Q1 2022 Parkland Corp Earnings Call
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Yes.
Okay.
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Good morning.
My name is Marianne and I will be your conference operator today.
At this time I would like to welcome everyone.
Everyone's who parkland 'twenty 'twenty to Q1 results Analyst Conference call.
Lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
To ask a question during this time simply press star one.
On your telephone keypad, if he would like to withdraw your question. Please press star zero. Thank you.
I would now like to turn the conference over to Valerie Roberts Director Investor Relations for parkland.
Go ahead.
Thank you operator with me today on the call are Bob Espey, President and CEO , Marcel Tunison, Chief Financial Officer, and Ryan Krueger SVP supply trading and refining this call is webcast and I encourage listeners to follow along with the supporting slides will go through our prepared remarks, and then open it up for questions from the investment community.
Please limit yourself to one question and a follow up as necessary and if you have other questions re enter the queue, we ask that.
Analysts to follow up directly with Investor Relations team afterwards for any detailed modeling questions.
During our call today, we may make forward looking statements related to expected future performance. These statements are based on current views and assumptions and are subject to uncertainties, which are difficult to predict. These uncertainties include but are not limited to expected operating results and industry conditions. Among other factors risk factors applicable to our business are set out in our revised annual information form and managements.
<unk> analysis.
We will also be discussing non-GAAP and other financial measures, which do not have any standardized meaning prescribed by <unk> for us. These measures are identified and defined in parkland continuous disclosure documents, which are available on our website or on SEDAR.
Please refer to these documents as they identify factors, which may cause actual results to differ materially from any forward looking information or statements.
Dollar amounts discussed on today's call are expressed in Canadian dollars, unless otherwise noted I will now turn the call over to Bob.
Thank you Bill and good morning, everyone. We appreciate you taking the time to join us to discuss our record first quarter results, which have set the stage for a strong year.
Before I begin I'll highlight the photo on the.
On the cover slide, which showcases an eminem retail location in Calgary alongside our on the run branded vehicle. We are excited about the coming together of these brands, which will enhance our food quality food offering and provide customers with even greater convenience Eminem is one of many steps we are taking.
In our retail diversification strategy to expand our proprietary food offer in addition to its retail network and capital light operating model Eminem creates a runway of organic growth opportunity for us to offer a high quality food offering.
<unk> delivered an exceptional quarter against a volatile backdrop that ongoing COVID-19 recovery inflation and the invasion of Ukraine by focusing on our customers and by staying one step ahead of their evolving needs. We demonstrated the strength of our proven integrated business model.
And our ability to thrive through various economic environments. During this call will share the highlights of the quarter. Our integrated supply model delivered record results across all three regions are renewables EBITDA was $25 million in the quarter.
Growth, we grew our mining business by 60%, we continued to expand beyond the run convenience brand by adding 37 sites.
Through our Joya journey rewards loyalty membership by 10%, we accomplished a co processing co processing first using low carbon intensity tall oil a product of the forest industry. We.
We advanced the integration of our acquisitions from last year, and we maintained a strong balance sheet. Despite working capital headwinds that increased our leverage I would like to thank the entire parkland team for a strong start to the year and for delivering record results, which continues to demonstrate the quality of our team and the trajectory of our company.
Any.
Now let's start with.
We continue to expand our customer base and successfully grow the contribution from our marketing businesses.
Our accomplishments generated adjusted EBITDA of $387 million in the first quarter. In addition to underscoring our confidence in achieving the high end of our 2022 adjusted EBIT guidance, our performance puts us on track with our $2 billion run rate ambition by the end of 2025.
Before Marcel walks through the enhancements, we've made to our reporting disclosures and does a deeper dive into our Q1 performance I'd like to take a few minutes to outline the strategic themes from the quarter.
Sure.
Teams in each of our markets continued to advance our strategy, which is built on our unique supply vantage, which is embedded across our marketing business.
We continue to advance the integration of great companies, we welcome to parkland last year in parallel we successfully ash the impacts of inflation, while optimizing margins during the quarter. We continued to advance our retail initiatives. We added 37 on the run stores and grew our journey membership.
Over 10% from Q4 yet.
Yet again, driven by proactive sales efforts and strong volumes and margins, we continue to prove the strength and resilience of our commercial business.
As an example, as residential customers and new homebuilders transitioned from furnace soil. We grew volumes in our eastern Canadian propane business by almost 15% versus Q1 last year, we see green shoots of the tourism industry and during the quarter, we secured marine contracts for over 130 million liters per year.
Spanning the international cruise lines and the provincial ferry sectors.
As you know we are committed to leading our customers through the energy transition, helping them lower their environmental impact our activities are far reaching and I'd like to draw your attention to one highly innovative accomplish from a renewables refining activities in Burnaby recall in 2017, our Burnaby.
<unk> became the first in North America to cope <unk> bio feedstocks using existing infrastructure, we extended our leadership in Q1, delivering the world's first by co processing tall oil. This feedstock comes mainly from pine trees and as a byproduct of the pulp mill process Ryan will talk about this later.
During the quarter, we benefited from last last year's U S and international acquisitions and close to our previously announced purchases of <unk> and Eminem food market in Canada, each trends transaction advanced our strategy to further develop our platform diversify our revenue streams and strengthen.
Our customer offer recall that we effectively executed two years of acquisitions in 2021 on the last call. We estimated that we could generate $80 million of synergies by 2024 on the $200 million of acquired EBITDA included in our guidance. We are now focused on integrating.
These high quality companies, capturing synergies driving organic growth opportunities and on reducing our leverage by slowing down acquisitions.
