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Edited Transcript of PKI.TO earnings conference call or presentation 2-Aug-19 12:30pm GMT

Q2 2019 Parkland Fuel Corp Earnings Call

RED DEER Aug 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Parkland Fuel Corp earnings conference call or presentation Friday, August 2, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brad Monaco

Parkland Fuel Corporation - Director of IR

* Dirk Maclean Lever

Parkland Fuel Corporation - VP of Finance

* Michael Stanley Howie McMillan

Parkland Fuel Corporation - Senior VP & CFO

* Robert Berthold Espey

Parkland Fuel Corporation - President, CEO & Non-Independent Director

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Conference Call Participants

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* David Francis Newman

Desjardins Securities Inc., Research Division - Analyst

* Elias A. Foscolos

Industrial Alliance Securities Inc., Research Division - Equity Research Analyst

* Kevin Chiang

CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Analyst

* Michael Van Aelst

TD Securities Equity Research - Research Analyst

* Peter Sklar

BMO Capital Markets Equity Research - Analyst

* Sabahat Khan

RBC Capital Markets, LLC, Research Division - Analyst

* Steven P. Hansen

Raymond James Ltd., Research Division - SVP

* Vishal Shreedhar

National Bank Financial, Inc., Research Division - Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the Parkland Fuel Corporation's Second Quarter 2019 Results Analysts Call. (Operator Instructions) This call is being recorded on Friday, August 2, 2019.

I would now like to turn the conference over to Brad Monaco, Director of Investor Relations. Please go ahead.

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Brad Monaco, Parkland Fuel Corporation - Director of IR [2]

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Thank you. With me today on the call are Bob Espey, President and Chief Executive Officer; Mike McMillan, Chief Financial Officer; and Dirk Lever, VP Finance, Capital Markets and Supply. 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, and prioritize questions from the investment community only. If you are a member of the media, please connect with our Communications team, who will be happy to respond directly. Please limit yourself to one question with a follow up as necessary. Our Investor Relations team is available for more specific question afterwards.

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.

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 SEDAR. Please refer to these documents as they identify factors which may cause the actual results to differ materially from any forward-looking statements.

Dollar amounts discussed in today's call are expressed in Canadian dollars unless otherwise indicated.

I will now turn things over to Bob and Mike, who will highlight key takeaways from our second quarter results. Bob?

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Robert Berthold Espey, Parkland Fuel Corporation - President, CEO & Non-Independent Director [3]

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Great. Thanks, Brad. Welcome everyone to the second quarter earnings call. On our opening slide, you saw a photo of a brand new Ultramar site we opened in late June. This site in Nova Scotia. You'll notice we have a McDonald's as our quick-serve partner here. The site is almost 6,000 square feet. This is a great example of our retail strategy at work.

We had another great quarter, demonstrating the strength of our diversified portfolio and integrated assets. We also achieved some milestones. We continued our network development plans in retail and have now added 13 brand new sites in 2019. We are 2 quarters in with Sol and results are pacing ahead of expectations. The quarter is a great example of how our diverse product and geographic platform benefits Parkland and our shareholders.

We continue to track well against our CAD 180 million target for synergies with the CST and Chevron acquisitions. We've made great progress through the second quarter and are now running at $140 million. We also did a small tuck-in acquisition of KB Oil in the U.S. This deal was accretive for us before accounting for synergies and was integrated in less than 1 week. We like these types of deals, strong local operators that we can fold into our platform and build scale in existing regional operating centers.

I'll pass it to Mike to go through some of the corporate numbers, and then I'll walk through the segment performance after that.

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Michael Stanley Howie McMillan, Parkland Fuel Corporation - Senior VP & CFO [4]

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Great. Thanks, Bob, and good morning, everybody. The Parkland team delivered a strong first half of 2019. Another record result for adjusted EBITDA. You'll recall that Parkland adopted the new accounting standard, IFRS 16 leases or IFRS 16, in January of this year. So keep that in mind as we go through the numbers.

We delivered adjusted EBITDA of CAD 346 million in the second quarter or CAD 315 million on a pre-IFRS basis relative to CAD 249 million reported in Q2 of 2018. We were up materially compared to the prior year, driven by the contribution from Sol, very strong refining margins and synergy capture over the past year.

We have also highlighted our adjusted distributable cash flow for the quarter, which we use to monitor normalized cash flows of the business. Adjusted distributable cash flow increased by CAD 17 million or about CAD 0.01 per share over the year and we will look to continue growing this metric going forward.

I'll take a moment to quickly touch on the moving parts in adjusted EBITDA this quarter before Bob goes through the segment detail. There are 2 quarterly charts on this page. The one of the left walks through our as reported numbers, while the chart on the right shows our -- shows the pre-IFRS 16 amounts, which is more comparable to prior year results.

The total Q1 impact of IFRS 16 on adjusted EBITDA was about CAD 31 million. As you can see, the year-over-year increase was primarily due to the new International segment, our growing U.S. business and a strong performance in Supply. Offsetting the increase was Canada Retail, where volumes were strong. However, we experienced lower fuel margins in Canada Commercial, which had reduced oil and gas industry activity in the quarter, but good overall performance on a year-to-date basis.

