Parkland Fuel's (PKIUF) CEO Bob Espey on Q3 2017 Results - Earnings Call Transcript

Parkland Fuel Corp. (OTCPK:PKIUF) Q3 2017 Earnings Conference Call November 3, 2017 8:30 AM ET

Executives

Ben Brooks - VP, Treasury & IR

Bob Espey - President & CEO

Mike McMillan - CFO

Analysts

Kevin Chiang - CIBC

Michael Van Aelst - TD Securities

Sabahat Khan - RBC Capital

Peter Sklar - BMO Capital Markets

Ben Brooks

Hi and good morning, everyone, and welcome to Parkland Fuel Corp.'s Q3 Results Call. Speaking to you right now is Ben Brooks, Vice President of Treasury and Investor Relations for Parkland. And with me again this morning are Bob Espey, President and Chief Executive Officer; and Mike McMillan, our Chief Financial Officer.

A quick reminder on Slide 2 around forward-looking disclaimer. During the call today, Parkland may make forward-looking statements related to expected future performance. Such statements are based on current views and assumptions and are subject to uncertainties which are difficult to predict including expected operating results and discrete conditions et cetera.

Certain financial measures, which do not have any standardized meanings prescribed by GAAP, will be referred to during this presentation and these measures are identified and defined in Parkland's continuous disclosure documents, which are available in our website on SEDAR. Please refer to our continuous disclosure documents as they identify factors which may cause actual results to differ materially from any forward-looking statements.

The plan for the call today is that we will start with some key highlights from the quarter and an update on some of our strategic initiatives, and we will then provide an overview of the business results. Currently we will give you an update on our 2017 guidance before we move to Q&A.

I will now turn things over to Bob who will give an overview of our quarter.

Bob Espey

Great, thanks Ben, and welcome everyone to our third quarter earnings call for 2017. I'm very proud of our phenomenal Q3 results and I would like to point to a few great highlights from the quarter.

First, we are excited to have the Chevron team brands and Burnaby Refinery to Parkland. I also want to take this opportunity to thank everyone on the team involved with successfully completing this acquisition. This was a tremendous effort and we were able to close on October 1 because of the commitment and dedication of all involved.

Secondly, it gives me great pleasure to report on Ultramar's first quarter results post-acquisition. This was an extremely successful first quarter of operations from our newly acquired Ultramar business. We'll touch based on this in greater detail as we walk you through our presentation, but you will see the Ultramar integration and synergies are tracking ahead of plan.

And finally, you'll see in our results that we've seen strong growth throughout our base business, both our financial results and our KPIs demonstrate the growth the team is continuing to deliver on our base business.

In terms of specific initiatives that helped our business grow, I would like to highlight our newly refreshed On The Run / Marché Express store design. To-date, we have opened four retrofit stores with approximately 40 to come by Q1 2018 and we've also planned to launch our first flagship store on Winchester, Ontario, in January 2018. At this stage, in our OTR test we are encouraged by the results we are experiencing with revenues and margins both showing strong results and particularly improvement in margin contribution which has been driven by shift in sales mix to more profitable categories is promising. This is expected to continue to improve with the introduction of private label.

Speaking on private label, Parkland developed a new private label brand 59th Street Food Company which will be launched and available at selected Parkland locations in the fourth quarter of 2017. The private label brand will allow Parkland to provide high quality products at competitive price points with increased margin contributions. Initial products include various types of confectionary, with additional offerings planned for next year.

We also continue to drive organic growth in retail through new to industry sites that offer strong fuel and non-fuel offerings. Over the last 12 months, we have introduced 12 new sites across the country and continue to optimize our network flow in the future.

We've also continued to see strong growth in our commercial propane and diesel volumes. This is in fact the sixth consecutive quarter that we've seen double-digit growth in our propane volumes in commercial, a real demonstration of our commercial teams' ability to perform in this space.

On supply front, gas and diesel volumes increased 13% as a result of strong market share gains and strategic initiatives to drive volume growth and scale.

