Parkland Fuel Corporation (PKIUF) CEO Robert Espey on Q4 2019 Results - Earnings Call Transcript

Parkland Fuel Corporation (OTCPK:PKIUF) Q4 2019 Results Earnings Conference Call March 6, 2020 8:30 AM ET

Company Participants

Brad Monaco - Director, IR

Robert Espey - President, CEO

Darren Smart - Senior VP of Strategy & Corporate Development & Interim CFO

Dirk Lever - VP, Finance

Conference Call Participants

David Newman - Desjardins

Michael Van Aelst - TD Securities

John Royall - JPMorgan

Steve Hansen - Raymond James

Ben Isaacson - Scotiabank

Peter Sklar - BMO Capital Markets

Vishal Shreedhar - National Bank

Derek Dley - Canaccord

Amir Arif - Cormark Securities

Elias Foscolos - Industrial Alliance Securities

Operator

Good morning, ladies and gentlemen, and welcome to the Parkland Fuels Corporation Q4 2019 Results Conference Call. At this time all lines are in listen-only mode. Following the presentation we will conduct the question-and-answer session. [Operator Instructions] This call is being recorded on Friday, March 6, 2020.

I‘d now like to turn the conference over to Brad Monaco. Please go ahead.

Brad Monaco

Thank you. With me today on the call are Bob Espey, President and Chief Executive Officer; Darren Smart, Senior Vice President of Corporate Development and Interim Chief Financial Officer; and Dirk lever, VP, Capital Markets.

This call is webcast, and I encourage listeners to follow along with the supporting slides. We are targeting the call to be approximately one hour. We will go through our prepared remarks, then open it up for questions from the investment community. If you are a member of the media, please connect with our communications team, who will be happy to respond directly.

Please limit yourself to one question and a follow-up as necessary and reenter the queue if needed. Our Capital Markets team is available afterwards for more specific follow-up items.

During our call today, we may make forward-looking statements related to expected future performance. These statements are based on current views and assumptions and are subject to uncertainties, which are difficult to predict. These uncertainties include, but are not limited to, expected operating results and industry conditions, among other factors. We will also be discussing non-GAAP measures, which do not have any standardized meanings prescribed by GAAP. These measures are identified and defined in Parkland’s continuous disclosure documents, which are available on our website or on SEDAR. Please refer to those documents as they identify factors which may cause actual results to differ materially from any forward-looking statements. Dollar amounts discussed in today’s call are expressed in Canadian dollars, unless otherwise noted.

I will now turn the call over to Bob.

Robert Espey

Great. Thanks, Brad. Welcome, everyone, to the fourth quarter earnings call for 2019. We had a record year, and I’m pleased to speak with everyone today.

On our opening slide, we have some examples of our JOURNIE Rewards marketing assets, which you are starting to see across Canada. Journey with CIBC as a strategic banking partner is on track to be rolled out nationally by the end of Q1. Initial customer reaction has been very positive.

We currently have over 400,000 total members and it is growing daily after just six weeks and around 400 sites. You’ll be hearing more about JOURNIE Rewards with media support from Parkland and CIBC starting in Q2. We will talk more about this within our retail segment results. I’m very proud of our team’s accomplishments this year.

Let me touch briefly on some key milestones that we achieved. Based on our performance through the year, we had the confidence to raise adjusted EBITDA guidance twice and exceeded the midpoint of that guidance.

Geographic and product diversity of our business was on full display with all our segments contributing to our overall success throughout the year. Our balance sheet is strong, and the business generates significant cash flow. In 2019, we completely funded our CapEx program and U.S. M&A within cash flow, which underpins our ability to grow our business sustainably, both organically and through tuck-in M&A.

We continue to add to our track record of integration success, hitting over $180 million synergy target for the CST and Chevron acquisitions one year ahead of schedule. This represents over 50% synergies based on our initial EBITDA assumption and well above our original estimate of approximately $70 million.

We have a track record of buying great businesses and extracting additional value for our shareholders through our integration capability. We continue to look for assets and businesses for which we can add value.

We are pleased to announce another $0.02 increase to our annual dividend, our eighth straight year of dividend increases. We will continue to grow this at a modest pace given the runway for organic and M&A growth in front of us right now. The opportunity set for Parkland has never been greater than it is today.

I’ll now pass over to Darren to go through the corporate financial results, after which I will walk through the segment details.

Darren Smart

Great. Thanks, Bob. And good morning, everyone. Parkland team delivered strong fourth quarter performance with adjusted EBITDA of $302 million and $1.265 billion for the year. We are up materially compared to 2018, driven by the contribution from our new international operations, strong refining margins and synergy capture. We have significant momentum with our organic growth initiatives and have carried that into the start of 2020.

We have highlighted adjusted distributable cash flow, which we use to monitor normalized cash flows of the business. Adjusted distributable cash flow was essentially flat year-over-year as higher maintenance capital and cash taxes offset our higher EBITDA.

