Parkland Corporation

Good morning, ladies and gentlemen, and welcome to the Parkland Corporation's Q4 and year-end results analyst call. At this time, all lines are in listen-only mode. Following the presentation, we'll conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Friday, March 5, 2021. I would now like to turn the conference over to Brad Monaco, Director of Capital Markets for Parkland. Please go ahead.

Thank you. With me today on the call are Bob Espy, President and CEO, Marcel Tunison, Senior Vice President and CFO, and Doug Hawk, President of Parkland USA. This call is webcast, and I encourage listeners to follow along with the supporting slides. We will go through our prepared remarks, then open it up for questions from the investment community. Please limit yourself to one question and a follow-up as necessary, and if you have other questions, re-enter the queue. We would ask analysts to follow up directly with the capital markets team afterwards for any detailed modeling-type questions. During our call today, we may make forward-looking statements related to expected future performance. These statements are based on current views and assumptions and are subject to uncertainties which are difficult to predict. These uncertainties include, but are not limited to, expected operating results and industry conditions, among other factors. Risk factors applicable to our business are set out in our annual information form and management's discussion and analysis. We will also be discussing non-GAAP measures which do not have any standardized meanings prescribed by GAAP. These measures are identified and defined in Parkland's continuous disclosure documents which are available on our website or CDAR. Please refer to these documents as they identify factors which may cause actual results to differ materially from any forward-looking statements. Dollar amounts discussed in today's call are expressed in Canadian dollars unless otherwise noted. I will now turn it over to Bob.

Great. Thank you, Brad, and good morning. I hope everyone is staying safe and healthy, and we appreciate you taking the time to join us today. Given it is his first quarterly conference call with Parkland, I would like to officially welcome Marcel. We are excited to have him as part of our senior leadership team. We also have Doug Hawk joining us today, who leads our U.S. business, to talk about our recent U.S. acquisition and provide insights into our U.S. growth strategy. On slide three, we have highlighted some of the many successes we have had as a business over the last year. We believe the true test of a company's resilience is how it performs over a prolonged period. And while we experienced some COVID-19 volatility through Q4 and the impacts of one off items, our underlying operations were right on track and we delivered excellent performance through a challenging year. When I look back at 2020 and particularly to the start of the COVID-19 pandemic, I'm exceptionally proud of our team. Our full year results exceeded our initial expectations and highlights our ability to manage any ongoing uncertainty through our diverse geographic platform, product lines, and customer segments. I'll start with safety. We ended 2020 with a record low TRIF of 1.12. This is a more than 20% improvement from 2019 and a testament to our relentless focus on continuous improvement and the commitment of our teams who safely and reliably provided the essential fuels and services customers need through COVID-19. Safe businesses are well-performing businesses, and I'd like to thank the Parkland team for their accomplishments. As always, we remain highly disciplined in advancing our strategy through 2020. We drove organic growth, acquired prudently, integrated effectively, and leveraged our supply advantage. We fully funded all these initiatives across all geographies and are positioned to deliver significant growth through 2021. After a brief pause in the first half of 2020, we resumed our acquisition growth in the second half of the year. Doug will touch on the recent U.S. acquisition activity later in the call. I also want to highlight that it's not just been the U.S. segment doing acquisitions. Our international and supply teams continued to find accretive opportunities and in the first quarter of 2021 completed an LPG marketing acquisition in St. Martin and two LPG rail terminals in the U.S. Midwest, respectively. Turning to slide four, 2020 marked the launch of our inaugural sustainability report. Sustainability practices are deeply embedded at Parkland, and we intend to share key milestones and exciting developments as we move through the year. We are highlighting a few great examples on this page. First activity I want to highlight is our biofeedstock coprocessing efforts at the Burnaby Refinery. We have spoken about this in the past, but I want to emphasize how proud we are that our Burnaby Refinery was the first facility in Canada to use existing infrastructure and equipment to co-process Canadian biofeedstocks such as canola oil and tallow alongside crude oil to produce low carbon fuels. This includes gasoline and diesel with a renewable component and progressing towards commercialization of a low carbon aviation fuel or biojet. This is a highly capital efficient way of producing lower carbon fuels. that give our customers the mobility they depend on, but with far less carbon intensity. For example, since 2017, we have invested approximately $30 million in total on these efforts. In addition to stacking up extremely well relative to other projects out there, our low carbon fuels have less than one-eighth of the carbon intensity of conventional fuels, making them a critical element of Canada's transition toward a lower carbon future. We coprocessed 44 million liters of biofeedstocks in 2020, up 140% from the prior year. We have high confidence in our capability and expect to increase this by 125% in 2021. This equates to 100 million liters of biofeedstocks, or the equivalent of removing the impact of 80,000 passenger vehicles' emissions. As you can tell, we are excited about this and look forward to talking more about it as the year progresses. The second example I want to highlight relates to our Journey Rewards program. As part of our commitment to offer our customers greater choice, we have made an exciting addition to the way our Journey members can deploy their rewards points. Beginning on March 1st, in addition to the option to collect items from within our convenience stores, Customers may now use their loyalty points to collect a carbon credit offset. This is a great example of our commitment to help customers lower their carbon emissions. I will now pass over to Marcel to go through the corporate financial results.

