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Edited Transcript of PKI.TO earnings conference call or presentation 5-Nov-19 1:30pm GMT

Q3 2019 Parkland Fuel Corp Earnings Call

RED DEER Nov 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Parkland Fuel Corp earnings conference call or presentation Tuesday, November 5, 2019 at 1:30:00pm 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

* Derek Dley

Canaccord Genuity Corp., Research Division - MD & Consumer Products Analyst

* John Macalister Royall

JP Morgan Chase & Co, Research Division - 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

* 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 Parkland Fuel Corporation's Q3 2019 Conference Call. (Operator Instructions) This call is being recorded on Tuesday, November 5, 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. This call is webcast and I encourage listeners to follow along with the supporting slides.

We are targeting the call to be approximately 1 hour. We will go through our prepared remarks, and then open it up for questions from the investment community. 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 1 question and a follow up as necessary. This allows us to get to more questions from our growing analyst community. Feel free to reenter the queue after your question. Our Investor Relations team is available afterwards for more specific follow-up items.

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 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 call over to Bob Espey.

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

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Great. Thank you, Brad. So, good morning and welcome everyone, to the third quarter earnings call for 2019. We had a strong record third quarter and I am pleased to speak with everyone today.

On our opening slide, we had a photo of our first Chevron branded corporate site in Calgary, which we opened during the quarter, on McKnight Boulevard near the Calgary International Airport. This location has an On the Run convenience store, integrated with A&W quick serve restaurant and is selling 94 octane fuel. This is a great example of our retail strategy at work and we are looking to expand this premium brand, going forward.

Let me touch briefly on some key milestones from the quarter. Corporately, we are increasing our adjusted EBITDA guidance to CAD 1.24 billion. Our business is performing well and the increase reflects our strong third quarter and confidence for Q4.

We also announced the launch of JOURNIE Rewards last month, with CIBC as our strategic banking partner. The partnership immediately bolsters our customer value proposition and reach and is something we are very excited about. To remind you, JOURNIE connects our coast-to-coast fuel network and the On the Run/Marche Express brands under 1 proprietary reward program with nationwide scale.

We continue to track well against our $118 million target for synergies resulting from the CST and Chevron acquisitions.

We made great progress through the third quarter and are now running at CAD 160 million. We also acquired Florida based Tropic Oil, which we announced in early September and closed on October 1st. This deal continues on our U.S. growth strategy and will be synergistic with our Caribbean business. We are laser focused on delivering against our growth targets, driving value from acquisitions and the associated integration benefits. All underpinned by differentiated supply platform that increases our integrated margins and factors into all our growth decisions.

I will now pass over to Mike, to go through corporate results, after which I will walk through the segment details.

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

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Okay. Thanks, Bob. And good morning, everyone. Thanks for joining us this morning. The Parkland team delivered a strong third quarter financially, with adjusted EBITDA of CAD 302 million net to Parkland or CAD 268 million on a pre IFRS 16 basis, relative to the CAD 200 million reported in Q3 of 2018.

Year-to-date, we have delivered adjusted EBITDA of CAD 963 million net to Parkland, or CAD 871 million on a pre IFRS basis; relative to the CAD 602 million, reported last year.

We were up materially compared to the prior year driven by the contribution from Sol, strong refining margins, and synergy capture over the past year. We have also highlighted our adjusted distributable cash flow year-to-date, which we use to monitor normalized cash flows of the business.

Adjusted distributable cash flow increased by CAD 25 million reflecting strong operational performance and contributions from acquisitions but offset by higher interest and tax expense this year.

Moving on to the next slide. The waterfall chart on the left walks through the year-to-date segment changes to third quarter adjusted EBITDA. While the chart on the right shows the same comparison but based on our pre IFRS 16 amounts, which is more comparable to prior-year results, of course.

The total Q3 impact of IFRS 16 on adjusted EBITDA was CAD 34 million in the quarter. As you can see, the year-over-year increase was across the board, including a large lift from our new international segment, a growing U.S. business, and strong performance in supply.

As we mentioned last quarter as well, the benefit of our diverse portfolio is evident, we are pleased with our businesses evolving.

On Slide 6, I'll run you through some of the corporate KPIs. Starting on the top left, our total funded debt to credit facility EBITDA continues to be well within our comfort range at 2.6x on a trailing 12-month basis. As this goes hand in hand with our adjusted dividend payout ratio of 36%, on the bottom left, affording us a lot of flexibility to fund our growth initiatives and the tuck-in activity in the U.S. while maintaining a conservative balance sheet.

Trailing 12 month fuel and petroleum product volume has increased to approximately 20.8 billion liters, which includes 3/4 of International operations and confirms our trend towards pro forma of 22 billion liters, annually.