System with our commitment to deleverage, we've decided to defer our option to acquire the remaining 25% of salt in 2022 with a record Q1 performance 2022 shaping up to be an exciting year I'll now pass it over to Marcel to discuss our results in more detail.
Thank you Bob and good morning, everyone.
<unk> delivered an excellent quarter and I Echo your congratulations as well I will focus most of my comments on quarter. One results. However, I do want to start with the changes we've made to our reporting disclosures. We did this to align with the strategy, we communicated last year and to provide greater transparency into our operations.
And underlying financial performance, but what else changed firstly, we have moved supply trading and wholesale in Canada from the supply segment to Canada. This aligns the Canada segment to our U S and International segment. It also reflects of these activities support our customer facing divisions.
And as a result, we are now able to report our Burnaby refinery as a separate segment.
Also to provide additional insight we have added a line of business reporting which highlights the performance of our retail and commercial business across parkland and lastly in line with our strategy. We have provided details on our renewable and conventional results of sub segments and to help you with this transition and for comparative purposes information for <unk>.
Prior periods.
Prior periods have been restated and reclassified.
Turning now to our results as Bob mentioned through a period of ongoing economic volatility we delivered a record quarterly adjusted EBITDA of $387 million and this marks an excellent start of the year and we are confident we are trending towards the high end of our full year guidance range.
At a macro level as COVID-19 restrictions are roelof receipt customers driving more this is reflected in our total volumes, which are up 26% from quarter, one 2021 with up.
Take a closer look at our segments I'll begin with Canada, where we delivered an adjusted EBITDA of $191 million. This is an increase of $42 million from quarter. One 2021 on a comparable basis, reflecting robust margins ongoing recovery of fuel volumes the impact of our <unk> and Eminem food acquisition.
<unk> and organic growth.
While we saw volumes improving during the quarter compared to quarter. One 2021, they have decreased slightly compared to quarter. Four we attribute this to loosening provincial COVID-19 restrictions and a gradual return to office workers to commute to markets being dampened by increased Covid cases and record pump prices.
Provinces remain 10% to 15% below pre COVID-19 volumes and this gives us confidence that there is further upside in continued recovery.
Excluding cigarettes, we saw one 7% growth food and company same store sales growth. This was underpinned by beverage is up eight 5% in central store categories up eight 9%.
Our retail operations continued to benefit from productivity enhancements such as refresh coffee.
A fresh coffee and frozen beverage offers merchandize analytics and store layout optimization.
We expanded our convenience margins from 29, 8% to 32, 9% in the quarter, reflecting the inclusion of Eminem and a shift in sales mix.
You may remember that last year, our retail team harnessed the new sales channel in the form of third party delivery through services, such as skip the dishes door dash and Uber eats during the first three months of the year, we saw 40% year over year growth in this channel and we will continue to progress. This initiative as we look to serve customer demand.
We are seeing some changes to consumer behavior in response to rising inflation.
Average fill rates and basket sizes have declined however, total transactions are up year over year or in other words customers are buying less few each visit but are coming to see us more more often as a result, while certain discretionary categories have declined overall fuel volumes remains resilient and our view is that for most <unk>.
Fuel is a necessity and higher prices have limited impact on volumes.
Our international segment delivered an adjusted EBITDA of $82 million, an increase of $15 million compared to the same periods in 2021.
During the quarter, we saw growth in tourism and wholesale business in most markets are easing COVID-19 restrictions.
Contributions from our acquisition in St Maarten last year and supply synergies from a 50% partnership in the Dominican Republic also made material contributions to our growth in international.
We continue to optimize our supply infrastructure, which helps minimize third party freight expenses, while at the same time driving higher fuel volumes.
Our focus has been on optimizing our operating efficiencies in response to increasing demand, especially from the natural resource and tourism sectors and a leveraging our world class supply platform to deliver a record quarter.
Our USA segment delivered adjusted EBITDA of $47 million up $28 million from quarter. One 2021. This growth has been led by a full quarter of results from our retail network acquisition in Florida, and our purchase of Lynch in the Pacific Northwest both of which closed in quarter four 2000.
'twenty one.
We are actively integrating both businesses to maximize synergies in the U S. We have seen growing fuel volumes with the phase out of Covid related measures driven by our team's knowhow and supply infrastructure, we continue to capture incremental margin through a volatile commodity price market.
Lastly, let me touch on a new refining segment and as a reminder, these results contain only to figures from our Burnaby refinery.
The Burnaby refinery delivered $89 million and adjusted EBITDA, which includes $17 million in renewable EBITDA.
The results were driven by a composite utilization of 92, 2% up from 91% in the same period last year and stronger refinery crack spreads as a reminder, we manage our price risk by hedging crude feedstock. This resulted in risk management losses during the quarter because of sharp commodity price increases and the.
Relative commodity prices had some timing impacts, which we expect to unwind in the next quarter.
Lower co processing also had an impact on the results. This quarter, we continued to progress our buyer feedstock capabilities co processing 4800 barrels per day and by your feedstock stock during the quarter, including a world's first in toll oil, which Ryan will speak to in a moment.
The table on this slide shows a clear trend of quarter over quarter increases in our results not only in adjusted EBITDA, but also in adjusted earnings and net earnings.
Distributable cash flow has also increased.
Approximately 9% to $4 73 on a per share basis. This puts us firmly on track to achieve the 2025 ambition outlined at our Investor base.
Used in operating activities was also impacted by rising commodity prices during the quarter and reflects a $436 million working capital headwind.