Thank you, Bob, and thank you for a warm welcome at Parkland. And good morning, everyone. I'm really thrilled to be here this morning and to be able to speak to you. We'll be talking to the Q4 results in the context of our overall 2020 financials, and then I will touch on the capital allocation and the balance sheet as well. If you just turn to slide five, we delivered an adjusted EBITDA of $967 million for the year and $247 million for the quarter. This is down compared to 2019, but of course, you know, under very different circumstances. We did see the COVID-19 impacts in parts of our business in Q4, and as we were hit with a second wave and associated lockdown in different parts of our business. However, these were not as pronounced as the initial impacts in Q2 2020, and we saw plenty of green shoots operationally. This gives us great confidence in how the business can adapt and how customers react as we work our way through the end of the pandemic. Given the circumstances, we were very pleased with our performance in 2020 year-for-year, when we demonstrated flexibility and resilience. And as you can see from our chart, our overall marketing operations grew both in quarter four and for the full year. And I think this is a testament to our compelling customer value proposition, our growth initiatives, deliberate actions taken to remove costs, the natural cost variability of our operating model, and strong per-unit margins on the fuel side. Those of you that have followed Parkland closely will remember that our supply segment had a very strong 2019, and the results in 2020 reflect a three-month turnaround earlier in the year, as well as lower refining margins, although they have remained relatively strong compared to the broader refining complex in North America. Our focus on balance sheet meant we exited the year with ample flexibility and liquidity, and we're well set up for 2021, and I will touch on that again shortly. Moving to the operational segment highlights on slide six, I will start with the Canadian segment. We delivered 112 million of EBITDA in quarter four and 435 million for the year in the Canada segment. A great year and a great quarter. Fuel margins, lower cost, and our 20th consecutive quarter of positive same-store sales growth contributed to a $24 million increase relative to quarter four 2019. despite reduced retail volumes due to COVID-19 and also warmer weather affecting the home heat business. We continue to benefit from purposeful investment in our digital capabilities, which underpin our ability to price on a micro market level and optimize growth margins. As you recall, we successfully completed the Canadian rollout last year of Journey and grew our membership to around one and a half million. and we're really pleased with this level of participation and delighted to see that continue to grow early 2021. Our teams remain focused on driving organic growth and successfully capturing retail market share in Canada, driven by ongoing enhancement to customer offerings and in particularly the strength of the on-the-run brand. Through the pandemic, we continue to see the value of on-the-run with branded on-the-run sites outperforming the non-on-the-run sites throughout 2020. For the full year 2020, our international segment delivered 270 million through an extremely challenging market environment. And for quarter four, strong shipping logistics, storage optimization and cost control supported an adjusted EBITDA of 72 million and offset COVID-19 impacts and lower tourism relative to 2019. We have reduced our chartered shipping fleet from 13 ships to 11. We captured supply margin uplifts and are on track with delivering our Synergy target when the SOL transaction was announced. So we are extremely pleased with the underlying base business and the organic growth in international. And we continue to benefit from the geographic and product diversification of our operations, where we have about a third, depending on tourism, a third are in diversified economies and about a third is in the resources sector. And these have all responded differently to the pandemic. So as an example, in Guyana, we saw the fuel volumes grow by approximately 15% in 2020, which was on the back of the growth in the oil and gas sector there. Our US segment delivered $74 million of adjusted EBITDA in 2020, which is up $20 million from 2019, driven by acquisitions, organic growth, and strong fuel margins. We believe that this is a good marker for where we see the base business prior to the impact of the most recent acquisition activity. And Doug will speak to that in a bit. In quarter four, the U.S. adjusted EBITDA of 11 million was lower than prior year. This was driven by a few abnormal items which do not impact the long-term growth strategy of the U.S. Specifically, we saw very high COVID levels and restrictions in some U.S. states like North Dakota where we have our business. alongside reduced oil and gas activity. A cruise line industry fleet in Florida, which was largely idled, also had an impact, as well as some one-time cost. The full 2020 results in supply were impacted by a scheduled turnaround early in the year, where we were offline for almost three months. Once up and running, Burnaby achieved utilization rates averaging around 90% and delivered record amounts of biofeedstock processing, as Bob already mentioned. Again, note that 2019 was an exceptional year in terms of refinery margins. In 2020, we have seen the effects of lower margins due to COVID-19. Underpinned by the location advantage at Burnaby, we continue to place diesel and particularly jet fuel locally and into the U.S., allowing the refinery to run more efficiently. We delivered $78 million of adjusted EBITDA in supply for quarter four, which was down compared to 2019. due to the impact of prior period adjustments, intermediation facility inventory losses, which we expect to reverse once commodity prices stabilize, and finally, a third-party power outage, which took us offline for four days in December. The total of these one-time impacts in quarter four was around $35 million. Our integrated logistics business had its second best year on record despite the pandemic, having success moving diesel via rail into Eastern Ontario market, and a strong crop drying season offsetting the tighter crude and propane spreads. In summary, 2020 was really great given the circumstances. In Q4, we saw the impacts of COVID on our supply and US segment, including a few one-offs. This softened the headline results. However, the underlying performance was structurally solid. We gained market share, increased fuel margins and shop sales, and improved refinery utilization, and our underlying cost performance were all strong. So that gives us lots of confidence as we enter into the recovery in 2021. So this being my first quarterly conference as the CFO, I do want to spend some time on looking at our capital allocation priorities and my view on leverage. Our primary objective as a company is to grow, both organically and through acquisition, and we have a deep pipeline of opportunities to do that. Built on the strength of our balance sheet, the quality of our assets, and sheer volume of growth opportunity in front of us, we don't expect changes to our dividend or leverage policies. And as always, we remain disciplined in our approach and must see a clear path to value creation. And we will evaluate our capital allocation choices regularly. As you recall, we have indicated our desire to maintain a leverage range between two and three times for a normal course of operations rising to around 3.5 for the right acquisition opportunities that advance our strategy and offer meaningful synergy potential. And as long as we then have a line of sight to de-lever back to the normal range in the next 12 to 24 months. We remain committed to this range, and I'm comfortable with the amount of debt in our business at this point and our ability to finance at competitive rates. We have a rateable business model that has proven its resilience through COVID-19 and we have ample room to execute on our growth agenda. And with that, I will pass to Doug to talk about recent activities in the U.S. Doug.