On a consolidated basis corporate, marketing and general administrative expenses, as a percentage of Parkland's adjusted gross profit, was 4.3% versus 5.6% in Q3 of 2018. Our goal remains to drive efficiency and reduce corporate overhead relative to the gross margin as the business grows in scale and scope.

I will now flip it back to Bob, to discuss the segment performance.

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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 delivered adjusted EBITDA of CAD 91 million in the quarter. Our ability to deliver this result, through an overall challenging Canadian margin and environment underscores our resilience and success in growing non-fuel gross profit, which increased by 8% year-over-year.

Our retail initiatives, which include On the Run conversions, new-to-industry locations, existing site improvements and private label products are designed to support sticky customer relationships. We are on track for over 200 corporate On the Run locations by year-end and continue to see favorable responses from consumers, spenders and our retailers.

We also announced the launch of our JOURNIE Rewards program with CIBC as our strategic banking partner. JOURNIE will offer Canadians compelling fuel saving and merchandise offers and will launch in select Ontario, British Columbia and Quebec markets this fall with a full national rollout in early 2020. This is a major milestone for Parkland. For the first time, we are connecting our network of approximately 1,300 Chevron Ultramar, Pioneer and Fast Gas sites along with the On the Run/Marche Express under a single proprietary rewards program.

We are continuing to enhance our customer value proposition and see upside from the JOURNIE program in Canada Retail.

Our same-store sales comp softened a little this quarter. But company C-Store same-store sales growth was around 1%, marking the 15th consecutive quarter of growth. We have been tracking against some tough year-over-year comparable results but had strong performance in snacks, beverage and car wash.

On company volumes same-store sales, we implemented new digital capability to inform our pricing decisions and drive the right outcomes. Our market share proposition remains constant for the quarter.

Our Canadian Commercial segment delivered adjusted EBITDA of CAD 12 million for the quarter. The theme in Commercial continues to be business optimization and building for growth in cardlock and our integrated propane offerings.

In Western Canada, the forestry and upstream oil and gas industries have witnessed continued weakness. But we've optimized our Canadian margins through the strategic reduction of some low-margin customers.

We continue to transition to our regional operations center structure and strengthening our results-driven culture at the local level with a heightened focus on growth.

We continue to put our customers first by focusing on new technologies, like tank monitoring and telephone system consolidations, to continuously improve efficiency and deliver a great customer experience.

Our trailing 12-month operating ratio has been relatively consistent through our brand consolidation efforts, and we continue our push to drive this down.

Our U.S. segment delivered third quarter adjusted EBITDA of CAD 17 million, an outstanding result. The business is performing extremely well and we are capturing synergies from recent acquisitions, winning new customers with our increased scale, and are successfully integrating businesses quickly and efficiently into our platform.

The increase, relative to last year, is driven by M&A activity with Rhinehart being added in late Q3 2018. KB Oil also had its first full quarterly impact. We like how that business is performing.

We have benefited from strong retail margins across the U.S., specifically, in the Rocky regional operating center. While wholesale prices dropped, U.S. retail margins remained strong and we see continued strength in diesel margin and lubricants growth.

Importantly, our trailing 12-month operating ratio continues to come down, improving by 3 percentage points to 69%, and reflecting our commitment to cost control, while simultaneously driving business growth.

As mentioned earlier, we recently bought Tropic Oil; based in Miami, Florida; which became the new hub for our new southeast regional operating center.

Florida is a market with exciting growth prospects and is an attractive region for us to build on our supply advantage. This initial toehold in Florida also complements our Caribbean business by providing supply and distribution synergy potential.

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

In our International segment, Parkland's third quarter adjusted EBITDA was CAD 63 million. We had some good operational wins, while focusing on business continuity.

We successfully launched a loyalty program in Barbados, called More Miles Journey. And initial results have been positive. We already have over 10% of the driver populations signed up and have achieved a swipe rate of 20%.

We're looking to move this loyalty program to other islands in 2020. And over time, to tie it together with the JOURNIE program in North America.

We've also had success, winning some key aviation contracts, an area of focus for the International team. We believe we have lots of opportunity in LPG, aviation, retail, commercial and wholesale operations within SOL. Thanks to our new International team, as well as our SOL partners.

Finally, turning to the supply segment, which delivered CAD 147 million of adjusted EBITDA in the quarter. The team at the Burnaby Refinery continues to operate efficiently, safely and reliably.

A strong refining margin environment means nothing if your team can't capture the opportunity. And the team delivered a utilization rate of over 96%.

Crack spreads were relatively strong in the quarter, owing to West Coast supply disruptions and were slightly above the trailing 3-year average. We also had slightly lower crude transportation costs in the quarter.

