Q4 2023 Parkland Corp Earnings Call
Marcel: We also increased our dividend and repurchased $26 million of common shares for cancellation in Q4. This success is a testament to the dedication of the Parkland team, and again, I want to express gratitude for their exceptional work. They are instrumental in delivering these results. With that, I will hand it over to Marcel to discuss our key four highlights. Thank you, Bob, and good morning, everyone. Parkland had a great fourth quarter and delivered a fair bid of four hundred and sixty three million dollars. Canada delivered adjusted EBITDA of $190 million, which was consistent with last year.
Marcel: Fuel unit margins were driven higher by our supply and logistics capabilities, as well as favorable market conditions. We also saw the benefits of our Husky and Cravier acquisition completed in 2022 come through. These positive drivers were offset by reduced demand in our commercial business due to unseasonably warm weather in Q4 and higher operating expenses. However, our operational KPIs show the benefit of consistent execution and organic growth investment. Company-owned, same-store fuel volumes were up nearly 7% in the quarter driven by our Journey Rewards program, which continues to attract customers to the forecourt and into our convenience stores. Food and convenience company same-store sales growth, excluding cigarettes, was 1.2%, and we delivered gross margins of $36. Convenience alone was up 4%, reflecting the impact of strong central store and packaged beverage sales. However, we did see some weakness in our M&M food market channel, reflecting customers being cautious with discretionary spend.
Marcel: We are adjusting our offers accordingly. Our international segment delivered adjusted EBITDA of $157 million in Q4. This is up 43% from last year. We delivered organic growth with higher volumes in our commercial business and strong fuel unit margins. We have also captured synergies from our Jamaica acquisition and our supply advantage. We are positioned to win in fast-growing markets like Guyana and Suriname and continue to win contracts in the utility space. This further diversifies our international business and is creating more rateable quarterly results, which we saw in 2020. Our USA segment delivered a justification bid of $39 million in the quarter. This is down 15% from last year. Across the U.S., industry retail fuel volumes were down, and we saw this reflected in negative company same-store volume growth.
Marcel: In Florida, we did not adjust our pricing fast enough in a dynamic environment, and as a result, we lost some market share. We have fixed this, and our volumes are back in line with industry trends. These impacts were partly offset by organic initiatives that drove higher convenience store margins, better than industry same-store sales growth, and lower operating expenses. Commercial fuel unit margins were also lowered due to unfavorable market conditions.
Marcel: We experienced some one-time impacts in the U.S. during the year that do not reflect underlying performance and believe the business now has a solid foundation to grow. We are confident in the future of our US segment, and in 2024, we expect to deliver between $230 to $250 million of adjusted EBITDA. Our refining segment generated adjusted EBITDA of $106 million, which is down $22 million from last year. Composite utilization was 90% during the quarter, compared to 98% the prior year, which was caused primarily by a third-party power outage. Crack spreads also normalized during the quarter. In the first quarter of 2024, the Burnaby refinery was temporarily shut down following a period of extremely cold weather.
Marcel: We expect to resume normal operations early March. During the expected downtime of approximately eight weeks, we have been able to complete repairs and previously planned maintenance activities, which will allow us to recover some lost utilization and improve our capture of refining cracks going forward. I would like to thank the refinery team for their continued commitment to safely executing the work. We have developed a robust recovery plan and still expect to meet our 2024 Adjusted EBITDA Guidance Range of $1.95 to $2.05 billion, despite the impacts of the refinery outage. In 2023, Parkland delivered cash flow from operating activities of $1.8 billion, up more than 30% from 2022, and available cash flow was $812 million, or $4.60 per share.
Marcel: We used these funds to grow the business, as well as repay nearly $750 million of debt on our credit facility in 2023, and this lowered our leverage ratio to 2.8 times. We also bought back more than 580,000 shares in November and December. And with that, let's turn to the slide.
Marcel: This slide is a reminder of our longer-term ambitions that we presented at our investor day in November. We expect to grow Adjusted EBITDA to $2.5 billion by 2028, driven mainly by organic growth initiatives, cost efficiencies, and some additional synergy capture from past acquisitions. We see the potential to grow Adjusted EBITDA up to $3 billion by 2028 through acquisitions, but that is subject to any deals being accretive relative to the alternative. We also expect to grow our available cash flow per share by almost $4 to $8.50 per share by 2028. In this period, we expect to generate about $6 billion of cash flow that is available for shareholder distributions, reducing leverage and growth.