The next slides, we will address how we have improved liquidity and are maintaining a strong balance sheet. During these volatile times.
Move to the next slide our focus in 2022 continues to be to maintain a strong balance sheet and ample liquidity.
If you recall last year, we refinanced our finance and refinanced $3 $2 billion of bonds in a favorable interest environment. We also pushed out the maturities of our bonds through 2026 and later.
And in quarter, one we extended our secured credit facility by a year.
We also decided to secure additional liquidity through a 400 million U S. Dollar two year term loan on favorable terms after the quarter. We believe that this is prudent.
This is a prudent move given the uncertain macro environment, and especially volatile commodity markets. We currently have around $1 4 billion in available.
Liquidity.
We've also made progress on improving the underlying leverage and you'll see that on the right. In this chart. The strong cash generation in our business contributed to a reduction in leverage of <unk> three turns and part of this was offset by the completion of the two previously announced transactions <unk> and <unk> markets.
Higher commodity prices resulted in additional working capital requirements, which drove leverage up and our priority continues to be continues.
<unk> continues to be to bring leverage down and with the cash flow from a from a business, we will reduce leverage by about half a turn each year.
Moving to slide six and.
I'll now take a moment to outline some of the consumer trends, we are seeing before inviting Ryan to outline our broad supply advantage.
I'll begin with our journey rewards program, which continues to gain traction as customers value.
As customers seek value and relevant personalized offers in the current inflationary environment.
Experienced a significant increase in membership acquisition in the quarter. This was driven in part by our participation in Tim Hortons roll up to win contests, and the strength of our partnership with CIBC.
The Tim Hortons program was 100% digital it proved effective through delivering double our typical new membership acquisition run rate.
Cibc's New co branded Costco card drove significant acquisition in <unk>, leading to an improved share of wallet with CIBC customers.
As our membership continues to grow so does engagement into program journey rewards members spent 16% more in fuel and 9% more in our <unk> stores. They also respond favorably to exclusive membership offers.
As an example in March we deployed a flash sale offer where members have the opportunity to redeem a fuel discount on a limited time basis in the BC market.
47% of our mobile users redeemed to Salford with 83%, making at least one purchase over the seven days of the program.
We have also moved our ultramar Supreme saving days exclusively to journey reward members in the quarter in the second quarter, we'll begin cross promotional offers between journey and Eminem rewards programs.
We continue to be encouraged by the results. We're seeing from the program. Many potential partners are expressing interest to participate which will further strengthen our program and improve its reach our relationship with Amazon Web services is accelerating our customer segmentation and personalization offers the team also has the team has some great <unk>.
<unk> for the busy summer selling season.
Okay.
In 2019, we acquired the Tropic oil company. This was a natural extension to the robust marine diesel and lubricant business in our international business segment. The team has been working collaboratively to extend existing crew ship relationships through new jurisdictions, including Barbados. This has added millions of incremental leaders.
Diesel volume.
We recently announced the creation of a Parkman Marine Division this will enable us to leverage our supply and logistics capability, while optimizing our existing and prospective customer relations across all geographies.
Tourism gains momentum, we extended our relationship with an existing customer into the Vancouver market. This added approximately 130 million liters of volume to our Marine network. We believe we are just getting started and have significant runway in this business.
I will now pass it over to Ryan <unk> to talk about our supply advantage.
Thank you Marcel and good morning, everyone, turning now to slide seven parkland. Once again saw the tremendous benefit of our supply advantage in our first quarter results across all of our segments.
Our great people are significant scale, our strong supplier relationships and our unique logistics capabilities provide us unrivaled optionality and ensuring we meet our customers' demands by delivering feedstocks and products on time and on spec.
Our logistics capabilities spanned the modes of rail marine and truck and pipeline.
Terminal and storage assets, whether owned or leased provide us additional flexibility to source barrels for our own system and meet the needs of our 33rd party bulk wholesale customers.
This winning combination enables us to physically arbitrage different feedstocks and product markets that maximizes, both customer value and profitability to parkland.
Our World Class logistics, which includes our last mile trucking distribution capabilities allows us to serve our customers' needs and provides us the opportunity to strategically source and deliver products.
For example, in the Rocky Mountain region of the United States, We base load our product requirements with regional refiners. However, pad for refining capacity is simply not sufficient enough to meet demand and local refinery production must be shipped long distances, so product must be regularly imported.
To the region.
Through our terminal network, our logistics capabilities and our supplier relationships, we can arbitrage and barrels from multiple supply sources, including Western Canada, The Pacific Northwest The U S Gulf Coast and the U S. Mid continent, we choose the best value and Cup.
With solid price risk management practices to deliver an optimized solution to our customers.
We continue to strengthen our supply advantage by investing in our people and assets to enhance our customer offer improve our team's capability and continue to deliver safe and reliable operations.
Moving now to slide eight.
As we have discussed on previous calls co processing provides one of the lowest cost compliance pathways and has required minimal capital investment to date driving strong returns on investment.
In the first quarter, we are pleased to announce a world co processing first.
The Burnaby refinery is the first facility to process call oil in our fluidized catalytic cracker without pre treatment to produce low carbon intensity renewable fuels.
The renewable fuels, we produce at the refinery in aggregate contain approximately one eighth of the carbon intensity of traditional fuels.
This achievement was made possible through our team that has a proven track record of innovation technical capability and.
And the ability to forge partnerships across a diverse supply chain of different feedstocks and once again. This is all backed by strong logistics.
Previously a waste product from the pulp and paper industry tall oil further diversifies, our renewable feedstocks and demonstrates our commitment to helping our customers decarbonize.