Our quarterly numbers also reflect the ongoing synergy capture imports and blending opportunities in crude oil and diesel export into the U.S. Our supply and distribution teams and Elbow River marketing are working closely and are finding value opportunities in the integrated nature of their logistics businesses.

We also continue to co-process canola and tallow, which helps offset high-cost biodiesel blending to meet B.C. low carbon fuel requirements.

Our supply advantage is a key tenet of Parkland's strategy, and we will continue to build and integrate this capability across the company.

Looking forward, plans continue for our 8-week turnaround at the Burnaby Refinery in Q1 2020.

Wrapping up now on Slide 12, we are increasing our adjusted EBITDA guidance for the year to CAD 1.24 billion, plus or minus 5%; an increase of CAD 75 million from CAD 1.165 billion earlier and reflects the strong year-to-date numbers and confidence in our Q4 outlook.

We mentioned last quarter that we identified some additional capital in the Caribbean business to accelerate our growth. Keeping in mind our rigorous capital allocation process and strong results this year, we've allocated an additional CAD 20 million to our 2019 growth capital program.

This is focused on retail sites and tankage and other infrastructure in Guyana, to support the large and growing offshore drilling activity.

We are at a total of CAD 420 million, which includes CAD 200 million of maintenance.

I'd like to end by, once again, thanking the Parkland team for their hard work and dedication to provide yet another great quarter for Parkland's shareholders and for their ongoing focus on safety.

I'd also like to thank Mike McMillan. This will be Mike's last call with Parkland. Mike has been a great partner for me in the past decade, as we've guided Parkland through its remarkable growth. And I want to thank him for his service and contribution to Parkland's success. We wish Mike all the best in the future.

This concludes the formal portion of the call. We will now take questions from our analysts and institutional shareholders.

Operator, please open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Steve Hansen from Vancouver.

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Steven P. Hansen, Raymond James Ltd., Research Division - SVP [2]

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Just a quick question relating to Tropic, its designation as a new operating center or region. Just curious what additional capabilities you're looking for in that broader region and whether it's U.S. specific or whether would it be additional assets would also tie into the Caribbean platform?

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

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Yes, we like the area of Florida, because it does tie in nicely with the Caribbean. It will operate separately as part of the U.S. business. And the opportunity in that market is -- is to grow through organic growth and then also through other acquisitions in the region.

We like the fundamentals of Florida from a growth perspective. And then the tie into the Caribbean is predominantly through supply on the fuel side, but also supporting the lubricants business in the Caribbean.

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Steven P. Hansen, Raymond James Ltd., Research Division - SVP [4]

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Just a follow-up on that if I may? You've allocated some additional growth capital to support the Guyana business. I believe you mentioned it's -- have you had the chance to have a full, sort of, perspective or observation around these opportunities?

Now, you gave us some good color on the previous call. Just trying to get a sense whether there's new opportunities still servicing there and/or whether you've got the targets sort of directly defined at this point?

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

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Well, so in Guyana, specifically, we are seeing that market grow quite rapidly. And the capital there has positioned us well to take advantage of that growth.

In the broader Caribbean, we continue to identify organic growth opportunities, primarily in 2 areas. One is in retail, where, similar to our Canadian business, we're looking at the network and have built a network plan and are starting to execute against that.

And then the second is, upgrading infrastructure and adding infrastructure into key markets, where we see growth opportunities.

We'll provide a view of that early next year in terms of how we see that going forward.

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Operator [6]

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Your next question is from David Newman from Toronto.

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David Francis Newman, Desjardins Securities Inc., Research Division - Analyst [7]

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Congrats on the [beating raise]. Just want to dig into the retail side on the same-store sales growth as to some of the attribution there in terms of, where you're seeing the weakness. I know it's a tough comp. But how are you doing in, let's say, in the cigarette category? And if you axe that out, how would you have been doing? And how much of the mix is sort of vape products? And any impacts that you might see -- long-winded question -- any impacts you might see from cigarettes moving to standard packaging?

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Robert Berthold Espey, Parkland Fuel Corporation - President, CEO & Non-Independent Director [8]

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Let me start off with the same-store growth number and the impact of tobacco. So we did see tobacco decline in the quarter. It was off 2.4%. Our other categories were up 5.2%. So -

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David Francis Newman, Desjardins Securities Inc., Research Division - Analyst [9]

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How much were the other categories up, Bob? The other categories wear 5.2%?

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Robert Berthold Espey, Parkland Fuel Corporation - President, CEO & Non-Independent Director [10]

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5.2%. So, really pleased to see that. It does still indicate that our focus on our non-fuel initiatives is yielding great results. And the team there is continuing to really service our consumer base quite effectively.

