Parkland Corporation
Q2 2021 Earnings Call Transcript

Published: 7 Aug 2021

[Operator:]

Good morning, ladies and gentlemen, and welcome to Parkland Corporation's 2021 Q2 Results Analyst Call. This call is being recorded on Friday August 6, 2021. I'd now like to turn the conference over to Brad Monaco, Director, Capital Markets for Parkland. Please go ahead.

[Brad Monaco:]

Thank you with me today on the call are Bob Espey, President and CEO; Marcel Teunissen, Chief Financial Officer; and Donna Sanker, President of Parkland Canada. This call is webcast and I encourage listeners to follow along with the supporting slides. We will go through our prepared remarks, then open it up for questions from the investment community. Please limit yourself to one question and a follow-up as necessary. And if you have other questions, re-enter the queue. We would ask analysts to follow-up directly with the capital markets team afterwards for any detailed modeling type questions. During our call today, we may make forward-looking statements related to expected future performance. These statements are based on current views and assumptions and are subject to uncertainties, which are difficult to predict. These uncertainties include, but are not limited to, expected operating results and industry conditions, among other factors. Risk factors applicable to our business are set out in our annual information form and management's discussion and analysis. 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 SEDAR. Please refer to these 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.

[Bob Espey:]

Great, thanks Brad. And good morning everybody and welcome. We appreciate you taking the time to join us today. I would like to welcome Donna to today's call to discuss our strong On the Run convenience store performance and provide some insights into our recently announced ultra-fast charging network in British Columbia, which we expect to be ready for summer driving season in 2022. Picture on today's cover slide showcases our proprietary On the Run convenience store brand, which features heavily in our performance year-to-date and our growth trajectory. On the Run or Marché Express, as it's known in Quebec underpins our strategy of creating food in convenience destinations and is key in helping our customers make the most of every stock. Our network development team built a lot of momentum through the first half of 2021. They completed Phase 4 of our expansion plan and added 60 new On the Run retail stores. We currently have over 330 On the Run convenience stores in the Canadian market. And in the second half of the year, we will enter Phase 5 of our expansion plan, which includes an advanced dealer offering. As we move towards our target of a thousand On the Run Marché Express in the Canadian market, we will leverage the unique characteristic of our network to develop large and express format convenience stores to meet the diversity needs of our customers. Our On the Run convenience brand is highly scalable and provides a convenience growth platform across our entire portfolio. Having bought the license for On the Run in the U.S., we have already opened our first location and are positioned to rapidly expand this throughout both our company owned and dealer network. We see big opportunity to continue to the expansion of our food and convenience business, and look forward to sharing more at Investor Day on November 16. We have delivered robust first half of 2021 performance and continue to advance our proven strategy through consistent operational execution, organic growth, financial discipline, and accretive acquisition. I'm very proud of our teams who continue to deliver exemplary customer service and grow our market share. We have seized the opportunity through COVID to fine-tune our operations, streamline our cost structure, increase efficiency, and win new business. This gives us tremendous upside potential as markets continue to recover. Combination of green shoots of macro economic recovery across our business, strong marketing results and safe and reliable operations at the Burnaby Refinery, help deliver a 69% increase in year-over-year adjusted EBITDA. We remain focused on our long-term growth strategy and are very confident in our trajectory. Our ambition for $2 billion of run rate EBITDA by the end of 2025 is firmly on track. We have a proven track record of disciplined value creation built on a foundation of continuous organic growth. We've been very acquisitive since the end of 2020 with a constant stream of highly accretive and complementary deals. Since our Q3 2020 results we have announced or closed 12 transactions across Canada, the U.S. and our international operations. Collectively the acquisitions have totaled approximately CD$800 million. They are immediately accretive to cash flow per share, and expected to be approximately 8% of accretive on a post synergy basis. We continue to advance our co-processing innovation at the Burnaby refinery, maintaining the previous quarter’s co-processing record of 25 million liters. This is a made in Canada success story that we are very proud of. In addition, we announced plans to launch the largest ultra-fast electric vehicle charging network in British Columbia by , which is a natural extension of our energy transition activity. We have been highly disciplined in launching this business in a market with the most promising emerging demand profile. We see opportunity to be our customers' energy partner of choice and to make our convenience retail business, a compelling destination for charging. Donna, we'll speak more about this shortly. Parkland has a very exciting future and you can count on us to remain focused on maintaining our financial strength and delivering sustainable long-term growth on a per share basis. I would now like to pass over to Marcel to discuss the second quarter results.

[Marcel Teunissen:]