I'd like to turn now to our environmental products business.
And I'd like to highlight our activities in the rapidly growing carbon compliance and carbon offset markets.
Parkland acts as a market maker between carbon offset or compliance originators and our customers, who seek carbon offsets or compliance credit for regulatory compliance purposes or to support their low carbon ambitions.
For example, we recently entered into a 10 year agreement with our food waste bio digester in the state of Maryland, who is producing renewable natural gas.
We have separated the environmental attributes from the physical RMG.
And have back to back the sale of these environmental attributes as they are delivered to us.
The global carbon compliance and offset markets are poised for exponential growth.
Takes considerable know how to be successful in this space.
Our regulatory and risk management expertise enables us to manage the entire lifecycle of these instruments all the way from certification to registration to delivery and ultimately retirement.
When taken together with our co processing, our carbon compliance and offset business supports our sustainability leadership and provides a suite of products and services, allowing our customers to decarbonize their businesses.
I'll now hand back to Bob to close out our formal remarks over to you Bob.
Alright.
Thank you Ryan and Marcel for a great overview of our quarter I am grateful for the parkland team's commitment to our customers working together as one team they delivered.
Third record results demonstrating the strength of our proven integrated business model and our ability to thrive through various economic.
Conditions.
We entered this year with a great deal of momentum and confidence in our ability to advance our strategy Q1 has reinforced that we expect to hit the high end of our guidance and are on track with our ambition to generate $2 billion of run rate adjusted EBITDA by the end of 2025.
To take a moment to reiterate our focus for this year, having accelerated X acquisitions. In 2021, we are wrapping up the remaining deals in our pipeline. We are focused on integrating and capturing the synergies from the companies acquired and on slowly.
On slowing down the pace of acquisitions to help strengthen our balance sheet.
Despite macroeconomic uncertainties and ongoing volatility that will continue to play out during the year the strength and resilience of our business gives me confidence in our performance.
With encouraging tailwind in each part of our business, we have a long runway of organic growth opportunities and much to be excited about as we advance our strategic initiatives.
Develop pillar is about providing our customers with essential fuels on which they depend and integrating and capturing synergies from the great business we acquire.
You should think of our diversified pillar is expanding our customer proposition by growing our convenience and food offers.
We have tremendous opportunity here, we ended Q1 with a little over 400 on the run and expect to end the year with over 500, well on our way to 1000 by the end of 2025.
I began this call with some comments on Eminem, however, beyond their food capabilities. We are excited about bringing eminems active loyalty customers closer to our journey platform, we see significant cross promotional opportunity and will begin joint promotional activity across our Eminem and journey loyalty.
Customers in the second quarter.
Ryan I already touched on our de Carbonization pillar. This is about seizing new accretive opportunities through the energy transition staying one step ahead of our customers' evolving needs and helping them meet our environmental goals. In addition to growing our co processing volumes by 30%. This year we are on.
On track to launch our EV Ultra fast charging network NBC during the summer we are confident our convenience destination model will resonate strongly with TV customers parkland has an exciting year ahead with that I'll now turn the call back to the moderator for questions.
Thank you.
Ladies and gentlemen, we will now begin our question and answer session.
Do you have a question. Please press star followed by the number one on your telephone you touched on the phone.
You will hear us retail pump acknowledging request Anil.
Questions will be pulled in the order that you received.
Should you wish to decline pooling process. Please press star followed by the number too.
One moment for your first question.
Your first question will be from Ben.
Isaacson from Scotiabank. Please go ahead.
Good morning, Thank you and congrats on the great print.
Bob you guys called out in your U S segment, New ship contracts I was wondering if you could talk about how meaningful those contracts or how do they work are they annual multiyear at the cost plus what is the size of that market that youre going after and what can you realistically achieve and how do you get there.
Yeah, Thanks, Ben and good question.
Yes.
Yes.
When we bought our business in Florida, we picked up quite strong marine capability.
This is a great example of how parkland can pick up a capability in one area and then deployed across our business and we've been able to do that successfully both in our international and Canadian business and our core customer within that market is the.
Cruise ship market.
And we've been able to pick up.
Additional volumes for our cruise ship customers in Indiana, and our international business, but also the recently extended that into Canada and seen some good wins there.
These contracts vary.
In some cases they are a year in some cases, they're a little longer and again.
Our differentiator there is service and being able to service these customers in local markets with a reliable.
Service provider.
And just a quick follow up there's been lots of talk about logistics delays congestion poor rail cycle performance rising costs can you frame what cost pressure you are seeing if any or delays on the logistics front and how would you frame the risk of that going forward.
Yeah. Good question, we certainly are seeing the impact of inflation across the business I'll turn that one over to Ryan and he can talk to specifically, yes. Thank you Bob and thanks for the question Ben So let me break this down.
By a couple of different modes of transportation.
On the rail and trucking side.
We are seeing challenges with labor availability.
We're seeing rising fuel surcharge cost that get passed on to us, which we ultimately pass onto our customers.
On the marine side with the invasion of Ukraine by Russia.
That has put some limitations on the availability of vessels that we can utilize and so those costs have gone up as well.
However, again, those ultimately get passed on to our customers.
Going forward do we think the situation will be materially different.
While it is hard to prognosticate. The reality is it looks like we are going to find ourselves in similar situations over the short term as we look forward that's the indication that we've gotten.
From our logistics providers, such as the class one railroads they are looking at a very busy summer.
And into the fall and again trying to address all of those challenges that I just mentioned.