Thanks, Marcel. Good morning, everyone. I'm excited to have the opportunity to talk to you about our U.S. growth strategy, in particular, our latest acquisition. We'll cover material on slide eight. Last week, we announced the acquisition of Conrad and Bischoff. This acquisition is form-fitting for Parkland and our U.S. strategy overall. CMB establishes a new regional operating center for us in Idaho and provides a supply and distribution foundation we can use as a springboard for growth throughout the Pacific Northwest. Equally important, CMB provides us with a large retail format, diverse portfolio of gasoline, diesel, and lubricants. Not everyone has the expertise to acquire and extract value from these integrated portfolios, but Parkland does. It's a critical component of our strategy. I'll talk a bit more about it on slide 10. Siem Reap brings us multi-line distribution capabilities and existing infrastructure in Idaho, from which we can expand further into Western Montana, Oregon, and Washington. These markets have strong underlying growth. Idaho has a population and GDP growth rate among the highest in the U.S., and this is a key criteria we look at when expanding our platform in the U.S. and looking at markets we want to enter. Conrad comes to us with 19 large format company-owned retail sites. nearly 50% non-fuel earnings, and 39 dealer sites. This is an attractive retail network in a market with 891 stores overall that gives us a lot of room to grow into. This mix provides us reliable, rateable C-store margins, which will benefit from our merchandising and purchasing power in the adjacent regions. Critically, this acquisition has 30 million liters of storage capacity and a scalable rail supply capability that will drive our supply security and optionality in the region. The Idaho supply tributary and surrounding markets are difficult to supply, and infrastructure is scarce, so these terminal operations will significantly strengthen our supply advantage and position us to expand and invest in this market with confidence and an advantage that positioned us as a logical buyer of other assets in this fast-growing market that's difficult to service. We continue to expand synergies, to expect synergies ranging anywhere from 20 to 50 percent in our U.S. acquisitions, This transaction falls well within that range, and we expect to capture synergies from CNB within the next two years. CNB comes with great brands, great assets, and most importantly, great people, all of which complement our existing business and team. We'll move over to slide nine real quick. We'll talk a little bit about how these assets fit with our other three transactions that we announced since we last met with you in the third quarter. After pausing for COVID, we've ramped up our acquisition activity. We've added nearly 40 company retail sites and 100 dealers, significantly expanded our supply advantage throughout the Rockies and Northern Tier. Across the U.S. now, we have approximately 100 company retail locations and service nearly 400 dealers. We're beginning to see the benefits of scale on fuel supply, merchandise procurement, and are validated by our national count wins across the region. This progress plants us well within the top 100 U.S. C-store retailers by company site store count. And the result of these four transactions is a pro forma 2020 adjusted EBITDA approximately 70% higher than our reported results. So we're well on our way to doubling the run rate EBITDA of this business yet again after doing so in both 18 and 19. And the map highlights our recent acquisitions and how they fit in. You can see the Conrad acquisitions in light blue and the combined SVO, Story, and Carter acquisitions in green. Everything prior to those is in gray. You can see we're really beginning to fill in the areas nicely. The CMB transaction connects the Rockies and Northern Tier Regional Operating Centers very nicely, and it offers us the opportunity to optimize delivery routes and local logistics synergies. The area between Salt Lake City and Montana refining centers is difficult to supply, as I mentioned, which is why we believe we are the logical buyers in this area. There are a few public terminals and pipelines in the region. and the marginal barrel into the area is typically supplied by rail, often from Canada, which suits us very well. Local refining capacity is not sufficient for local demand. The terminal operations required allow us to take advantage of supply and efficiencies to source the lowest cost product in our market. This supports the CMB assets, adds further optionality for parkland, and increases our ability to compete and win through business. And so what's next? If we look at slide 10 real quickly, You know, where do we go from here? I'd just like to reiterate, you know, what we're looking for in evaluating when we look at acquisitions and highlight some of the depth of the opportunity we see. While having consolidated a lot over the past two decades, the U.S. market is highly fragmented, and the rate of acquisitions and consolidation has increased. It's important to note that approximately 65% of the C-stores in the U.S. lie within chains between 1 and 10 stores. just as evidence of that fragmentation. To increase size and scale in this market, you have to have the capability to do multiple tuck-ins regularly. Many of the retail opportunities in this fragmented market come with commercial and wholesale business units, as well as transportation. To execute on the strategy of consolidation in this market, you have to have a reputation for treating people fairly and with respect, and you have to have expertise across that entire value chain to be able to integrate quickly. This is squarely in our wheelhouse. We do not believe it makes sense to buy a business for the sake of doing so. We must be able to grow it and deliver value to shareholders. Through our national accounts growth, supply capabilities, and now the cohesive on-the-run backcourt offering, we offer the opportunity to do just that. We won't buy a business unless we have a clear line of sight into growing it and improving it. Our opportunities for growth have never been greater than our existing rocks. However, we also have a sight set on other areas that meet our key criteria with strong underlying economic growth and demographics in markets that are supply inefficient in today's market. All in all, I'm extremely excited about the runway ahead of us and the pipeline we have available to us. And with that, I'll pass it back to Bob and look forward to answering your questions a bit later on. Thanks, guys.

Thanks, Doug. That was a great overview, and it sets the tone for a year of continued growth across Parkland. On slide 11, we have noted the key highlights of our 2021 guidance. We have high confidence in our business model and ability to navigate residual uncertainty. As a result, we expect 2021 adjusted EBITDA guidance of around $1.2 billion, which is approximately 25% greater than 2020. We come into 2021 with great confidence in our team and businesses' ability to deliver, but are paying close attention to the broader economy and evolving COVID-19 situation. As was the case in 2020, we have ample flexibility in our growth and maintenance capital programs and the ability to react quickly. Our growth initiatives are made up of primarily small projects, which can be moved around depending on available cash flow. Our maintenance capital includes some catch up on work from 2020 with some flexibility embedded as well. In total, we expect to spend between 400 and 550 million in total capital expenditures. With no major turnaround, we anticipate refinery utilization of around 85%. On slide 12, We have put some more detail around our strategic initiatives. Important to note, our strategy has not changed. If anything, COVID has reinforced it. We are consistent, disciplined, and focused. We plan to grow organically by strengthening our focus on customers, innovating towards the experience of the future, and by providing our customer with greater low-carbon choice. I mentioned it earlier, making progress on low carbon initiatives specifically is a big focus for Parkland in 2021. On the run will also feature in 2021, particularly as we roll the brand out across the US supported by the outperformance of OTR versus non OTR sites through 2020. There is a compelling business case to accelerate our on the run conversion plan. We now have. We now plan to have most company sites in Canada and the US on the OTR platform over the next two years. As always, extending our supply advantage and sourcing the most economical product for our marketing business is paramount to our strategy. We will continue to build our capital light infrastructure projects such as transloading facilities to increase import capability into eastern Canada. As mentioned earlier, our 2021 efforts will focus on coprocessing at the Burnaby Refinery and hitting our 2021 target of 100 million litres of biofeedstocks processed. Through potential US expansion, new markets that complement our international footprint, and being opportunistic in our existing areas of operation, we will continue to progress our long-term growth ambition to double the business. I'd like to thank the entire Parkland team for the effort to deliver a solid 2020 and a continued focus on safely supporting our customers and communities. We are well positioned for a strong 2021. We'll now open the line for questions.