In terms of tobacco demand, I think, there is a lot of change in that segment right now. As you say the packaging the -- we are seeing some cannibalization of tobacco into vape, which is a much higher margin product. And again that's a key point too, is the relative margins on tobacco are very low. So, growing our other categories is much more helpful to the bottom line of the business.

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David Francis Newman, Desjardins Securities Inc., Research Division - Analyst [11]

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Yes, hence the non-fuel margins were pretty decent otherwise, I think?

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Robert Berthold Espey, Parkland Fuel Corporation - President, CEO & Non-Independent Director [12]

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Yes, I was quite pleased with that. And we saw some good year-over-year growth in our non-fuel gross profit despite the ongoing conversions from COCO to CORO, which hits that numbers. So overall, very pleased with the results in our retail business this quarter.

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David Francis Newman, Desjardins Securities Inc., Research Division - Analyst [13]

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And second one from me and last one. Just heading into 1Q next year, before you go dark on the refinery. Beyond the cost what actions are you guys taking to ensure customers are served? I think the last time you had to go dark you actually made pretty decent profit from some inventory moves that you made. And are you at all concerned, I guess, about the last time the retail pump prices spiked given the political climate and everything else? So maybe, just on your prepositioning for that go-dark period, in terms of what you can do?

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Dirk Maclean Lever, Parkland Fuel Corporation - VP of Finance [14]

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Yes. As you can imagine, we have a fair amount of planning to do dealing with other refineries in order to source supply as we are down. As we are operating now, we are building up inventory but that will not be enough to carry us through. So, we have reached out and we have organized supply for the period that the refinery is down so that when -- as you call it -- when we are dark there is no disruption of supply to our customers. The impact of us going down, it's hard to estimate what would be for pump prices, since we are organized and will have full supply. We don't expect it will have a material impact at the pump. More material to pump prices on the West Coast are unplanned outages rather than planned outages. So, the fact that this is a planned outage and has been orchestrated ahead of time should not have a material impact at the pump.

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Operator [15]

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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 [16]

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So, I just wanted to follow up on the retail side of it. The non-fuel gross profit being up 8%. So that was the biggest year-over-year growth you've seen in, at least, the last 4 quarters. Can you explain where you are seeing that, the biggest gains, despite the drop in tobacco? Not just in the categories but in terms of what's having the biggest impact on profitability from whether it's On the Run or your private label or other?

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Robert Berthold Espey, Parkland Fuel Corporation - President, CEO & Non-Independent Director [17]

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I don't have an exact breakdown. I would say we're seeing at a high level 2 impacts. One is the ongoing success in the marketing programs. And I'm sure we can provide some more detail in a follow-up question offline. The other item is our capital that's coming into the market. So, a lot of new sites that's new. We're refurbishing sites. And as you recall from our Investor Day, we had a commitment to spend roughly CAD 100 million a year in growth CapEx in Retail. And that's some of the early benefit of that coming through as new sites stream and as we get the benefits of some of our retrofits.

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Michael Van Aelst, TD Securities Equity Research - Research Analyst [18]

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And can you talk to us -- so, I think you said you had -- you'll have 200 On the Runs by the end of this year. What's the -- pace of rollout you expect for 2020? And can you remind us what the ultimate count -- or the ultimate potential is?

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Robert Berthold Espey, Parkland Fuel Corporation - President, CEO & Non-Independent Director [19]

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Yes. So, we'll do 75 to 100 next year. And again, the team there has been very disciplined in the way that they've been doing this. We tend to do a group and do a look back and make sure that we're getting the benefits. And then we tweak based on consumer feedback. We would expect that in our legacy network will get somewhere up to about 400 sites. And then we'll continue to grow beyond that organically, with the ultimate goal of getting to 1,000 sites within the next 5 years.

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Michael Van Aelst, TD Securities Equity Research - Research Analyst [20]

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And I don't know of the other data with you but do you have any anecdotal evidence or data points that can -- that you can point to with respect to like a performance of these stores once you convert them?

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

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Yes. On an aggregate basis, we are seeing about a 4% lift in sales in those sites. And it's interesting, I mean, it does vary by region and also by brand that's the On the Run, on pipe fuel brand that the On the Run supports. So we've seen higher numbers in some of our eastern locations but in the Prairies, with our Fast Gas network, it's been a little less. But overall, we're pleased with the results that we see. And again, part of it is the OTR conversion, which is -- provides positive lift. But then the subsequent programs that we are rolling out around that, including our private label On the Run, we expect to continue to be able to see that growth here certainly for the next while.

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Michael Van Aelst, TD Securities Equity Research - Research Analyst [22]

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And I think a few quarters back, when you -- or about a year ago, when you started the conversions of COCOs to COROs, you said that initially it's somewhat neutral, the profitability. But eventually -- but over time you'll start to see better returns from a better execution at the store level and things like that. And with the growth rate picking up in the non-fuel retail, are we starting to see some of those benefits already?

