations, and we do that on a regular basis.

With respect to the -- our newly acquired Chevron business, we still have some work there to realize some of the supply expectations that we'd previously indicated.

Very good. Excellent results guys.

Congratulations. Great

Well, thank you. Thanks.

Thank you. Guys congratulations on the quarter.

Just on the synergy number, obviously a nice lift, and originally, you're targeting something over $60 million to $75 million, I think, but that was going out a few years. So is the $80 million kind of the end target run rate or do you still see potential to get more than that either in 2019 or '20?

Well, again, so the number we've always put out there is $68 million, roughly 3 years out, so that would take us to 2020 run rate. I would say we're making good progress.

One of the key enablers is coming off the transition services agreement that we had with CrewStart and getting everybody on one system. And we've made really -- I mean, that's done and it's gone very well.

I'm very pleased with what the team's been able to achieve in a record time there. The other thing is we're making good progress on the Chevron TSA exit.

In the next couple of weeks, we'll have our whole retail business running on JDE, and we'll still be doing work on the commercial and industrial business, which will complete later in the quarter here. So what we're getting is excellent visibility now across the business into our costs and also how the business operates.

So that allows to continue our optimization activities. And as we get more confidence around that, we'll talk about that in subsequent quarters and potentially increase that target.

Okay. Thank you.

You talked about the rail cars and the rail lines being congested and that helping the spreads in the first half of the year. There is a talk of it bringing up in the second half of the year.

Have you been -- what would Parkland's capacity be to exploit the opportunity to move more of the crude out by rail out of Alberta as those rail cars free up or as the rail lines free up?

So we buy lots of crude for the refinery and that's pipeline-supplied. Our crude by rail business is a business that we run out of Alberta and we have a terminal.

We move product basically from north to south. It would -- certainly, any relief in the congestion of rail cars would assist not only that business, but our whole rail business that has experienced delays over the quarter -- over the last few quarters.

And what that's -- the way that's manifested itself as we had to put on more rail cars and the time to deliver has increased. So you know what, this will have 2 impacts.

One is we should be able to move more product and we should be able to do it more efficiently.

And just switching to the retail side. You talked about on the run and roll and the initial success there.

Can you talk a bit more about -- give us some actual numbers of -- I think you're at 19 now. Where do you expect to be by the end of this year and next in terms of On the Run conversions?

And then what are the key merchandising programs that are driving that shift into the higher margin categories and increased basket?

Yes. So on the convenience side, again, the team there did a phenomenal job, again, in driving our same-store sales growth and we continue to see that opportunity going forward here as the team continues to look for opportunities to make improvements.

I would say when we look at how that broke out, it certainly -- where we're really focusing our effort is the non-tobacco, non-lottery and that's where we saw actually growth greater than 4.1% in the quarter and driven by, I would say, 3 primary areas. So one is, we are trying to see good traction on our On the Run or on our private label and the intent is to roll that out to approximately 20% of the SKUs within the next 24 months to 36 months.

So -- and again, it's early days. I mean, we've been in market now for roughly 4 months, 5 months with that program and certainly 4 months to the end of quarter.

And what we've seen is positive lift or dramatic growth. I think it's like 6% growth that we can -- but also, it hasn't impacted the legacy SKUs that had the same effect competing with.

So we've seen a good incremental lift toward sales through that, and again, we'll continue to roll that out of the team as a number of items that are planned for rollout here in Q2. The second thing is further drive to forecourt to backcourt.

So we did see our basket size and the conversion rate increase, and again, that's basically through promotion at the pump to drive consumers from the pump into the store. So we're seeing some success there.

The other item is we did rebrand, we did our initial test and rebranded 38 sites, 2 On the Run. There are a mix of rebrands and the new sites that we're building and seeing some really good traction there, just from the rebrand, the new interior to the site, and then starting to change the mix from -- to and again on the non-lottery, non-cigarette to improved coffee offer and working on making sure that our fresh offer aligns with the needs of the local community.

So all of those things are contributing to this. It's hard to isolate down to one factor.