Marcel: As we shared previously, we intend to allocate about $1.5 billion to dividends and firm share buybacks. This allows for continued annual dividend increases as we have now done for the past 12 years. We also expect to invest around $1.5 billion or $300 million per year in organic growth. As we have grown the Parkland platform in the past few years, we see many opportunities to invest in our own business with at least a 15% expected return. And finally, we have about $3 billion in available cash remaining. We will prioritize reducing our leverage to the low end of our target range by 2025.
Bob: This leaves the rest for inorganic growth and or additional share buybacks. We will allocate this to the highest value opportunity and focus on driving shareholder value. And with that, I will hand it over to Bob to discuss slide 7. Thank you, Marcel.
Bob: I am confident that we can deliver those targets with the growth platform we have built. Parkland is a much larger company today. We have significantly increased our scale through strategic investments made in our customer offerings and supply networks. The Parkland Strategy aims to continue building upon our customer advantage and leverage our supply advantage. These two pillars reinforce each other and provide opportunities to further grow and increase return. Our customer advantage is built on the value we provide to our retail and commercial customers. We gain their loyalty through our proprietary brands, differentiated offer, extensive network, competitive pricing, reliable service, and loyalty programs.
Bob: These programs have been our consistent focus for years, and we are starting to see the benefit of the team's hard work. Our supply advantage aims to achieve the lowest cost to serve through proprietary logistics assets, industry-leading capabilities, and significant scale. This allows Parkland to generate industry-leading margins and deliver value to both customers and shareholders. These two advantages complement each other and drive synergies.
Bob: As we create more loyal customers, increasing demand for our products, we increase our supply advantage with greater volumes and scale. In turn, we can attract more customers and continue to grow. This strategy is underpinned by the values, integrity, and dedication of the One Parkland Team.
Bob: I have every confidence that they are going to deliver the ambitious targets we have set. In conclusion, I want to thank the Parkland team for our success over the past year. Together, we've achieved remarkable results, and I'm excited about the opportunities that lie ahead. Let's continue to work collaboratively and build on our successes in the coming quarters and years. With that, I'll turn it back to the operator for questions. Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. Should you have a question, please press star followed by the number one on your touchstone phone. You will hear a three-tone prompt acknowledging your request. Should you wish to decline from the polling process, please press star followed by the number two. A reminder that we request our analysts limit themselves to one question and one follow-up and rejoin the queue for the remaining questions you might have. If you are using a speakerphone, please lift your handset before pressing any key.
Operator: Our first question comes from the line of Luke Hannon from Canaccord Denuity. Please go ahead. Thanks and good morning, everyone. I wanted to start on, if we can, the refinery recovery plan. Bob, could you describe, maybe in just a little bit more detail, to the extent that you can, what the core elements are of this plan? I think I heard you correctly in that there should be some catch-up when it comes to utilization as a result of the work that you've done there? But maybe just a little bit more detail on what the core pillars are of that plan. Yeah, good morning, Luke, and thanks for the question.
Bob: You know, as you indicated, we are bringing the refinery back up. It'll be next week, and we will start to bring it back online, which leaves us with about an eight week shortfall. You know, I would say a few things.
Bob: You know, one is that we had a minor shutdown plan for this period, so it was taken into account in our budget. Part of the slowdown. The second thing was on the recovery side, we've been able to pull forward some work that we planned to do later in the year, which allows us to continue to run the refinery at higher rates but also come out at a higher utilization than we had planned once we're back up and running, so we can make some profits there. Finally, we expect to be in a constructive crack environment when we bring the facility back online.
Bob: Some of the other things on the optimization side, we're seeing a good market right now for carbon credits, particularly Canadian carbon credits, which will allow us to monetize those as well. On bio-blending and imports, again, it's quite a constructive environment where we can make up, certainly a big portion of the unplanned shutdown. I would say that the team's working hard to get it back online here, and they're making sure that they're prioritizing safety before they put the refinery back online. Okay, thank you.
Marcel: And then for my follow-up here, I wanted to ask about the Sherry purchases. It was noted that you had done some in Q4, and it seems like that's accelerated a little bit further in Q1. So far, Q1.