On maintenance capital, we completed HS&E upgrades within our international operations, which was taken into account in our original purchase price. We also elected to accelerate spending for both the 2020 Burnaby Refinery turnaround and some additional work we are completing at the facility, while the refinery is down. Finally, we invested maintenance CapEx as part of the On the Run conversion program in Q4.

Moving on to the next slide. The waterfall chart on the left walks through the year-over-year segment changes to adjusted EBITDA, while the chart on the right shows the same comparison but based on pre-IFRS 16 amounts. Please note that starting with our Q1 2020 results we will no longer need to reconcile for pre-IFRS 16.

As you can see, solid supply, international and USA operations offset soft Canadian retail margins. We have seen strong performance in our international and U.S. segments, driven by organic growth. Bob will talk in more detail about these dynamics when we get into the segments.

On to Slide 6, I will run through some of our corporate KPIs. Total funded debt to credit facility EBITDA continues to be well within our target range at 2.8 times on a trailing 12-month basis. This is ahead of where we thought we would be a year after the SOL acquisition.

Cash flow generating ability of our business supports our ability to grow while maintaining balance sheet strength and financial flexibility. This is also reflected in our adjusted dividend payout ratio, which was just over 30% for the year. Trailing 12-month fuel and petroleum product volume was approximately 22.4 billion liters, again, ahead of our original expectations post the SOL acquisition.

Specifically in the last year, the Parkland team has demonstrated an ability to not only buy great businesses but to grow them as well. It doesn’t make sense to do acquisitions if we can’t grow businesses once they’re part of our portfolio.

On a consolidated basis, corporate marketing and general administrative expenses as a percentage Parkland’s adjusted gross profit was 3.8%. We will continue to drive efficiency and build a platform that is easy to scale.

I’ll now hand it back to Bob to discuss the segment performance.

Robert Espey

Thanks, Darren. I’ll start with the Canadian Retail segment, which delivered adjusted EBITDA of $56 million in the quarter. We maintained market share for the year and grew our corporate store volumes by nearly 3%. Lower EBITDA was driven by the continued bumpy margin environment, mainly in the west-end Ontario.

We also had some onetime costs for the investments in JOURNIE Rewards development, which lowered EBITDA by $3 million. I’m extremely proud of the fact that we have delivered 16 straight positive - quarters of positive C-store same-store sales growth.

Q4 was up approximately 1% and up over 7% when removing the impact of cigarettes. This is an outstanding accomplishment versus a strong set of comparables numbers in 2018.

We have rapidly grown our presence in Canada where we have some ambitious goals and continue to deliver on them. We launched our much anticipated JOURNIE Rewards loyalty program and brought on a leading Canadian financial institutions as our strategic banking partner. We added 27 new sites and converted 65 existing sites to our On the Run convenience store backcourt.

We exceeded our private label penetration targets and had 49 SKUs in market at the end of 2019, including our new non-food brand cargo. We are testing innovative new concepts to drive C-store traffic such as Amazon Hub and dedicated freezers from M&M Food Market Express.

We are expanding our enterprise digital capabilities and have built a team responsible for putting our customers first in improving our efficiency and analytics capability, which will add value to the entire organization.

We signed an exclusive agreement with Triple O’s to bring the brand into Alberta and Ontario markets and offer high quality, made-to-order meal options that cover all day parts.

We grew corporate volumes by nearly 100 million liters this year, which demonstrates our growth programs are working. We are delivering in all fronts, and we believe we are still in the early innings of our growth initiatives.

Returning to JOURNIE Rewards for a moment, we are seeing encouraging results on key revenue and margin areas such as higher average leaders filled and C-store basket size for participating members.

CIBC credit and debit card customers links are gaining traction and those linked members are buying more fuel and C-store items, which demonstrates the power of our partnership. We expect this momentum to continue as Parkland and CIBC begin to promote the program through various forms of media, including brand digital, on-site and out-of-home deployment as we enter the key driving season in Q2. Stay tuned for more updates on this exciting new program, and we encourage you to download the app and start earning rewards. All in all, I’m pleased with the underlying performance of our retail business and excited for 2020.

Our Canadian Commercial segment delivered adjusted EBITDA of $33 million for the quarter and $99 million for the year. We continue to improve our operating efficiency through regional operating center transition, cost management initiatives and strategic focus on higher margin business.

We repositioned our portfolio to reduce customer churn and ensure we remain focused on our highest value customers, specifically in our cardlock business, and you see that reflected in gross profit. These successes were enough to overcome the continued weakness in the forestry and upstream oil and gas industries in Western Canada.

The forestry sector, particularly in BC has been challenged and rig counts in Western Canada were down 30% year-over-year. Our trailing 12-months operating ratio improved through these efforts, and we continue our push to drive our operating ratio down over time.

