Q3 2020 Parkland Corp Earnings Call
Good morning, ladies and gentlemen, and welcome to Portland Corporations, Q3, 2020 results conference call.
As time all lines are in a listen only mode. Following the presentation. We will conduct a question and answer session. If at any time during the call you require assistance. Please press star zero for the operator. This call is being recorded on Wednesday November 4th 2020, I'd now like to turn the conference over to Brad Monica Director of capital markets for parkland.
[music].
Thank you.
With me today on the call are Bob asked me, President and CEO, Dan Smart Senior Vice President corporate development and interim CFO Dirk lever.
Mark.
This call is webcast I encourage listeners to follow along with the supporting slides, we will go through our prepared remarks and open it up for questions from the investment community.
Limit yourself to one question and a follow up as necessary and as yet.
Other questions reenter the queue, we would have to handle it all up directly with the capital markets to afterwards pretty detailed modeling type question.
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 condition among the softest.
Risk factors applicable to our business and are set out in our annual information form and management's discussion and analysis.
Well also be discussing non-GAAP measures, which should not have any standardized needs describe I guess.
I just identified in defined parkland.
Those are documents, which are available on our website.
Please refer to those documents is identify factors, which may cause actual results to differ materially from any forward looking statements.
All amounts discussed on today's call are expressed in Canadian dollars unless otherwise noted.
I'll now turn it over to Bob.
<unk>.
Thank you Brad and good morning, I hope, everyone is seeing safe and healthy and we appreciate you taking the time to join us today.
We announced exceptional results with record third quarter adjusted EBITDA of 338.
Over the past nine months, we've had the opportunity to quit business models to the test and we are very proud of parties performance.
The resilience and flexibility the business coupled with our customer focused culture have enabled our team.
Due to the lever to pull itself series.
Our convenience business performed exceptionally well highlighting the quality of our customer offer and the strength of our regional Fran.
Additionally, our commercial operations across all regions have continued to win new business.
This forms part of a larger trend across our enterprise to strong sales growth.
Further demonstrates our ability to grow organically from a challenging economy.
When we spoke last in August we were seeing encouraging volume recovery across our operations. This trend continued through the quarter and while we still saw the impacts from coal, but our geographic and product diversity and strong local brands returned our overall growth to fly to it.
And 5% prior year.
Combination of robust fuel and Nonfuel margin cobble, coupled with our deliberate sustained cost reduction measures more than offset lower volumes and helped deliver a record third quarter.
Cash from operations once again fully funded our growth and Bain capital expenses cash dividends acquisitions and lowered our debt.
Our strong cash.
Cash flow gives us tremendous financial flexibility as we advance our growth strategy organically and through potential acquisitions.
The strength of our convenience store model was on display again in Q3, as we delivered our 19th consecutive quarter of C stores same store sales growth in Canada.
Our team has quickly identify changing consumer preferences optimized our product offering and the executed consistently journey rewards our Canadian loyalty program continues to build momentum.
Exceeding 1 million members in the third quarter early promotional activity has driven strong member engagement reinforcing the value of the programs.
Our supply segment demonstrates strong recovery in the quarter as we experienced our first full quarter in 2020 of operations as the Burnaby refinery with utilization of 90%.
The refinery operated reliably in Q3, we sell one planned maintenance robust local demand and strong distillate sales all of which set us apart from others refining exposure.
Lastly, I'm proud of our North Naugle sustainability report, which marks an exciting milestone for our organization.
Well sustainability practices are already deeply embedded throughout our business. This report is a natural step in our sustainability journey.
Our board and management team are fully engaged in this activity and we are focused on further embedding sustainability practices into our strategic decision, making and capturing opportunities to grow our participation in the low carbon economy.
We have highlighted some of the key initiatives from our report on slide four including the co processing of renewable feedstocks that are Burnaby refinery, we hit an impressive milestone in September co processing over 40000 barrels up on local feedstocks are high smartphone resi.
We also improved our file feedstock supply chain capabilities through increased rail more optionality.
We can leverage our infrastructure optionality effort to optimize the tight.
The and economics of the file feedstock, we bring in our work on sustainability does not stop with the release of our another report team is focused on establishing our baseline emissions data, which will provide a meaningful basis for future targets I'll now pass over to parents to go through the corporate financial result.
Over to you.
Oh great.
Great. Thanks, Bob and good morning, everyone.
Turning to slide five we delivered adjusted EBITDA of $338 million for the quarter compared to 302 million last year.
Combined marketing segments in Canada, USA and international increased adjusted EBITDA by 24% as strong fuel and non fuel margins more than offset slightly lower year over year volumes.
In addition, we benefited from sustained cost savings through initiatives taken early in the pandemic and remain confident we can routine annual run rate savings of between 50 and $70 million.
Our supply segment was marginally lower than the prior year. However, we are extremely pleased with the results given global refining dynamics.
In Q3, the team delivered a 90% utilization rate at the burn to be refinery, which we believe is one of the highest utilization rates in North America and allowed us to run efficiently.