Sure. Thank you, Bob. And good morning everyone. And thank you for joining the call. I know that we are competing with the Olympics this morning, so I do appreciate that everyone has dialed in. So we will turn to Slide 4 and a summary of our financial results. We delivered a quarter two adjusted EBITDA $322 million, which is up nearly 70% compared to Q2 of last year. But COVID continues to impact the broader economy, each area of our business delivered underlying growth compared to last year, driven by compelling customer offers, margin strength and acquisition, our marketing businesses have continued to grow through a challenging operating environment. It's worth to note that relative to 2019 year-to-date the adjusted EBITDA in our combined marketing business is up 12%. In supply, we are markedly up from 2020 as the prior year included a scheduled turn around, which impacted both quarter one and quarter two, including 25 million liters of bio feedstock co-processing we delivered a composite refinery utilization of 97% in the quarter and the refinery continues to be a cash generator. In quarter two, we have started to see the early signs of the post-COVID recovery resulting in higher fuel demand. I would like to direct your attention to the chart on the right side of the slide where we've overlaid 2019, 2020 and 2021 retail volumes in the retail business in Canada. And there are two things that I'd like to point out on this chart. So number one, we have seen positive trends in the broader economy relative to 2020 with volumes up more than 15% ahead of the 2020 levels. However, while recovery has been strong, it is still bumpy. As you can see in April of this year, which featured some COVID-related lockdowns in a number of Canadian provinces. But important to point out as well is that this is locked down had a much smaller impact than the lockdowns in the same period in 2020, when we were in our first kind of wave of COVID-related lockdown. The second takeaway is really that there's a lot more to go in the recovery. So although the gap is narrowing, we still have a way to go before returning to 2019 levels on the volume side. And to put that in context, total retail volumes in the quarter were approximately 15% behind 2019, but we have been improving each month. And so for example, in July, we are within 10% of the 2019 demand levels. And across our portfolio in the U.S. and in the international business, we see a similar pattern. The U.S. is a few months ahead of Canada and the international markets are generally a little bit behind Canadian recovery. And so against this backdrop, we have been able to grow the profitability of our marketing business through sustainable cost reductions and robust unit margins. And we are well positioned to take advantage of – when volumes return after COVID ends. Moving to Slide 5. The second overview, I'll start with Canada where we've delivered $101 million of adjusted EBITDA in quarter two, that's $8 million higher than the prior year driven by improving volumes, I already talked about it, continued healthy retail margins, C-store growth and strong commercial performance. Same-store sales growth, excluding cigarettes, was 8.6% driven by strength in major categories, including the central store, beverages, Triple O's, and car wash. Importantly, this also resulted in an improvement in gross margin as our data and analytics capability has improved in-store margins. And we have upped our game materially in this regard, and Donna will touch on that a little bit later. The International segment delivered $66 million of adjusted EBITDA, which is up $12 million relative to prior year, this performance was driven by a strong base business, and per unit margins and continue to benefit from sustainable cost control initiatives. In addition, our teams continue to optimize margins in our wholesale supply business. At a macro level, the Caribbean region continues to see varying impacts from COVID. For example, the Dominican Republic is open for business, Cayman is currently in lockdown and other markets such as Barbados and St. Kitts are reentering some form of lockdown at the moment. So against this backdrop, we continue to see strength in our business and in the markets that reopened, we have delivered meaningful volume and convenience store growth, demonstrating the quality and appeal or offer. Our business is well positioned to benefit from a regional recovery. And we do see green shoots in the tourism industry with all countries working hard to open for the late fall tourist season. So just to provide some additional color, our sales channel indicates strong cruise ship bookings towards the end of the year, while jet is still down by 30% to 35% of 2019 levels, airline nominations are beginning to pick up, which provides optimism and upside potential for late 2021 and beyond. Shifting to the U.S., we delivered $31 million of adjusted EBITDA in Q2. That was up 10% from 2020. And we continue to deliver growth in our U.S. business through a combination of acquisitions, organic growth and synergy capture. We are pleased to welcome the Conrad & Bischoff team to Parkland that happened quarter two, which as a fourth regional operating center in the Pacific Northwest and provides a new platform for growth for Parkland in the U.S. And as I alluded to in the previous slides, the U.S. is recovering well from COVID-19 with retail volumes approaching 2019 levels and strong convenience store margins as well. That said pockets of our U.S. business have yet to fully recover, particularly our Marine business in Florida. However, the team in Florida has done a great job in offsetting this headwind through continued diversification of the business and so there's upside in the recovery. As you like from the broader macroeconomic data cost inflation is real in the U.S. and we see wages for drivers and store personnel go up. However, we are managing to really pass these costs on to – into the prices, and into the markets and recover this additional cost as well. Like other areas in business, we've done a great job in the U.S. offsetting COVID impacts through operational execution and underlying organic growth, while positioning ourselves for additional upside as the markets fully recover. Our supply business delivered