We also saw 4% growth in adjusted EBITDA in supply and wholesale due to continued focus on executing our supply strategy. And on the acquisition front, it has been a transformational year at Parkland, in the space of just over three months we have closed our two largest acquisitions to-date and are very pleased with the results that we have seen from the Ultramar business in the third quarter.

I would also like to note that the progress of integrating the business and driving the previously communicated synergies are tracking well and ahead of schedule. Again I'm very pleased to welcome both the Chevron and Ultramar teams to Parkland.

During the third quarter, we achieved 33.8% growth in volume delivering 3.6 billion litres of fuel and petroleum products. The volume increase was driven by increased volumes from the successful first quarter of operations from our Ultramar business as well as strong organic growth of propane volumes in commercial fuels and increased gas and diesel volumes in Parkland USA.

Parkland achieved a record third quarter adjusted EBITDA of $96.4 million, a 60% increase from Q3 2016. These results were driven by the Ultramar business and strong organic growth and performance in the base business across all segments. On a year-to-date, they delivered 8.9 billion liters of fuel and petroleum products in the first nine months of 2017, representing growth of 17% compared to 7.6 billion liters in the same period of 2016.

Parkland achieved a record Q3 year-to-date adjusted EBITDA of $220 million in 2017 representing growth of 25% compared to the first nine months of 2016. This increase was driven by the Ultramar business acquisition as well as stronger base business performance from organic growth across all segments.

I'll turn it over to Mike who will provide you with a deeper dive into our business segments in Q3.

Mike McMillan

Great, thanks Bob, and thank you all for joining us on our call this morning. First off, I would like to welcome our new team members from Chevron as well.

Turning to Slide 5, I would like to add some additional color to the numbers that you see. One key thing to highlight with the growth you can see across all of our businesses that this would have developed all green in every segment even without the impact of the Ultramar business. This is a real testament to the team that showed how we can continue to deliver organic growth on our base business, while successfully integrating and driving synergies on our acquisitions.

Retail fuels adjusted EBITDA grew 80% to $73.7 million for the third quarter of 2017. This increase was primarily driven by the Ultramar acquisition with 654 sites successfully added to the Parkland network. Early improvements are beginning to be realized as we leverage our scale to drive efficiency and operational improvements.

Also of note, is that the different mix of our operating models that the Ultramar business brings that had positive impact on our fuel margins. Excluding the impact of the Ultramar acquisition, the base business showed solid organic growth for the third quarter of 2017, driven primarily by growth in the non-fuel side of our operations.

Commercial fuels adjusted EBITDA was $8.7 million for the quarter, an 85% increase from 2016 primarily due to the impact of the Ultramar acquisition. Excluding Ultramar, the commercial fuels base business saw exceptional results with excellent growth driven by increase in fuel volumes and related service contributions across the segment driven by the impact of recent customer wins and the contribution from the PNE, our propane cylinder exchange business which we acquired in December 2016.

Parkland USA's adjusted EBITDA of $4.3 million remains stable for the third quarter of 2017 as a result of growth in the lubricants business as well as new customer wins. Growth was offset by increased sales of lower margin products as well as the foreign exchange impact resulting from the stronger -- relatively strong Canadian Dollar when we consolidate our results.

Supply and wholesale adjusted EBITDA for the third quarter of 2017 increased 4% to $24.4 million compared to $23.5 million in the third quarter of 2016, primarily driven by continued efforts in executing Parkland's supply strategy and improving supply economics, partially offset by softer performance in the crude and LPG businesses during the quarter on the back of quite strong results in the third quarter of 2016.

In Parkland for the third quarter of 2017, MG&A expenses increased 10% and corporate adjusted EBITDA expenses increased 12% primarily due to the merging of our corporate functions of the Ultramar business with that of the base business as expected. This increase was partially offset by cost control initiatives, integration synergies, and lower variable compensation in the base business.

Moving to Slide 6, you will see more details around our segment results on a year-to-date basis. Overall you will see that we've experienced growth in all of our business segments. On a year-to-date basis, retail fuels adjusted EBITDA grew 30% to $136.5 million for the first nine months of 2017 compared to the same period in the prior year. Excluding the impact of Ultramar, the base business was stable versus 2016 with slightly improved fuel margins in growth of non-fuel being offset by increased OpEx and MG&A as a result of the different mix of sites in our network and investments for future growth such as On The Run and our private label programs.