Turning to page six means.
Maintaining balance sheet strength and financial flexibility are paramount to our strategy.
This focus on the balance sheet has continued through the pandemic.
And we are well positioned to manage through any further uncertainty grow our base business and capture the right acquisition opportunities.
As always we will exercise strict financial discipline in evaluating potential opportunities and must see a clear path to value creation.
Total net funded debt decreased by 85 million from Q2 to Q3 2020.
In cash generated by the business in 2020 has funded growth and maintenance capex acquisitions in cash dividends.
Our total funded debt to credit facility EBITDA ratio was 2.6 times, which is around the middle of our target range from normal operations and down slightly from Q2.
When coupled with our 1.6 billion of liquidity, we have ample flexibility to EPS.
Executes our disciplined growth strategy.
I'll now turn it back to Bob to discuss the segment performance.
Okay.
Okay.
Thanks, Darren I'll start with Canada on slide seven the team did a great job and delivered adjusted EBITDA of 128 million, which is up by 23% compared to last year, while volumes were still 8% behind prior year due to cope with 17, they continue to recover.
Through the quarter driven by increased traffic in economic activity.
Personal vehicle use and domestic tourism.
We have also grown market share in retail, which is a testament to our fuel convenience brand propositions and the quality of our sites.
Importantly.
And demonstrating the resilience of our business the combination of strong unit margins in our proactive cost control measures more than offset the impact of lower volumes.
Our ability to flex our cost structure, plus our dynamic pricing capabilities helps insulate us from localized demand fluctuations as we manage through August nine.
Our convenient store channels delivered its 19th consecutive quarter of C stores same store sales growth of 10.7%.
With most major categories contributing to this growth.
This is a remarkable accomplishment, which highlight the execution capabilities of our team.
Compelling customer value propositions, and our ability to quickly adapt to anticipate changing customer needs.
More broadly.
Safety measures have increased in priority for customers, who are deciding where to sell and we believe the convenience model and our C store proposition is well positioned for that.
Consistent with our focus on driving customer loyalty and only three months after we completed our national rollout.
We passed a major milestone with our journey multi program as we exceeded 1 million members in the third quarter earlier.
Well the promotional activity has driven strong member engagement and our partnership with CBC delivering increased card holder penetration.
Turning provides a powerful platform for us to deliver highly targeted customer offers increased engagement and satisfaction.
We are very pleased with the early performance and then the intermediate term remain focused on member acquisition and program we're fine.
For our international operations on Slide eight we delivered adjusted EBITDA of $77 million, an increase of 14 million compared to last year.
As Adam.
At a high level. This is driven by exceptional supply performance, which included shipping fleet optimization and routing efficiencies and a robust base business.
Supported by continued cost control initiatives, our combined operating costs and Mdna were 20% lower than Q3 2019 going forward. These efficiencies will help insulate us from potential Colby. Thanks.
We continue to see the benefit of our geographic and product diversity in the quarters. For example, our diversified economies like Puerto Rico continued to perform well and marine buffeting Bunkering and power supply volumes helped offset declines maybe Asian.
We remain cautious on the outlook for tourism heading into late Q4, and anticipate because the recovery will be tempered until COVID-19 restrictions.
Our base business is performing ahead of expectations and our teams continue to demonstrate their ability to win new business and that falling through the pandemic.
We continue to see LPG as a growth opportunity in the region, having benefited from supply and wholesale wins.
You will see on the slide we upgraded our dedicated LPG vessel to a more modern ships, which has resulted in shipping efficiencies and target cost savings.
The underlying growth from these initiatives helped offset continued albeit 19 impacts.
Turning to slide nine like our other segments, the geographic and product diversity in our us business, Sean through our USA segment delivered third quarter, adjusted EBITDA up $23 million.
Being organic growth.
The impact of acquisition and strong per unit fuel non fuel margins despite over 19 volume impact.
We continue to capture the benefits of our local scale, which resulted in additional buying power on the supply side and strengthens our ability to successfully bid on and win new National account business as mentioned last quarter, a steady stream of new customers is the life blood and healthy business.
I'd like to share as our team added over 60 million liters of annualized fuel volume amongst our regional operating centers. This.
This is a fantastic result, which highlights the new business focus and capabilities of our team.
Setting the stage for a broader retail growth strategy in the west and the creation of a unified North American export Fran we acquired the perpetual license for on the run across you EPS.
This is an exciting springboard for continued organic retail growth as our existing us retail business was getting to the size, we're having a unified offer was the logical next step.
The license acquisition will help us capture efficiencies on leverage and already existing established brand. Furthermore, we are excited about what it can do for the organic we will start kicking in operation and is a scalable convenience, we sell foundation for future acquisitions.
Finally, turning to supply to supply on slide 10, we delivered $122 million of adjusted EBITDA.
While we recognize the challenges facing refineries across North America, the strategic benefits and cash flow generation generating ability of our Burnaby asset remains strong we are particularly proud of our team's ability to operate reliably through the third quarter and successfully market distillate we jungle.