But, what we're seeing is our investments in our marketing team is really starting to pay off as that team is really starting to get traction. It's interesting because we met with our new team and a lot of the team has come out of our Ultramar business and our Chevron business.

So as we bring this team together and reflecting on where we were a year-ago. A year-ago, we had 6 people in that group and now we've got certainly, I think, it's about 40 people that are focusing on this, and again, they've really rallied around bringing the company together nationally and developing a national offer and we're seeing that pay off.

Okay. Thank you.

And just on the numbers that we --so you have 38 On the Run now. Where do you see that ending year and where do you think you could be in...

So with our existing On the Run, so when we did acquire, now they're still in the old branding. And also with our franchise partners, we expect to have about 200 On the Runs in market by the end of the year.

So we'll do another 40 sites this year on the refresh program and new-to-industry program. So again, what we're starting to do is build out the brand within the legacy Parkland network and are seeing very positive results as we continue to do that.

All right. Thank you.

All right. Thanks.

Just wanted to get some color on how you're thinking about the seasonality of this quarter in terms of the margins across the segment, the CPL margins? Was there anything sort of seasonally that might affect them up or down or just trying to get a understanding of how we can model out similar margins next year, like would this be a good approximation for kind of the first half, what you've seen so far?

I would say the best proxy for margins is to look at Kent or the MJ Ervin site. And they publish Canadian margins.

You can also get it through Opus and look at a 5-year average that tends to be fairly accurate. We will bounce around quarter-over-quarter, but on a long-term that tends to be where the margins pan out.

So, it's hard, I've been in the business now 10 years, and every time I think I understand it, it starts to move to a different direction. There's a lots of factors that come into what drives the price to the consumer and what we do is we're an active participant in that market.

The dynamics change across the country depending on the local competitive environment.

Great. And then, I guess just on the synergy side, you mentioned that you were able to pull some synergies earlier and taken up the target for 2020.

Is the -- I guess the additional synergies, is that more fuel savings, is that stuff you're able to find on the operational side, maybe some color there?

It's really across the board. We have had some benefit on the fuel side as it relates to our Ultramar business.

I would say -- but there's a lot of good savings coming out of working with our non-fuel vendors to take advantage of our scale and our ability to work with them across the country. And we are starting to see process improvements as we look across the business and look for best practices.

So I would say it's a good mixture. And again, as I'd indicated, we now come up the transitions services agreement, which -- we were running Ultramar up until a week ago on SAP, it's now run on our ERP and that's giving us -- starting to give some great visibility into the business that we can look for further opportunities.

All right, great. And then just on the, I guess, on your supply side and on the Alberta business, I know you can't get into details, but as through this market environment where a lot of refineries are down, crack spreads are widening, has that business outperformed relative to kind of historical levels and this kind of relates to your kind of $30 million one-time gain as well.

Is that more on kind of the trading side? Just wanted to understand how that business performs during periods of, I guess, when there is disruptions in supply in the market?

Yes. No, I mean, that is -- it tends to be when we can make some extra margin in that business.

So -- and we've seen favorable results both in Western Canada across the region and then in Eastern Canada as well. The price of product relative to New York Harbor has gone up and we've been able to benefit from that.

Thanks. And then, one last one from me.

I guess this relates to sort of the synergies question. Have you been able to go back to some of your suppliers, I guess, now with the larger field base, maybe not renegotiate the agreements at Ultramar and CST, but just with the broader business now, have you started to see some of those benefits with fuel volumes added through your acquisitions?

With our increased scale, that does help us. We're always in the market renegotiating a portion of our supply.

It is laddered and we tend to be in market every year renegotiating the benefit of that. So with that, we work with our supply partners to look for opportunities to improve the economics of benefit, both them and us.

Great. Thank you.

Hi. Thanks for taking my question.

Hi, Vishal, and welcome to the Parkland story.

Thank you, and I'm happy to be here. On the -- if you could just take 10 steps back and just help describe how Parkland's business generally reacts to rising oil price environment, aside from higher revenues?

I'll answer part of this and then hand it over to Mike. I think there's always 2 components.