Thank you. Ladies and gentlemen, should you have a question, please press star followed by one on your touch tone phone. You'll hear a three tone prompt acknowledging your request and your questions will be pulled in the order they are received. Should you wish to decline from the polling process, please press star, followed by two. If you're using a speakerphone, please lift the handset before pressing any keys. For today's conference, it's limited to one question and one follow-up. Should you have a further question after that, please come back to the queue. And your first question comes from David Newman from Desjardins. David, please go ahead.

Good morning, folks.

Good morning, David.

How are you guys doing?

Yeah, good.

Excellent. Good to hear. So two questions, one for Doug and then one on international. So my first question is you guys continue to rock and roll in the U.S., pardon the pun, pulling together a really decent patchwork with the fourth rock. Maybe just a few thoughts, Doug, on your rock strategy. What considerations go into establishing a new area? What do you look at? and how do you effectively service it through your supply van? So basically, what considerations go into your thought process in terms of deciding where you go next?

Yeah, I think the great question, I'd say the first and most important criteria is a market that has strong underlying growth rates, which you can find in several parts of the U.S., but not all. So we've had lots of folks ask us why we're in the markets we're in, and You think about that demographically and from a GDP population and underlying demographic trends perspective, that's part of what drives our first screen criteria. We've talked about the second being patchy, inefficient supply systems because we think that gives us a natural way to leverage our supply expertise, which many other pure retail companies don't enjoy. So it gives us a competitive advantage in terms of both acquisitions and improving and capturing synergies. And, you know, also markets where we can acquire, like we've done with Conrad, you know, core operating capabilities in each part of the value chain that we need to be able to build upon as we grow and then do tuck-ins on top of the rock. So, you know, Conrad gives us that in a highly rapidly growing market, but also a market that is tough to supply, so you need some proprietary infrastructure there that Conrad brought to the table. and also sufficient scale in the commercial side of the business, you know, transportation side and lubricant side, as well as, you know, the operating and leadership capabilities that go along with that. So once we have that in place, you know, we're able to execute as you've seen us do in the Utah market. After we acquired the Reinhart business, you know, we've been able to layer on consistent tuck-ins quarter over quarter and, you know, have space in these markets to do so for many, many years to come. We like to keep the rocks big enough to have advantage in their market in terms of the quality of our leadership, the capacity of supply and procurement and merchandising, but also small enough and local enough to know their market intimately, know their customers well, know the right product and category selection that's optimized for their market. It's finding the balance of that scale and capability with

community connection that we you guys have done a great job diversifying the business down there reducing costs maybe just elaborate a little bit on the supply and logistics initiatives your path towards greater LPG, growth in the natural resource economy. So, I mean, coming out of this, you're going to be on a new level, a new normal in the Caribbean. And how does that play into early 2022 when you're looking to buy in the other 25%?

Yeah, thanks for the question, David. We're very excited about how the the international businesses performed and the team did an admirable job in optimizing the business under independent of the volume shortfall that we experienced across some of our channels in the market. You know, I would say as we look forward, I mean, certainly we'll see some good performance on a robust recovery in the back end of the year. So we're quite excited about that. And to your point, a lot of the improvements that have been made are structural and not only in the organic sales side, but also on our supply side. And as a result, when we do see the full business come back, we should see some good performance in that channel.

Excellent. Thanks, gentlemen, and thanks for the guidance. It's good to see, you know, putting it out. You know, we're still in COVID, but great to see that you're putting out some guidance there. Thank you very much.

Great. Thanks, David. Your next question comes from Ben Isaacson from Scotiabank. Please go ahead.

Good morning, everyone. Thank you for taking my question, and congrats on getting through a really tough year. So, yeah, on the guidance of... $1.2 billion. When you think about the $50 to $70 million of cost savings that you're looking to achieve, organic growth of, I think, 2% or 3% or 4%, the M&A that you've already achieved over the last couple of years, I was a little surprised to see the guidance coming in a little light of where 2019 was. So can you describe how you came up with that guidance, either on a segment basis, or maybe you can just add some color in terms of how much that guidance has been impacted by COVID. What should run rate be without COVID? Thank you.

Yeah. Again, putting guidance out for 2021 does speak to the resilience of the business and our ability to navigate through 2020. The big swing item between 2019 and 2020 was the refinery. And as we look forward, the crack spreads aren't as robust as we would have seen in 2019 and 21. And that's the big delta in the guidance. But I can assure you that the forward plan includes the M&A that we've achieved and also you know, the organic growth that the team has continued to deliver throughout the last few years.

And my follow-up is just on how Q1 has been going. You saw a little bit of margin compression in the U.S. and in the SAL business because of lockdown. So as those start to ease, how have you seen things playing out in January and February?

Yeah. You know, I would say in different markets, you know, certainly in Canada, you know, we have seen, you know, the market, you know, again, we are in lockdowns and emerging, and we're seeing a positive impact of that. In the U.S., things are coming back a little quicker. I mean, they're further ahead in their vaccination programs. And, you know, the Caribbean, again, you know, we are seeing some more air travel, which is lifting our aviation business. And, you know, again, expect those markets to recover here in the back half of the year as restrictions start to get eased. So, again, you know, I would say we're seeing green shoots across the business and are quite optimistic for the back end of the year.