Going forward, we are excited to launch our National Fuel Network or NFN in mid-2020. It is a unifying commercial brand for servicing national and cross-regional customers in a capital-light structure. More on this as we progress through the year.

In our International segment, Parkland’s fourth quarter adjusted EBITDA was $73 million and $281 million for the year. I’m extremely pleased with our decision to enter the market and with the performance in our first year of operations. Thanks to our new international team, as well as our SOL partners.

As Darren mentioned earlier, it doesn’t make sense to buy businesses unless you can grow them. We did just that, taking advantage of retail and commercial opportunities and expanding LPG, aviation and bunkering operations, resulting in an 8% year-over-year growth in our volumes.

We received a new LPG vessel in late 2019, which started to benefit us in 2020. We gained traction with More Miles Journey program in Barbados now used by 18% of Barbados drivers. We plan to roll this out in other international markets in 2020, and we are fine-tuning our supply operation, expect to start benefiting from it in 2020.

We also recognized an immediate benefit of having synergistic operations in Florida through the U.S. - U.S. Tropic Oil acquisition. We are working together to service Tropic customers in the Caribbean and SOL customers in Florida. This is a perfect example of our growing supply platform and working together as one Parkland team.

Our U.S. segment delivered fourth quarter adjusted EBITDA of $15 million and $56 million for the year, which is double our 2018 results. We bought three businesses in 2019 and another subsequent to year-end, and we are starting to see the benefits of local scale in our Northern Tier and Rockies regional operating centers.

Importantly, we are also driving strong organic growth, securing new commercial volume and growing our national accounts business. We’ve had a lot of cross-functional success where our regional operating center team partners with our national accounts, and supply teams to win new business by providing a differentiated offer.

We recently acquired Kellerstrass Oilin early 2020, which came with high-quality physical assets, such as 17 car rail spur, our supply team was already utilizing and adds significant optionality to our portfolio. We had a great year in the U.S. and are pleased with the underlying performance and our organic growth run rate with additional tour toward accretive acquisitions.

Finally, turning to the Supply segment, which delivered $152 million of adjusted EBITDA in the quarter and $658 million for the year. The team at the Burnaby refinery continues to operate efficiently, safely and reliably. We did have a third-party electrical outage in October, which lasted for six days, which slightly lowered our utilization rate to 92%.

Overall, refining margins were strong, and we also benefited from synergies and optimizing our pipeline space. We are highly focused on the current turnaround at the Burnaby refinery, along with some other work we are doing to take advantage of the downtime.

We are investing capital to upgrade our co-processing ability and hope to exit the turnaround with additional capability to produce renewable gasoline and to test production of renewable diesel and jet fuel.

Our rail logistics business had a record year, capitalizing on a robust arbitrage environment and growing third-party LPG, refined products and carbon trade operations. Our supply advantage is a key tenant of Parkland’s strategy, and we will invest capital in 2020 to enhance our capabilities.

Wrapping up now on Slide 12, our 2020 guidance is $1.13 billion for adjusted EBITDA and $575 million for total capital expenditures, both with a variance of 5%. As we did in 2019, we are targeting to fund our capital program at a cash flow and maintain financial flexibility to capitalize on tuck-in opportunities.

The strategic pillars remain the same. Grow organically, build a supply advantage, acquire prudently and integrate effectively. Keep in mind, with our adjusted EBITDA guidance range this accounts for our turnaround at the Burnaby refinery. We have provided an approximate breakdown of our capital expenditures this year to give an idea of where investing is going on.

Maintenance capital is tilted towards supply because of the turnaround. But I will give some more color on the growth slide. Our organic growth is focused on some key items for 2020. Network development, improving our customer value propositions, supply and logistics capabilities, building our enterprise digital capabilities and accelerating low carbon.

I’d like to end by once again thanking the Parkland team for their hard work and dedication to produce yet another great year for our shareholders and for their ongoing focus on safety.

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

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Your first question comes from David Newman, Desjardins. Please go ahead.

David Newman

Good morning, folks.

Robert Espey

Hi, David. How are you?

David Newman

Very good. How are you?

Robert Espey

Very good.

David Newman

Good. So just as you look at your guidance, I just - a high level sort of thought process as to the setting of the guidance and the conservatism that you may have taken. A couple of things. I mean, first of all, maybe you can try to quantify what the thought process was.

I’m thinking about coronavirus and what potential impact that could have on either servicing the Vancouver airport with jet fuel or Tropic Oil on the cruise ships, maybe Caribbean tourism, vehicle miles traveled, what was your thoughts when you were kind of setting the guidance on that front?

Robert Espey

Yeah. So look, we’ve - in terms of the virus. So first of all, our guidance is set taking into account, particularly the impact of the turnaround this year. And then our forward view of the crack spread. Those are the two big drivers on a year-over-year basis.