Tend to 90% utilization for Q3, we believe this them among the highest utilization rates in North America.
The global reduction and this other man primarily for jet fuel has resulted in an oversupply distillate and our resulting decrease most refining run rates in North America, our team's ability to successfully market eastland's yet has allowed our refinery to run more efficiently capture it.
Additional refining margin.
On to slide 11, our capital expenditures remain on track relative Scott Smith initiatives focused on high return Megan retail at the investments in advancing our supply capability across all areas of operation I'll touch on some of this is on slide.
There is no change to our capital 2020 expenditures.
On slide 12 to conclude we are delighted with our performance year to date and are highly confident that whatever lies ahead and we are well positioned to ride.
We will continue to exercise financial discipline to maintain a strong balance sheet advance our organic growth strategy we carefully.
Carefully select acquisitions in all scenarios, our goal is to deliver shareholder value.
The acquisition market has heated up since we last spoke and our team is actively assessing opportunities, which we believe we can add value.
As always we remain we remain highly selective.
We also have a lot of exciting organic growth the option not only have we revived our retail investments in new sites, we built rebrand but.
But also we continue to pursue highly high quality infrastructure projects, John we supply Optionality increased margins and the breadth of our wholesale operations.
Our collaboration with Amazon Web services continues to progress leveraging cutting edge technology to drive efficiency, enhancing our pricing capabilities and generating C store customer loyalty in sight.
In the coming months, we will accelerate these efforts and advance our us store of the future concepts all with the goal of improving our customer value proposition through innovation.
I referenced our us on the run expansion earlier, we will pilot testing.
Thats, an early plenty plenty, one leveraging our existing expertise sysco brand.
Tailored to the decline in the U.S. retail.
As I said on our last few calls the resilience and flexibility of our business has driven tremendous performance through these challenging times I believe we will we are well positioned for a strong ended the year and to excel in 2021.
We remain focused on growth and the team continues to execute remarkably well.
Thanks to the entire parkland team for an amazing quarter and a continued focus on safe and reliable operations, while continuing to provide.
The support to our customers and communities. Once again, thank you and we will now open the line for questions.
Thank you, ladies and gentlemen, we will now begin.
Question and answer session should you have a question. Please press star followed by one on your Touchtone phone you will hear three John Crum acknowledging your request and your questions will be pulled in the order their receipt should you wish to climb from the billing process. Please press star followed by chip.
The speaker phone please lift your handset before pressing the keys one moment for your first question.
Your first question comes from Ben Isaacson with Scotiabank. Please go ahead.
Thank you and good morning, and congrats on the great quarter.
Just a couple of questions. If I may your operating an M&A expenses went down $47 million year over year in Q3 can you just run through.
Your cost cutting efforts that youve outlined since covance and kind of where are you in a few uncovered any new cost cutting opportunities.
Yes, Hi, Ben it's Bob SB and thanks for the question.
No our our costs.
No when we look at our costs.
Yes, certainly on our Mdna, we're able to reduce a lot of the discretionary costs.
We have in our budget and also we.
We did make some.
Structural changes in the business that allow us to capture a portion less going forward.
The operating side.
We are fortunate that we have.
[music].
No our highly variable cost base.
We continue to see the positive impact.
That's in the quarter as as we progress through and volumes have been somewhat under where they were last year.
Thank you for that and then my second follow up question to partner in the U.S.
First can you talk about different outcomes in the us election.
Could there be any.
Different impacts for your business.
As part of the U.S. also you talked about M&A opportunities are heating up are you seeing since called fit.
Couple changes.
Regional opportunities are shifting somewhere else can you just kind of.
Some more color in terms of what you're seeing in M&A market.
Yeah.
On your first question I think independent of the.
Outcome of the election, we still see the U.S. market as highly attractive highly fragmented and our business thesis there remains in tact.
Yeah, we like we like the market separately.
No we've seen some good growth in those markets and most importantly, we have a great.
Great team that really focuses on.
We're seeing customers and supporting their local communities.
We want to continue to grow and invest in that business and dependent on the outcome of the election.
No in terms of the M&A opportunity again, our growth thesis there remains intact, while the market is still highly fragmented and we are seeing opportunities.
To to buy some great business suits as we can falls into our platform.
Always we remain disciplined M&A process and look for good quality assets with great deeds.
Thanks.
Great color. Thank you.
Your next question comes from Davis with RBC. Please go ahead.
Hey, good morning, guys. Thanks for thanks for taking my question.
We've been getting a fair amount of questions on the international segment, just as we head into what would normally be a peak travel season, as well as kind of a resurgence in Kobe cases globally. I know you provided a rough split on retail commercial and supply in the past can you refresh that breakdown and then.
Provide a bit of detail on what you've been seeing in terms of base demand local tourism and commercial activity in the area.
Yes, hi, good Bob SB and thanks for the question.
I think we provide the breakdown when we initially bought the business.
We havent.
Disclose sort of broken it down further sense.