Thanks, so much and congrats again.
Thanks Ben.
Your next question will be coming from Steve Hansen with Raymond James. Please go ahead.
Good morning, guys.
Just a question on the refining side, if I may the North American diesel and jet markets have become extremely tight here in recent quarters.
Notable transition from just 18 months ago I'm, just curious if there's any unique factors or issues that would allow you to capitalize on that any differently in the Vancouver market.
Or it might even limit you for that matter.
Get a sense for how that's going to trend going forward. Thank you.
Great. Thanks, Steve I'll pass that over to Ray sure. Thanks. Thank you Steve for the question.
It certainly is a volatile market and the middle cut of the barrel or what people call distillate, So it's largely diesel and jet fuel.
Have really been on a tear here from a pricing perspective.
As consumer demand for air travel.
It comes back and then there's been strong demand for rail and ground transportation, which drives a lot of the diesel market I think driving diesel up as well is the fact that we've got some natural gas that will no longer flow out of Russia.
Into Europe and they substitute.
So for some of that natural gas. So the pressures are quite strong when you add in the fact that we're in spring maintenance season, so lots of turnarounds across the industry.
It just exacerbates the supply demand fundamentals that we see currently how do we take advantage of this.
So we.
We approach the market from the perspective of buy from the best available source.
And we optimize across our system and that great logistics advantage that we have allows us to pull product in to any market that we currently sell into.
And we do that on an opportunistic in a very flexible.
Basis, and so we go where the opportunity is and we've been able to capture some fantastic arbitrage opportunities.
And keep our customers well supply I think that is critical.
That is our first priority and to do it safely. So I hope that gives a little bit of color.
Yes, that's fantastic color guys. Thanks, that's it for me.
Your next question comes.
Coming from Neil.
From Goldman Sachs. Please go ahead.
Hey, Good morning. This is Charlie on for Neil Thanks for taking the questions today.
Just wanted to start kind of on the fuel margin and cost inflation environment a bit it seems like up until this point kind of fuel margins have been on and off.
Set to the higher cost that we've been seeing but curious if you could opine a bit on how you expect the fuel margin piece relative to the cost inflation that you're seeing to kind of evolve at.
The retail business as commodity prices persist at these higher levels.
Icarly and thanks for the question.
Always difficult to predict where fuel margins are going to go they have been constructive here.
As.
As.
We've seen costs escalate.
Generally I would say in our industry costs do get passed on and certainly over time, we see that.
Fuel margins have offset general inflation.
Great. That's helpful. Thank you and then the follow up is was kind of around the renewable comments that you've made and congrats on the progress there could you talk a little bit about the suite of feedstocks that that youre looking at co processing, we've heard a lot about the tightness in the global vegetable oil markets. So curious if there are cost advantages that you.
We're seeing from running things like tall oil.
And if there is room to kind of grow the non veg oil feedstocks as you continue to increase your co process volumes.
Yes look we're really delighted with what our team has been able to do at Burnaby and I'll pass it over to Ryan who can talk through the feedstocks. Thank you Bob Yes, specifically, we run several different bio feedstocks through our FCC and our diesel hydro treater at the refinery.
Let me just run those down a little bit.
We process Talose.
Animal fats used cooking oil Greece's, we also co process canola oil and there are different grades of canola oil Super deep gummed bleach.
Bleached and refined all of those have different properties and thus drive different pricing differentials between the feedstocks and then tall oil that we've talked about a lot. Today. We also continue in partnership with with others to look.
At new feedstocks, and being able to co post process of those into the future. The big advantage that we have at the Burnaby refinery is this technology and the team's capability there, but these feedstocks are also right in our backyard.
The logistics advantages that we have are quite substantial.
When it comes to bringing these bio feedstocks into our facility.
And as we look out into the future. These feedstock.
We will become.
Growing concern in terms of availability.
But our partnerships are great logistics.
Will enable us to really be in the race.
And to procure these feedstocks as we need them because we are often the highest net back given the logistics advantages we have for these bio feedstock producers and that's a big advantage, we have from our location in Vancouver.
Great. Thanks for all the color.
Your next question is coming from Derek <unk> with Canaccord. Please go ahead.
Yeah, Hi, just turning back to Canada.
And I suppose a bit in the U S, but with the recent spike that we've seen in fuel costs, you mentioned youre seeing more trips with lower volumes at the pump.
Is this good for C store traffic just given the fact that people are coming to your sites more off there or are you seeing a benefit there as well.
Yeah, Hi, Derek it's Bob Espey.
Look I would say the best data we have is through our loyalty program, which shows that where we can track and certainly get.
The data that Youre alluding to.
And again, what we show is that folks in our loyalty program are more active at our sites.
And.
On average have a higher spend both on the fuel and the convenience category.
And that translates through.
And folks are buying smaller amounts.
Okay, and then switching just to the refinery with.
With the crack spread environment here remaining strong.
Can you just comment on how that the hedging works in this type of environment.
With oil prices, where they are at is it sort of is it reset at the end of each quarter like should we expect that similar hedging loss in Q2, given the elevated price oriented the magnitude of the increase over the quarter.
Yes, great question Derek.
I think the volatility in the results we were able to produce show the robust nature of our risk management across the organization, but again I'll, let Brian talk specifically to the mechanics.
Thank you Bob Derrick.
We look at our risk profile every single day multiple times throughout the day. So it is an ongoing very robust process that we undertake and we managed two basic elements of commodity price risk first we look at flat price risk.