In terms of the coronavirus, I mean, we have a diverse business. And to date, nothing has impacted us material. We’re continuing to monitor the situation very closely. But at this point, it’s hard to tell what the potential impact will be.

We’re quite confident that at this point, where our forward view and the potential impact is within the tolerance that we provided in our guidance. And if that were to change, then we would renew our guidance numbers.

David Newman

Okay. And then - and just on supply and retail in particular, Bob. When you’re thinking about this year, I know, on supply its pretty simple, you kind of look at the 3 year average and whatnot. But do you guys implicitly bake in physical arbitrage?

And then on the retail, what are sort of your assumptions on volume growth and organic growth because that’s been a challenging market in terms of retail?

Robert Espey

Yeah. So on the supply business, we certainly have a budget that anticipates a certain amount of arbitrage within that business. And that’s what we would bake into our projection going forward. Last year was particularly strong. We tend to moderate that in our forward view.

And with regard to retail, we do report retail as one segment. I would say, when we peel it apart, the volume growth, particularly in our corporate network, where we really control the proposition was on target at a roughly 3%. We’ve seen some good growth in our non-fuel margin that supports our continued capital program around new sites and conversions.

What we’re also seeing is as a percentage of gross profit, the non-fuel volume, we’re hitting our targets that we set out in our - in our new builds, and we’re also getting the returns that we’d anticipated.

And one of the - as we transition the network and put newer, larger sites and with our large-format OTR and a QSR. And what we’re seeing is we’re less and less sensitive to retail margins because most of the gross profit is driven out of non-fuel.

David Newman

Okay. And last one for me, and then I’ll give up the line. Just overall in terms of what you’re doing in Burnaby and the turnaround. I’m just thinking that you’re scrambling to sort of build your biodiesel capability. And I know that in the past that you’ve had to process some higher cost inputs like tallow oil.

Is there a potential here that when you exit the turnaround that you could actually see better margins because you can internalize some that rather than getting expensive imports?

Robert Espey

Well, first of all, we never scramble at the refinery. We do things very deliberately and safely. The - in terms of the turnaround, one of the items that we’re investing in is to be able to increase the proportion of bio inputs. And I think we’ve talked about exiting the refinery or exiting the turnarounds, and certainly this year being able to increase that in the area of 3,000 to 5,000 barrels a day.

In terms of the inputs, I mean, our team, one of the focuses on the turnaround and the technology that we’re developing is to make sure we have maximum flexibility around a number of different bio feedstocks. And that ensures that we can always get the best economics for the facility as we go forward.

David Newman

Excellent. Thanks, Bob.

Operator

Your next question comes from Michael Van Aelst, TD Securities. Please go ahead.

Michael Van Aelst

Thank you. So I just want to start off on the retail side. You had modest same-store sales, but the non-tobacco is actually quite strong and up 7.1%, and that accelerated compared to what we saw in the last couple of quarters. So can you talk about what’s working for you? And what are the key drivers of that same-store sales growth?

Robert Espey

Hi, Mike. It’s Bob Espey. In terms of the key drivers there - there’s a number of things. One is, again, a continued focus on our merchandising and also on our private label. The second thing is the OTR refresh program, where we do see that a benefit there as we pull new customers into sites.

And the third is, we’re seeing the impact of our organic growth investments. So new sites as they start to grow we do see some good same-store comps year-over-year as they start to take off.

So those would be, sort of, the three key drivers in that number. And we’ll start to see the impact of loyalty here in 2020. So expect that number to continue to be quite robust here throughout 2020.

Michael Van Aelst

Can you talk about what some of the learnings was - were from the soft launch in Q4?

Robert Espey

Yeah. I would say so first of all, I think the soft launch demonstrated that we can get good traction on the program. We’re seeing average basket size go up quite nicely, and it will be interesting to see how that translates through into the broader rollout.

I think our team has been focused certainly through the pilots and the soft launch on making sure that the technology can - is easy to access and that our customers can use it effectively. So there is been some tweaks there.

The other thing is the partnership with CIBC, we tested that in BC and again, got - there was some working there on how to make sure that we encourage customers to join cards. And again, we’ll start to see that here in Q2 as we do some promotion around that and encourage folks to link their cards. So what we do see is when we do get someone to link cards, the impact is even greater than just having the loyalty program.

Michael Van Aelst

Okay. And then – thank you, Bob. And then on - if I look at SOL, it’s definitely been a good first year. I think there are some question marks as to how you guys would manage your business outside your North American market, but it’s obviously been a very good year.

So can you talk about some of the areas where you’ve been able to get some early wins in improving that business? Where is the growth coming from? What are some of the efficiencies and synergies that you’ve been able to generate early on?

Robert Espey

Yeah. Our growth there that we’ve seen compared to business - compared to what we announced has been primarily organic growth in the business and some early wins on the synergy side. Again, that business, we certainly didn’t see or anticipate a lot of cost synergies with our Parkland business. It was more about sharing best practices.