What we would say consistent to what weve communicated in the past we've seen some segments of the business perform.
Exceptionally strong and.
Others, where we have had an offset to too.
No reduce.
Tourism.
I would say.
You know, it's like like all of our businesses. The international business has is diversified and has many product lines.
You need to see the benefit of that not only in international but across our business because were not people, sending one on sector or segment.
The other thing is geographic.
The geographical.
Diversification has really helped.
Some of the some of the highlights from that area are we continue to win in May.
Markets that are more within or LIBOR towards natural resources, such as Diana concern Admiral we except may two accounts.
We continue to gain market share.
In the power.
Power generation market, where our team has continued to.
To win.
Large commercial contracts in that space.
On our on our diesel on propane business, we've had a lot of good local wins within markets.
And you know that has that and.
An intense focus on cost has helped to offset some of the pending shortfall or some of the shortfall in tourism.
That we see in the market so again.
Not not one item, but many.
The other item as our supply business there.
The team has made some really.
Good adjustments on the distribution side and optimizing our fleet of ships and going on and then also continues to set.
To look for opportunities in the market to buy well and we continue to see that flow through the results. So so again many.
Many great.
Activities, there that help shore up.
Part of the reduction in tourism.
Thanks, That's a that's really helpful. Just a quick follow up if I may.
Margins were also very strong can you can you remind me roughly how much of the international segment is regulated from a market perspective.
Maybe just kind of outline the key driver so thatll performance during Q3.
Yeah, you know roughly roughly half the markets that we're marketing into.
On.
On the retail side are regulated.
And we've got many different product lines that are that are in those markets.
And no again, a lot of the margin improvement has happened on the supply side of the business, what we've been able to leverage our distribution and supply capabilities.
Two.
No by well in the marketplace.
That's great thanks, very much Rob.
Your next question comes from John Moran with JP Morgan. Please go ahead.
Hi, Good morning, guys. Thanks for taking my question.
On burn to be can you talk through a little bit the 90% utilization rates.
He said that you guys mentioned.
Good deal higher than the industry in North America, and I know you gave some color and called out the Eagle inkjet, but just hoping you could dig in a little on the refinery and how it's been so unique in this environment.
Hi, John and good question, the you know again.
I do commend the team there on being able to move, particularly jet diesel because that is really the.
The key item that's no other supply constraints with.
And yes.
Yeah, we've been fortunate that.
It's been able to place that into the local market or adjacent markets.
And sell it so so some good work by our optimization team and our sales team to place that product in the market and allow the team in the refinery.
To operate safely and reliably now the other thing is we have seen gasoline demand, particularly in western Canada as things play. So that's probably been strongest in Canada, where we've been the least impacted by site co bits.
Now the.
The slowdown once that happened in the marketplace. So those things combined helped us maintain a high utilization rate.
For the quarter.
Great. Thank you and then on.
On the Canada retail side, you're inside the store comps were up double digits, the second quarter in a row.
You are also up about 500 basis points on the non fuel gross margin percentage for can you talk about the mix effects in that category I know tobacco in Lotto strike drew.
Drove the margin down a little bit in Twoq. It seems like that's come back somewhat.
Yes, so that non fuel component has our convenience and also our commercial non fuel so its not just purely convenience.
That margin that you see.
You know I would highlight that we do continue to see good growth.
In that segment and then paying all that.
That's the number of different factors one as we continue to see the benefits of the rebranding of on the run in key locations.
We continue to see the benefits of some of the capital we put in 2019 at both sites gain traction.
No start growth in the market and we continue to see the benefits of.
Our efforts of our category management team, which is optimizing the offer.
Some of the changes that we've seen.
That are cold that driven where people are using the convenient segments as a way to supplement their their weekly online buying with like with items, let's say.
Have running short on the phone.
Great. Thank you very much.
Your next question comes from Steve Hansen with.
Raymond James Please go ahead.
Oh, yes, yes.
Question on the journey program you have surpassed the 1 million member Mark that's that's an obvious and notable milestone here just curious if youd be willing to share.
Good for your membership over the next one to two years given the strong take up we see thus far and maybe just some additional metrics if you've got any around.
You know again that the worksite benefits, you've been seeing and or any additional sort of obvious milestones you're seeing that you're correct kind of keep your perspective.
Yes, Thanks, Steve and I appreciate Youre.
Can you use it so the journey program I Love. The report that you wrote on that quite insightful.
You know the.
I would say first of all look we're delighted with the growth and again, particularly.
In an environment, where we put the brakes on for a few months and we really did only ramp our promotional.
Activity here towards the back end of the quarter, So very delighted with the uptake and again speaks to the strength of the program and our operations team and engaging customers too.
Two.
To to participate in terms of our targets.
Yes.
The growth rate is certainly where we're delighted with it.
You know I would say our target is as big as we can get right.
We eat.
We service millions of Canadians and.
And I expect to see that continue to grow.
Quite dramatically.
By that the growth rate continues here.
There certainly is a scenario where.
I believe over and over time that we should be able to get into that.