Marcel: So I'm just curious how we should be thinking about, one, maybe further share repurchases or accelerated share repurchases in the near term. And then maybe also, if I can squeeze another one in here, how that speaks to your overall near-term thinking on capital allocation, specifically M&A and balancing that with share buybacks. I'll ask Marcel to... Yeah, good morning, Luke.
Marcel: So, yes, we have, so share buybacks, we did some in November and December, and we've continued to do that actively in the first quarter. Our NCIB is active at the moment, and those share buybacks fit within the overall capital allocation framework that we laid out in InVEST today and I summarized a bit earlier here as well. So that's how it fits in there.
Marcel: I think our focus continues to be to bring leverage down, which we have now done within the range and will continue to do so. And then the allocation of the cash flow, which we have available. It's really how we look at M&A opportunities both from a strategic and value kind of fit relative to, you know, the value of buying back the shares.
Marcel: And we'll continue to do that. But we're, yeah, we're, we continue to be active with the RNCRB program. Okay, thank you very much.
Operator: Thank you. Our next question comes from the line of John Royal from J.P. Morgan. Hi, good morning.
Bob: Thanks for taking my question. So my first question is on the 24 guide. You've reiterated confidence in the $2 billion, despite the eight-week refinery outage. Was there a contingency built into the guide, or do you think other parts of the business could make up for the loss? And I think Bob mentioned that you expect to come back into a better crack environment. Do we need better cracks that weren't in the plans that you're running to maintain that number, just kind of trying to bridge to that $2 billion, despite the outage? So, good morning, John.
Bob: And no, we don't actually need higher cracks to make the plan. Again, though, we had planned to have a slowdown during this eight-week period anyway, so the cash flow that we predicted in Q1 was less than what was already taken into account in the plan. And then other items like optimization, particularly around renewables and carbon credits, are incremental to the plan, as well as a higher utilization rate for the balance of the year. So those are the key items that allow us to have confidence in our guidance for the year, and so we're on track to being within the range that we had indicated, 1950 to 2020. Okay, thank you.
Bob: And then my second question is on the Canada business. Can you speak a little about what's going right in Canada on the same store side, the same store gallon side? You've consistently, you know, throughout 2023, been doing kind of mid to high single digits there. I know you called out Journey, but any other driver?
Bob: Yeah, you know, look, whether the impacts are good or bad. Yeah, you know, look, we have been well above industry. And, you know, our market share data would show that we've been increasing our market share. I would say the primary driver is the journey rewards and, you know, as we've indicated in the past, getting scale. And, you know, the other thing is that we've been doing a lot of work on our backcourts, which is pulling people in as well.
Bob: We're seeing that trend well from an industry perspective, but it also has the offsetting benefit of selling more fuel. So, you know, I would say those are the two key drivers that we're seeing. Thank you. Our next question comes from the line of Ben Isaacson from Scotiabank. Thank you very much, and good morning, everyone.
Bob: Bob, in 2023, you improved your leverage, you focused on synergy capture, and organic growth. The stock did very, very well. Can you talk about what the plan is for 2024?
Bob: What should we be looking for to get the stock to the next level? You know, look, I think we've laid that out in our investor day. And again, you know, the focus that we'll see this year is again, continued organic growth. The US business continues to come on, particularly through integration; we've guided that to 240 for the year. So some nice growth in that segment and our international business, you know, is continuing to perform. The team did well over the last couple years.
Bob: And, you know, we would expect to maintain within that business. And, you know, I would say on the balance sheet side, we'll continue to see increased strength in our balance sheet, and that gives us the option to continue to buy back shares, as Marcel had chatted about, and de-lever at the same time. Thank you for that. And then, just as a follow-up, not to belabor the Recovery Plan at the refinery. Is it fair to say that Lost Diva is probably going to earn somewhere in that kind of 75 to $100 million area?
Bob: And if so, what I'm interested in is the NG&A cost reductions that you're focused on. It seems like that's something that could be sustainable. Can you just kind of quantify that? to the best that you can.