On a year-to-date basis, commercial fuels adjusted EBITDA grew 27% for the first nine months of 2017 compared with same period a year prior. Excluding Ultramar again, growth was recognized in this segment as a result of a 41% increase in propane volumes and the impact of a number of business acquisitions from 2016, as well as growing volumes with a number of the customer accounts won over the last 12 to 18 months both in the East and West.

Parkland USA adjusted EBITDA increased 11% for the first nine months of 2017 primarily due to growth in the lubricants business which saw improved margin year-over-year, growth in the retail division with the addition of three new sites in Wyoming, as well as organic growth at existing sites. Cost management initiatives have also continued to be very successful in managing spend even as we drive growth in this market.

On a year-to-date basis, supply and wholesale adjusted EBITDA grew from $62.8 million in 2016 to $65.5 million in 2017, an increase of 4% primarily due to improved supply economics and strong performance in the LPG business on a year-to-date basis, partially offset by slightly weaker performance in our crude business.

At this point, I would like to pass it back to Bob for a business overview.

Bob Espey

Thanks Mike. Now I will take you through some of our key performance indicators for the quarter and I'll start by saying that I'm pleased by the progress made on these again.

Before I do that, I think it's useful to quickly note that there are a number of areas where our KPIs look different as a result of the efficient of Ultramar. Company-sites in Ultramar retail fuels improved company-operated sites where Parkland is fully responsible for managing the site, including hiring employees to operate site. This is different from Parkland's base business company sites where sites are managed by independent retailers. In addition the dealer sites that Parkland operates are primarily on a consigned fuel basis where they get to full act to retail margin.

As a result, the introduction of Ultramar retail fuels positively impacts fuel and petroleum adjusted gross profit on a cent per liter basis but also increases operating cost from MG&A expenses as a result net unit operating costs have increased.

In commercial, our customer mix is different also Ultramar were not concentrated in propane or lubricants or operate some of their exchange program and therefore their gross profit on a cent per liter basis is lower than the legacy Parkland business but their OpEx is also lower as a result.

In the retail business, company C store same-store sales growth improved to 4.1% for the quarter of 2017 compared to 2.7% for the same period of 2016 primarily due to the Ultramar acquisition. Excluding the impact of the Ultramar acquisition, company C store same-store sales growth for the base business was 3.3% for the third quarter of 2017 and 3.5% for the first nine months.

On a year-to-date, commercial fuels adjusted EBITDA grew 27% for the first nine months of 2017 compared to the same period in the prior year. Excluding Ultramar, growth was recognized in this segment as a result of 41% increase in propane volumes and the impact of a number of business acquisitions through 2016 as well as growing volumes with a number of the customer accounts won over the last 12 to 18 months both in the East and West.

Parkland USA adjusted EBITDA increased 11% for the first nine months of 2017 primarily due to growth in the lubricants business. We saw improved margin year-over-year growth in the retail division with the addition of three new sites in Wyoming as well as organic growth at existing sites. Cost management initiatives has also continued to be successful in managing spend even as we drive growth.

On a year-to-date basis, supply and wholesale adjusted EBITDA grew from $62.8 million in 2016 to $65.5 million in 2017, an increase of 4% primarily due to improved supply economics and stronger performance in the LPG business on a year-to-date basis, partially offset by weaker performance in the crude business.

At this point, I would like to pass the overview back to Mike.

Mike McMillan

Thanks Bob. As Bob just highlighted, we've seen some great traction and important improvements in our corporate metrics.

MG&A expenses have increased due to the combining of the Parkland and Ultramar corporate functions. This increase was partially offset by cost control initiatives, integration synergies, and lower variable compensation in the base business.