Two to 4 million Canadians participating in this program.
You know some of that we are seeing very positive.
Well and again these are all early days.
In terms of the program.
As we gather data, but we certainly seen piece or basket size.
Trip frequency.
Starting to increase.
And also build size go up quite dramatically as as consumers.
It used to the program and get used to using it. So and then also I would like to highlight our.
Partnership CNBC, they've been a great partner here, where.
We've been able to connect our journey program to folks that have us T C.
Credit cards, no myself being one of them.
The team has done a lot of work in the last quarter to really simplify that that that's.
It's process and as a result, we're continuing to see the number of Blink cards climb up quite quickly and we do see a material increase in the share of fuel spend building parts. So again very delighted with the progress and the old answered.
Main LP project forward this will have a.
A very positive impact on our sales.
I appreciate the color. Thanks.
Your next question comes from Michael the Analyst with TD. Please go ahead.
Hi, Thanks, you've covered some of it but.
Fuel margins.
Obviously been very strong, particularly in Canada and international but.
Can you get the best of your ability.
Tried to sell.
Separate how much of this you think as temporary because the market is adjusting to lower volumes and how much of this you think is.
The business mix related and supply procurement efforts made by parkland and sustainable longer term.
Yes.
First of all on the pricing side very difficult to predict.
Again, we don't need to price.
Price competitively in the marketplace to make sure we deliver the best value for consumers.
And we're committed to do that.
On the.
No supply side it is captured in various areas of our business.
No on them.
Wes and international side, we do have an integrated margin there.
And in Canada, we isolate that into our supply group.
No again, we continue our our supply team continues to improve our supply economics through.
No partnering with our refining partners to optimize value.
Arbitrage within the marketplace, leveraging our distribution and storage assets in local markets to move product around and take advantage of location, our arbitrage and then.
Now and then the third thing is making sure that we always have products for our customers, which we.
He is an ongoing advantage of our claims system.
The other item that Weve done Michael is.
No as we said we we we've made some investments in our digital capability and analytics and that's really helped us across both our.
Our.
Customer or consumer facing side of the business, but also on the supply side, we continue to get better at.
Taking that data and analyzing it and making sure we're optimizing.
Locally, but across the system when we connected in with our.
Our demand management, and our supply making sure that those are connected to optimize across the entire value chain and.
And again those.
I think were all at parkland delighted with the outcome of that investment and the.
Some very quick payback.
To to those initiatives.
That's helpful. Thank you and just a follow up on the journey program.
[music].
I can only imagine thats, helping on your same store sales, but how clear is that relationship between the rising.
Journey membership count numbers and the acceleration in the same store sales that you hadn't heard from first half to into Q3 or is that something that you can monitor through the data and see that the the membership is driving the higher pace of same store sales outlook.
I think it's certainly something that we can see and we started to quantify.
The theme.
The incremental basket size, which we can correlate the frequency of visits and ultimately how that drive same store and we are seeing the positive impact.
I think we'd like to see that.
Program mature a little further.
But thats something that at some point, we'll provide more clarity on again as the program matures and we get.
A couple of more cycles here of seeing the benefits.
And our confidence that the.
That trend persists.
Thank you and just finally on the refinery.
Yes on the Q2 call you guys said that the refinery is running around 80% to 85% utilization than your finished just over 90. So.
I'm, assuming that you exited Q3 and enter Q4 at a rate that was north of 90%.
And it sounds like you're yes, it would it be fair to say that you're comfortable that you'd be able to.
The 91% utilization than you did last year in Q4.
Yes, I would say, it's a current demand persists that should certainly be.
Achievable number here as we go into this quarter.
And we are continuing to see that sort of utilization.
The asset.
Yes, I'd also highlight.
This quarter is sort of the.
First quarter, and 2020, where you do see the full impact of the refinery.
And because the prior two quarters, we were in turnaround.
And so I would say we're delighted that the.
The ability of the team to two.
To keep a high utilization rate and capture the economics that they have.
Great. Thanks, Scott.
Your next question comes from Kevin Chiang with CBC. Please go ahead.
Hi, good morning, Thanks for thanks for taking my question.
I could just turn to the my first question if I could just turn to the international segment. If I just look at your Q3 results versus.
Your Q2 results.
Volumes are down a little bit, but EBITDA was is obviously much higher sequentially, even if I back out the one onetime supply Dave.
Trying to get a sense of prepared them, but there's a lot of synergy capture opportunities within international I guess thinking about Lloyds this year given.
Given some of the end market.
Volatility but.
How was that synergy capture coming along here or are you are you still on target to I think hit over 40 million kind.
Kind of within the next year or so or are those apples pleasant accelerated given some of the cost cutting you've done at some of the efficiencies you foundry this pandemic.
Just be interested in knowing kind of some of the drivers here with the international earnings growth.
Yes.
Hi, Kevin and good question I appreciate it I would say the first.
First of all the pandemic did force us to review our cost base across the business and again, we benefited from moving decisively in quick here across the business, including our international business and.