And where we - where the team there has been able to make improvements is, one is starting to push more aggressively into the LPG business. The other is in the retail business. A lot of tactical items that led to volume increases and market share increases in certain markets, where we just were a bit more aggressive in terms of our offer. And then finally, on the supply, well, more to come, but we did see some early wins there on the distribution side, specifically.

So again, look, we’re quite excited about the business. As we look forward, we’re still bullish around the synergies that we had projected when we bought the business and continue to see some really good organic growth opportunities as we roll out LPG into markets that we’re in, but don’t offer it and also our aviation offer.

Michael Van Aelst

Okay. And just to clarify, on SOL, how sensitive is it to tourism and the cruise industry?

Robert Espey

Well, it depends on the market, right? So there is sort of three types of core markets, as the ones that are tourist sensitive. The second would be the natural resource dependent economies, which are still very robust and growing well. And then the third – third or more they don’t have either of those, and they tend to be quite steady performers.

In terms of the potential impact, again, early to tell. We haven’t seen that. I mean, we are getting close here to the end of the tourist season. So hopefully, the impact is minor. And again, a lot of the tourists that - we haven’t seen any flight cancellations. So that would be a driver of fuel, on the jet side.

And then also, we’re - on the crew side, where it would impact us more is in the business we bought in Florida, where we’re doing a lot of into ship. But again, at this point, we haven’t seen a drop-off in that business to any sort of material - in any sort of material way.

Michael Van Aelst

Excellent. Thanks, Bob.

Operator

Your next question comes from John Royall, JPMorgan. Please go ahead.

John Royall

Hey. Good morning, guys. Thanks for taking my question. So just thinking about your $300 million in growth CapEx. It’s a pretty big step-up from what you did in ‘19? And I appreciate your business is growing, and so you’ll need more to move the needle.

So I guess my question is what level of growth CapEx do you think you need each year to get to your 3% to 5% organic growth target? And is $300 million - should we think of that as the new norm?

Darren Smart

Hi, great. It’s Darren Smart here. So thanks for the question. So yes, so on the growth side, we see approximately $300 million of growth CapEx. And if you think about some of the elements of that, certainly there is some this year related to the refinery as we invest into co-processing and things of that nature. And then as we continue to scale the business that growth number will change as well. But that’s kind of how we think about it.

John Royall

Great. And then just sticking with CapEx. Just looking at the ‘19 maintenance CapEx. You were above guide there and you mentioned pulling forward some turnaround expense. But if I look at ‘20, you’re still doing $85 million between CapEx and OpEx on the turnaround. So is there some incremental expense there for the Burnaby turnaround?

Darren Smart

Yeah, there is. And as we’ve said, there’s about $60 million included in maintenance CapEx for the turnaround in 2020. And as you noted, in 2019, we did have the chance to accelerate some of our HS&E related spend in international.

John Royall

Okay. Thank you.

Operator

Your next question comes from Steve Hansen, Raymond James. Please go ahead.

Steve Hansen

Yeah. Good morning, guys. Just firstly, on the front quarter here, the crack spread has been fairly robust through Q1 resilient gasoline prices. Presumably, that has something to do with the refinery downtime. I’m just trying to get a sense for how much inventory you had done in advance, prior to the turnaround? And whether or not we should think about that in sort of our front quarter estimates?

Robert Espey

Yeah. So we’re limited by storage at the facility. So we would have built some inventory, but we predominantly move to a program where we’re importing or buying up refining partners in the west here to meet our demands through the turnaround.

Steve Hansen

Okay. Appreciate it. And then just on the M&A side. I’m just hoping you could speak to the pipeline that you’ve been seeing, your commentary suggests that you continue to look for M&A targets in the U.S. and to leverage the new ROC you’ve got.

I’m just trying to get a sense for how we should think about that pattern through 2020 and whether you think you can be more active than last year or similarly active? Or just any sort of your context for what you’ve got in the pipeline? Thanks.

Darren Smart

Great. It’s Darren Smart again. Thanks for the question. Our M&A pipeline remains very strong. And so we’re very excited about the opportunities that we see in the U.S. and across all of our rocks.

It’s hard to predict exactly when we’ll be able to sign and close transactions. But we do have a diverse pipeline across regions and different types of businesses that fit our operating model quite well. So we continue to focus on finding good value and when those opportunities come up, then we focus on closing them.

Steve Hansen

Very good. Thanks.

Operator

Your next question comes from Ben Isaacson, Scotiabank. Please go ahead.

Ben Isaacson

Thank you very much. Just a question on commercial, the cardlock strategy. So it looks like you’ve been giving up volume to raise margins. How much of that volume that you initially give up actually comes back and pays higher prices? And is that strategy - has that now played out? And should we look for growth going forward?