As Bob mentioned earlier, the benefits of our diverse and integrated portfolio was evident. Overall, we are happy with our KPIs and Bob will go through them on the following slides.

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Robert Berthold Espey, Parkland Fuel Corporation - President, CEO & Non-Independent Director [5]

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Thanks, Mike. I'll start with the Canadian Retail segment, which reported adjusted EBITDA of $63 million in the quarter. We continued to demonstrate strong organic growth with our same-store sales numbers. There was some poor spring weather in Ontario, Quebec and Alberta, which negatively impacted the business. So we are particularly proud of these KPIs for Q2.

Company volume same-store sales was positive at 0.7%. Pricing execution improvements and targeted promotional activity helped drive volumes and increased market share. Company C-Store same-store sales growth was positive at 2.7%, marking the 14th consecutive quarter of increases. The strong performance was driven by all major merchandise categories, including snacks, beverages, car wash, tobacco and vape products.

We continued to demonstrate our commitment to operational excellence and success of our strategic marketing programs and converting customers from the frontcourt to the backcourt. We believe we are still in the early innings of our initiatives in retail.

Fuel margins did compress across the country, most notably in the west. We continued to execute well and have grown our market share. Our loyalty initiative, new retail sites and on-the-brand recognition have us well positioned now and for the future.

We continue to make progress on our COCO to CORO conversion program, with approximately 10 more Ultramar locations converted in the quarter and just under 40 to go. We are on track to complete these conversions in 2019.

Our Journie loyalty program is progressing well with pilot results in line with our expectations and supportive of a national launch. We will provide some updates on this as we head into the fall.

Overall, we are pleased with the base business performance in retail and will continue to focus on our long-term initiatives to improve our customer value proposition.

For the Canadian Commercial business, adjusted EBITDA came in at CAD 10 million for the quarter, which is seasonally weaker than Q1 due to home heat demand. On a year-to-date basis, we're slightly off. We have a strong first quarter. The theme in our commercial business continues to be building for growth. Specifically, our areas of focus has shifted to cardlock and an integrated propane offer, both of which had strong performance in Q2. For cardlock, we improved our pricing strategy and margins. We will provide updates as we develop our national fueling network and target broader interprovincial and cross border traffic into the U.S.

The primary drivers for the decrease in adjusted EBITDA this quarter were lower oil and gas demand for diesel and propane and wet weather impacting agriculture and construction activity in the east. The mandated Alberta oil production curtailment impacted demand from some of our larger customers. We saw an approximate 30% decrease in rig counts in the first half of 2019 compared to the first half of 2018.

Our TTM operating ratio has been consistent through our integration and will come down over time. The focus is on implementing a regional operating center approach similar to what we do in the U.S. to optimize our cost structure, maintain a logo presence and implement better sales processes.

In the U.S., our second quarter adjusted EBITDA was CAD 13 million, more than double last year's Q2 number. The increase relative to last year was primarily due to M&A activity, Rhinehart being the largest impact. We also had strong wholesale gasoline and propane performance, increased retail margins in the Rockies and continued growth in the lubricants business.

Costs have increased on a per liter basis owing to different business mix. But importantly, our trailing 12-month operating ratio continued to come down. This metric improved by over 4 percentage points to 70.1%, reflecting our commitment to growing the business and to ongoing cost control measures.

As I mentioned earlier, we recently bought KB Oil based in Southern Utah. This reinforces our core business in a fast growing region. The acquisition comes with 9 retail locations operating under the Phillips 66 brand, with large high-quality C-Stores that have a proprietary food offering. KB also has a lubricants and commercial diesel business. We started to realize the financial benefits of integrating right away with KB.

We are excited about the prospects in the U.S. and are very pleased with the team's ability to grow our business, integrate quickly and generate strong results.

In the International segment, second quarter adjusted EBITDA was CAD 74 million attributable to Parkland. We have rolled out our values, behaviors and sales platform across the Sol operations. Our initial focus has been on business continuity and servicing existing customers.

We also begun our push for growth and are excited about the potential opportunities in LPG, aviation, retail, commercial and wholesale. Specifically in Q2, we have improved product supply and shipping optimization. We also benefited from some corporate cost savings and our strategic storage positions, which drove wholesale performance.

Finally, turning to Supply. We delivered CAD 216 million of adjusted EBITDA in the quarter. The largest contributor was increased refining crack spreads primarily due to planned and unplanned refinery outages in the Pacific Northwest and California, which is closely tied with the BC market. The indicative crack spread has since reverted closer to the trailing 3-year average.

In addition, the Burnaby Refinery had strong utilization of nearly 95%, an increase from the prior year on the back of strong operational performance and the small impact of the 2018 turnaround. We also had slightly lower line space cost as a result of tighter crew differentials.

Our quarterly numbers also reflect the benefits of increased synergy capture, import and blending opportunities in Eastern Canada and crude oil and diesel exports into the U.S. Moving forward, we will continue to plan for our 8-week turnaround at the Burnaby Refinery in Q1 2020.