And secondly, we look at spreads we look at time spreads we look at location spreads and we manage those all collectively in the context of where we believe where we're positioned prudently to both protect against the downside of a P.
Price drop or a disconnect in those key spreads like crack spreads that drive our business.
And also we attempt to maximize our cash flows.
Along the way so that's a very robust process, we do not have.
At time, where we reset.
And we position ourselves as I just mentioned.
So that were protected against <unk>.
Anticipated or unexpected downside event.
And we're able to participate in the upside.
As we go forward, what we'll experience in terms of risk management hedge losses really depends on what Bob said, which is the volatility in both flat price and those spreads, including the crack spreads that I mentioned so to be seen.
But that gives a little color on how we do think about our commodity price risk and how we manage it.
And then Ryan if I just add to that so where we have derivative results right. We have a physical offsets. So in the financial results you will see all of that sitting in gross margin the comment that I made it a little bit earlier on timing as to.
Just do and how some of the <unk> flow through the economy. So we are basically managing to a risk neutral position from a commodity perspective, but particularly in a very volatile period as we saw in quarter. One there were some timing effects that will run through the accounts that we expect some of that just to show up in quarter two from an accounting perspective, so hopefully that helps.
Okay. That's helpful. Thank you.
Okay.
Okay.
The next question will be coming from Michael Van <unk> with TD Securities. Please go ahead.
Hi, good morning.
I think you mentioned that you're.
Your volumes are about 10% to 15% below pre pandemic levels still in Canada.
Yes.
And I'm wondering if you have a sense as to where they stand in your other divisions and.
Whether you expect them to get back to pre pandemic levels in the next year or two as or is there structural changes.
Hi, Michael Bob Espey and thanks for the question.
<unk>.
It's interesting in Canada and also do recall that in January February we did have further restrictions due to an outbreak in COVID-19.
No.
We have continued to see volumes trend stronger.
<unk>.
Provinces in Canada have opened up so we do expect that cap to closing Canada here over the next couple of quarters.
And look and are seeing robust traffic across all of our markets right now, particularly when we get into summer, we're hoping to see that come back quite strong.
U S has been pretty much consistent.
We although we did see some slowdown in 2020, we saw recovery in 'twenty, one and 'twenty two.
And then in our.
Caribbean business or in our international.
<unk> business we've seen.
Tourism come back, particularly in the last couple of months.
And.
That drives a lot of economic activity, including gasoline and diesel demand in those markets. So we are seeing them come back we are getting into the off season in those markets.
We will start to see that muted, but expect it to continue through as it would have in 2019 through the back end of the year.
And then I would say on top of that what the team has been able to do across all markets, particularly in our commercial business has grown market share.
What we've seen we talked about examples in the mining business in the cruise ship business, but those are only two of many examples where we've been able to to win additional volume.
Volume in our international business, we continue to have a strong tailwind from the natural resource segments in various markets there so quite.
Quite optimistic about continued volume growth as we go forward here.
That's good color Bob.
In the U S. You said, you're seeing a recovery in.
In 2020 on 2020, two and a lot of the.
The industry data is showing that it's still.
I think retail demand in the U S is still down 10% plus is our year regions being.
Yes, more remote regions I guess, there are less populated regions are they have they rebounded a lot faster.
Youre regions back close to 2020 at 2019.
Yes. So two things one is are the markets that we're in are the high growth markets in the U S. So we do have.
A nice tailwind within those markets.
The second thing is we have acquired a lot of business. So.
What youre seeing there is a combination of.
The natural growth within the market and the M&A drive that.
To pin it back to 2019, specifically it was a little difficult for us to do because of all the growth we've had in those markets, but again when we look at.
Volume trends on a broader basis.
We see them consistent with where they would've been in 2019.
Okay. Thank you and just finally can you give us a bit more color on the progress being made and using your digital and analytical capabilities to drive the higher margins and then maybe kind of supplemented with an example or two.
Yes, so as we've talked about we have invested in a digital capability Marcel referred to that.
Some of the ongoing projects through our partner partnership with AWS.
And I would say it spans sort of three different areas within our business. So the first is on the consumer side and driving.
Mainly driving.
More loyalty and understanding consumer buying behavior, and tying that to our loyalty program and as we get more refined in that offering specific promotions to customers within regions.
Again, Marcel alluded to.
In a number of markets, where we helped consumers by doing what we called flash sales on fuel, which drove not only increased volume in our <unk>.
In our fuel business, but also the cross sale into convenience was quite strong. So those are great. Examples on the consumer side, where we can.
Incent demand.
We do have as we've discussed previously our pricing platform in place and that allows us to price in our micro markets and make sure that we can deliver the best value to consumers in that market.
Yes.
And we've recently.
We're on the cusp of rolling that out in our U S business. So we to date have not had that so we should see that help our U S business and then.
Select markets in international.
<unk>.
So on the one hand, we are focusing on consumers and our commercial business, which we haven't really talked about and we're really moving their two platform that allows us to add value through.
Increased management of peoples fuel.
Great. Examples of that are some of the work we do in marine where we can.
Provide very specific customized solutions to customers and then.
As <unk>.
Brian alluded to.
We're growing.
Our capability within the carbon offset market and we see that being linked to the digital interface with the consumer.
And then finally in the third area is around efficiency in our business, where we continue to find opportunities to optimize.
In our supply system.
And generate some some good good incremental.
Our cash flow.
Do you do you want to talk to the example in.
Absolutely so to add to Bob's comments, just a little more.
Comment on how we use it in supply so we do use artificial intelligence and machine learning.
On our on the Trans Mountain pipeline system specifically.