And also similar to our our North American business, our international business does benefit from variable cost base on the operating side. So we continue to see the benefit of that in terms of.
Has that accelerated our synergy capture I would say our synergy capture is on track.
We know that the plant that makes it force us to operate to push a little quicker on the.
On the cost side.
But we continue to make very good progress gone against the base assumptions, we put in.
Fortunately because of the slowdown in Colgate.
Some of that as as.
Been absorbed by the slowdown in the business.
Tough to say, how that'll how how that will.
Manifest itself.
Next year I mean again, we do continue to see the business performed well.
We continue to see the team there.
Look for alternative sources of gross profit, which they've done admirably and so we continue to make great progress on.
Particularly the supply and distribution side and continually optimizing that and improving the opportunities and.
That side of the business. So so again.
So delighted with the progress.
Certainly a large part of that is what we did plan.
We're seeing some of that a bit earlier, but again the headwind there is.
Economic slowdown.
Thanks.
That's very helpful color I mentioned my second question.
Obviously Q3 was strong as you mentioned in your prepared remarks, you kept your capital envelope on.
Change from what you had guided to in Q2, and just wondering just given up just given the.
The resiliency and earnings.
The fact that you're holding capex unchanged just wondering about that that reflects maybe a medium term change in how you think about your capital allocation weather.
Whether you're prioritizing de leveraging more or does the M&A pipeline look a little bit more robust here.
Yes, you have the put call option with with a small minority stake you don't own are you are you, creating some balance sheet for that.
Just any color in terms of how you think about that capital allocation over the next 12 to 18 months yes.
Yes, certainly Kevin and I'll, we'll split that into two questions I'll take the first part and talking about our capital spend and then Karen to comment on the balance sheet.
In terms of our capital.
Going forward certainly we are ramping up again and looking both organically on off and on the M&A side.
And we do see some good prospects in both those areas. There is a lead time and certainly.
Now with some of our.
No more northern growth Capex, we fit into winter and its hard to supply that so it pushes a lot of the stuff in the next year. So we will start to see and have started to see some some opportunities and we're executing again.
On the maintenance Capex, we did cut back this year. We next year, we will have to be just to make sure that we.
Don't.
Run our assets.
To a point, where we can service our customers.
But our intent is to get that fully back on track next year across.
Yes, the business. So you will see capital come up.
No we have.
That has been a benefit to the balance sheet and I'll, let Darren talked about the balance sheet.
Yes, great. Thanks, Bob.
And on the balance sheet I think we're really pleased with.
How how.
How leverage has come in May remain very steady here this quarter down slightly.
In a quarter, where we didnt.
Significant M&A, we did repay.
85 million of net debt, which is which is a great thing.
Thing to be able to do.
But we're very comfortable with where we are on our overall leverage.
And we have lots of flexibility and lots of liquidity to be able to fund our growth, both M&A and organic and continue to be very.
Disciplined in looking at those opportunities and ensuring that were.
We're getting the value from those investments, but so we're in a really great shape on the balance sheet.
That makes sense of perpetual taking my questions. Congrats on a good quarter there.
Well.
Your next question comes from David Newman with Jordan. Please go ahead.
Good morning, Gents, a remarkable quarter.
Just a couple of questions first of all I've been digging a little bit deeper into into the U.S., which has really stood out in the last couple of quarters here. It does seem like you're really leveraging or supply vantage down into the U.S. and we're really starting to get some good traction there and negotiating better rack prices.
Overall, it's and scaling the U.S. operation. So I guess my question is.
How much leverage are you seeing how much of the scale, helping you out and negotiating better procurement deals and.
Obviously, that's a good set up for future M&A as well.
Hi, David and thanks, Bob.
Yes look our U.S. business look we're delighted with the performance down there and what we've seen is that.
We set up these regional operating center and.
Again, the team there and focus on on the local markets, which are fairly large write down these are large markets and.
We've been able to start to build scale in those markets. So that we can for the supply and supplies a number of different levers that the team they're both no again first and foremost its.
Partnering with the rate refiner and finding value that works for both of us and we've been able to.
The team there has been able to develop strong relationships with some refiners in the market.
Second thing again is leveraging our distribution fleet, which gets bigger with every acquisition.
And in that market, it's mainly a truck based fleet.
And again the teams ability to shift.
[music].
Between various.
Suppliers in the market quickly is part of the success and then the third element is we do continue to supply that market with planks Canada.
Both on the diesel and gasoline side, we do have term.
Terminals rail offload rail to truck terminals in key markets that we continue to leverage and that also helps us.
I'll make sure that we have the best best supply in those markets. So so again scale and then the more scale, we put on top of that.
The better benefit gas and we continue to see that with the acquisitions.
As we continue to grow we did announced some acquisitions earlier this year and continue to see a.
Similar trends in that market, where it's continuing to consolidate and with certainty.
Okay, and then second question I had just on the M&A side further to Kevin's question on capital allocation, you've got obviously a looming.