In addition, we continue to co-process canola and tallow, which will help offset high cost biodiesel blending and demonstrates our leadership in low carbon fuel refining. Our supply advantage is a key tenant of Parkland's strategy and we will continue to build and integrate this capability across the company.

I'll now turn it back to Mike to discuss some of our other corporate KPIs.

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Michael Stanley Howie McMillan, Parkland Fuel Corporation - Senior VP & CFO [6]

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Thanks, Bob. Starting on the top left of our corporate highlight slide. Our total funded debt to credit facility EBITDA ratio is lower than expected due to our strong performances in Supply and SOL of 2.5x on a trailing 12-month basis. Trailing 12-months fuel and petroleum product volume has increased to approximately 19.5 billion liters, which has 2 quarters of SOL operations included. We will trend towards 22 billion liters at the end of this year.

Our adjusted dividend payout ratio improved to 29%, putting us in a strong position to fund a significant portion of our growth out of cash flow from operations.

On a consolidated basis, corporate marketing and general administrative expense as a percentage of Parkland's adjusted gross profit was 4% versus 5% in Q2 of 2018. Our goal remains to drive efficiency and reduce corporate overhead relative to gross margin as the business grows in scale and scope.

I'll now flip it back to Bob to wrap up with comments on our outlook.

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Robert Berthold Espey, Parkland Fuel Corporation - President, CEO & Non-Independent Director [7]

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Great. Thanks, Mike. We are increasing our guidance for the year to CAD 1.165 billion plus or minus 5% pre-IFRS, which is up from CAD 1.065 billion. We are keeping our capital guidance flat at CAD 200 million for both growth and maintenance capital. As we mentioned in our press release last night, there are some additional growth opportunities within SOL that will be evaluated later in the year.

In addition, we want to confirm our 3% to 5% organic growth target for Parkland, which is a key pillar of our strategy. We have previously applied this rate to our entire operations, but given the strong performance of the Burnaby Refinery since the acquisition, we would note for further clarity that this target applies specifically to our marketing operations and associated supply volumes, essentially everything but the Burnaby Refinery. Opportunities to improve Burnaby refining operations will be separately outlined.

I like to once again thank the Parkland team for their hard work and dedication to produce yet another great quarter for Parkland and for their ongoing focus on safety.

This concludes the formal portion of the call. We will now take questions from our analysts and institutional shareholders. Operator, please open up the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question is from David Newman of Toronto.

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David Francis Newman, Desjardins Securities Inc., Research Division - Analyst [2]

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A quick question on the volume growth you're seeing in retail. I think this is the third consecutive quarter where you're seeing positive volume growth and it would imply that Parkland is gaining share. But margins have been under pressure at the same time given some greater competition. Maybe you can delve a little deeper into the market dynamics in retail gas and what's driving the volume growth and the degradation of margins? And are you guys using the pumps to drive greater foot traffic? I know, Bob, in the past you mentioned possibly getting 80% of profit from non-fuel. So what are the market dynamics that you see out there and are you guys sort of leading the competitiveness overall?

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Robert Berthold Espey, Parkland Fuel Corporation - President, CEO & Non-Independent Director [3]

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Yes. In terms of the retail business, again, our core focus is always to focus on the KPIs and ultimately the market. We take -- we're a price taker in the marketplace. And what I would point to is our strong same-store sales growth both on the fuel and in the non-fuel. And what that does demonstrate, in a pretty tough environment that we've been able to grow above industry in both of those categories. And when we look at ourselves against the market as a whole, it does show that we certainly maintained and grew slightly within that market.

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David Francis Newman, Desjardins Securities Inc., Research Division - Analyst [4]

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And Bob, if you look at these margins, I mean throughout history have you seen this sort of margin compression in the past?

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Robert Berthold Espey, Parkland Fuel Corporation - President, CEO & Non-Independent Director [5]

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Yes. And we've talked about this before. I mean the margins do bump around. And again, the key with a good retail business is to focus on execution and make sure that the team is focused on growing the KPIs, so when margins do rebound, you're in a good position.

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David Francis Newman, Desjardins Securities Inc., Research Division - Analyst [6]

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Okay. And on the C-Store, obviously a little bit lower than I think your long term range of 3% to 5%. What's going on there overall? How much was weather as an impact? Like if weather had been the normal weather patterns that you would have seen, what sort of organic growth would you have witnessed? And are you kind of getting maybe the more value conscious people into the gas sites? Or what do you think is going on there?

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Robert Berthold Espey, Parkland Fuel Corporation - President, CEO & Non-Independent Director [7]

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Yes, I mean -- look, if you look at our year-to-date, we're still at 5%. And again, it's always -- the key is to track the trends. The individual quarters will bump around. And then we did have a headwind due to weather, particularly at the early part of the quarter. And that does impact particularly recreational driving, which tends to be a big -- at this time of year a large factor in the business. And as a result, we did see traffic into the store -- coming to the site was down. And again, in that tough environment, I commend the team for delivering a good result.