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Robert Berthold Espey, Parkland Fuel Corporation - President, CEO & Non-Independent Director [23]

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Yes. It generally takes 12 to 24 months to start to see that. So, we're seeing that on some of the initial conversions as the team works with retailers kind of fine-tune the model.

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Operator [24]

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The next question is from John Royall from New York.

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John Macalister Royall, JP Morgan Chase & Co, Research Division - Analyst [25]

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So, just want to talk through the EBITDA guidance raises a little bit. You're now over 50% higher on your full year guide than when you rolled it out back in March. So, I was hoping you could walk us through each business and how it's shaping up compared to what you were thinking then? I imagine supply has probably been a big driver of the increases. But just curious on the different pieces of it?

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

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Why don't I kick it off, and then I'll pass it over to Mike here, to pick it up. But I would say in general the guidance is consistent with the story that we've been telling through the year. And a key contributor has been the supply. But I would say generally, all of our businesses have tracked at or ahead of plan with the exception of Retail, which has seen some headwinds from a margin perspective. From my perspective, I'm really pleased with the performance of the business. Generally, our operators are hitting their targets, their key performance indicators for the year.

And the increasing guidance reflects that continued success in, in our execution on the operational business. But I'll let Mike to fill in with a bit more detail.

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Michael Stanley Howie McMillan, Parkland Fuel Corporation - Senior VP & CFO [27]

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So maybe just a couple of quick comments by segment, just to give you some color. I think, if you look at the retail business, we did see some softness there. But we are seeing benefits, as we commented on the call earlier, about some of the network development impacts, whether it's On the Run, some of the new-to-industry builds. And just things that we're doing with technology and so forth as well, helping us to monitor and engage productivity by site. So that's starting to show some very positive impacts.

In Canada Commercial again, with the reorganization around the [rock] model and a lot of focus on accounts, cardlock, volumes and so forth, is starting to show some continued strength and managing margin and cost structure within that business. So, the team has really turned the quarter on some of those things. And we see some positive direction going into the end of the year and into next year. We talked quite a bit about the U.S. and outside of the tuck-ins and the obvious things around acquisitions, the business is performing very well on the base business, organically. And again, managing their cost very, very effectively.

So we see some -- we see it on the organic side base performance as well as the acquisitions and some synergy capture there, which is performing well. We talked about, if I look at supply, again, keep in mind last -- early part of the year, we did benefit from some of the outages and that sort of thing on the West Coast. And so -- but what we do see is continued positive performance there, high utilization rates and good allocations on the line.

And so the team is doing well. But in -- behind that, Elbow River is also part of that segment. That business is performing very well as well and behind it. So the number of areas within supply, showing some good performance leading into the back end of the year. And we did touch, lastly, on International. I would say, again, synergies are tracking nicely, we do see some growth in those areas.

And the team is doing an exceptionally good job of managing costs and taking some costs out and very selectively adding capability. So, well done in that market. And maybe, as a final point on our corporate cost structure, again, we're really mindful of where we're investing and consolidating some of our efforts here in Calgary and just trying to manage that cost structure as we scale the business. So hopefully that gives you some color. I mean, I think really hitting on all cylinders in managing our forecast into the latter part of this year.

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John Macalister Royall, JP Morgan Chase & Co, Research Division - Analyst [28]

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And then just one more quick one on the refinery turnaround. Specifically, will there be any effect on 4Q from a utilization and a cost standpoint? I'm just thinking about any kind of prework you might be doing ahead or should we be thinking of it as purely a 1Q effect?

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Dirk Maclean Lever, Parkland Fuel Corporation - VP of Finance [29]

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Obviously, we're doing prework. Scaffolding has gone up, long lead time items have been ordered. But these will not be interrupting the operations at the refinery. They'll be working around it.

So it will not -- those, that prework will not be impacting Q4 results. It will be business as normal. We're -- it's smooth sailing as far as day-to-day operations go. More to the point is just planning around it.

This is not something that's new to them. They've done turnarounds before. They're very adept at working the operations at the refinery -- well, setting up for the turnaround. So, don't expect an impact from the prework to impact the day-to-day operations.

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John Macalister Royall, JP Morgan Chase & Co, Research Division - Analyst [30]

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And sorry, just to clarify, before I go; should we see any incremental costs from that, understood that the utilization won't be impacted?

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Dirk Maclean Lever, Parkland Fuel Corporation - VP of Finance [31]

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The costs? Yes, we will be incurring some costs as we lead up to the turnaround.

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Michael Stanley Howie McMillan, Parkland Fuel Corporation - Senior VP & CFO [32]

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I thought it's reflected.