There is our -- I would say, for the most part, the business reacts pretty quickly, so we don't carry a lot of inventory, so we tend to have a fairly reliable margin that is dictated by the market. So -- and the market tends to react pretty quickly when prices go up or down and we tend to follow that.

So that's -- I would say, there is no correlation between a rising or falling environment, that would suggest in Canada that there is a benefit to one scenario over the other. I do think it does have working capital implications, which I'll let Mike talk to.

Yes. No, that's a good question.

So if you think of our business, a couple of factors I would suggest, as Bob mentioned. We tend to turn our inventory over pretty quickly.

On some markets, it's in the retail side as well as a day. We're bringing in new fuel every day into the site.

Other markets are not as sensitive where we do have some storage and so we think about it from a business segment turnover perspective, I think, is the right way to look at it. On a working capital perspective, we tend to turnover our inventory pretty quickly and the retail side is an example.

And so we don't see when oil prices are going up and you think of working capital investment, the retail side balances the commercial side. If we're in a winter season in Q4 and Q1, where we tend to have more commercial and home heat activity, we do see our receivables go up a little bit, but offsetting any oil price movements on that side, we see a negative working capital carrying in our retail business typically, where we tend to monetize our inventory as quickly or slightly faster than our payables.

And so we tend to see a bit of a muted impact, if you will, on working capital from that perspective. And so it really comes down to those 2 factors when you think of how quickly we turnover fuel and then also as the segments of business in the season we're in offset each other from that perspective.

That's helpful. Thanks.

Just further on that question. Do you see short-term margin compression as your COGS goes higher and maybe you can't pass the prices on this quickly, albeit for a short period of time or is that not really much of an issue?

It's not. It depends on the market, how dynamic it is.

We see some markets that restore daily and others that -- it's a little longer, it tends to be as you get further from the distribution points, the adjustments are a little slower. But generally, there's no -- again, there really is no correlation between crude rising, falling and the margin available in the market.

Okay. At the retail side, are you seeing consumers starting to push back on the pump price and maybe miles driven or is that not a factor yet?

Too early to tell. And I would say, certainly, miles driven is something that is a very lagging measure.

But on our network, we haven't seen or felt that yet.

Okay, great. And just as we move into the C-Store, given that PTI typically has these -- a preference for this company owned retailer model or company owned dealer operated model.

When you look at the -- in the retail segment, the non-fuel gross profit line, is that principally composed of rents and royalties?

It is except for Ultramar network. Mike, do you want to comment on that?

Yes. A couple of different ways to think about it.

Essentially, it is, I'll call it, non-fuel flow of income and so in our legacy business and in the Chevron business, we run a similar model, which is a company owned retailer-operated model. And so in that line, we tend to have what we think of is a variable rent largely, and so we share in the merchandise margin.

And so you'll see that in the Ultramar business, today, we inherited an employee base model and so it's a slightly different way of thinking about it because we do see the -- we do have the inventory, the merchandise sales and the margin, and so it's not necessarily a variable rent or sharing in margin, it's really -- it's an employee-based model. So you see the employee costs and OpEx and you see the full margin in non-fuel.

Over time, you'll see us move in the markets that make sense towards that retailer model. And so it's just a different way of thinking about how that non-fuel contribution comes through.

So you do see things going though flowing through in terms of merchandise, car wash and other flows of income if we have a QSR, rents and things like that.

Okay. So PTI does in fact benefit.

If the mix improves and the margins go higher, there is a benefit for you guys?

Yes, for sure.

Yes, absolutely. If you think of the private label program we have as an example that Bob touched on earlier, as we change the mix, our partners, our retailers, we share and that we have an equation there where we go through and we work with them in terms of driving the performance of those programs and products, and so they'll benefit the company and benefit the retailer to some degree as well.

Okay. And just a last one here.

On the supplier contracts that you renegotiate regularly, where those supplier renegotiations included in your guidance and how meaningful can these opportunities be?

Yes. I mean, our guidance is our estimate of how the business will perform for the balance of the year.

And there are many factors that impact that.