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David Francis Newman, Desjardins Securities Inc., Research Division - Analyst [8]

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Okay. And then last one from me, guys, is just on the arb opportunities, which are always as an analyst kind of hard to nail down. But you did note crude oil and diesel exports to the U.S. as well as some imports and blending in Eastern Canada. How material were the arb opportunities that you guys realized in the quarter and maybe you can give us some color on the price dislocations that you took advantage of?

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Robert Berthold Espey, Parkland Fuel Corporation - President, CEO & Non-Independent Director [9]

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Yes. I would say the diesel and crude have been consistent. That play -- we've been in that space for quite a while now and it continues to be robust. I would say our Elbow River business had a particularly strong quarter and they were able to take advantage of that and the opportunity to move some product into Eastern Canada, which again is very consistent with what we've done in the past. Where they've been able to -- those opportunities have been particularly robust in the last quarter.

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David Francis Newman, Desjardins Securities Inc., Research Division - Analyst [10]

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Do you think given your size, Bob, that -- and the number of leaders that you guys are now pushing out that this is afforded Elbow River just that much more wiggle room to actually exploit those advantages? Is this something we should be thinking about every single quarter that you guys should be able to get some -- extract a little bit more out of price dislocations?

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Robert Berthold Espey, Parkland Fuel Corporation - President, CEO & Non-Independent Director [11]

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Well, what's helped is our expanded footprint in the U.S., particularly on the diesel side, where we now have a lot more markets that we can move product into. That's our own demand. And that coupled with our existing wholesale business in that market has led to growth. And again, it's difficult to predict ultimately the quarter-to-quarter where those arbs go, but they certainly -- we see them as persisting over the long term.

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David Francis Newman, Desjardins Securities Inc., Research Division - Analyst [12]

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Congratulations on beating the race.

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Robert Berthold Espey, Parkland Fuel Corporation - President, CEO & Non-Independent Director [13]

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Thanks. Can I just clarify one item in the call? When we gave the guidance number, I said pre-IFRS, and it is in fact post-IFRS.

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Operator [14]

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Your next question is from Peter Sklar of Toronto.

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Peter Sklar, BMO Capital Markets Equity Research - Analyst [15]

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Just a question first on your U.S. M&A strategy. I'm sure you saw that Cumberland Farms was acquired by EG Group. Is that the kind of thing you would look at? They are based -- like I think their footprint is largely in the northeast in Florida. Like would you look at something like that? Or are you looking more for smaller assets that are contiguous with your existing footprint?

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Robert Berthold Espey, Parkland Fuel Corporation - President, CEO & Non-Independent Director [16]

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I would say our strategy is focused again on that mid-continent area and anything that's contiguous with our business and allows us again to benefit from our supply strength. And hence, we -- that asset wouldn't have been one we would have pursued aggressively. We are finding lots of value in the smaller, more diversified companies. But that being said, if the right opportunity came along at the right value, we would certainly look at it.

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Peter Sklar, BMO Capital Markets Equity Research - Analyst [17]

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Okay. And then just one more question on other area if I may. On the Journie loyalty program, can you just talk a little bit about like how extensive is your pilot program? Is it just in certain regions? And what technology you're employing in the store and that point of sale? And like in that pilot, are you using the information you're collecting for targeted offers?

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Robert Berthold Espey, Parkland Fuel Corporation - President, CEO & Non-Independent Director [18]

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So we continue to pilot in 2 areas. I know the team is getting ready to look at a third area here later in the quarter. And again -- so overall, we see a positive impact both -- in 3 areas. So one is in terms of average bill size, tends to increase. The second thing is conversion forecourt to backcourt. And then we're also seeing people who are in the loyalty program spend more in the store. So when we look at it, it's meeting the fundamental objectives that we set out.

And with this -- so we are learning and we are -- and the team has been experimenting with various offers and tweaking the offer within those markets. At the same time, we are building this -- we are scaling the technology so that it will work across our platform. It has to integrate with our POS system and then -- and with the pumps, right? And that's -- ultimately, there's a lot of systems integration work that needs to happen there.

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Michael Stanley Howie McMillan, Parkland Fuel Corporation - Senior VP & CFO [19]

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Yes. The only thing I'd add to that, Peter, is there's certainly a card, but it comes with a mobile app and that mobile app does allow the consumer -- and there will be functionality we continue to work with, as Bob says, and test. It does allow our consumer to be able to identify locations and indirect market to them on some of their favorite choices. And so the idea is to help them move into the backcourt and also get some great value through the application. So we're excited to see that come together.

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Peter Sklar, BMO Capital Markets Equity Research - Analyst [20]

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And in your CODO stores, like who bears the cost of the reward? Is that -- the dealer bears the cost?

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Robert Berthold Espey, Parkland Fuel Corporation - President, CEO & Non-Independent Director [21]

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It depends on the arrangement. But we do pass on -- because they get the benefit, so we do pass on a portion of the cost to the dealer.

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Operator [22]

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Your next question is from Michael Van Aelst from Montreal.

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Michael Van Aelst, TD Securities Equity Research - Research Analyst [23]

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Just a quick follow up to start on the loyalty program. When you do roll this out in Q4, is this something that you expect to be able to roll out nationally right away? Or will you do it in phases across the country?