Great. Thanks so much.

Your next question comes from Derek DeLee from Canaccord Genuity. Derek, please go ahead.

Yeah, hi, guys. Thanks. Just wondering quickly in terms of acquisition opportunities in the U.S. Obviously, you highlighted what seems like a big pipeline. Can you just talk about the multiples that you're seeing in the space and where you're able to get those multiples post-synergies like you mentioned, Doug?

Yeah, thanks, Derek, and great to hear you. Yeah, look, we're quite excited about the prospects in the U.S., so I'll turn it over to Doug, and he can fill you in specifically on what he's seeing in the marketplace.

Thanks, Bob. Yeah, I think we've got a clear range of multiples that we're comfortable with, and we're continuing to see those These last four transactions we've announced and completed here have come squarely in that range that we've historically enjoyed, which really speaks to the value of being able to buy these diversified businesses and add value and synergies and growth to each product line and not just retail. It is important to note that, like the Conrad acquisition, which is a great illustration of You know, we like to get the supply capabilities, the distribution capabilities, the logistics capabilities in place so that we can add many, many more additional stores and outlets and great corners to those platforms, which is what we've done. And we've been able to do that at, you know, substantially better multiples than the retail consolidators. So, you know, we like hunting in that part of the market. There's less competition because there's far fewer companies that, you know, have the capability of operating those other parts of the value chain successfully. And it's also where the greatest population of opportunities lies. When you get past the top, again, stores with 100 stores, chains with 100 stores or more, there's not very many. But there are tens of thousands of stores available in the smaller chains and the smaller outlets. But those are most typically bundled with these distribution businesses. which, again, is right in our strike zone. That's our sweet spot, and we continue to see tremendous opportunities there. I'd like to say that our strategy in one way is simple to understand. We want to make money on the product three times. We want to make money supplying it, distributing it, and retailing it, and we think that gives us a unique advantage in consolidating this part of the market.

Okay. That's really helpful. And then, Bob, just sort of a A bigger picture question for you. I'm just wondering if you could provide your views longer term on the state of the fuel retailing business as a whole. Obviously, a competitor of yours evaluated what we thought was a pretty meaningful strategic shift about a month ago. I'm just wondering what your thoughts on some of the longer-term trends are around sustainability, electrification, and things like that.

Yeah, no, happy to comment on that. And look, I would say CouchTard, with a lot of respect for their team, their management, and the strategy that they've pursued, and can comment specifically on where they're taking the business going forward. I would say when you look at Parkland, we see lots of opportunity in two spaces. One is in our traditional operating space, And that's across all three segments that's across our retail segment, where we continue to see opportunity to grow our convenience business in our commercial business, where we continue to see opportunities to grow both of our diesel and propane and then also in our wholesale and supply, but continuing to build our supply capabilities. You know, on top of that, when you do look at the energy transition and the potential impact on the business, You know, again, we see more opportunity than threat, and it varies by channel. You know, for example, in our supply business, we're the first refiner, as we talked about in our presentation here, to co-process biofeedstocks in Canada. And, you know, with very little capital, we've had a big impact on GHD emissions in B.C., and can see a real pathway to expanding that. And we'll be talking about that more as we go through the year and the team in Burnaby gets more confidence around their ability to increase that capacity. I mean, that's just one area. We're very active in the renewable space, in the liquid renewable space. We have significant opportunities in the Caribbean that we're pursuing. So very pleased with the opportunity set there. When you look at our retail business specifically, certainly gasoline is projected to decline over the longer term. Our view is it will take a long time to do that, and there are some good offsets. Again, the strength of our retail business and focusing on a larger, a destination-oriented offer with both food and really leading convenience. We saw in the pandemic the fuel cell decouple from convenience and the macro trends really do support the convenience channel as a viable channel for the consumer. And again, we saw that in the pandemic where fuel sales went down and convenience sales went up. And again, it speaks to the strength of our offer and our continued commitment to investing in that space. And then on top of that, we are continuing to explore and experiment with EV charging in markets where there are sufficient vehicles to warrant it. So again, when we look at it, our base business has a long runway, and we'll continue to invest. And on top of that, the opportunities provided through low carbon are immense, and we're really happy to be able to participate in that.

Great, appreciate the color. Thanks.

Your next question comes from Neil Mehta from Goldman Sachs. Neil, please go ahead.

Thank you, and good morning, team. The first question I had was around the retail margin outlook. We've had a big move in the flat price of Brent here post-OPEC, but it's been a steady move over the course of 2021. As we think about retail margins, how are you thinking about managing potential compression? And embedded in that $1.2 billion of EBITDA guidance, did you assume a backward-aided oil curve or a steady recovery in the commodity price? Okay.

Great, Neil, and thanks for the question. And I guess we'll answer it in three parts. So I'll lead off and talk about the benefits of having a a large diversified business across multiple jurisdictions because pricing does behave different in different geographies. And then I'll pass it over to Doug, and he can talk specifically about the US market. And then Marcel can talk about how we budgeted crude into our forward view. You know, in terms of, again, you know, the benefit of our business, I mean, we're in many different markets. I would say, and pricing dynamics are different in various markets. The Canadian market tends to be much more dynamic and responsive to changes in the underlying commodity price. We have some markets that have legislated margins in Eastern Canada and down in the Caribbean where we're less sensitive to, again, changes in the underlying commodity price. in the U.S., probably a bit more sensitive. And, Doug, why don't you comment on that specifically?

Yeah, I mean, it's a great point, you know, in terms of the, just the steady and dramatic rise in the flat price. I mean, it's crude up as much as it is. It always, you know, results in retail compression on the margin side. We certainly saw that mostly in the fourth quarter of 2020. We have seen it certainly in February. January was kind of more of the same that we didn't get the normal January kind of swoon in pricing that you often see. So that kept margins, you know, challenging compared to, you know, our typical run rates. But, you know, I think we're through the worst of that given the shape of the curve and the opportunities for additional production to be brought back in. I mean, I know the Saudis, you know, stuck with it for another month. But, you know, I think you can see the pressure that's on that system to increase production rates, which is going to, you know, I think get us back to a normal recovery in terms of fuel margins. So it's, you know, not unexpected. Certainly, you know, in our markets, what we enjoy is a bit more margin structure than much of the U.S. You know, I think if you look at how those crude price impacts land in markets like Texas and the Southeast, it's a much more dramatic impact than we have to deal with in the Rockies. So we're fortunate in that regard.