Buying the remainder solid thinking it's early 2022 that you can do that to the extent that you're investing in growth capital and looking at M&A et cetera, and you've got a great balance sheet. Obviously at this juncture does.
There is a whole chicken deep deep do you hold some back on M&A and you asked a little bit and kind of densify, the mark rocks that you're in today and keep your powder dry for the for the stub of solvent you don't all so in other words is that keep your keeping a little bit in check on M&A for next year.
Okay.
Hi, it's Darren Smart here and thanks for the question.
You know we.
One of the the dynamics that does play out as we acquire.
Wire in the US is we're able to acquire EBITDA at the same time.
And so we don't we.
Materially increase our leverage as we buy lots of these.
Small to medium size businesses so.
As we look out we think we've got lots of balance sheet capacity to be able to continue to Neil for.
As to the the us opportunities and as well to be prepared for.
For the.
Purchase of the remaining solid.
Stake, Okay, and any change in valuation metrics and you asked the guys become a little bit more desperate at mid to covert to potentially sell it at a really reasonable multiples.
See I think valuation.
In the U.S. has remained pretty consistent with before the pandemic.
The sector has been quite resilient and.
We're seeing very similar.
Valuations out there in some businesses that are really hold up well.
Excellent. Thanks, guys I appreciate it great quarter.
Thank you.
Your next question comes from Peter Sklar with BMO capital markets. Please go ahead.
I'm trying to better understand the relationship between your fixed and variable cost structure. So.
The 47 million up costs that you took out which I believe were largely marketing and general administrative costs.
Like if you had done nothing in terms of attacking your structure how much of that 47 million do you think you would have.
Captured.
Just from lower volumes, so what I'm really trying to drive at is how much of that 47 million.
Purely variable and related to lead or do you have a appeal for that at all.
Hi, Hi, Peter It's Bob SP I don't have.
Feel for that in terms of an exact number let's let's get back to you.
Okay.
On the International Division could you explain what that onetime gain was that the 10 million.
Yes, no for sure let me just go back to your previous question. So I think on a sustainable basis.
Telegraph that we believe Theres 50 to 70 million.
Cost savings.
Annually.
We've been able to to work into the business through.
Okay.
That makes sense.
Yes, and that's a mix of opex spend them.
Okay.
And then on the International Division the 10 million game could you explain what that is.
Yes, I mean look that's just the team there.
Was able to buy some product in.
Previous quarters.
When prices were very low and as demand picked up we're able to push that into the marketplace and we got a benefit on the.
The difference in the price.
Okay and also on the International Division you talked about like you won some contracts and power generation. So.
When you're bidding on contracts like that is it is it purely on price and why are you able to bid stronger than others on price or are there other.
Factors that.
Our generators look at strictly aside from price.
No. It it does tend to be very price driven although.
I would say one of the things that helped us, particularly having our own fleet.
The Caribbean as being able to optimize around.
The.
The delivery and.
Our.
Logistics advantages hat is been able to has enabled us to have a price advantage, but but we can still.
We can still get some good gross profit out of these contracts.
Okay, and then lastly, just on the back.
In the U.S. M&A landscape.
Speedway transaction put to bed.
Two questions do like do you feel that that's changed like does that change the dynamics in that.
In the U.S. M&A landscape has that treat things up and then the other thing what are you hearing about.
You know the assets that will have to be so you know if they put the two organizations together.
From an antitrust perspective like are those are you seeing those assets yet or if you can just give us an update on what you're seeing from your perspective.
Yes, so in terms of the dynamics of the market.
You know again the market is very fragmented than we are still seeing good opportunities and good value in the markets that we operate in.
I would say with regard to.
Potential.
No the acquirer 711, having spinoff potential sites.
We do believe there in the market, we don't comment on specific processes, but certainly expect to see those transactions here over the last fall.
Okay. That's all I have thank you.
Your next question comes from Vishal Shreedhar with National Bank. Please go ahead.
Hi, Thanks for taking my question.
On the in the Canada section in the disclosure material management networks that economic activity improved through the quarter.
I presume in.
Clients at the business trends improved throughout the quarter.
I also indicated that seem positive trends at the end of September so.
You know that that roughly coincided with a little bit.
Increasing in the Cold cases, I'm just wondering you know last quarter, you did give us some indication more discreet indications on how the businesses are performing which coated ramping back up in this commentary in the disclosure wondering if you can give us a taste of how the second wave impacted particularly the candidates.
Yes, I would.
I would say look.
No volumes are slightly down on a year over year basis.
I would say that the impact of.
The second wave.
At this point is fairly minimal in the business.
We continue to see the same dynamics, where.
The.
Any decline is offset through margin and cost at this point so.
No not seen massive slowdown like we saw in March and April.
Well, what we're seeing is on a very localized micro market basis there are.
Fiftyk impacts, but overall.
Overall, we don't see any material impact to the business.
Natural offset margin and cost.
Okay. Okay. Thank you for that and with respect to your efficiency and cost savings I guess, a big topic in this quarter and I know you called out that 60 to 77 year earlier and I understand it's early days.