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Robert Berthold Espey, Parkland Fuel Corporation - President, CEO & Non-Independent Director [24]

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We will do -- so we are planning to do another pilot and then we'll roll it out nationally. So a pilot in a different region. So we're actually going to do one in Western Canada later this year.

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Michael Van Aelst, TD Securities Equity Research - Research Analyst [25]

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And is there any issues right now with profitability of the program? Clearly, it's driving higher sales I would think. But is there any questions about funding of the program?

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Robert Berthold Espey, Parkland Fuel Corporation - President, CEO & Non-Independent Director [26]

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So -- I mean there's 2 parts of the funding. There's the build. And we did highlight that in our results that we did have some extra costs in retail that we incurred as we build.

Now the second component is the ongoing maintenance of the program and the cost of the loyalty program. And that is in line with what we would have seen in our previous loyalty programs, so the Litre Log and Bonus Bucks, and then also what we would see with some of our partners like with the program we see at Esso.

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Michael Van Aelst, TD Securities Equity Research - Research Analyst [27]

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On the commercial side, are you able to quantify at all how much of the year-over-year drop in profit was attributable to the curtailment and the wet weather in the east?

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Robert Berthold Espey, Parkland Fuel Corporation - President, CEO & Non-Independent Director [28]

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Yes. In terms of the shortfall -- and again, just sort of off the top of my head here, it's I think 2 things. One is, on a year-to-date basis, the business is performing well and there is some seasonality in the business. And we've experienced this in the past, where there's a component of that business that's very dependent on when we see spring come and then also related to agriculture when we see the farmers get busy. So there's been some fluctuations in weather there that has affected that.

The second thing is the -- and the largest component, I'd say approximately 1/2 of it is due to the slowdown in the west. I'd say roughly that's how it would divide out.

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Michael Van Aelst, TD Securities Equity Research - Research Analyst [29]

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Okay. And just so I'm clear on the impact of the wet weather. Is that something that is lost and that you have to just get next year? Or is some of that pushed into Q3 now that the weather is a lot better, drier or hotter?

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Robert Berthold Espey, Parkland Fuel Corporation - President, CEO & Non-Independent Director [30]

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Yes, some of that gets pushed into other quarters or the previous quarter, right.

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Michael Van Aelst, TD Securities Equity Research - Research Analyst [31]

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All right. And just finally, on the cardlock side, can you explain how you're integrating it with the retail network?

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Robert Berthold Espey, Parkland Fuel Corporation - President, CEO & Non-Independent Director [32]

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Yes. So we are rolling out our national fuel network, which is basically an integrated offer across all of our assets. And we'll be doing that late this year, early next year. And what that will allow is a driver can fuel up at any of our cardlocks, and then if they're in an area where they can access a retail site, they can do that as well. But the predominant use will be through the cardlock network.

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Michael Van Aelst, TD Securities Equity Research - Research Analyst [33]

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When you talk about fleet card acceptance and reciprocity expansion, is that with -- I'm assuming that's with competitors? Or is that done in the U.S.? Or what is that?

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Robert Berthold Espey, Parkland Fuel Corporation - President, CEO & Non-Independent Director [34]

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So just one other item is we -- when we do build retail sites, we are now putting in these combo units, where we'll have a retail gas station in the front and then a cardlock in the back. We'll increase the size of the C-Store so that we get multiple use out of it. So that's the other crossover in the business.

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Michael Van Aelst, TD Securities Equity Research - Research Analyst [35]

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And that fleet card acceptance -- you talked about expanded fleet card acceptance and reciprocity. Could you explain what it is you are doing there?

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Robert Berthold Espey, Parkland Fuel Corporation - President, CEO & Non-Independent Director [36]

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Yes. So on -- so we'll -- so again, we'll be able to accept third-party cards. Many of those will go cross border. And then we'll also have our own system that will be proprietary to our network.

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Operator [37]

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Your next question is from Vishal Shreedhar from Toronto.

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Vishal Shreedhar, National Bank Financial, Inc., Research Division - Analyst [38]

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Just on the -- and I may have missed this off the top, but just on the International business. Did you -- it's coming in a bit stronger than we anticipated? Did you capture any synergies there? And if so -- what else is the cause of it coming in stronger than I think even you guys signaled on the onset?

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Robert Berthold Espey, Parkland Fuel Corporation - President, CEO & Non-Independent Director [39]

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Yes. In our International business, again, the team there executed phenomenally in the quarter and we are seeing some benefits. And I would say it's locally operational improvements that we've done, where we've gone -- we've had some improvements in the cost structure of that business. But they've also benefited from some robust sales in that region. And we've also seen the benefit on the supply side as well, where we've started to supply that business out of our newly formed Houston office. So we've seen some benefit from supply as well.

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Vishal Shreedhar, National Bank Financial, Inc., Research Division - Analyst [40]

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Okay. So does management provide the actual number of synergies so we can track that against your guidance that you originally indicated?