On our dividend payout ratio the strength of the Ultramar cash flows as well as lows in our base business are more than offsetting the impact of the dividend obligations related to the equity issued to fund the Chevron acquisition. The dividend payout ratio improved in the quarter to 83% from 99% in the same period last year and the adjusted dividend payout ratio to 59% from 83% on a year-over-year basis. Going forward, our payout ratios will benefit from the cash flows related to the Chevron business as we start to stream in Q4.

Distributable cash flow increased during the quarter to $46.2 million mainly due to an increase in adjusted EBITDA of $36.1 million, partially offset by acquisition and integration costs associated with the Ultramar business and Chevron. This distributable cash flow per share is an increase of $0.06 per share to $0.35 per share.

Our total funded debt to credit facility EBITDA or our total leverage ratio continues to be low because of the pre-funding of the Chevron financing which had yet to close and as we've mentioned it occurred on October 1. Excluding the impact of this, we were slightly ahead of our expectations.

From a safety perspective, Parkland's 12-months trailing LTIF is 0.29 an increase of 0.18 year-over-year. While this shows a modest increase we are pleased to have seen significant reductions in LTIF over the last several years in line with our commitment to health and safety of our employees.

I would now like to turn it over to Bob who will comment on what we expect in Q4 as a result of the completion of the acquisition of Chevron Canadian downstream fuel business.

Bob Espey

Okay, thanks Mike. It appears that I skipped a slide here, skipped a portion of a slide. Let me go back to KPIs let me apologize for that. And so we will pick up again around the company C store same-store sales growth and some of the initiatives that were driving it. Again, the increases experienced in both Western and Eastern Canada were primarily due to strong back-court convenience store sales driven by improved fore-court to back-court conversion rates and merchandising programs. This is a continuation of the positive C store same-store sales growth we've seen over recent quarters as a result of ongoing initiatives, refinement, and store refresh programs.

Volume same-store sales growth was minus 0.6% for the third quarter of 2017 compared to 0.7% in the prior year, and 0.6% for the first nine months of 2017 compared to minus 0.5% for the same period in 2016. This we believe was driven due to softness in industry demand due to the impact of higher pump prices and adverse of weather in some parts of the country.

Our net unit operating cost was higher by 28% in the trailing 12-months ended September 30, 2017, compared to the same period in 2016 primarily due to the Ultramar acquisition which is a different operating model with higher new look as discussed earlier. Excluding the impact of the Ultramar acquisition, net unit operating cost increased slightly in the trailing 12-months ended September 30, 2017, largely due to higher operating costs associated with 12 new industry retail stations added within the last year. New larger format company sites introduced in 2016, higher variable credit card transaction fees due to increased pump prices, and higher marketing general and administration expenses driven by investments and marketing initiatives to drive long-term future growth.

In commercial fuels, we saw volume growth of 102% in gas and diesel and 30% in propane. As of retail, the majority of the gas and diesel growth is a result of the addition of Ultramar. While propane volumes in our base business grew again as volumes and the number of recent customer wins saw improved demand. The trailing 12-months operating ratio in commercial saw modest improvements as a result of cost control initiatives as well as the inclusion of one quarter of the Ultramar business which as discussed earlier operates with lower margin but also lower operating costs. Excluding the impact of Ultramar and PNE which also has a higher operating cost our base business saw an improvement of just over 1.5% in its operating ratio.

At Parkland USA in addition to strong volume gains of 3% in wholesale and 32% in retail, trailing 12-months operating ratio saw improvement of 2% as a result of focused efforts and successful cost control initiatives in this segment.

I will now skip to Slide 9. So again apologies for the mix up. On October 1st, we were able to announce that we had completed the acquisition of Chevron Canada R&M ULC, which will provide Parkland with bridge fund with strong fuel marketing business in addition to the newly named Parkland Burnaby Refinery. As we closed the deal at the start of the quarter, we will be able to recognize a full quarter of operations from this business, and as such, we have raised our full-year EBITDA guidance from $310 million to $340 million to $350 million to $390 million. This is the expected benefit based on our previous projections. But some level of turnaround cost that we expect to occur in Q4, as we plan for the turnaround in Q1 2018 which I'll highlight continues to track on schedule, on scope, and on budget.