As we head into what we call our monthly nomination process. It gives us insights into how other shippers may be thinking about what the shift down the line.
And again, we use that artificial intelligence and machine learning.
And with a lot of data behind it as a great example of how we are harnessing this capability that.
That we're building and then as Bob alluded to.
Our products value chains are refined products value chain.
Are also using machine learning and AI for optimization opportunities so that is.
To arbitrage between different supply locations.
Again, we use those tools to assist us in making those decisions on an on an hourly.
Basis every single day.
Very helpful. Thank you.
Your next question will be coming from Peter.
Taylor with BMO capital markets. Please go ahead.
Bob on your renewables business.
I heard you during the course of the presentation throw to EBITDA numbers I heard $25 million I heard <unk>.
$17 million and then within the renewables business there seems to be.
Like a number of of.
Different pockets there theres a renewable fuels there is delivery delivery, there's this whole carbon.
Kind of compliance that offset so can you just kind of clarify what numbers go with what.
Yeah for sure and I'll turn that over to Marcel to yeah.
Clarify hey, good morning, Peter Good question. So you will see also in our financial disclosures as well. So 25 years. The aggregate number of 17, which is part of the refineries so mostly relates to co processing.
Rich Ryan talk quite a bit around an eight that will be in our Canadian segment, which is around some of the <unk>.
Fueled by your fuel logistics as well as the carbon offset business sits within that part of the business. So those two numbers together, our 25 17 in the in the refinery and eight in the Canada segment.
Okay and with all this new segmented disclosure, you'll have where does the elbow river.
Business fall.
Does it fall in between Canada and U S.
It sits in Canada.
Okay.
And then my next question is Bob I wanted to ask you. Your I believe you said your merchandise same store sales.
I'm not too sure. If this was for Canada or the U S or both is positive one 7%.
I would've thought.
Given inflationary trends, there's a lot of price in.
In there, which suggests to me that kind of.
Net of price.
Youre tracking negative so I don't know if traffic is down or basket is down or all of the above. So if you can just have some more flavor around that comp.
If you were a little disappointed in it and I understand the comp I believe is ex tobacco.
Yes look.
I would say always want to see that number higher as high as possible.
And.
Look I would say in the core categories, where we've certainly focused our marketing program, we're seeing well above inflationary growth.
Growth, but I will turn it over to Marcel who can talk specifically about the components of that metric.
No as I already shared a bit earlier, so beverages were up eight 5%, which are of course, good margins and then the central store categories. Those were up almost 9%. So that's the reference both made I think I would also point out that the comp for quarter. One of this year compared to quarter, one last year, where we had quite significant growth I think last year.
Same quarter over 2020 was up 10%. So we are still coming out of some adjustments.
Covid periods, Peter So that's how I would describe it.
And so we will continue to look to look forward into this year two to grow this channel.
Inflation and the other thing I will point out just in terms of overall margins and the mix, which is really where we're looking at as well that we have increased our margin by by by almost 3% of gross margin out of out of the convenience stores.
Right, but I mean.
Like you've highlighted the strong categories, but what like what were the weak category, so that dragged it down to one 7%.
Yes, so what we have seen we've seen some reductions in things like car wash and a little bit that this is a discretionary spend so and it has to do with driving as well.
Our prepaid cards, we've seen those come down so those were the two categories.
Kind of were lower than the year before.
Okay I went into the ultramar this week.
I know, it's only one store so maybe it's not representative.
But I had trouble finding your private label products in the store.
<unk>.
So I don't know if they were there and I just couldn't find them have you backed off on your private label.
Category or is that right.
<unk>.
Was that in on the run branded site.
I can't remember to be honest with you.
We do have a dealer offered and having the dealer site, but if you send us the address of the ultramar and we can give you the exact details on the.
The operating model and.
Whether or not we would carry our private label. If you haven't backed off from privately we haven't backed off in fact, we've seen it grow quite nicely.
Okay. Thanks very much.
Your next question is coming from John Royall with J P. Morgan. Please go ahead.
Hey, good morning, guys. Thanks for taking my question.
Can you talk about your outlook from here for refining crack spreads are obviously very strong at the moment.
Do you think those types of levels are sustainable over the next couple of quarters and then maybe what are you assuming when you talk about the high end of guidance.
I imagine if you.
If you didn't have some conservative assumptions in there for rig.
Craig and guidance.
I know when we first quarter, but just wanted to get your views there.
Sure, Thanks, John and I'll pass it over to Ryan.
Yes, John I think.
The market is supportive for this strength in cracks to continue.
Through throughout the remainder of this year.
Backwardation has been incredibly strong in the market would incent folks to lower inventories.
And so that Destocking is the signal that the market's sending however.
The market doesn't if you look at the inventories.
<unk>.
We're seeing a lot of areas, particularly in the U S.
Where supplies are below that five year minimum.
And so it's quite constructive.
From our perspective for the remainder of the year there will be volatility. However, as we go through the year. So we expect that we anticipate that but we stay on course.
With our risk management plans and of course, the most important thing we can do is run safely reliably and at the highest utilization possible.
When profitable to process that last barrel and Thats what were going to do.
And deliver and deliver those strong margins if they continue in the marketplace and maybe just I'll add to your question on overall guidance Joan So clearly we have a very strong first quarter, we're very pleased with that and so that's why we have confidence.
Our guidance, because we had that real where we'll finish the year at the at the top end of that range that we've given we also recognize just like everyone else are quite a bit of uncertainty in the macro environment geopolitical and so with all of that we said listen we'll we'll continue to stay the course and delivering a printing good quarters here.