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Robert Berthold Espey, Parkland Fuel Corporation - President, CEO & Non-Independent Director [41]

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We will -- as we get further into the business, we'll start to disclose our synergies against our target.

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Vishal Shreedhar, National Bank Financial, Inc., Research Division - Analyst [42]

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Okay. So the supply benefits that you captured, does that flow into the International segment or the Supply segment?

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Robert Berthold Espey, Parkland Fuel Corporation - President, CEO & Non-Independent Director [43]

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A bit of both.

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Vishal Shreedhar, National Bank Financial, Inc., Research Division - Analyst [44]

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Okay. So when you capture the synergies related to the supply extraction -- and I guess this is a bit of a technical question -- is there any commentary you can provide to the analysts how to allocate that?

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Robert Berthold Espey, Parkland Fuel Corporation - President, CEO & Non-Independent Director [45]

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Yes, it's difficult to do, because we do -- but we'll start to give some guidance on how to estimate that.

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Vishal Shreedhar, National Bank Financial, Inc., Research Division - Analyst [46]

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Okay. Thanks for that. Just switching topics a little bit here. I appreciate that you gave us some commentary on the commercial business and the retail business and the softening trends a little bit. I understand why there's an issue and understand there's some industry issues there as well. But underneath that all, do you see any slowing economic indicators? Is that an issue? And how are you confident that some of these issues are transient?

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Robert Berthold Espey, Parkland Fuel Corporation - President, CEO & Non-Independent Director [47]

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Well -- I mean the only place we felt it was in Western Canada this year I would say across our entire organization. We saw some robust demand in Eastern Canada. Down in U.S., we're in really high growth jurisdictions that are benefiting from a robust economy in the U.S. We certainly had some favorable economic conditions down in our Latin American and Caribbean business.

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Vishal Shreedhar, National Bank Financial, Inc., Research Division - Analyst [48]

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Okay. And just switching gears here to another topic in Supply. That segment continues to shine in terms of profitability. And you mentioned a few things. You mentioned, number one, incremental costs for the 2020 turnaround. Maybe just quickly -- is that something that we should consider, these costs building, as you get into the turnaround? And if so, are you going to give us a number to help us model that?

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Dirk Maclean Lever, Parkland Fuel Corporation - VP of Finance [49]

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Sure. It's Dirk here, Vishal. We've guided about CAD $85 million plus or minus for the turnaround. And so there are some costs that you have to incur ahead of time, which would be for long lead order items. Remember, the turnaround starts at the beginning of February, so they'll be setting up ahead of that. So we have had some long lead order items that have been put in. And I expect that as we hit Q4, we'll probably see some costs there.

But what we'll do is, when the turnaround is completed, we'll sort of outline what the costs were in total. But you could probably expect some costs coming in ahead of time. That certainly was the case during the last turnaround, where we saw some costs coming in particularly in Q4, which was the first quarter that we owned the refinery, and then some of the cost trickled into the second quarter as well.

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Robert Berthold Espey, Parkland Fuel Corporation - President, CEO & Non-Independent Director [50]

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But it's all within our maintenance capital budget that we expect this year. So you wouldn't see an increase over what we've guided to.

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Vishal Shreedhar, National Bank Financial, Inc., Research Division - Analyst [51]

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Okay. And on the processing of biofuels, is that something that we should be aware of as it -- will it become a bigger part of the business? Is it more profitable? And given that this refinery is such a large business relatively, like should we think this refinery business actually has opportunity to grow volumes or grow profitability? Or are we just really tracking the crack spread?

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Robert Berthold Espey, Parkland Fuel Corporation - President, CEO & Non-Independent Director [52]

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Well -- I mean the -- so we -- the team in Burnaby continues to really focus on the operating effectiveness of the plant. And when you look at a plant like that, I mean the key thing is reliability, reliable and safe. And our utilization is a key number that we track. And ultimately -- so that's the first thing.

The second thing is the team is always working on improvements to the business and those again can affect the operational reliability but also looking at their cost structure. And when it comes to the biorefining, I mean the offset there is having to blend more expensive bio-components into the product, which we avoid. And then secondly -- I mean it's just -- secondly, and more importantly, the right thing to do is to start to push that facility to assist the government there in meeting their low carbon targets.

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Vishal Shreedhar, National Bank Financial, Inc., Research Division - Analyst [53]

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I appreciate that color. But just as we look out in -- let's say, 5 years out for this particular refinery business, do you think -- are there any initiatives that management could have or could implement which would meaningfully change the trajectory or the profitability of this business? Or is it more just kind of steady-state tracking the...

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Robert Berthold Espey, Parkland Fuel Corporation - President, CEO & Non-Independent Director [54]

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Well, it's incremental. So we've always said we don't see ourselves adding additional capacity in a significant way. Again, it's more about optimizing the current plans and continuing to improve yields and drive down costs.

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Dirk Maclean Lever, Parkland Fuel Corporation - VP of Finance [55]

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Yes. The other thing to think about is, as we go on in time, the carbon intensity is supposed to come down on fuels in British Columbia. And so there'll be a greater need for -- if you don't do things like co-processing, there will be a greater need for blending in of biodiesels and other additives to lower the carbon footprint. So as Bob said, it's the right thing to do, but it also has some economic benefits as well.