While we've updated our EBITDA guidance for 2017, we will be looking at a more metric driven set of guidance we announce our expectations for 2018 and the New Year. This will include historic information pertaining to the specific Northwest tax spreads which we believe is a good publicly non-benchmark with a reasonably strong correlation to what we will experience in our refining business.

To wrap up, it's been another successful quarter at Parkland. Q3 was an exceptional quarter where we were able to deliver on our strategic priorities and have been able to recognize the favorable impact of a full quarter of business contributions from the Ultramar business acquisition. Our teams have worked diligently to complete the transaction of Chevron's downstream business which we will be excited to talk more about when we discuss our Q4 results next year.

In closing, I would like to thank all of you for joining this call this morning. I'm extremely proud of all the work of our teams have done not only this quarter but throughout the year. We're continuing to drive growth in our base business while closing and starting the integration on our two largest acquisitions to-date.

Ben Brooks

Thanks Bob and Mike. At this point, I would like to ask the operator to open the lines for any questions you might have.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions].

The first question is from Kevin Chiang from CIBC. Your line is open.

Kevin Chiang

Good morning, thanks for taking my question here and congrats on the quarter on closing Chevron. Maybe the first one for me here, I know you've talked about tackling your leverage ratio post these deals closing and you've targeted roughly 2 to 3.5 times for that leverage ratio. When I think about when you put that in place you're a much smaller company back then and today you close on two very large acquisitions. With that higher earnings base should we think about that target leverage ratio being lower and that you don't need to borrow as much or you feel more borrowing capacity on that higher base earnings than you had three, four years ago when this target was first announced?

Bob Espey

Yes, hi, Kevin. Thanks for your question. It's a good observation. So couple of things around capital strategy and you're right the scale of the business as we predicted especially as we go through 2018 and into 2019 will be in a scale, in the 600 range in EBITDA. So a turn there is a very significant amount of capacity and so the way we think about it I mean it's really about capital allocation and thinking about how we optimize that structure and I'm sure that we have capacity for growth and for our strategy go-forward.

And so what you'll see and what we forecast as you we will see our leverage ratio going down from the mid-threes down into the sub three level as we get to our first full year of contribution on combined businesses and the synergy star to kick in. And so now I guess what I will direct is we would look to bring that ratio down below three and into that two range which is really our comfort zone as you know from the past.

And I guess a sizable capacity I think for continued growth in that position and so we're very mindful of equity and we're a strong dividend payer and so I think you look at -- we'd look at the strategy there to maintain it below three and maintain the strength of our balance sheet. But we might bump up into the 3.5 range if something very material came along and we saw strong cash flows where we could drag that down as well.

Anyway that would give you some color. I think what you should expect from us to continuously monitor a very disciplined balance sheet approach around that leverage metrics and we will continue to monitor that as opportunities come up and we will give you guidance in terms of how we think that the allocation and funding.

Kevin Chiang

That's helpful. And just a second one here more a housekeeping question when I think of the acquisition costs run through your corporate -- your corporate line wondering should I think of this Q3 number being the high watermark given the CST and Chevron deals that were in play. And if you can provide any guidance in terms of how we should think about that acquisition cost line over the next let's say year or two or on a quarterly basis what's a good run rate we should be thinking about.

Mike McMillan

Yes, I think you're right, Kevin. As you look at Q3 it is. It is a higher run especially with a two of our largest acquisitions to-date and concurrent integration activities ongoing. What I would suggest is there's a lot of integration activity planned through into Q1 and if you may be focus on that along with turnaround et cetera and so we would expect that sort of run rate to be in effect probably into Q1.

We'll start to see it taper off maybe later in Q2 as we do the system conversions and as we start to see a number of the initiatives around the integration of the business take effect. And so we've got some significant integrations planned on the system side for example next year, early next year and then we'll see it taper as we get both these businesses in.