excellent second quarter results with $154 million of adjusted EBITDA, that's up $119 million compared to quarter two of last year. As I noted earlier, that included a scheduled turnaround at the Burnaby refinery. Our refinery really at a great quarter as did our integrated logistics business, which benefited from a diverse product portfolio and strength in the propane market. The composite utilization at Burnaby was 97% is included 1700 barrels a day or 25 million liters of bio-feedstock co-processing . This matched our previous quarter’s record and keeps us firmly on track with our 100 million liter full year target for 2021. And co-processing continues to help us meet our carbon compliance requirements in BC, which I will discuss in a little bit more detail in a moment. Corporate adjusted EBITDA expense was $30 million. That was up $12 million relative to quarter two of 2020, reflecting variable costs connected to volume recovery and reduce benefit from COVID-19-related wage assistance programs. Turning to Slide 6, I want to provide some additional color on the Burnaby refinery dynamics, considering very strong results and giving the rise in compliance cost in the BC market. So first on the left side of the page is our standard kind of indicative Burnaby Crack Spread indicator, which is normalized against the trailing three-year average at any time. And we've highlighted a few areas since 2018, which drove up – which drove upward volatility and how it then reverts back to mean. For instance, you may recall that in quarter two of 2019 that was characterized by some unplanned outages along the West Coast in the U.S., which increased local crack spreads and resulted in very strong supply results for us. Our Burnaby Refinery operations have proven to be extremely consistent and resilient with volatility tending to deliver upside. The name of the game on the West Coast continues to be reliability, which our facility has proven to be reliable. BC is a unique market, and one of the recent trends we have witnessed is the rising cost of compliance in the province's increasing low carbon fuel requirements or LCFR, which are some of the most stringent regulations in North America. You can see on the left side that the indicative crack spreads already starts increasing and part of that increase is a result of rising refined product prices, which reflect the rising cost of the low carbon fuel compliance. The full cost of compliance is not reflected in the simple 5-3-1-1 crack spread, which considers crude as the only input. This impact is impacting most refineries in North America. However, we have a unique advantage at Burnaby Refinery through our co-processing initiatives, which helps us to meet BC's low carbon fuel requirements. The chart on the right helps to depict our co-processing advantage. For every liter of gasoline and diesel sold in the BC market needs to comply with BC's LCFR and most economic and what everyone does first is to blend ethanol and biodiesel into the gasoline and diesel streams. This form of planning hit technical limits and the resulting mix is still not compliant. What comes next is where our Burnaby team creates additional value to meet the low carbon fuel requirement, HDRD or renewable diesel is typically blended into the diesel stream to bring down the overall carbon intensity of fuel. HDRD is relatively expensive at nearly three times the price of diesel at the moment. And so where -processing comes into play and why it's important to us is that it's about 2/3 the cost of purchasing HDRD and offsets the majority of HDRD otherwise required. And by continuing to optimize this activity, we aim to replace as much HDRD as possible, capturing additional margin as we go. So compliance costs will continue to increase over time, but we believe we are differentiated in the BC market. All in all, Burnaby is a strategic asset within our portfolio which offers robust margins and an economic advantage in meeting the BC low carbon fuel requirements. Turning now to Slide 7, and there's a lot on this, but we want to talk about the recent acquisitions. As Bob already mentioned in his opening remarks, we have announced or closed 12 transactions since reporting our Q3 2020 results in November, adding to approximately 800 million Canadian dollars of acquisitions taken together and that would be equivalent of our fourth largest acquisition, if we look at it that way. Our corporate development and asset teams have done a fantastic job seeking out businesses that complement our strategy and add value for our shareholders. After accounting for equity issued under our dividend reinvestment plan at the market program and a small amount of vendor take-back, the transactions are immediately accretive to distributable cash flow per share and approximately 8% accretive after reflecting synergies and other enhancement initiatives. Our acquisitions have been directly aligned with our stated growth strategy, as you can see on the slide. They provide integration and organic growth opportunities and strengthen our supply advantage at highly attractive returns. Enabling this activity is the strength of our balance sheet. During 2021, we witnessed interest rates that have reached multi-decades' low, and we have taken advantage of this opportunity to capture the financial benefits of the low interest rate environment by redeeming over $1.4 billion of bonds and issuing nearly $2.2 billion of new bonds at lower interest rates and extended maturities. Additional amounts were used to help fund a series of acquisitions and transactions and reduce the amounts drawn on our credit facility. At the end of March of 2021, we amended our syndicated credit facility to expand the available facility and extend the maturity date. The result is that Parkland now does not have any bonds or its credit facility maturing until 2026. In addition, we have kept our total funded debt to credit facility EBITDA leverage ratio within our desired range below 3.5x and in line with the previous quarter, while funding our growth program. We believe that we are in excellent financial condition to reach our ambition for $2 billion adjusted EBITDA run rate by 2025. So with that, let me pass it on to Donna to speak about our organic growth and EV charging rollout in BC.