Yes. I mean, I think if you think of the supply side, there are a number of initiatives that they're commonly focused on, just managing distribution costs, small arbitrage opportunities from regional basis as well as working, like Bob said, with scale and with our partners.

And so, there are a number of contributors there certainly that we look to manage throughout the different aspects of that segment of the business.

Wonderful. Thanks for the color guys.

Great. Thanks.

Yes. Hi, guys.

Congrats on another strong quarter here. Just wondering, in terms of the storefront conversions and the re-branding initiatives, what kind of lift on sales are you guys seeing out of these conversions?

It's early days, but we are seeing a positive lift and it's varies by market and also by formats of site. But what I can say that they are positive and it's given us confidence to continue the program and to continue to put capital into the program.

And I'm assuming it varies between formats, but is there an average capital spend that you can give us for these conversions?

Yes. We do have that number.

I just don't have it on the top of my head.

Yes. Depending on the nature of the retrofit, too, Derek, I think if we look at the retrofit, for example, as a refresh and it can be -- it could be $75,000 to $150,000 depending on the nature of the location and the extent of that sort of renovation.

And so somewhere in that ballpark, I would say, on average. So it's a fairly modest capital investment that will include the signage on the site, reimaging in the pumps and fuel delivery side as well as the interior and the programming.

And so it can be fairly modest that way.

Okay. That's helpful.

Just switching gears a little bit. Just on the propane side, you guys had some strong volume growth there on the -- in terms of new customer additions, and obviously, you benefited in certain regions from weather.

But we've seen this merger with 2 of your larger competitors and they had to let go of some of their customer base for competition issues. Where you guys a beneficiary of any of that?

Our propane team continues to execute very well. What we've seen is a number of new wins across the country.

We have seen some robust wins here in the west, particularly larger accounts and we'll expect that to continue here over the next several quarters. I would say its good sales and some good marketing on the residential side that is leading to an increase in market share.

Okay. And residential typically is higher margin, higher operating cost, correct?

Yes. That's right.

It tends to be the small drop, small volume, but little higher margin to compensate for higher operating costs.

Okay. That's it for me.

Thank you very much.

Thank you.

Hi, good morning and congrats on a good quarter there. Maybe if I could just ask about Parkland USA, you're generating, it seems like, pretty consistently about $4 million a quarter of EBITDA, which is now 2% of your total EBITDA.

How do you think about that business longer-term? Does more capital need to be spent there to grow it?

Is it a focus given all the other stuff you talked about? Just wondering how you think about that franchise relative to all the other stuff you have on the go here?

Although it's become our smallest segment, it's still very important to us. We recently hired Doug Haugh.

Doug has been working with the team to grow the business organically within our existing footprint very successfully to a number of sales initiatives and also working with our lubricants team to improve our offer. And then, Doug also is looking for opportunities to grow the business through acquisition and we're making some good traction there with the number of prospects and really executing a very similar strategy to what we've employed before, but going a bit broader within the Mid-Continent and Rocky Mountain markets.

That's helpful. And you mentioned growing that business organically.

Maybe when I look at your guidance for the full year for your whole business of $650 million of EBITDA, and I apologize if I missed this, I got in the call late, but did you break down the expected organic EBITDA growth within that $650 million? Should we still be thinking kind of 3% to 5% on the core business that you're layering on kind of the acquisitions and the synergies and higher crack spreads?

Yes. I think that's the way to think about it right.

So our Base Business forecast hasn't changed so 3% to 5%. We did have exceptional growth this quarter in the Base Business.

But, again, our goal and objective is that 3% to 5% and the other area's where we are tracking ahead of synergies, so we've taken that and added that into our guidance and also some of the supply initiatives that we have in place are paying off and we'll see some more earnings on the supply side.

Thank you. And then just on the synergies actually.

Are the way synergies -- the way they're coming through, is it different than maybe historically? I think I recall when you acquired Pioneer way back when you thought of kind of 20% target, whatever the number was and it took about 3 years as you know, it was about a third, a third, a third.