Kevin Chiang

And just last -- thank you for that. Just last one here with the addition of Ultramar and Chevron there's obviously been a mixed impact on gross margins here both on retail and commercial. And I think historically you talked about gross margins in retail roughly $0.05 per liter and then commercial being call it $0.10 per liter give or take. With the addition of these two is there any additional color you can provide on how those margin profiles look now post the closing of Chevron. It seems like that those should be a little bit higher didn't know what you said in your remarks.

Bob Espey

Yes, Kevin, it's Bob Espey. The -- you're correct it will shift particularly the Ultramar business with the two things the corporate network so we experienced a full rec to retail and then also the dealer business there's a large component of this consigned fuel where we take that full rec to retail margin. And as a result the mix is changing substantially and two things one is we will be more -- we will see -- we will be more susceptible less to the retail which in the legacy Parkland business which is predominantly a dealer business, we will weight much more towards the $0.05 and as a result it's driven that margin up higher.

The second thing that we have Chevron which is a predominantly company network we will continue to see that cent per liter bases grow assuming that retail margin space stable.

Operator

Thank you. The next question is from Michael Van Aelst of TD Securities. Your line is open.

Michael Van Aelst

Hi, thank you. You gave us the CST contribution for revenues in that income, are you able to give to us at the EBITDA level.

Mike McMillan

Yes. I think what you should expect Michael is we will be breaking it out actually not by the business unit itself and we will probably provide you some directional indication in terms of how it's performing versus our case. But we've had a does segment into -- in our retail business, commercial business, in wholesale. We will report it on a combined basis going forward.

And also, Michael, as we are proceeding with the integration of that business so it will start to get mixed in with the legacy Parkland business in jurisdictions such as geographical overlap.

Michael Van Aelst

Okay. You did talk about synergies, a lot of it with respect to the acquisition and in your press release you mentioned supply synergies should be presented going forward. Are you talking about fuel or merchandise?

Bob Espey

So certainly we've made good progress on the synergies across the spectrum. And drivers' to-date would be on a convenient side and on the blank side. We've also seen and we will start to see some benefit from better fuel buying as we leverage the impact of that overall contracts across our broader business portfolio.

Michael Van Aelst

And that's what you're talking about for next quarter, starting next quarter.

Bob Espey

That's correct, yes.

Michael Van Aelst

And then the commercial growth continue to be very strong on the propane side and you mentioned I think both East and West. Are you able to tell how much or to what extent you may be getting some benefit in market share gains from the consolidation among your peers in Western Canada?

Bob Espey

We continue to -- our sales team has done a amazing job picking up new accounts both new to industry accounts and also from competitive accounts. So it's hard to pin it exactly on the consolidation. But again the team has had some nice wins particularly on the larger commercial accounts side which are great accounts because it tend to be long-term customers.

Michael Van Aelst

Have you seen those win -- have you seen newer wins in the most recent quarters or you just cycling through what you got a year ago.

Bob Espey

No, there is definitely the team one of the measures is net new volume and there has, year-over-year in that area.

Michael Van Aelst

And even versus Q2, like, in terms of run rate wins?

Bob Espey

Yes, yes. So it is end of that volume, as it rolls through.

Michael Van Aelst

Okay.

Bob Espey

Yes, you know Michael one thing we think about like for -- as an example different ways to measure the performance but the team has done an exceptionally good job of -- like in the activity in Western Canada as we monitor things, like accounts and other things. We what we do is we take a look at how many rigs are out there and what share those rigs are servicing. And so where we can -- we actually -- we’re seeing some good performance in terms of growing our service percentage of the rigs that are active and so that's a good indication of how we're going to share in the marketplace as well as an example.

Michael Van Aelst

Thanks. On a separate topic are you going to determine what your cash tax rate is going to be once Chevron is included in the results over like 2018 and beyond.

Bob Espey

Yes, so a couple things we are working through right now. I mean it does come down to the consolidation of newly acquired businesses and the classification right on the purchase price allocation. I would say we're pretty close on that I mean we certainly have estimates, a base business. We understand completely Ultramar and the Chevron components as we finalize the fair valuation and work with our tax teams on that we will be able to provide a little bit more guidance in terms of what we expect there, yes.