And maybe, Neil, just to pick up on your final comment or question on how we looked at the market. So we have looked at the market basically on a backward-dated basis. So we see that going forward. And clearly, if we hit contango, there might be some opportunities for us to trade around. So that's how we've looked at it. And I think, of course, we see volatility in the crack spreads going forward, as you know, and Bob talked about it as well. That is one of the main things that move around. And so with our plus minus 5% on the $1.2 billion is where we have tried to capture that as well.

That's great. Thank you, guys. Yeah, it'll be very interesting to see how the markets play out over the course of the summer. The follow-up is just on the capital spend levels that you called out, the $175 to $275 million. And in the release, you talked a little bit about what they are. But can you unpack what the spend is? And how do you think about the rates of return on those investments? Any more detail as we evaluate the growth projects that met your hurdle rate?

Yeah. Basically, it falls into three buckets. So the first would be in our retail business. We talked about accelerating our OTR rollout both in Canada and the US. And then also predominantly in Canada. Upgrading the network so new sites rebuilds where we have an ongoing program to do that. And you know when you look at the amount it would probably be 2019 would be an indicative of what we would spend in 21. You know, the other then is in our delivered business where we, and again, we would do network enhancements across the business, but again, primarily in Canada is where you'll see that. The, you know, in our delivered businesses or a commercial business, you know, we are investing in growth and that has two forms. It's Customer storage, so tanks could be propane cylinders that are on customer sites or oil tanks for larger customers and trucks to deliver that. I mean, those are the what you see growth capital. And then in our supply area, it's the refinery and continuing to invest in some logistics there to support our co-processing. uh in our um the ability to move lipids into the plant and then also on some of our storage and distribution at the refinery and then within our broader supply we do continue to invest in in distribution storage and key markets across all regions canada the us and the caribbean and that would be captured in that amount. In terms of returns, we talk about targeting five to eight times in our M&A, and our returns are comfortably within that sort of range.

Thanks, guys.

Your next question comes from Kevin Chang from CIBC. Kevin, please go ahead.

Hi, good morning, everybody. Thanks for taking my question here. Maybe I could just turn to your cash conversion. If I look at 2020, your cash flow from operations and backing out a lot of the noise from the working capital, it looks like a high watermark, at least over the past 10 years, in terms of your CFO conversion from EBITDA, close to 80%. Just wondering how I should be thinking about this conversion moving forward. You know, if I think back to last year, I suspect the weaker crack spreads were probably a drag on cash conversion. And despite that, you did hit this high watermark. So do you think you've hit a new level here for conversion? And if so, just what do you think is driving that? What do you think is driving that moving forward?

You know, look, there was a lot of noise last year. On the one hand, we did cut back. You know, we did react quickly and the team responded very aggressively in the early days of the pandemic to protect the business and the balance sheet. And you saw the impact of that, you know, pulling back on both the growth capital and maintenance capex. And one of the things that we've talked about in 21 is there will be some catch up on the maintenance CapEx. We have to make sure that our assets are well maintained. The other tailwind we had in 20 was the underlying commodity price. So we did see commodity prices come off quite dramatically, which results in an unwind of working capital in our business. You know, on the flip side in 21, we'll see the reverse of that as the underlying commodity does come up. You know, are there any other comments there, Marcel?

No, I think the only thing I would add is, of course, during the year we had some benefits of, you know, delay in tax payments, which we caught up with since then. But that's also, of course, not structural.

So hard to use, you know, overall hard to use 20 as a, as a guide, you know, I think, uh, you know, we'll hit our sort of normal cash conversion you would have seen in 19, uh, this year.

Okay. That's helpful. Um, and not to belabor the point on, on, on, I guess, uh, the shift towards electrification. And I think, you know, some of the comments you made Bob, or I think primarily around some of the initiatives in your, in your retail network in terms of charging stations, but just wondering what you're thinking within your commercial operations. It just seems like daily companies are talking about converting their commercial fleets to full electric over some period of time. Is that an area of opportunity for you as you think about that transition with the customer base you have today?

Yeah. You know, it's... When you look at forward... diesel demand even under, you know, renewed substitution into electricity or other forms of energy. I mean, still the predominant fuel will be diesel here going forward over the next couple of decades. So, you know, again, we're pretty confident in diesel demand. Now, that being said, as opportunities to arise to help customers Through a number of different forms. One is reducing carbon emissions. I mean, we can do that, you know, and we have some great examples now in D.C. where through the coprocessing and blending, you know, we can reduce the carbon content to diesel by roughly 15%. You know, so that's something that we can bring to our customers to help them reduce their emissions and take some of the pressure off repurposing capital. The other thing is, again, similar to in the EV market, as we see opportunities to support our companies with electric solutions, we'll be looking at those quite aggressively and see if we can help them.

That's it for me. Thank you very much. Have a great weekend, everybody.

Your next question comes from Varshel Sridhar from National Bank. Please go ahead.

Hi, thanks for taking my questions. For the bio feedstock that you're using, that Parkland's making a lot of progress in, I understand that a lot of the feedstock prices are increasing, and I'm wondering how management thinks about, you know, not just for 2021, but over the long term, the impact of this transition on profitability. Can it pass pricing to accommodate any pressure, and is the margin profile comparable to your traditional product?