[Donna Sanker:]

Thanks, Marcel, and thank you, Bob, for inviting me to join today's call. Good morning, everyone. Before jumping into our recent announcement regarding our ultrafast charging network in British Columbia, I would like to spend a few minutes reiterating some of the organic growth success we have had within the Canadian business and build on the commentary Marcel provided in the previous slides. The robust performance of our C-store initiatives has grown convenience gross profit and demonstrates our commitment to creating food and convenience destinations for our customers. As you will hear later, we believe this will underpin a compelling offer for EV charging customers. In the second quarter, we delivered strong same-store sales growth of 8.6%, excluding the impact of cigarettes and negative 3.2%, including cigarettes. Just as a reminder, cigarettes are a low margin business for us. And in Q2 2020, cigarette sales were higher due to closures of competing sales channels due to COVID. I'm very fortunate to be running a strong and resilient Canadian business and to have a team always focused on making it better. We are becoming increasingly sophisticated retailers when it comes to data and analytics. We developed these capabilities through COVID and have enhanced our category management process, priced more effectively and optimize the makeup of our merchandise offering. This is paying off as evidenced by the approximate 25% increase in convenience store gross profit relative to last year. Alongside our compelling customer value proposition, we believe these capabilities can drive robust organic growth in our convenience store business. In addition, we will continue to progress the customer offering initiatives, which have underpinned our success through 2021, including our Canadian On the Run expansion and partnerships with locally relevant, high quality, fresh food offerings. We expect to accelerate the rollout of On the Run and both our company-owned and dealer retail locations, targeting another 60 Canadian On the Run sites in the next six months. After opening our second Triple O's location in Ontario, we plan for two more Ontario sites and two Western Canada sites by the end of the year. Taking a step back and looking at our convenience store performance over the last two years, we have followed up a great 2020 with an even better 2021. We are immensely proud of high single digit growth, excluding cigarettes for two years running. By staying focused on our customers we believe we have the right formula that leverages our enterprise capabilities and generates a superior value proposition. Turning to Slide 9. It is my pleasure to talk about the latest focused investment we have announced as part of our approach to energy transition. Building on our co-processing activities at the Burnaby Refinery, our decision to launch British Columbia's largest network of ultrafast EV chargers is an exciting and natural next step for our business. We have been disciplined about where we position our charging network and thoughtful about our customer proposition. Let me take a couple of minutes to share how we think about this. At a macro level, North American EV penetration is in its early phases. Adoption looks different and is moving at a different pace in different markets. We see emerging EV adoption when we look at new vehicle sales, particularly in BC, which leads the way across Canada with 9% of new sales in 2020 attributed to EVs. For context, the Canadian average was only 3.5% with EVs making up less than 1% of the total fleet. This market fundamental was the main reason we selected BC for ultrafast charging network. In addition, we have many other competitive advantages in the province, including an extensive high-quality Chevron retail network, featuring On the Run convenience stores and Triple O's restaurants, which we believe are a great fit for charging stations. We put our customer's needs and convenience first when designing our charging network by embracing three core principles. First, our chargers will be located where our customers need us, at 25 locations, extending from BC to Calgary in and around major cities and towns, and on major highways, helping reduce EV owner range anxiety. Second, we will ensure our customers have quality site amenities. EV charging customers have unique needs often requiring more than a 20-minute stop. Our existing retail footprint in BC is well suited to this dwell time as our customers can shop in our On the Run convenience store, eat in our exclusive and delicious Triple O's restaurants which cover all day parts and be productive with our complimentary Wi-Fi. Third, we are delivering maximum customer efficiency as our ultrafast chargers will be compatible with most EVs and deliver an 80% charge in around 20 minutes. We are on track to open our charging network by the summer driving season of 2022, by leveraging our digital and analytics capabilities, we will learn about customer behaviors and preferences such as charging frequency and times, backcourt and QSR visit trends, interaction with our loyalty program and differences between the various geographies. This will help us refine our model and customer offer meaning that where we see emerging demand, we will be well positioned to scale further. I will now pass it back to Bob to wrap things up.

[Bob Espey:]

Great. Thanks, Donna. That was a great overview and it sets the tone for what we expect will be a strong second half of the year for Parkland. Underpinned by the resilience of our portfolio, our strong base business, ongoing economic recovery and contribution from acquisitions gives us confidence to raise our full year adjusted EBITDA guidance to $1.25 billion plus or minus 5%. Due to anticipated timing of capital spend including some COVID-related delays, we've also reduced our 2021 expected capital expenditures by a combined $50 million to $350 to $500 million. To wrap things up, before we invite your questions, I'd summarize by saying that I'm extremely proud of the team for delivering another strong quarter for a great half – for a great first half of the year. First, we delivered strong operational performance and continued to see recovery across our portfolio. Adjusted EBITDA of $322 million reinforces our updated full year 2021 guidance. And we maintain high conviction in a strong second half. Next, progress on key organic growth initiatives and a pipeline of accretive acquisition opportunities have us firmly on track with our ambition for $2 billion of run rate adjusted EBITDA by the end of 2025. Our growth program is firmly on track. Finally, we continue to approach the energy transition in a disciplined way with focused investments to bring us up the learning curve and position our business for long-term success, while generating superior returns for shareholders. Backstopped by our financial strengths, we have tremendous momentum heading to the second quarter of the year. Thanks to the entire Parkland team for all their efforts to deliver a great second quarter. I would now like to turn the call back to the moderator for questions.

[Operator:]

Thank you. Your first question comes from Ben Isaacson with Scotiabank. Please go ahead.

[Ben Isaacson:]

Thank you very much and good morning and congrats on the beat and raise. Just a bit of a longwinded question here. When I look back over the past four or five years and if we skip 2020 because of COVID, it looks like Q2 fuel volume in Canada is consistently flat or about equal with Q1, usually 2.4, 2.5 billion liters. Now we've just seen 2.1 billion liters two quarters in a row. I'm a little surprised by that. I would have thought in a recovering environment, we would have seen some further progress in Q2 over Q1. So my question is, based on that data, is it fair to say that the recovery is over in Canada? And if so, is it a 12% to 15% decline in volume that's the new normal for Canadian fuel volume? Thanks. And I'll ask my second question after.

[Bob Espey:]

Okay, great. Thanks. Thank, Ben, and look, I appreciate the question. I think a couple of things to keep in mind. First of all, markets have been in lockdown, both in Q1 and Q2. And so the current volume that you saw in Q2 is not representative of full recovered volume. I would say we have seen an offset in the margin environment for that, but volumes still are light compared to 2019, and we expect to see more recovery here as markets have opened up and restrictions have come off.

[Ben Isaacson:]

Great. Thank you. And then my follow-up question is, you said in your release that you've spent $800 million over the past eight or nine months to what you think will be an 8% accretion on a -synergy basis. When you look back over the past five, seven, 10 years, is that 8% accretion roughly in line, is it improving, is it getting worse? Is that something that we should be modeling going forward when we think about how you spend capital to get to your $2 billion run rate by the end of 2025?