I would say we'll publish the bar for example and we'll have a lot of that material around the Chevron business. The deadline for that would be mid-December so as we get into Q4 here we'll have a much better picture on that and be able to advice.

Michael Van Aelst

At this point, I'd assume, it looks like it will be the cash tax rate will be lower than the effective rate.

Bob Espey

No I would say, I would say difficult to say that’s probably firm but I would just sort of hold that back. So when we do the analysis and look at -- just look at the asset values and the transaction itself right, as we look at how that plays out here in terms of how we acquired the business and so forth. So I reserve comment on that at this point but I would expect it will be net, it should trend little bit lower but let us follow-up with you on that as we get more information.

Michael Van Aelst

Okay, thank you. I'll jump back into queue.

Operator

Thank you. The next question is from Sabahat Khan of RBC Capital. Your line is open.

Sabahat Khan

Thanks. Just kind of a follow-up to a question earlier on the political format business look with the addition of CST and Chevron you commented on what the gross profit will look like, can you maybe provide a little bit of color on the way you expect fuel volumes to be, should we expect the breakout going forward to be similar to what it was this quarter? Obviously it was a big win in or big wins in commercial, so just trying to get understanding of how we should think about the mix of volume going forward quarterly?

Mike McMillan

Yes good, it's great question, great question here. So as we look at maybe I’ll leave in, I will let Bob to provide some color. I would say characteristically we get a couple of things to note, I think as we come from Q3 into Q4 and so on the business typically the base business we would see higher volume and contribution out of the commercial business as we get into the winter months in Q4 and Q1 so we would see crude business, propane business and so forth coming up.

Now with mix of the CST and the Ultramar business from a largely retail and so forth more ratable if you will and so forth and so that will provide us with a little bit more weight business and then again as you look at the business that we are bringing in Q4 for Chevron, we will have the retail components coming through and then there is a component in their wholesale business like as we supply aviation which is very ratable and then of course the refinery contribution. So overall, I think that you'll see is a bit of a mixed change in our volume as we go through the winter months and later full-year basis across the CST business and the Chevron business comes into play.

Sabahat Khan

Thanks. And then just a follow-up there, on the -- similarly on the non-fuel gross profit side, retail obviously did well and likely benefited from CST, is this also would you say there was outperformance in the non-fuel side this quarter, or would you think this a good run rate for the retail business the Q3 numbers?

Bob Espey

That was very strong performance in the quarter. We do have a lot of initiatives in place to continue to drive non-fuel growth but I would say that was a very strong performance.

Sabahat Khan

Okay. And then just one last one on the synergies now that you have the CST business for a full quarter that you operated it, now that you got a closer look maybe are there opportunities that you saw that will provide some more upside beyond just executing better that you think will provide upside to your synergies or something to think might take a little bit more time now that you've more time with the business?

Bob Espey

Yes. I mean I think first of all the -- we’re tracking ahead of plan right now. Now I would say on the cost side or the purchase cost side, we've made further progress than we've anticipated at this point. One of the big initiatives that we have ongoing is to migrate the SAP system from CST onto Parkland's JVE System, so that will be a key enabler for others process-based savings once that’s completed, that currently is progressing and is expected to take some time in the latter part of next year.

Mike McMillan

Yes thank you. I will just add to that, look again just to refresh we typically would see -- we typically see things on the purchase side pretty quickly and we've talked about CST for example, the Ultramar business and lower [ph] on working those contracts post close, so that’s something that we’re working through.

But on the merchandising side, we’ve had some good traction in scale of the combined business. I think the other two categories are the back office and the operational side, so as we reorganize and do some work on efficiency in the operational side that comes in and sort of medium-term progressing well and as Bob mentioned, the back office component is very I'd say it's all triggered around the system conversions emerging not only in the ERP but I’ll think the retail system we use a customer facing system, the PES system for example and in the commercial system. So as we bring those systems again, those take a little bit longer. And so last year, where we guided later part of the next year into the next -- into the year following and also sequencing that with the Chevron transactions as well. So the back office tends to a trail a little bit out which is why we provide the synergy guidance that by year three and that sort of thing want to make sure that we have a logical sequence to implement some of those longer-term changes.