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Dirk Maclean Lever, Parkland Fuel Corporation - VP of Finance [33]

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Yes, it is reflected in our guidance.

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Operator [34]

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The next question is from Peter Sklar from Toronto.

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Peter Sklar, BMO Capital Markets Equity Research - Analyst [35]

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Bob, back on the Canadian merchandise comp; were you surprised that the tobacco category had a negative comp, notwithstanding that the e-vaping category still has momentum? I was a bit surprised by that.

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

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So, our -- we don't include the vape sales in the tobacco category. So it is pure tobacco. Were we surprised? Look, it does seem like there is a trend for consumers to switch from tobacco to vape. So, we were expecting that category to soften somewhat.

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Peter Sklar, BMO Capital Markets Equity Research - Analyst [37]

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And do you have any kind of loyalty program or tobacco club or anything associated with that?

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Robert Berthold Espey, Parkland Fuel Corporation - President, CEO & Non-Independent Director [38]

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No, we don't. I mean, you can, in sites we do have loyalty. You can get your contribution to your loyalty program, which is independent of the category. But no, we don't. We -- yes.

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Peter Sklar, BMO Capital Markets Equity Research - Analyst [39]

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Then the other thing I wanted to ask you about, with Keystone being down. And if differentials really widened out in Alberta; like, when -- like, I'm not too sure how forward you purchase your crude. Like, when would you start to benefit from that? Is there a lead time or are you buying crude spot?

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Dirk Maclean Lever, Parkland Fuel Corporation - VP of Finance [40]

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No, we don't buy crude on the spot market. In fact, the nominations are usually 2 months in advance. So, the impact that it could have if the differential is decided, if they did widen out, that would be independent of what our purchasing is, as our purchasing is done well in advance.

But if the differentials do widen out that tends to hit, in particular, the marketplace and pricing of products. I wouldn't say immediately, but shortly thereafter. And it certainly does impact the [dog] bid price for the pipeline. But we haven't seen that come into effect yet.

But if we do see the differentials widen out because of this Keystone outage, it will work its way through the marketplace. But we'll have already purchased our crude.

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Peter Sklar, BMO Capital Markets Equity Research - Analyst [41]

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So you're purchasing on average 2 months in advance, I think is what you are saying here?

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Dirk Maclean Lever, Parkland Fuel Corporation - VP of Finance [42]

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Yes, that's the nomination. It's around that.

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Operator [43]

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The 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 [44]

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My first one, just on your fuel gross margins within your Canadian Retail segment. Had a nice sequential lift here, call it flat year-over-year. Just wondering what you're seeing from a competitive perspective in that market?

You talked of it being pretty competitive on your Q2 call. Is that sequential improvement a sign that maybe some more rationale behaviors returning to the market, or any explanation would be helpful?

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

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It's always difficult to comment on pricing. The market is very dynamic and always very competitive. And also, I would say, where -- again, where the team focuses on, operating our sites cost effectively.

So we're less sensitive to fuel margins. The team continues to do that. We did see NUOC come down quarter-over-quarter, which is an indication that we're pushing the business in the right direction.

We have worked on our -- we have centralized our pricing, and I think that's helped us understand the competitive environment better and also be able to react to it in a more timely manner.

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Kevin Chiang, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Analyst [46]

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And then maybe just turning to maybe the long-term capital intensity of your business. So you're going to -- you're guiding to CAD 1.2 billion of EBITDA. Your CapEx this year is now CAD 420 million, so about 35% of EBITDA is going to CapEx.

When we get into 2020 and beyond, how should I think about the capital intensity of your business?

It sounds like it should roll off, as maybe the -- there's a deceleration in the COCO to CORO conversions, but just trying to get a sense of what -- how you see the normalized run rate for CapEx. And then if you could split that between maintenance and growth, that'll be helpful.

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

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Yes. So we do guide maintenance, that's CAD 200 million, and expect the base business to be in that area plus Sol, right? And that'll add another CAD 20 million to CAD 30 million annually to that number.

And then growth is really dependent on the opportunity set. In our Investor Day, we did outline a number of opportunities. So, we do expect growth capital to continue here for the foreseeable future, as we continue to invest in our retail network, in expansion in our commercial business, both in Canada and the U.S. And then in the Caribbean, in a combination of retail and infrastructure projects.

As always, we have a very robust process to identify growth opportunities and make sure that we're getting value for our shareholders out of that and improving our returns over the long run.

But again, the beauty of Parkland is, we do have lots of opportunity and we want to make sure that we continue to capitalize on that as we go forward, and drive a lot of the base organic -- base growth in the business organically rather than through M&A.

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Operator [48]

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The next question is from Vishal Shreedhar from Toronto.