Yeah, it's a great question. And, you know, I would say a couple things. You know, certainly initially our two primary feedstocks are tallow and canola oil, you know, both readily available in Canada. You know, you're right to ask, you know, will there be upward pressure in those? And we have seen some of that certainly going into the year as others start to draw on those feedstocks. You know, there's a few mitigators. One is flexibility in feedstocks. So we are working on with a number of technologies around second generation feedstocks, you know, that would include, you know, byproducts from wood as an example in BC, you know, to alleviate some of that. You know, the second thing is, you know, we do expect there to be a response, particularly on the canola side to, you know, more production. So, or more canola oil will help offset some of that. But again, you know, certainly something our supply team is on. You know, they've been very good at securing supply for us. And again, From a technical perspective, one of the key things that our refinery team is focusing on is flexibility and making sure that we can use multiple feedstocks as this part of the business starts to evolve and grow.

Okay, thank you for that. And switching gears here a little bit, on the $17 billion prior period adjustment in the supply segments, Wondering if, on review of that impact, if management will be changing or implementing any new financial controls associated with how they bring acquisitions in, or is that more of a transient kind of one-time item?

Yeah, good question, Michelle, and I'll turn that over to Marcel.

Yeah, no, and it's a great question. So clearly coming in, I have a lot of attention on the balance sheet and what sits in the balance sheet. and make sure that everything is there and that the controls are working. And we just went to our CSOCs at the station, which I spent a considerable amount of time just making sure that all of those controls work. So this was one that we discovered ourselves, so our controls picked it up, but, you know, a bit late. And so we went through that, not only kind of with our own internal wallet function, but we used some external help to make sure that that was all completed and there was nothing left there. And of course, as we then looked into some of the root causes, one of those had to do with integration. And you will appreciate that some of these are quite complicated. And so we went through that. And we have made sure that those are reflected in our audit programs going forward so that we prevent them in the future.

OK, thank you very much.

Your next question comes from Michael Van Elst from TD Securities. Michael, please go ahead.

Good morning. I wanted to follow up on a few things. First of all, it's my understanding that the sole option to buy the remaining 25% would be available to you starting this year, January of this year. Is that still the case? And if so, what is the argument? in favor of waiting rather than triggering that now?

So that call is available in 21, not in... 22. Sorry, 22. Yeah. So a year from now.

Okay, because the original document said that it was available on this two-year anniversary.

No, it was three years. So we clarify that.

Okay. All right, that's clear then. I don't need to talk about that anymore. And then as far as the U.S. is concerned, are there other areas within the U.S. that make sense to set up a ROC, or is the opportunity now more to focus on filling in the four platforms that are already established?

Yeah, Doug, why don't you take that one?

Yeah, thanks, Michael. I'd say our near-term focus is certainly going to be on building out the four we have now that we've got the supply capabilities to do so. That being said, there are a number of other active tributaries that we look at adjacent to our current rocks, but distinct tributary markets in and of themselves. I would point you to kind of the moving east from our current northern tier in markets that share some of the adjacencies to both Canada, where we have dynamic capabilities, as well as our current U.S. rocks as well. So that's probably where you would see us focus next, but I would say the vast majority of our efforts for the next 24 months in particular are going to be on really harvesting the opportunities that are quite attractive in the rocks we have.

Okay, and is there any reason to believe that the synergies wouldn't be better when you're building, when you're adding to existing platforms rather than starting new ones?

Yeah, they certainly are, you know, incrementally. You know, although, you know, like we saw with our entry into Florida, you know, it's not just the synergy creation that's from the existing U.S. ROCs, but our adjacent businesses as well. So if you look at some of those other border markets that have dynamic trade flows and supply flows with Canada, those offer different kinds of synergies that we can generate in addition to the just in-country scale synergies that we have with current rocks.

Okay. And then just finally, on the supply side, you talked about some good volume growth coming from the U.S., and I'm it's not unclear as to whether that's you're referring to volume coming from Canada going into the U S or is this the, um, is this coming out of the Houston office? And with that, can you give us, uh, an update on, on the Houston trading office and, and how that's helping your business at this point?

Yeah.

Um, so first I'll just help start off.

No, I was just, yeah. Um, Again, look, I think the one thing is our supply system is one. We do have offices and people in certain markets to make sure that we're optimizing across the whole system. And to your point, there are times where it does make sense to supply our business in the northern part of the U.S. out of Canada by rail, which we have a really good capability. But with that, I'll turn it over to Doug, and he can talk specifically about some of the work we're doing in that area to optimize.

Yeah, thanks, Bob. The key flows have been, I think the Houston team has matured a lot in the last 12 to 18 months. We're seeing our ability to support and coordinate with the Caribbean business very dynamically as well as with you know, the refinery in Burnaby and the rail supply network that our supply team, you know, complemented by Aldo River's capabilities, really has a unique way for movements, both exports from the U.S. and imports into the U.S. So we're dynamically engaged in both. And having the Houston Supply and Trading Office has helped a lot with, you know, kind of centralizing our risk management capabilities for those inventory movements. in the world's biggest energy center. So it's really synergistic for us to continue to build out that team and those capabilities, which we've been very pleased with in the past year.

All right, thank you.

Your next question comes from Steve Hansen from Raymond James. Steve, please go ahead.

Yes, good morning, gentlemen. I'll stick to the two-question request here to be respectful of everyone's time. The first one is just on operating leverage. I think one of the big surprises we saw in 2020 was your ability to flex your retail cost structure down with volumes. That certainly provided a welcome degree of resilience here. I'm just curious how we should expect to see those operating costs return as the volumes start to flex higher with pandemic relief, specifically on the operating and marketing costs.

So we did guide that we had a structural cost advantages as we've gone through the pandemic and made some changes. So you will see that it will manifest itself in different areas of the business. So to your point, you know, retail, our retail business has a very variable cost structure and that that did kick in and assist nicely as volumes came off. But in terms of the costs, they need to be looked at across the business. So we certainly saw improvements in our Canadian commercial business and also in our U.S. and international businesses. and then in our corporate overhead as well. Now we do, on the other hand, we have added some costs back in, you know, to support some of our growth initiatives on the corporate side. And then also, you know, as we grow various areas of the business, we do end up bringing cost in. So, you know, the key thing is to focus on cost on a per unit basis. And, you know, you should be able to see that improvement as we go forward in the business.