[Bob Espey:]

Yes. The – what we're – look, the business that we're currently purchasing and the synergies that we're getting are consistent with previous years and so that accretion is certainly representative of the type of M&A that we'll do and have been doing here over the past several years.

[Ben Isaacson:]

That’s great. Thanks so much.

[Operator:]

Your next question comes from David Newman with Desjardins. Please go ahead.

[David Newman:]

Good morning, folks. Great results.

[Bob Espey:]

Thanks, David.

[David Newman:]

First question, I guess for Donna. So Donna, you've got a target of sort of 60 OTRs over the next six months and an ambitious 1,000 target. So maybe you can talk about the cadence of the rollout of the OTRs over the next 12, 24 months and how the EV chargers might fit into that in terms of when you're developing or converting a site, how the OTR EV chargers might fit into that in terms of your footprint?

[Donna Sanker:]

Hi, David, and thanks for your question. So we're really excited about the results that we're seeing from our OTR conversions. And so as noted, we'll be accelerating and doing another 60 sites before the end of the year. We then are looking to kind of ramp it up and continue to dial up really over the next 12 to 24 months with the intent of completing for our company network, the conversions that we have planned for our company sites. Further, we have added a new dealer on the run offer program that we will be rolling out here shortly. And the aggregate of both of those programs, we believe will help us get to the 1,000 site target by 2025. In response to your…

[David Newman:]

Go ahead, Donna. Sorry.

[Donna Sanker:]

No, no, you had asked a second question about the EV charters and how that plays in.

[David Newman:]

Correct, yes.

[Donna Sanker:]

I mean, I think as I noted in my comments, we'll be watching what happens with EVP penetration across the markets, and we believe that our sites and our on the run offer and the number and the range of sites that we have will be well positioned for us to advance EV charging when we feel the time is right and the penetration justifies it. And so we feel that it's a natural link.

[David Newman:]

Makes infinite sense. And my second question is just 8.6% ex-cigarettes is a pretty solid number and obviously, the offer in the back quarter is resonating with consumers. But as you look at your sort of data analytics as to what is driving that and the conversion of frontcourt to backcourt what in your arsenal of things like journey, obviously, Triple O's, things like that, what appears to be really what appears to be really resonating with consumers? And what I'm really driving at here is, now we've moved into – sort of morphed into this hybrid world, how can you make the C-store that much more relevant in kind of in a hybrid world going forward, people working from home, in the office and kind of a mix?

[Donna Sanker:]

The beauty of our model and our small store format is that we are able to be extremely agile and flexible as we see the trends move. And so what we have observed in the last few quarters is a bit of a shift, I would say back to kind of normal C-store goods. So for example, our beverage offers whether it was packaged beverage, hot beverage, frozen beverages, we delivered quite strong results. Further, the center of categories, things like candy and snacks, or automotive fluid, and health and beauty, all of the standard categories in the center of the store we've just seen some really robust and good growth. Part of that comes from what consumers are looking for and then also for our execution around being in stock, having the right products in the right positions so that our customers can access them.

[David Newman:]

Excellent. Thanks so much folks. Great results overall.

[Operator:]

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

[Unidentified Analyst:]

This is Chang filling in for Peter. My first question is, can you give us some more details about the On the Run rollout in the U.S.? How are you upgrading the stores to the On the Run standard? How many – how does the stores differ from the Canadian On the Run stores and kind of what is the timeline going forward?

[Bob Espey:]

Yes. Hi, and welcome. That’s a good question. We are pushing the On the Run rollout in the U.S. We now have two sites that are open. The look and feel from a branding perspective is consistent with the Canadian business, although not a small little maple leaf on the logo. And – but the sites in the U.S. are different, I mean they tend to be larger. There's a consistent beer and liquor offer that we don't have in most markets in Canada. And then also, most sites have food directly incorporated into the site. So a bit of a different offer down there, but consistent with the look and feel. We're also in the process of rolling out our loyalty program in the U.S. and again, making it very consistent with what we have in Canada.

[Unidentified Analyst:]

You mentioned that you're incorporating food inside the store. So it's not like a QSR attached to the C-store. So like you're going to have a real food program?

[Bob Espey:]

Yes. We do have a food program in the U.S., and we'll continue to roll that out as we roll out the On the Run brand. And look, we have that in many of our existing sites that we've purchased in that market.

[Unidentified Analyst:]

So this is kind of like a reverse synergy that you've adopted from some of your previous acquisitions, is this like a commissary model or like what – how does the food program work?

[Bob Espey:]

No. No, it's done through supplier.

[Unidentified Analyst:]

Okay. Understood. And my second question is in terms of the M&A landscape, obviously, you guys have been doing a lot in the U.S. and in the international segment. Can you guys give us like kind of some color on the runway in those two geographies? Obviously, in the U.S. it is very fragmented. So can you just give us some more idea on that?