Robert Espey

So again, talking about the year-over-year volume decline. Again, a portion of that is due to the cardlock business. We also saw demand come off in forestry in BC, which has been a large segment for us, and also in the continued decline in Alberta and Saskatchewan in the rig count. So I would say it’s not just due to recalibrating our cardlock portfolio.

I would say on that side, we are at a point where I think we’ve got the value proposition to a point where it can start to grow. The other component is with the NFN that we’ll be launching in the back half of the year. It will give us a much more robust payment platform, but also the opportunity to link other partners into the program and increase the available traffic to the site. So we do expect to start to see that to turn around and see some growth here as we go through the year.

Ben Isaacson

Great. Thank you. And then second question, back to M&A opportunities in the U.S., you had some nice bolt-ons at the end of last year. And when you look at the opportunity set, are there some medium-sized businesses that you’re seeing some value such that it’s more kind of needle-moving transactions? Or is it the same type of size as we saw in Q4 last year?

Darren Smart

Hi. It’s Darren Smart. Thanks for the question. Yes. So our pipeline has really the full continuum of opportunities in it. From the smaller tuck-in transactions that you noted we’ve done in the last year, as well as medium-sized and larger transactions.

So it really is kind of diverse. And again, we look for opportunities that fit well with our business and our strategy and look for situations where we can find good value. So that’s how we evaluate them.

Ben Isaacson

Okay. Thank you.

Operator

Your next question comes from Peter Sklar, BMO Capital Markets. Please go ahead.

Peter Sklar

Bob, on the synergies from the Chevron and the Ultramar businesses, like you’re indicating that the synergies are that you’ve realized are significantly larger than what you originally anticipated. So two parts to the question is, one, like where are you finding these extra synergies? And two, like, are they fall - like if you do the math, are they - when you look at the math, are they falling to the bottom line? Or are you investing some of that back in the business?

Robert Espey

Yeah. So in terms of where do the synergies come from, it’s pretty standard to what we’ve seen in the past. So we would look in three areas. One is in supply. And for this particular acquisition, there was a large part in-supply. Then the second thing is in operating improvements, and we were able to make substantial operational improvements in the marketing business and also in the - there’s been a lot of operating improvements in the refinery as well, so impacting both the reliability positively and also the OpEx.

And then the third thing is on the MG&A. And there, we’ve made - we announced earlier in 2019 that we had everybody on a common platform for systems that’s enabled us to go after efficiencies across the business.

And we’ve also done some consolidation of our office footprint. We were in two offices in Vancouver. We’ve moved that into one. We’ve done that in Alberta, where we’ve been able to move into one corporate office and also in Montréal. We’re in the process of coming down to one corporate office there. So again, those are the ongoing improvements that we’ve seen. And I would say we outdelivered or delivered well beyond our expectations across all of those.

In terms of where do you see that. I mean, the - at some point, the businesses get integrated, and it is hard to pick out where things are coming from, I would say, on an aggregate basis, we have been investing in the business. And certainly, we’ve seen that in our retail business, where we’ve been investing in marketing programs. And it’s hard to say exactly where that’s come from. But certainly, the synergies would contribute to that.

And then we’ve also seen an increase in our capital program, which is largely funded through the EBITDA across the business, of which these synergies are a key contributor to that.

Peter Sklar

Okay. Switching topics. On Journey, you’re going to be getting a lot of data on your customers. So I was just curious, like do you get their e-mail and their cellphone or it’s either or potentially both? And I’m just wondering, are you - have you developed yet the company’s strategy with what you’re going to do with all this data? And how you’re recruiting the team that’s going to work with the data with this new…

Robert Espey

So you’re right. I mean, one of our key assets as the business is our transaction count, which across our business now is 1 million customers a day. Our focus here on the program is to push people to digital, so we do get customer information. And the bulk of that does tend to be an e-mail address or phone number.

What that allows us to do is track our - the consumers’ behaviors and how they’re buying and how they’re interacting with the site and ultimately get to a point where we can push promotions to them on a one-on-one basis. We’re not there yet. That’s to come. We need to get the program launched.

The other area that we’ve been investing in is our digital capability. We’re currently - last year, we brought in a head of digital into Parkland. And that’s not just on the consumer side, but we have a lot of data across the business, our commercial business but also in our supply side that we can continue to extract and you know, get digital insights into on a quicker basis.

We’re growing that team from - I think it was three or four people coming out of the year to about 20 people this year. And that’s a combination of technical people. But also data - data analysts that can extract the data, and again, give insights to the business in which we can generate further value. So quite excited about building that capability and really look forward to seeing it gain traction in 2020.

Peter Sklar

Okay. And then just lastly, a question on the Canadian retail business. The fuel comp, I think it was 3.1% in terms of volume. Were you surprised at the strength of that comp - you talked about you holding your market share, I would think that would be above and beyond the growth that Canada as a whole is experiencing in terms of retail volumes.