But wondering.
Just curious able to quantify to what degree you are able to capture any of those savings in this current quarter.
Well they would be within in the quarter. I mean look we are going to have to add cost back into the business as the 50 predicts.
Particularly as we start to reinvest in our our initiatives, which you can see have added tremendous value, whether thats or digital initiative.
Our our loyalty program.
Or are.
Our organic growth, which does require some cost to execute so you will see some of those costs come back, particularly on the.
Side.
But we have found efficiencies on the system side, where we continue to execute effectively across our business and strengthen the platform.
And.
And then certainly on the operating side, we there has been able to.
You can find some efficiencies, which will persist going forward, but those would be within occurrence.
Quarter.
Okay, and lastly, with respect to.
Impact COVID-19 on our longer term decisions that management may make which Rick with respect to.
Your investment plan and Capex and so on and so forth it does seem like.
It does seem like there will be some lacking changes for the consumer is going it coking.
Gets better perhaps work from home sticks, perhaps.
And there are different elements that stay around wondering if this changes that we were at the end of the elements that you've talked about even on the margin for acquisitions more or less so are you willing to pay more or less or is that what I'm gathering from you. It seems like business as usual.
You know I know you've done them or to work on the clock and Capex side with respect to the plans looking forward. It seems like business as usual is that a fair characterization.
Yes, you know what we've said is our our our sort of investment thesis remains intact in terms of our plans to deploy capital and our M&A thesis.
You don't have to have things shifted around for sure I mean look there are certain and it's hard to predict ultimately how once.
Once vaccination is in place or are certainly more rapid testing, how the consumer response and how their behaviors change.
Well there is certainly some impacts of cobot that we would have never predicted in terms of convenience channel and some of our other channels and how we're going to take them through this.
No on the on the demand side I think it's early to tell whether they'll be structural impairments and in various markets again, where we have seen a certain the offsets to that that.
Continue to persist so.
No that that's how we're proceeding going forward. The other thing is were always very careful in how we deploy our capital.
We do have if you look at the organic growth side.
We've got lots of opportunities that aren't focused in the core urban markets and we continue to see robust demand and activity outside.
Outside of those core urban areas. So so.
Anybody you to invest and get great returns and again on the M&A side same thing.
I think in the markets that we're in in the Rocky Mountains Northern tier.
Florida.
We have seen.
Again demand.
Main robust and certainly see good opportunities there continue to buy very well run businesses that in our minds.
No it will persist here going forward.
Okay.
Thank you.
Your next question comes from Derek Dley with Canaccord Genuity. Please go ahead.
Yes, hi, Thanks, just one quick one for me just in terms of we've talked a decent amount about M&A here today.
Just wondering what you're seeing in terms of the opportunity set it sounds like the multiples of sort of remain the same but.
Are you seeing more opportunities I get the regions, where you're looking in the U.S. what about in Canada is there anything to really do in Canada would be would you be focused more on commercial propane just wondering how that sort of plays out.
Hi, it's Darren Smart here thanks for the question.
Yeah, we.
The us is certainly a priority for us on the M&A front, but.
But that being said, we continue to see opportunities in Canada.
And international as well so.
There's there are opportunities across our business.
And.
Which makes for a broad M&A base, if you will.
And they do take the.
The nature of.
All of the businesses you've mentioned so retail commercial.
Propane LPG.
And have you seen sort of an increase in I don't know files it coming across your desk as of late or is it pretty stable from what you saw pretty cold it.
It's it's probably busier.
Our team is quite busy looking at opportunities across the business.
And.
Yes as busy as we've been.
Okay. Thank you very much.
Your next question comes from Elias Toskala with Industrial Alliance. Please go ahead.
Hi, Good morning, I just have one question.
Focusing on Burnaby, and you mentioned coprocessor Drydocks and coverage blending so correct me if I'm incorrect.
Is it possible that we can see a step up.
You were able to cope process, which which could be.
You know increasing output without sort of the capital expansion in the long term or may be modified product mix up a bit.
Well so so.
Our co processing, we are actually taking bile feedstocks into the refinery.
And processing them.
No. We just went through with turnarounds, which enabled us to increase the throughput of file feedstocks that team is currently.
Ramping that up and they've made some very good progress so.
In terms of going forward.
In order to increase that we do need to make some investments on the logistical side to enable.
We do have some constraints there in terms of handling.
We have planned and are executing against.
And we can continue to ramp that up.
The next steps will require capital.
Additional capital, it's something that we're evaluating and certainly.
We'll make sure that any capital investment there is justified by the returns that we can get in that facility, which again look very favorable at this point so.
We're really proud of what he has been able to achieve there.
We have great support of.
The BC government as we continue to be a leader in the space and certainly.
What's a British.
British Columbia burn to be on the map as a leader in coal processing in Canada.
Great. That's it for me I'll leave it at that thank you very much.
Great well. Thank you thanks, everybody for joining and look forward to connecting with you next quarter.
Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines have a great day.
Okay.