[Bob Espey:]

No, for sure. And consistent to what we've telegraphed in the past, I mean the U.S. is our highest growth business and will continue to be so, and it's largely M&A driven. And the type of transactions, you'll see are very consistent with what we've done. As you've indicated, it's a very fragmented market and we always pride ourselves on having a very deep and broad pipeline of opportunities. We do see opportunities in the international business, both within our current operating areas and also in adjacent markets and we'll continue to pursue those. I would say the frequency and of those trends – or the opportunity set is less than we would see in the U.S. We also did announce a transaction in Canada. So we've always talked about where we do have opportunities and have white space in our network we will acquire. And we're really fortunate to acquire Crevier in Quebec which fills out our business quite nicely there.

[Unidentified Analyst:]

Okay. Great. Thank you.

[Operator:]

Your next question comes from Neil Mehta with Goldman Sachs.

[Neil Mehta:]

Hey, good morning, Bob and team. The first question is just on the EBITDA guidance raise for 2021. Can you talk about the components that went into it and how much of it was driven by the fuel side of it relative to the supply side of it?

[Bob Espey:]

Yes. So the raise is on the back of good performance year-to-date and also, we continue to see the business perform well and expect it to do so into the back half of the year. We've seen consistent and good performance across our business and expect to see that here into the back half. The one thing that I would remind you is that we will be having a turnaround in Q4 in our refinery and the facility will be down for three to four weeks during that period.

[Neil Mehta:]

Thanks, Bob. And the follow-up is just on fuel margins in general. In a rising crude price environment often when we think of fuel margins, again, fuel retail margins getting squeezed, you've been able to hold them in a little bit better than I think what the market would have anticipated. Do you want to just talk about how you see fuel margins playing out from here in an environment where a firm crude price is sustained?

[Bob Espey:]

Yes. Now again, I always am very careful to predict fuel margins because the market – we are in a competitive market. I would say, and Donna can pick up on this certainly in our Canadian business, we have done a lot of work on the digital side and on the developing pricing algorithms that we believe have helped and provided a sustainable difference. That being said, I can't predict the margin environment going forward. The U.S. has been a bit tougher from a margin perspective. We did see a bit of a pinch on the way up, but that's leveled off now. And our Caribbean business has held in quite consistently where the dynamics in those markets are quite different. A lot of the markets are – have legislated margins and so we don't see and so we don't see the same volatility in the marketing business that we would typically see in other jurisdictions. Donna, did you want to comment on some of the work we've been doing in Canada?

[Donna Sanker:]

Sure. So I think, as Bob noted, the margins move with the market dynamics, and we aim to remain competitive with the best offerings for our customers. We have invested quite materially in data analytics and in our team's capability to optimize volume margin dynamics and we believe that this will help us really in any market location or condition and I think we've seen the results from that and so we're quite pleased with the tools and the skills that we've developed.

[Bob Espey:]

Nicely done. Thank you.

[Operator:]

Your next question comes from Kevin Chiang with CIBC. Please go ahead.

[Kevin Chiang:]

Thanks for taking my questions everybody. Maybe if I could just turn to your cash conversion. If I look at – and I appreciate all the moving parts on the end markets you service, but if I just take a high-level look at your cash flow from operations before changes in working capital, you're trending at least in the first half of this year at almost 100% and pre-pandemic, sub-70% and so as we think through the recovery, just wondering, are you – do you expect a step-up in cash flow conversion here or core cash flow conversion to remain high? Or is there anything you'd point us to that would suggest maybe some slippage as the recovery takes hold?

[Bob Espey:]

Yes, why don't I just provide a couple of comments, and then I'll pass it over to Marcel. Again, the cash flow that we saw in the TTM has been quite strong. And again – and what it does is it shows, again, the underlying resilience of the business, but also the flexibility that we've had to manage our cash flow through the volatility that we've seen over the last 12 months. I'm going to turn it over to Marcel, and he can comment more specifically on the trends.

[Marcel Teunissen:]

Yes. Great question, Kevin. So the – we continue to focus on the cash flow from operation. As you know, margins – I already commented margins are strong. Volumes are picking up. So we see that. So when you look at our cash flow from operation, I will just point out that we have made some presentation changes as well in this quarter where the interest cost on leases have moved to financing. So I just want to point it out as you do your quarter-over-quarter comparison. But other than that, we – I would say we continue to see kind of robust cash generation out of our business and of course, the more retail we become, the higher the cash conversion will be in our business.

[Kevin Chiang:]

That's very helpful color. And just maybe my second question, when I think back to I guess your last Investor Day and you called the $2 billion of EBITDA opportunity you laid out a pipeline of I guess opportunities you saw you could execute against on the M&A front. Just wondering as you sit here today, just given I guess this transition, this energy transition, and I guess the accelerated growth in EVs or at least expected accelerated growth in EVs, how does that pipeline look now versus what you saw maybe I guess two to three years ago when you initially put the $2 billion EBITDA target out there? Has that expanded? Are more people looking to sell their business because they don't want to put the capital in as we think about this energy transition?

[Bob Espey:]

No. I would say our – when we look at businesses that we acquire and the pipeline of opportunity, I would say it's consistently – certainly for owner-managed businesses related to succession and people wanting to monetize their business, we're not seeing the pace accelerate at this point. I think what Parkland has been able to particularly in the U.S., as we've grown our presence is just the opportunity set has grown significantly. And as we've continued to add ROCs, which we're now up to four, each of those comes with an opportunity set that wouldn't have been prevalent prior to that. So – and then the other area that we do see opportunity is from larger companies and doing carve-outs. A great example, although small, is the aviation business we bought in…

[Marcel Teunissen:]

Puerto Rico.