Sabahat Khan

All right, thanks. And then just one last one for me. You mentioned, your private label offering. Can you, maybe, talk about some of the rollout plans? You've mentioned confectionaries already offered maybe some of the other categories, and how many sites you'll kind of looking to -- be looking to roll that out towards the next couple of years?

Bob Espey

So we're running a pilot hearing test with confectionery which will launch here later in Q4 and monitor how that progresses and post that we will rollout -- we will continue within the confectionery category. There are opportunities across all the categories and we will roll that out next year. I mean the objective is that over the next 24 months we're looking at roughly 20% of our skews being private label.

Operator

Thank you. The next question is from Peter Sklar of BMO Capital Markets. Your line is open.

Peter Sklar

I believe you said your fuel comp was negative 0.6% similar to the disclosure you provided for the merchandise comp, can you let us know what that comp was ex the Ultramar assets.

Mike McMillan

I'm not sure that holds on the line. Let me just diverse a second here. I think --

Peter Sklar

I don't need the exact number what Ultramar improved that number or caused that number to deteriorate?

Mike McMillan

Yes, again we don't have the exact numbers but top of mind was that Ultramar was a bit stronger than the base business in the quarter.

Peter Sklar

Okay.

Mike McMillan

And again I do want to provide some we've fortunately industry data tends to trail by a quarter. But indication and we do get a good sense of industry because the best of our network and also our dealer business which show that the industry was soft in the quarter.

Peter Sklar

Right, okay. Like I was looking at like your slide package like your fueling business your corporate stores in terms of volume are so much stronger than your dealers -- the average corporate store does almost twice the volume of your dealers, can you just run through the reasons why that’s the case.

Bob Espey

Yes, so our -- that that's correct. And when we look at our business dealer business is a great way for us to gain volume and what that does is allows us to access the broader market. And with the dealer business we're in a lot of smaller communities where volumes per site tend to be less also it allows us to access weaker sites in the markets as well. We have a whole rate of dealer sites that we service through that channel.

Peter Sklar

Okay. And then just moving to your merchandise comp I think you said that one of the KPIs that were strong as you measure I guess conversion of front-court to back-court I believe that's what you said. How do you -- like what merchandising or promotional plans do you have that encourages that conversion.

Bob Espey

So that's been a big focus of ours and with the brands that we have, we have industry-leading throughputs on the fuel side and one of the big opportunities for Parkland is better conversion. We've done that by promotion that encourages consumers to basically drive great example would be is a promotional item that forces them into the store around discounts on an in-store item could be drink and a snack.

Also the other item is refreshing the sites and making them more attractive to the consumer so that they in fact go into the site and then improving the merchandising so that it's more appropriate and aligned with the customer segments that we serve.

Peter Sklar

Okay. And then lastly I just want to ask you about the Chevron refinery. I believe there is a major upgrade or maintenance coming up in Q1 of next year.

Bob Espey

That is correct.

Peter Sklar

And does the refinery go down during that or does it say operating.

Bob Espey

No it does go down so that the refinery is down for an eight to ten week period. And at that time I know that the maintenance would progress.

Peter Sklar

And how do you supply your network.

Bob Espey

Sorry so that timeframe is six to eight weeks. I just want to clarify that.

Peter Sklar

Okay. And how do you supply your network during that period, do you build out an in tank inventory or how does that work.

Bob Espey

So three things one is we do build up some inventory. The second is we will look to our refining partners to assist. And then the third is import. We also do have an ongoing supply relationship with Chevron and they will be assisting us through that.

Peter Sklar

Okay, those are my questions. Thank you.

Bob Espey

Great. Thank you, Peter.

Operator

Thank you. There are no further questions at this time. I'll turn the call back over to Bob Espey for final remarks.

Bob Espey

Great. Well thank you, thank you for listening in to our call and look forward to talking through our results with the addition of the Chevron business.

Mike McMillan

Thank you.

Operator

Thank you. Ladies and gentlemen this concludes today's conference. You may now disconnect. Good day everyone.