Okay, that's helpful, thanks. And just a quick follow-up on some earlier themes. Just curious how you think the draft clean fuel standards that were released late in December might impact or benefit your current position in Burnaby and whether or not the existing plan contemplates that going forward. Thanks.

Yeah, it's a good question. I mean, in BC, you know, BC is ahead of the rest of Canada And I would say, fortunately for us, with the refinery there, we've worked well with the BC government to make sure that we can implement changes, and coprocessing is certainly one of them, to meet the low-carbon requirements. Again, being in BC, where the low-carbon regs are more stringent has helped, and certainly with CFS coming, we're well positioned as an organization to comply with those regulations. Okay, thanks for the time. Appreciate it.

Your next question comes from Luke Davis from RBC. Luke, please go ahead.

Hey, good morning. Thanks for taking my question, guys. Just on the U.S. expansion, things are clearly going well down there. You've seen some material growth in the last year. But given that it's becoming a much more material piece of the corporate equation, can you just comment on whether you plan to start providing a little bit more granularity in terms of the transaction data just to give us a better understanding of pricing and performance?

Yeah. You know, it's interesting because what's now small was once big. So as we grow as a business, you know, these transactions on their own aren't material. And, you know, we've avoided giving specifics around the EBITDA and capital because of, you know, the fact that we're in the market buying businesses. We want to make sure that we protect the confidentiality requests of buyers in many cases, and also it helps us as we negotiate with other buyers. But again, you will see that in the guidance. As we put guidance together, you'll see the net impact of those acquisitions on a year-over-year basis.

Got it. Yeah, makes sense. Just one more quick one. On refinery utilization, it's obviously been running pretty strong here. You guys are using a more conservative figure of 85% in 2021. Can you just outline kind of key drivers that you're seeing there?

So when it comes to next year and we are, or this year, We are planning a small turnaround late in Q4, and then we do have some other maintenance on the facility, which has reduced our utilization to the 85% level.

Got it. Makes sense. Thanks, guys.

Your next question comes from Peter Sklar from BMO Capital Markets. Peter, please go ahead.

First, I have a question on the supply chain. division. When you talked about $35 million of unusual costs or charges you incurred in the quarter, you talked about realized risk management losses on intermediation. I have to admit, I don't quite understand. Can you explain what that is and what happened there?

Yeah, thanks, Peter. I'll pass that over to Marcel to talk about those one-time items.

Yeah, so the 35 million, the breakdown of the 35 million, there was about 17 million, which was the prior period adjustment. And so that related particularly to the excise tax calculations that we did, where 17 million related to prior periods, not in this quarter. 14 million was the intermediation loss, and then the power outage, which I mentioned is about 4 million. So the intermediation loss really relates to the crude and finished product inventory, and that flows to the cost of goods sold. And so it's essentially when the crude price moves up rapidly, we have a loss on the intermediation hedge that we put in place. And it will also mean that our lower-cost inventory will have a gain when we then sell it. So it's really a timing impact. And in this quarter particularly, that was a loss, and that will flow back. Some of that will flow back as the prices stabilize.

Okay. And then, Bob, I wanted to ask you – All the stuff that's going on with Michigan politically, where the governor, she's threatening to revoke the Line 5 easement. I would assume that's something you're thinking about in the unlikely event that it does occur. Can you speculate a little bit? How would that impact your eastern Canada operations? I would think it would have quite an impact on your supply business. Can you Give us your thoughts on that.

Yeah, so it is a situation that we're monitoring quite actively and also working on contingency plans to make sure that our customers continue to have fuel. I would say our ability to import into that market is certainly a key mitigator should that happen. and we're quite confident we can continue to supply our customers in the unlikely event that that does happen.

I mean, how would you import into the region? Would you bring it in by rail?

So we do have multiple rail terminals in the market that we can access. There are importers in the market that we can buy from, and And, you know, and again, our suppliers in those markets are also working to put contingency plans in place. So, again, you know, we do feel we're, you know, we can maneuver through it in the unlikely event that it does happen.

Okay. Thanks very much.

Your next question comes from John Royal from JP Morgan. John, please go ahead.

Hey, good morning, guys. Thanks for squeezing me in. So on the C&B acquisition, as you guys push your U.S. business west to places like Idaho, do you start to see more synergies with your business in B.C. and your Canada business in general, or are the synergies more with the rest of the U.S. platform? I'll let Doug take that one.

Yeah, thanks. I'd say in Idaho in particular, It's a combination of both. The Canadian supply position we have, in particular the Elbow River capabilities to evacuate product from Western Canada into other markets, both Eastern Canada and the Northern Rockies, is particularly influential in that Idaho tributary. So there has been periods historically where Conrad has received as much as 50% of their supply from Canada via rail. And we're obviously uniquely positioned to take advantage of that as compared to any other operator. So it's a really good situation.

I'm getting some back-changer guys on board. Great. Thank you.

I apologize if it's me. Can you hear me okay?

Yeah, hopefully you can hear me. Sorry about that.

Yeah, yeah. So thanks for that. And so my second question, you guys have spoken a lot and been very clear on the tourism impact in the Caribbean in the past. And so not trying to dwell on that point, but just wondering if you're seeing any early signs of life in that business towards, you know, looking towards the back half of the year. I don't know what the data there would be, maybe some advanced hotel bookings or something like that. But is there anything you're seeing in general that can give you some sort of optimism on next winter? Or is it really too early to tell?

Yeah, you know, I think, again, you know, that team has done a tremendous job in offsetting that. In terms of activity, I mean, we are seeing some aviation come back, so our aviation fuel is starting to climb. You know, in terms of bookings, I mean, again, anecdotally, we're hearing that people are booking vacations and planning to come once restrictions are lifted. And that's both, you know, directly... uh to into the region um and and staying you know on the islands or um on the cruise ships as well so again optimistic we'll see that in the back half of the year here great thank you guys great thank you there are no further questions at this time please proceed Great. Well, thank you for joining the call today and look forward to connecting in May at our AGM.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.