[Bob Espey:]

Puerto Rico from Total. So both those – we do see activity in both those areas and continue to pursue those. And again, I'll reinforce that the bulk of these transactions are done on an exclusive basis.

[Kevin Chiang:]

All right. That’s great color. Thanks for taking my questions here and have a good weekend, everybody.

[Operator:]

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

[John Royall:]

Hey, guys. Good morning. Thanks for taking my question. So on the refinery, the economics of co-processing versus buying in HDRD and that 2/3 cost savings, I think you called out, somewhat dependent, I would assume, on the cost of the feedstocks, but can you talk about your feedstock cost and how they're trending? And will these new facilities that are scheduled to come up in California compete for and potentially bid up these feedstocks?

[Bob Espey:]

Yes. Good question. And again, one of the keys is flexibility from a feedstock perspective. And it's something that our team continues to work on, and we do have good access to feedstocks that are within Canada, but I'll pass it on to Marcel to talk specifically about some of the economics we see.

[Marcel Teunissen:]

Yes. So what we've typically seen, John, is that when the compliance costs are going up, so for instance, the RINs in the U.S. go up, that it typically correlates well with how HDRD is pricing. So that generally pulls it up. And then what we also see is that the feedstocks that we are relying on like canola or tallow also typically go up, but that the relative spread, if you wish, between the most expensive compliance pathway and the co-processing that that stays constant. So there's always going to be an advantage there. Bob already made a comment on diversifying the feedstock, the feedstock Excel. So at the moment, we do canola and tallow primarily. There's a number of other feedstocks that we are looking at and testing that have kind of better or lower carbon intensity. So they're even better as a co-processed feedstock as well. And so we're looking at all of those. But I would kind of think of these compliance costs as when they go up, they all go up, but the relative advantage of co-processing kind of remains within that range that we've actually talked about.

[John Royall:]

Great, thank you. That's really helpful. And number of questions on M&A this morning, and I want to maybe take one from a slightly different angle. The $800 million announced since November and since you keep growing in at a pretty rapid pace. And so the question is just trying to get a sense of the overall corporate resources. Is this type of pace sustainable, or perhaps even could be accelerated from here, when you look out over the next several years? Or as you move into kind of the integration and synergy capture phase on these, will there be kind of a natural slow down in the activity level?

[Bob Espey:]

Yes, it's a good question. So, as you are aware, we do have our own M&A team within Parkland. And that team has lots of experience and has done many ramps. So, the other thing is a lot of the smaller ones are – they're easier to do so they don't require as much effort on the front end. In terms of – so no issues on capacity, we can certainly handle the pipeline and continue to grow at the pace that we that we've been doing. I would say your question about integration is important as well. And part of the beauty of Parkland is our regional structure and that each regional has resources within it to do things like integrate businesses. And in the U.S. where again, we've been doing the bulk of our acquisitions, the other thing is we do have a common IT and operating system within each region and that makes these integrations quick and they can be done fairly, rapidly and efficiently. We also have designated people within each business unit to do the integrations and make sure that we can put them on our platform as we do them. So again, we've – and again, certainly in the U.S. we've built a lot of this over the last three years. The team there has really learned how to do these and keeps getting better. And certainly don't see any constraints there on the resource side to be able to continue the pace that we’re at and accelerate it.

[John Royall:]

Great, thank you.

[Operator:]

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

[Vishal Shreedhar:]

Hi, thanks for taking my question. Going back to the refinery, is there a target comp utilization rate that management is pursuing for 2021 in longer-term? And does management want to solely rely on co-processing for compliance, or will there always be HDRD in the mix, or is it more about the flexibility of pursuing based on prices in the market?

[Bob Espey:]

Yes, good question. And let me just comment on the latter question, and then I can hand it over to Dirk here who can talk about our utilization. In terms of our path to compliance, so the one thing we continue to invest in our co-processing capability. So our throughput of renewable feed stocks will continue to grow. And that is the most cost effective compliance pathway for us. So expect to see that grow. And certainly some of the capital that we put in this year is focused on growing that and getting to roughly 10% of the throughput of the refinery converted over to renewable inputs. So that's our primary path to compliance, and it is very economical compared to the more expensive alternative of importing, renewable diesel. How that affects utilization? Perhaps Dirk you can comment on that.

[Dirk Maclean:]

Sure. And thanks, Bob. Good morning, Vishal So if we look at just on a crew throughput on normal operations, we've typically been running at sort of that 91% to 93% utilization rate. If we get up to 10% of co-processing through there, that would be additive to it. The thing to think about is that we're always trying to optimize our economics to the extent that we can debottleneck and get ourselves a hundred percent reliant on the co-processing so that we do not need to buy any further HDRD. Again, we will be looking to optimize. So the co-processing would be additive to that. So you'd be just adding on the throughput of the HDRD. If you think about where we're at displacing about two thirds of the need for HDRD, you could add another, given the current crude throughput, you'd be about another third to the throughput of co-processing, so you’d be adding about another 800 barrels a day. So just think of it in those kinds of terms, it's additive to the crude throughput.