Robert Espey

Yeah. I think, look, I think the same-store was down on an aggregate basis. And now if you slice out are our corporate business it grew, and our dealer business declined. We did see - we do compare against market and it would show that we maintained our market share. But I would say we grew relative to market in our corporate business, and we’re slightly behind in our dealer business.

Peter Sklar

Okay. Thank you.

Operator

Your next question comes from Vishal Shreedhar, National Bank. Please go ahead.

Vishal Shreedhar

Hi. Thanks for taking my questions. Looking at 2018 as a whole, and I know management was pleased with the year, and these questions have been touched on in various ways already. But the volumes in the key segments, retail, commercial supply, kind of a little bit down year-over-year.

So just wondering in context of your 3% to 5% adjusted EBITDA growth. Was that in line with your expectations, the volumes? Or - and how should we think about it in 2020? What are your expectations for the comps…

Robert Espey

Yes, I would say our - certainly, if you look at retail, our - we maintained our volume on a year-over-year basis. Again, I would say, where we can control the proposition, we grew and grew quite well within expectation. And again, our growth - when we talk our organic growth, it is EBITDA growth. It’s not necessarily volume growth. So we did see good growth in our corporate network, both on the fuel and the non-fuel side in the year. So I was quite pleased with that and the comps that we were able to produce.

On the commercial side, we talked through the volume picture there. We’ve certainly made operational improvements and again, adjusted our customer portfolio to offset that, you know, would like to see some volume growth in that business as we go into 2020.

And then in our supply business, we had a very robust year, in terms of - certainly, on the wholesale side, we grew our volume significantly on our wholesale and our rail distribution business. So expect that to continue here as we go into the next year.

Vishal Shreedhar

Okay. On the competitiveness in Canada for the fuel margins. Do you - it looks like the fuel margins are getting a little bit more challenged at least on a sequential basis. Do you see that abating that competitiveness? Or is it status quo for now?

Robert Espey

I can’t project where the market is going to go. I would say, our focus is to focus on growing non-fuel, making sure that our costs are coming down. One of the metrics that we talk about is net unit operating cost, and that should go down on a year-over-year basis. And so that’s a key focus of ours to make sure that we continue to drive that.

To get the returns out of our growth capital, which we continue to see as we grow our non-fuel in the sites. And ultimately, make us less sensitive to the fuel margins and make sure that we’re the lowest cost operator and can win in any margin environment.

Vishal Shreedhar

Okay. And just on the - given the competitiveness, like does Parkland help its dealers and certainly with corporate stores have any analytic kind of software to figure out what the ideal fuel margin is to maximize gross profit? Or is it done in a more traditional kind of market-by-market manager figures at the best price kind of way?

Robert Espey

No, we do - we invested in our digital capability, which has allowed us to get better insights into pricing at a local level and help our territory managers, managers manage their respective areas by making sure that they are pricing that specific market competitively and appropriately.

Vishal Shreedhar

Okay. I appreciate that. And just switching gears here a little bit, and it’s already been touched on a little bit with SOL. But if the economy does experience a little bit of weakness here. Wondering, just given that your business has changed so much over the years and grown so quickly, just wondering your thoughts on how the various businesses perform in a weaker economic period?

Robert Espey

Yeah. Look, I would say, first of all, we’ve got this diverse platform, which is a great mitigator against uncertainty. So if you look at the breadth of the markets that we’re in, the different products that we carry. There are good offsets. Certainly, as we’ve seen and gone through in the past. Slowdowns in the economy, we’ve been able to see that our business is robust and can pull through that.

If you look at our various segments, retail driven by primarily population growth. There is some sensitivity to economy but less sensitive. Our commercial and diesel demand tends to track GDP. And I think projections are globally that the virus could impact growth by 2 or 3 percentage points. And that would translate through into our volume, and then ultimately, within each area.

Again, various markets have more or less sensitivity to it. And again, it speaks to the diverse nature of the business and the fact that on an aggregate basis, we would expect to be able to push through, should the impact of the virus be more substantial. We would expect that our business can push through that.

Vishal Shreedhar

Okay. And so certainly, that kind of thinking was reflected as you contemplate your guidance?

Robert Espey

Certainly, it’s within the tolerance of our guidance. And if we were to see that we - if our expectations there would change, we would adjust accordingly.

Vishal Shreedhar

Got it. Okay. And similarly, this question was, I think, kind of touched on as well. But in the last turnaround, Parkland benefited substantially from, I guess, optimization initiatives, selling line time, et cetera. And so I think it was a $30 million benefit. But am I correct to kind of think that level of magnitude of benefit, it’s not repeatable?

Robert Espey

We are importing. And at this point, it’s - it looks like we’re on track in terms of being able to supply the market. And we’ll update in terms of any economic benefits above what we’ve projected when we’re done the turnarounds at the end of Q1.