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Operator [56]

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(Operator Instructions) And your next question is from Kevin Chiang from Toronto.

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Kevin Chiang, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Analyst [57]

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Yes, just the one from me. You noted on SOL you're seeing some growth I guess with some just local execution. But when I think -- so profitability is up. But when I think of volumes at 2.3, 2.4 billion liters, that doesn't look significantly above -- at least at this point in time above what you had noted when you acquired the business, which was annualized I think 4.8 billion. So I'm just wondering is the growth better mix or -- because I guess the absolute volumes don't seem to be trending higher relative to what you acquired. So what exactly is helping improve profitability there?

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Michael Stanley Howie McMillan, Parkland Fuel Corporation - Senior VP & CFO [58]

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Yes, it's -- there's many factors affecting the business, but -- and we're -- we tend to track it on a country by country basis. And there were puts and takes within each region, but generally every region was positive. And that was a mixture of volume and margin within the markets from the gross profit perspective. And then the other thing that the team really focused on was the cost base and optimizing that.

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Kevin Chiang, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Analyst [59]

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Okay. So it wasn't necessarily just higher volumes driving the improved profitability here out of the division relative to expectations?

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Robert Berthold Espey, Parkland Fuel Corporation - President, CEO & Non-Independent Director [60]

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Yes.

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Michael Stanley Howie McMillan, Parkland Fuel Corporation - Senior VP & CFO [61]

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No, that's right. That's right, Kevin. You'll see in our arb cost, as Bob mentioned, some nice performance quarter-over-quarter and so forth. And so a lot of attention paid to execution in the market as well.

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Kevin Chiang, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Analyst [62]

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Okay. If I could just squeeze one in too. It's just more of a clarification. You've seen a big bump in your accounts payable. I just wondered does that normalize -- it's been a pretty significant tailwind to your net working capital. Just wondering how that trends through the back half of the year, Mike. And when you look on to next year, is it a more normalized level from a net working capital headwind/tailwind perspective?

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Michael Stanley Howie McMillan, Parkland Fuel Corporation - Senior VP & CFO [63]

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Yes, there's a couple of things in there, Kevin. I think some of it is timing. We do see periodically on a quarter just the timing of certain payments and things like that, like tax payments. So I would say it's -- in the cycle, it's a bit higher than you normally expect and it will normalize.

Having said that, the team is working really hard on working capital both on the -- when you think of our terms both on the receivable side, DSO and payment terms and trying to make sure that we drive the most efficiency we can out of our working capital balance. So there's quite a bit of focus there as well. But yes, I think you would see it being slightly higher than normal and it will start to -- it will normalize as we go back towards the tail end of the year and so forth.

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Operator [64]

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Your next question is from Steve Hansen from Vancouver.

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Steven P. Hansen, Raymond James Ltd., Research Division - SVP [65]

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Just a quick one to follow up on an earlier comment on the M&A background. Could you just perhaps speak to the M&A pipeline that you're seeing, particularly on the U.S. side of the border on the KB purchase? And just perhaps maybe elaborate as well on the multiple trends you might be seeing in the market? My understanding is that in the [latest] year there have been some more aggressive players of late. So just trying to understand how you are balancing the smaller tuck-ins versus some of the larger tickets where there could be higher multiples?

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Robert Berthold Espey, Parkland Fuel Corporation - President, CEO & Non-Independent Director [66]

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Yes. We continue to have a broad pipeline of opportunities and I would say the value of those or the pricing we're seeing in line with what we've typically paid for transactions in that area. So we're not seeing an escalation in value.

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Steven P. Hansen, Raymond James Ltd., Research Division - SVP [67]

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That's great. And just one quick follow up if I may, is just on the growth opportunities on the International side. You referenced some growth opportunities for SOL earlier and just wondering if you could perhaps elaborate a little bit on that and what that might entail from both the opportunities standpoint and the capital incurred?

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Robert Berthold Espey, Parkland Fuel Corporation - President, CEO & Non-Independent Director [68]

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Yes, so -- I mean we're 2 quarters in to that business. We continue to see I would say immediate opportunities within the retail business. And that's a combination of I would say just latent capital opportunities, where we can put some refresh capital into certain areas and then also opportunities to build some existing opportunities that the team had and hadn't executed on as they went through a sale process. So that's one area.

The second area is we have -- we are in Guyana. We're actually the largest fuel supplier into the region there. And with the big Exxon find offshore, we're investing in more storage capability in that market and we expect to see dramatic growth in that market as they exploit that resource base. And we're positioned -- we also did a -- we've partnered with Exxon in that market. We're now their primary lubricant supplier. So we offer them Mobil lubes around there.

And as it's an Exxon find, I mean they specify that suppliers need to use Mobil lubes and we're now the supplier in that market of Mobil Lubes and also diesel to a lot of the supporting services in that market. And if you look at it, the magnitude of that find relative to the size of the economy in Guyana is off the charts, right. So we'll dramatic growth and we're positioned to support that.