Bob: Yeah, so look, I think your estimate on the low-end is an accurate estimate, and again, there are many things that will help us make that up, but the primary one is being able to come out stronger. As I had indicated, we pulled forward some maintenance activities that we planned for later in the year, which would have been a headwind on utilization, so we don't need to do that. Plus, we've been able to make some improvements that just allow us to run the refinery harder, along with, like I said, some of the other activities.
Bob: Yeah. I mean, those are the primary things that we're doing here to make sure that we're back on track. Yeah. And then maybe just then on your MG&A comment, right? As you recall, we initiated some of that work in the middle of last year. And of course, then in 2024, we will have the full year benefit plus some additional benefits that took a little bit longer, just with a bit longer runway. So the answer is yes, there's more. It's sustainable, and there's more to go on the MG&A side. And that also will make up a little bit of the shortfall here with the refinery. So it's very helpful. Thanks so much.
Marcel: I appreciate it. Thank you. Our next question comes from the line of Michael Van Elst from TD Kallen. Go ahead, please. Good morning.
Bob: I just wanted to touch on the U.S. business. So the quarter, $39 million in FDA revenue in the quarter, and that was boosted quite a bit by a strong lubricants business. So can you talk about the sustainability of the 80% increase in lubricants? And then, on the flip side to that, it means the commercial business must have been quite weak.
Bob: So, how do you bridge the gap between what your kind of normalized run rate might have been in the fourth quarter and that $60 million average or so that you're looking at for a per quarter in the U.S. for 2020? Yeah, so look, I would say the lubricants business is quite small. So it might be worth connecting with Val just to clarify that I don't think that was a key driver of performance in the quarter. You know, we talked about a couple of one-time items.
Bob: You know, one is on our pricing system. So, as you're aware, we've been doing a lot of work on that business. One of the initiatives was to roll out our pricing system, and we had some issues with that in our Florida ROC where it wasn't as responsive as we would have liked, and we had some bad information and were out of market for a period there. That's since been fixed.
Bob: You know, I would say when you peel that out, our data would show that we tracked at industry throughout the rest of the business, so indicating that we don't have any structural issues in the business. That's one item, and then the second item is, as the team there continues to dig in and make improvements, we're seeing an increase in the run rate, which brings us back to that $2.40 for the year, roughly $6.25. Okay, and then, and then on the commercial and wholesale business, if I might, just the, you know, obviously very strong growth. Are there any headwinds that you're seeing, whether it be ocean freight or anything else that might cause that to slow down considerably going forward, or should we expect some reasonable growth on the international continent? You know, look. I think the international business we saw a lot of growth last year, so I wouldn't expect a ton of growth in that business this year.
Bob: And we did have constructive commodity markets that helped that business last year. You know, I would say businesses and, you know, to your point, there are some headwinds around shipping costs. I mean, generally, those costs can be transferred into the market because everybody has the same cost structure.
Bob: And so, you know, I would say that business is on track for a year that is as strong as last year. Yeah, and then maybe, Mike, just to add to what Bob said, like we talked about continued growth in the Guyana market with all the offshore work that's happening. We are starting to see the first bits of that, a similar kind of event happening in Suriname.
Marcel: So those are kind of good commercial contracts. And one of the things which we've added over the last few years is sales to utilities, which are more rateable during the year than we perhaps have seen in the past. And you see that come through in international as well, with strong Q2 and Q3, in addition to the usual season of Q4 and Q1.
Operator: So more rateability going forward in international from what we saw a few years back through the addition of more commercial, more kind of all-year round business as well as the kind of utility contracts that we've, and, Thank you. Our next question comes from Neil Mehta from Goldman Sachs. Go ahead, please. Yeah, good. Good morning, team.
Operator: The first question I have is just around that as you bring back Burnaby, your perspective on the crude markets. Neil, you cut out on us. Mr. Medak, you're still on the line.
Operator: As we are hearing no response, I will go ahead and move forward to the next question. Our next question comes from the line of Luke Davis from RBC. Go ahead. Yeah, thanks. Good morning.
Bob: Just seeing a headline here suggesting that you guys have put up 157 Canadian C stores to be divested through NCR Realty. Just wondering if you can speak to some of the details there, what the key drivers were, how that relates to your private or your previous story, yeah, divestiture targets, planning to speak to kind of the quality of the station. Yeah, this is consistent with the priorities we laid out in our divestiture program. We've talked about high-value retail sites, which we've made good progress on. We've talked about various aspects of our commercial business, and then the third one was around low productivity sites. So these are sites that you know don't quite fit where we're pushing our brands but are still good sites. So, in most cases, these will be sold to partners, dealers that will own the business and continue to sell branded products through them.