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Vishal Shreedhar, National Bank Financial, Inc., Research Division - Analyst [49]

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Just on the International operations. I think you noted that you were closing some retail operations in Haiti. And off the top, you indicated a review of the business.

So just wondering, should we expect large changes in the International business over the next little bit, or are these more of a one off kind of decisions?

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

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No, I wouldn't expect large changes. This was actually a divestiture that we planned when we purchased the business. We were uncomfortable with the operating environment in Haiti. And we were able to divest that to another operator in the region, which was comfortable with that jurisdiction.

So -- but there isn't a larger plan to divest out of markets within the region. We like the region, we like the fundamentals of the region and we'll continue to invest and grow our business there.

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

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And on the retail fuel margins and volume, just that dynamic there. I think it was indicated that market share was maintained, but the volumes were maybe a bit more tepid than I, at least, I had anticipated.

I'm wondering if these centralized pricing initiatives that you referred to, are maybe resulting in a little bit of volume sacrifice in favor of margin? And if so, where are we on that trend? Are we starting this initiative? Should we expect more of this? How should we think about that?

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

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No. Look, our objective is to maintain or grow our market share. And in fact, our benchmarking would show that we slightly increased our market share in the quarter.

In terms of -- our strategy is to, from a pricing perspective, is to give the best value to the consumer. And as a result, we'll focus on making sure we're competitive, relative to others in the marketplace, so that we continue to grow our business in a reliable manner.

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

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So, how significant is the central pricing initiative? Is there a large opportunity there, or is that more of an incremental tweaking?

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

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Yes, as with our supply, our fuel volume is one of our biggest assets and also our biggest opportunities. And we need to make sure we manage it on both sides.

It's part of the integration that we've undertaken, where we've -- basically, it's part of integrating the 3 businesses or -- the 3 businesses, the legacy Parkland, the legacy Chevron and the legacy CST business into 1 business. And make sure that we've got a common methodology and pricing methodology across the business. And a common way of monitoring based on the competitive environment.

So we do expect that to produce benefit. Always difficult to quantify, because fuel pricing is one of the most dynamic pricing that you'll see in consumer products anywhere.

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Vishal Shreedhar, National Bank Financial, Inc., Research Division - Analyst [55]

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And just lastly, just looking back to the organic growth targets that management refers to. How would an investor determine, kind of, if management is hitting those organic growth targets? Should we -- is there a metric that you'd point us to or several metrics that you'd point us to, to help us understand if we're hitting that range that you're targeting? I know, in the past you used to give us --

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Robert Berthold Espey, Parkland Fuel Corporation - President, CEO & Non-Independent Director [56]

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Yes, I'll start off and then I'll hand it over to Dirk, who can add some color as well. I would say, first of all, first and foremost, organic, the organic growth target is a long-term target, and it'll bump around from quarter-to-quarter. It's not a linear type growth. But overall, our experience has been that we can hit that 3% to 5% over the long-term and/or over the intermediate term.

The -- and that's a combination of the KPIs that we report against, as well as the -- and those KPIs are cascaded through the business, right down to our operating people so that we're all aligned with the shareholders.

And it's a combination of revenue growth and cost, right? And I would say in general. And again, it bumps around. But in general, we've been successful in delivering that.

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Dirk Maclean Lever, Parkland Fuel Corporation - VP of Finance [57]

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I would also point out that it does not include the refinery. So we backed the refinery out from that. The refinery has, effectively, a utilization rate that we look at as it moves a little bit. But that should not be included in the 3% to 5%.

Also, it has somewhat of a variable refining margin that's driven by market dynamics, and we exclude that. So, if you look at the business and think of it as marketing and other aspects of our supply division that's where we look for that 3% to 5% growth.

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Vishal Shreedhar, National Bank Financial, Inc., Research Division - Analyst [58]

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Did you hit it this quarter? I know it's longer-term, but--?

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Michael Stanley Howie McMillan, Parkland Fuel Corporation - Senior VP & CFO [59]

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Generally, Vishal, it's Mike here. We do look at it on an annualized basis, not specific to quarters, because it can move around based on initiatives and programs. But generally speaking, we're quite pleased with how it's trending across the businesses that we covered here.

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Dirk Maclean Lever, Parkland Fuel Corporation - VP of Finance [60]

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I think you would look at it on a trailing 12-month basis.

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

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Yes, exactly.

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Dirk Maclean Lever, Parkland Fuel Corporation - VP of Finance [62]

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To give you a better indicator of it, rather than the noise from 1 quarter to the next, because we will have seasonality et cetera. It's much better to look at it on a trailing 12-month.

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

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Exactly.