So those are some of the immediate opportunities that we're looking at. And then we continue to look at opportunities on the LPG side, where we've actually done some work there to consolidate our distribution. And we'll actually be in the ship on distribution side of the business, where we'll see some benefit to the business.

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Operator [69]

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Your next question is from Sabahat Khan from Toronto.

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Sabahat Khan, RBC Capital Markets, LLC, Research Division - Analyst [70]

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Just one on the retail side like -- and just in terms of forecasting for the rest of the year. Just trying to get a better understanding of how much of that business are you typically pricing maybe in reaction to what you're seeing in the market on the competitive side. So just trying to understand how much of the business that you're supplying or fuel you're supplying to the dealers is sort of locked in for maybe a little bit longer. Are you pricing for the back half of the year based on current visibility? Are you reacting more to the market on your company side? Just trying to understand the dynamics, so when we see data points on margins, we can kind of estimate, well, how that impacts your retail side.

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Robert Berthold Espey, Parkland Fuel Corporation - President, CEO & Non-Independent Director [71]

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I mean the best thing is to look at Kent data, which is public information available that shows the trends in rack to retail. I certainly can't predict the market and wouldn't want to do that.

In terms of how our business prices, again, as you've indicated, there is a portion where we price right to the end consumer. So we've got the full rack to retail. And that's in our corporate sites. And then also we have a section of the business where we have cosigned inventory, where we take that pricing risk. And then we have a segment in the dealer business where it's purely a wholesale arrangement and we're passing the product on to the -- to our dealer at a basic -- at a small mark up.

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Sabahat Khan, RBC Capital Markets, LLC, Research Division - Analyst [72]

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Okay. And then one more if I may on just broader kind of the guidance revision. Just -- and I know you don't comment specifically by segment, but directionally do you expect kind of similar trends out of each of your bigger segments kind of for the remainder of the year? Or is there any swings in either direction on any of your big buckets segments that we should think about for kind of the trends that we'll see in H1 into H2?

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Robert Berthold Espey, Parkland Fuel Corporation - President, CEO & Non-Independent Director [73]

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Well, I would say the 2 areas, one is retail, that's dependent on, as we discussed, fuel margins. And then the second would be the refinery, where basically we'll see the -- our expectation is that the robust crack spreads that we saw in the first half, again primarily driven on the product side through outages of refineries on the West Coast, that we'll see that come off -- which we have. So that would be reflected in our forward numbers.

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Michael Stanley Howie McMillan, Parkland Fuel Corporation - Senior VP & CFO [74]

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Yes, just on that too, Sabahat. You'll see in the third package we have again, we've -- we didn't speak to it on the call, but the last slide in appendix on 14 shows the indicative crack spread. And you'll see the trend and how that came out, just as Bob mentioned. With some experience with Western Canadian crudes and then also the unplanned outages in the first half that's behind us, and you'll see how that has trended indicatively and how we're thinking about it.

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Operator [75]

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Your next question is from Elias Foscolos from Calgary.

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Elias A. Foscolos, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [76]

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Just following up on the margin and on Canadian Retail, trying to get a bit of granularity. Would it be fair to say that some of the margin compression that you saw was related -- or really technically inversely related to supply margin? In other words, there's only so much that can be passed through and if one area is performing higher, another would be performing a bit lower? And then how does that bode for a potential rebound? And I'll leave it at that for now.

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Robert Berthold Espey, Parkland Fuel Corporation - President, CEO & Non-Independent Director [77]

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Yes. I haven't seen the trends or any sort of rule of thumb that you can use on an integrated basis how much of that ends up in the rack forward versus the rack back part of the business. So I don't think that there is a trend there.

I mean if you look back on our results, there have been times where margins have tightened up and other times where they've expanded. It's difficult to point that to any particular trend. I mean what it does indicate is that we have a healthy and robust competitive environment and the business -- our business has been able to do quite well in that environment and we'll persist independent of where the margins are.

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Dirk Maclean Lever, Parkland Fuel Corporation - VP of Finance [78]

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Yes. And I think naturally it leads to -- like where there are some dislocations, there's a natural arbitrage that closes that up fairly quickly. And so you do see the market rebalance in certain areas. I mean, as Bob mentioned, we're well positioned through our Elbow group and other parts of the business to try to respond to that. But it's pretty effective and competitive as he mentioned.

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Elias A. Foscolos, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [79]

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And with the margin compression that did occur, does that open up opportunities for you?

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Robert Berthold Espey, Parkland Fuel Corporation - President, CEO & Non-Independent Director [80]

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Yes. I would say the benefit of a tough margin environment is it puts pressures on the entire industry, right. And that's where our focus on strong sites, strong non-fuel in great locations will persist over the long term.

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Operator [81]

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There are no further questions. I'll now turn the call back over to Bob Espey for closing remarks.

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Robert Berthold Espey, Parkland Fuel Corporation - President, CEO & Non-Independent Director [82]

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Great. Thank you. Thanks for your participation today and look forward to talking to you after the third quarter.

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Operator [83]

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