Bob: So we're just changing the operating model of those businesses and allowing us to pull some of the capital out. And it's all part of our $500 million divestiture program, which we committed to by the end of 2025, and we're making good progress. Gotcha. And would that be incremental to the 325 that are already there? That is included in the 325.
Bob: Okay. Thank you. Our next question comes from the line as Steve Hansen from Raymond. Go ahead. Yeah, good work, guys. Thanks for the time. Marcel, I think you referenced the M&M offering was a little slower in the period. Just curious if that weakness extended across the rest of the food offering at all.
Bob: And what type of adjustments are you implementing for that demand shift at all? Yeah, so M&M was off the frozen food segment.
Bob: You know, we did see some pressure on consumers, which was consistent with other food retailers. I would say on our fresh food offer, we continue to make good progress in terms of rolling out frozen food within our convenience store network. And again, we won't see the benefits of that because, really, we just completed the rollout at the tail end of the year. And then, secondly, on our fresh offers, which were in the market in three locations. So again, you know, those are on track.
Bob: We have M&M, you know, certainly has been adjusting its volume margin just to make sure that we're continuing to be able to meet the needs of customers. Okay, great. That's helpful.
Bob: And just to follow up, I see that cruise bookings continue to hit new records. This is perhaps a bit of a naive question, but how much visibility do you get into the types of customer demands in the Caribbean as you look at sort of staging fuel supply and that kind of thing in the future? Do you get a good read on those customer bookings and what kind of demand you expect through the balance of the year? Yeah, yeah, no. We do see that we do continue to see robust demand in those markets. And we do monitor customer bookings, which remain robust throughout the region. Okay, very helpful.
Operator: Thank you. Our next question comes from Neil Mehta from Goldman Sachs. Go ahead, please. All right. Can you guys hear me?
Operator: Yeah. Yes, Neil. Okay. Sorry about that.
Operator: The first question is just on the crude markets. There's been a lot of volatility in Western Canada as you bring Burnaby online. Do you see commercial opportunities around this? And then just your thoughts on what TMX means for both the crude and product markets in Western Canada. Yeah, no, they're good questions.
Bob: I mean, look, you know, we're not sensitive really to the price accrued; it's the spreads, and the spreads remain constructive, particularly for light crudes, which we use in the Burnaby refinery. So, you know, we've seen that environment stay consistent. And don't expect it to change here going forward. TMX, you know, interesting, mainly bringing heavy capacity online. And, you know, our analysis would show that it'll have little to no impact on the light spread.
Marcel: So we don't expect to see a significant impact there. And, you know, on the product side, I mean, Vancouver is currently supplied by Burnaby or primarily out of Edmonton, and so that product's already in the market, so we don't expect that to create any changes in terms of product supply and availability in that market. Neil, we are active shippers on the pipeline. And, of course, with our own crew being there, there's always opportunities to optimize as the markets move. And that is an active program that's ongoing. And so when Bob earlier referred to kind of higher capture, part of that higher capture comes from optimizing those positions that we have, you know, in the market. And so, generally, volatility is good.
Bob: Yeah, and both you got talked about this, you've made a lot of progress around deleveraging, and part of that's been the asset sale market. So I just love your perspective on, you know, is there room for further asset monetization? And as we think about M&A, is it fair to say that, you know, Parkland at this point is digesting a lot of the M&A that is done as a result of being active in the business? Yeah, so our deleveraging has primarily come from cash flow from the enterprise. So it hasn't been materially boosted by divestitures at this point. We'll see that more in 2024 and 2025 as we continue to work through the pipeline of opportunities, um, and Yeah, M&A. Look, we're still in a mode here where we're integrating.
Bob: And, you know, as we talked about in our investor day, our first priority right now is to get the benefits we can internally out of the business, focusing on organic growth and synergy capture, of which, you know, there's still opportunity, and it's a core part of our plan to grow the business from 2 to 2.5 billion without M&A.
Bob: Thanks a lot. Thank you. This concludes our question and answer session. 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 lovely day!