Vishal Shreedhar

Okay. And was that contemplating your guidance as well, the optimization initiatives that you potentially may be able to engage in?

Robert Espey

Yeah, certainly, we’ve - we budgeted the impact of the TAR in the guidance and any ancillary benefit from importing would have been in an initial projection.

Vishal Shreedhar

Okay, wonderful. Thanks for your time.

Operator

Your next question comes from Derek Dley, Canaccord. Please go ahead.

Derek Dley

Hi, guys. Just a quick one for me. I was surprised to see the delta between your same-store sales growth with and without tobacco. So just wondering, could you give us some color just on what is the revenue or gross profit mix within your non-fuel side?

Robert Espey

Well, so - I mean, cigarettes are our lowest margin item. So - and certainly, our in-store non-tobacco, our non-lottery items are much higher margin. So they tend to be 3 or 4 times the margin of selling cigarettes. So we’re more than offsetting any decline in gross profit on the tobacco with the growth on the inside sales.

Derek Dley

But in terms of sales mix, I mean, one of your competitors disclosed this tobacco makes up roughly like 40% of their sales. Would the split be similar for you guys?

Robert Espey

Yes, we’d be slightly higher.

Derek Dley

And what else would - what are some other major categories for you?

Robert Espey

Well, so - well, cigarettes is our largest category. And then after that, we get into the - into the non - in terms of those categories, the exact order, I can’t give you off the top of my head. But we’ve seen good growth across all of those. The other area that’s growing is our food offer as we continue to roll out more QSRs, we’ll start to see the impact of that roll through our non-fuel gross profit.

Derek Dley

Okay. Thank you very much.

Robert Espey

Great. Thanks, Derek.

Operator

Your next question comes from Amir Arif, Cormark Securities. Please go ahead.

Amir Arif

Thanks. Good morning, guys. Just a quick question on the growth capital. I was just hoping you can just give us a rough breakdown of how much of that capital is for top line revenue or volume growth? And how much of it is in terms of gaining EBITDA from improving your margins or lowering your costs?

Robert Espey

Sorry, that’s - can you just clarify that?

Amir Arif

Yes. So just on the growth capital of $300 million, how much of that is actually to add on the revenue side or the volume growth side? And how much of that is adding EBITDA by improving your cost structure, just given the commentary you gave in terms of where some of that growth capital is going?

Darren Smart

Yes, it’s Darren Smart here. It’s really difficult to break out the growth CapEx on that basis. Our projects there do span both of them. And just as a general philosophy, we are focused on ensuring the - we get great returns from the growth capital we invest, but its on both fronts.

Amir Arif

Okay. Fair enough. And then just a follow-up question there, then, as you set your growth capital in any given year, are you looking at return thresholds of payouts? Or is it a percentage of the EBITDA because I’m sure you have a lot of opportunities to put capital to work?

Darren Smart

Yes, we do. And very focused on ensuring we’re getting the return on capital and focused on the high-returning projects.

Amir Arif

Okay. So does percentage of EBITDA come in as a cap in terms of how much? Do you wish to put in any given year?

Darren Smart

Don’t think about it as a percentage of EBITDA. But do focus on ensuring that we’re spending within our means and focusing on the best projects.

Amir Arif

Terrific. Thank you.

Operator

Your next question comes from Elias Foscolos with Industrial Alliance Securities. Please go ahead.

Elias Foscolos

Good morning. Most of my questions, almost all of them, have been asked. But I just want to focus on the Burnaby refinery and some of the enhancements that you’re trying to make in terms of blending. I guess, the way I kind of look at it, in theory, with Inlet being fixed and blending capability increasing, margins based on crude throughput could go up, but is that kind of micrometer in the brick, something we can’t see because 3,000 barrels a day at kind of $1 a barrel is $1 million a year. Any comments?

Dirk Lever

Yes, Elias, it’s Dirk here. Yes, the - what you’re referring to is the bio feed part of the business and on the bio feed what we do get the benefit of - from the bio feed is - it does help us achieve our low carbon fuel requirements in the providence of British Columbia at a better rate than the alternative, which would be to blend in a biofuel.

So from that perspective, there is a benefit, but the economics of it certainly exceed our hurdle rates. But it’s going to be something that’s going to - that will be very hard to actually see when you’re actually looking at the results. We just know that the results are there.

Elias Foscolos

Got it. And those results, of course, are built into your guidance?

Dirk Lever

That is correct, yes. And then what will we be hoping to do is ramp up the proportion of bio feed that we have each year as we get better at this.

Elias Foscolos

Great. That’s it from me. Thank you very much.

Operator

There are no further questions at this time. Please proceed.

Robert Espey

Great. Well, I’d like to thank everybody for dialing in. Appreciate your ongoing support and look forward to connecting after Q1.

Operator

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a great day.