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Robert Berthold Espey, Parkland Fuel Corporation - President, CEO & Non-Independent Director [64]

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But I would say, it's fair to say on a trailing 12, we're confident that we're hitting that metric. And again, it varies across the business. But generally, we're hitting it.

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Operator [65]

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The next question is from Derek Dley from Toronto.

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Derek Dley, Canaccord Genuity Corp., Research Division - MD & Consumer Products Analyst [66]

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Just circling back on the, On the Run conversions. Appreciate your comment that you're getting about a 4% sales, what you are seeing on the conversions. And I would assume that's in the first year.

But can we talk a little bit about just sort of the IRR that you're targeting on these conversions? Is it still in that neighborhood of, sort of, I think it was 15% to 20% is what you've seen in the past?

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Robert Berthold Espey, Parkland Fuel Corporation - President, CEO & Non-Independent Director [67]

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Yes, that's about right.

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Michael Stanley Howie McMillan, Parkland Fuel Corporation - Senior VP & CFO [68]

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That's correct.

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Derek Dley, Canaccord Genuity Corp., Research Division - MD & Consumer Products Analyst [69]

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And you're still seeing those type of returns going forward, or targeting those types of returns with the CAD 75 million to CAD 100 million you're going to do next year?

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Robert Berthold Espey, Parkland Fuel Corporation - President, CEO & Non-Independent Director [70]

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We're dogmatic around those returns. So, everything gets filtered before we approve. And then there's a very rigorous look-back process to make sure that we're getting the benefit, but also allowing us to tweak the offer so that we're continuing to make sure that it connects and resonates with the consumer.

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Derek Dley, Canaccord Genuity Corp., Research Division - MD & Consumer Products Analyst [71]

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And then the second question, and Bob, I echo your comments with Mike. And Mike, congratulations on all the success you've had at Parkland over the last 10 years. But can you just provide us with an update on the CFO search and where you stand in that process?

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Robert Berthold Espey, Parkland Fuel Corporation - President, CEO & Non-Independent Director [72]

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Yes, so there's some big shoes to fill here with Mike leaving. And we'll be announcing an interim here before Mike departs, as we continue our search for a replacement for Mike.

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Derek Dley, Canaccord Genuity Corp., Research Division - MD & Consumer Products Analyst [73]

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You're welcome, Mike. And what is the timing, Mike? Is it the end of November?

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

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I would say end of December. I'll be around the end of December. And, Bob and I will work together on what's required there.

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Operator [75]

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The next question is from Steve Hansen from Vancouver.

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Steven P. Hansen, Raymond James Ltd., Research Division - SVP [76]

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Just a quick one as it relates to the growth opportunities as a follow-up, it really wasn't commented on thus far. This will be you provide some commentary around your current M&A pipeline, perhaps give us a flavor for either the quality or the quantity of opportunities you're seeing and how quickly you might be able to execute?

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

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That's a good question. As we've talked about in the past our focus is on breadth of pipeline, which we continue to work and work with prospective vendors to make Parkland the acquirer of choice in the areas that we operate. We are seeing a broad pipeline, as always we'll be disciplined around value and making sure that we can price assets effectively and get the synergies that we look for when we do M&A.

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Operator [78]

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The next question is from David Newman from Toronto.

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David Francis Newman, Desjardins Securities Inc., Research Division - Analyst [79]

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Just a quick one guys. Just on the Investor Day you noted that your cardlock business is very intra-provincial and you want to make it more inter-provincial and cross border. Maybe obviously, legging off the last question from Steve. M&A versus organic and what are you guys doing to kind of build out the network of cardlock?

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

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We continue to develop that. And there's sort of 2 key components to that. One is the IT platform, we've talked about [NFN], which is a payment platform that we can roll out across our business to link our brands together and also to keep partners of ours. And we're working on building that network both through capital, which is the second lever. A number of the new retail sites that we've approved have -- are integrated with cardlock. And you'll start to see those roll into the market, continue to broaden our network. And then looking for partners where we can connect them into our network through the NFN platform.

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David Francis Newman, Desjardins Securities Inc., Research Division - Analyst [81]

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And where would you guys be in that evolution, I guess, in terms of fleshing out of a full offering that you can really do trans con and north south moves?

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

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Yes. So we're, we still have a ways to go. I mean, it's really a 2020 initiative that we'll be pushing. The focus in the short-term has been to get the technology platform built and then some growth capital in Canada. But that next is really over the next 2020, 2021 we'll start to see that all materialize.

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David Francis Newman, Desjardins Securities Inc., Research Division - Analyst [83]

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Excellent.

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Robert Berthold Espey, Parkland Fuel Corporation - President, CEO & Non-Independent Director [84]

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Okay. Great. Well, thank you very much for dialing in. We appreciate your continued support and look forward to talking to on our year-end call. Thanks

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Operator [85]

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