And now you have more than half of this $80 million revised target coming in year one. Has something changed here or is there a reason why we shouldn't think that $80 million could be $120 million if this kind of -- if that trajectory holds as, if I recall correctly, you had mentioned on the Pioneer conference call in terms of how synergies typically roll through your business?

Yes. So, again, we have increased our guidance long-term, the long-term synergies from $68 million to $80 million.

And there are a number of different factors contributing to that, both on the non-fuel and the fuel side. What we did talk about previously is that as we continue to get confidence around other initiatives, we'll look to increase that once we're confident that we can achieve the results.

The other area is we did exit the TSA and Ultramar and that is now totally -- completely on JDE. We're about 80% through the retail business within Chevron, so we're getting good visibility of the whole business.

And later in the quarter, we'll be done with the commercial business within our legacy Chevron business. So getting on one common platform will really enable us to further dig in and look for opportunities to create some savings.

That's great. And last one for me.

You had 2 very strong quarters now, you've raised your outlook for earnings. Does this change how you think about that leverage ratio target?

I know we asked you this before, but it seems like your earnings profile is maybe higher than you'd originally anticipated when these deals were announced. So that change how you think about the long-term range of your leverage between 2x to 3.5x and maybe that top end comes in because you have maybe greater earnings power then you thought a year ago?

Yes. It's a great question, Kevin.

I think, yes, we reported I think 2.74x on our total leverage and it is a reflection of the historic contribution as well as what we saw in the last couple quarters. Certainly, any excess cash flow, as we've always said, will go immediately to pay down near-term leverage and free up capacity.

But I think you're point to give in terms of scale. We do think about our leverage and trying to use leverage very effectively and to have capacity for growth, as you know, through acquisition.

So I would say our comfort range is still 2x to 3.5x, I think with the scale of the business now and the guidance we provided, the half a turn is a meaningful amount of cash flow. It won't turn to be about $650 million.

So if we can persist in that 2x to 3x, that would be our preference, just because we like to have that capacity for growth. I do think also we're very mindful of some strong historic results and that number can move a little bit ground and so we tend to think of it as a normalized number and strip out some of the Q3 results from last year.

For example, which were exceptionally strong and just get comfortable that we're still in that low 3x range on a normal basis, 2.7x on a reported basis. And then as I mentioned, as the performance of the business continues through the year, any excess cash that we had in Q1 here will just help us to delever and maintain that ratio more strongly than perhaps our conservative forecast.

Hey, that's great color and great quarter everybody. Thank you.

Thanks Kevin.

Just a couple of quick ones. You're talking about the propane, it was fairly robust in the quarter, obviously, given the account wins and the weather, et cetera.

But on the diesel and trucking side, how does that fare? And as I look out, it looks like that dynamic seems to be improving and certainly, the trucking business overall has finally recovered.

If you look out into the summer, what's your view on just the diesel and the cardlock, how you're leveraging it and things like that?

So I would say on the diesel side, we were certainly in the first quarter on the Base Business, we were a little off where we thought we would be. It's driven by two things.

One was activity in the west here is not as robust as we had anticipated because of the challenging oil price environment Western Canada. And then in the east, surprisingly, and I was very surprised about this, the heating-degree days was actually less, it was 6% less than the 5-year average.

So it was a little less heating oil consumed than what we'd anticipated. I think going forward, we would expect our demand to be on target.

And as the summer season kicks off, you see the mix change and we tend to be more supporting summer-driven construction and economic activity versus as intense on the oil side in the west. And then, in the east, we expect to see a robust demand there.

Okay. And then the last one.

There is a consortium that's building a terminal, I guess, near the airport to provision jet fuel, obviously, boarded in versus, I guess, taking trucks, and I know you supply a third of the Vancouver airport, it is busting in the scene. Do you think there's any impact at all?

To me, it seems like none, but just like to hear your thoughts on that one?

Don't expect that to have a material impact as we will continue to supply the airports. And it is -- to your point, the airport is growing and so there certainly is the requirement to increase the amount of jet that can be brought into the market and moved into the airport.

Okay. Very good.

Thanks guys.

Great. Well, thank you.

Look forward to talking to everybody in August when we announce our Q2 results.