And then we'll see wherever yep.
After the second quarter refer if that warrants any change in cognizant.
Makes sense. Thank you and then.
Just sticking with the refinery in terms of running all oil burn to be for your co product I'm not as familiar with our feedstock can you talk about supply availability there.
Sounds like others are not using it for Biofuels and from your commentary.
The moment, but are there other sources of demand that you are competing with them.
Ample supply to support growth from the Biofuels industry.
Ryan why don't you, yes, certainly.
The tall oil again as Bob had mentioned before in his comments is a byproduct or a waste product that comes out of the paper and pulp industry.
And as we as you know British Columbia has a significant forestry industry with lots of paper and pulp mills and that is a huge advantage to us because this tall oil is produced a literally within a 150 mile radius of the burn.
<unk> refinery.
And.
So we do not compete.
With a large number of consumers for the tall oil.
Currently and in the future again, given where we're positioned relative to the source of the feedstock.
We believe we're going to.
The best Netback for the producer of that tall oil and so we don't see a lot of competition yet what we like about tall oil is that it is actually has a negative carbon intensity assigned to it.
That is a significant advantage over the competing feedstock such as Coppola.
Tallo that we also consume in the refinery.
So.
As we look forward, we will continue to develop that all oil processing capability as we continue to look for additional feedstocks that are not on the market yet.
But are in that innovation and commercial piloting stage and hopefully bring those into our toolbox as well.
That's really helpful. Thanks very much.
The next question is coming from Matthew <unk> with <unk> capital markets. Please go ahead.
Good morning, Thanks for taking my questions I think my first is just on on the refining and thinking about some of the costs there in the quarter and kind of some higher costs associated with renewables compliance a little bit and understanding there were some mechanical issues. There on the coal processing side I was just wondering if.
Those had been resolved and going forward, if youll be able to optimize.
Co processing, a little bit more and benefit from the offset that you generate.
More on that and sort of the lower the operating costs and compliance side of the business there.
No.
Yes. Thank you for the question.
So earlier this year I just want to take everyone back to late last year, when the Trans mountain pipeline had shut down.
Well shortly after Trans mountain resumed operations, we had another weather front that move through Vancouver, and it brought.
Freezing temperatures.
Refineries on.
On the Pacific Coast really weren't built to operate in freezing temperatures and what happened to us as a result to our facility was we had a couple issues to specifically our compressors.
That were mechanical in nature, and so to manage through those issues, we slowed down.
Our co processing.
Through our distillate hydro treater.
Specifically and we have addressed those issues that caused that slowdown and I expect that you will see.
US back on track with our stated objectives.
For this second quarter, so hopefully that gives a little bit of color around our availability and our ability to utilize.
That co processing capacity.
Through the DHT as well as the FCC. So that gives you a little bit of the mechanical challenges that we had but.
Again, we've addressed those and where.
We're in a different posture.
Okay. That's great. Thank you my second question was about the acquisitions announced here.
One.
Caribbean acquisition.
And then as well the supply Act.
Acquisition in Eastern Canada, I'm, just wondering strip.
Strategically.
What.
Prompted you to pursue these acquisitions, how did they come about and how do you see them, adding value to the business going forward.
Yeah.
Yes, why don't I kick off with the.
Acquisition in our international business, and then I'll turn it over to.
To Ryan and he can talk about.
How we're building out infrastructure and the acquisition of OPEC.
So on <unk>.
We did we did announce an acquisition.
Bye.
Our footprint in Jamaica. It is a market that we're not in we have previously talked about.
Growing in adjacent markets and this is a great example of where we can pick up a leading market position.
In those markets.
In Jamaica, and it fits very well with our supply capability within the market. So we're quite excited too.
To get that business closed and start to operate it.
Thanks, Bob I think it speaks to our scale.
That I mentioned before in my in my comments.
As we grow scale, we're able to take advantage of those great logistics capabilities that we have.
And that's in the international supplier Arena in the United States, and then in Canada in Eastern Canada.
Again, we have we.
We believe infrastructure is a critical component of moving our strategy forward.
And that infrastructure is going to provide us the platform that we need not only to deliver conventional fuels of the fuels that we use today, but also for the fuels that we will use tomorrow and Thats again, increasing volume of renewable diesel and eventually sustainable aviation.
Fuels, so our acquisitions in eastern Canada are not only to grow our scale to give us additional arbitrage optionality, but it's also to be able to pull through the products that our customers will demand in the future lower carbon intense.
<unk> fuels and to provide us the unique blending capabilities that we will need to be able to meet our customers' demands in this space again looking towards a lower carbon intensity future across gasoline the <unk>.
Distillate cut and even.
Lower down into the residual or the fuel oil cut of the barrel. So that's the platform that we're building.
<unk> to enable that capability.
Thank you I appreciate it and lastly, thinking about the outlook and the confidence that guidance.
We'll likely hit the high end of.
Guidance. This year does that include the impact of these acquisitions.
Coming in or is that before the acquisitions and really just based on the strong Q1 results and underlying fundamentals you're seeing in the business recovering volumes margins and crack spreads and all of that.
Yeah.
So yes, so the guidance that we provided previously includes all the acquisitions that we announced when we issued guidance in these particular.
Acquisitions, we spoke about that we haven't completed yet so once they are completed we'll also factored that into our outlook.
Okay. Thank you I appreciate the commentary on that that's it for me I'll turn the call back.
There are no great since at this time. Please go ahead.
Great well, thanks for listening in and look forward to connecting next quarter.
Hi.