[Vishal Shreedhar:]

Okay. Thanks for that color. Maybe just changing topics here, last quarter, and even in the prepared remarks, management was talking about the tightness in labor and various inflationary pressures and its ability to accommodate those pressures. Wondering if you can give us an update on the cadence of those pressures, sequentially, are they abating, or are they continuing to magnify?

[Bob Espey:]

Well, it depends on the jurisdiction. So as we talked about in our initial comments, we do see some pressure in the U.S. We have for the most part been able to pass those costs through. They are both in our distribution business, where access to drivers has been tight and also in our convenience business. But so far we've been able to effectively absorb and pass those through.

[Vishal Shreedhar:]

Okay, thanks for the call. I appreciate it.

[Operator:]

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

[Michael Van Aelst:]

Hi, good morning. I'd like to circle back with Donna on the same-store sales, because the two-year non-cigarette number of around 15%, I guess, is quite impressive. And I'm sure that the products that were being sold, and the categories that were doing well this time last year were probably more along the lines of the filling, shopping, taking over from grocery, and other areas. Whereas this year we're seeing a rebound in the car wash and the food service. But I'm curious as to how well you did in those categories that picked up last year during the pandemic? And if you've been able to hold onto a lot of that business?

[Donna Sanker:]

Thanks for your question. I would say some of the differences we've seen, if you look at categories like packaged beverages, or perhaps, at least the chips, or the snacks is that last year we were seeing a bigger increase in takehome type packages as people were using our convenience stores, more for kind of grocery fill in, and then also some of the grocery categories. And what we've seen this year is a bit of a shift back to the single serve type of products. And so, really that would be an example of the types of trends that we're seeing. I mean, certainly some of the categories last year, that when COVID first hit and we weren't really sure what to expect, and we shut down like a coffee service, for example, because of the importance of safety to our consumers, that certainly come back nicely as we've reopened for business. And so it kind of varies across the different categories each have a bit of their own story.

[Michael Van Aelst:]

Okay. Thank you. And then, I guess for Bob pretty much every quarter, it seems like you're pointing out strong performance in your integrated logistics business. So I was hoping you could give us some more detail on this. And I guess, give us some ideas of what Elbow River is doing well, and the benefits you are extracting from the Houston Trading Office?

[Bob Espey:]

Yes, both our rail business, which Elbow runs has held in quite well. Compared to 2019 where we're down in that segment. But, I would say the beauty of that business is the fact that we're in multiple commodities. And we've seen robust demand in the refined products. And the crude business has started to come back that was off. And LPGs have been consistent, I would say year-over-year. In terms of our marketing business that we've set up in Houston, it continues to grow. It continues to support both of our U.S. business and our Caribbean business. And certainly in the soul results, you can see the strength of our supply and wholesale in that business and it's been a key contributor to the results in that business. And in the U.S., again, as we continue to get more volume and participate in more markets on a wholesale basis, that office continues to add a lot of value. So seeing, good growth in the underlying cash flow out of the Houston office, and I would say our rail business, run by Elbow is holding in there. And certainly I expect to start to see that grow here as all these commodities come back in a consistent fashion.

[Michael Van Aelst:]

Perfect. Thank you Bob you covered everything. Thank you.

[Operator:]

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

[Derek Dley:]

Yes, hi guys. Just one for me, just on JOURNIE. Can you just give us an update on ho JOURNIE is going in terms of – perhaps penetration of JOURNIE users? And do they tend to have a higher average transaction size or higher C-store conversion rate?

[Bob Espey:]

Yes. Thanks Derek. Thanks for the question. I'll turn it over to Donna.

[Donna Sanker:]

Yes, thanks Derek. So, we are very, very pleased with the performance of JOURNIE, especially this year as a business is coming back. We're now, well over two million members, we recently launched our biggest ever marketing campaign and we are out talking to customers about the JOURNIE program in a pretty material way across TV, radio, and digital. I think as we look at the actual performance of how JOURNIE members shop in our stores and fuel up, we are certainly seeing better basket size, if you will, higher fill-ups and increased baskets from our JOURNIE members. And so the loyalty program, I would say, is working as intended.

[Derek Dley:]

Okay, great. Thank you.

[Operator:]

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

[Steve Hansen:]

Yes, hi guys, just two quick ones. I know we're running long. Just quickly on the recharge research station program, just quickly I might have missed it. But do you have a total cost estimate for the program rollouts? And just as a related question, how do you expect to charge for a 20-minute charge up? And just, I guess a related point again is how do you drive loyalty through the JOURNIE program, are you planning to offer some sort of discounted offer equivalent to your $0.07 program that you have on the fuel side?

[Bob Espey:]

Yes, hi, Steve, it's Bob. Let me start it off and I can hand it off to Donna here. The rough cost of that is roughly $10 million. And part of – the purpose of standing this up is to learn and to develop our customer value proposition. We certainly intend to integrate it into the JOURNIE program, and certainly see it as an opportunity to have a customer on our site for 20 to 30 minutes, while they recharge their vehicles. So, see lots of opportunity here and the purpose of the network in BC is to a tap into growing demand, but also to develop this proposition and make sure it resonates with the consumer. Donna, did you want to add?

[Donna Sanker:]

I mean, I think you've covered it quite well. Really, as we're getting ready to stand it up, there will be a number of variables that we'll be contemplating, including how charge, what that structure looks like, how we’ll incent the JOURNIE members to come visit our sites. And so I think more to come in that space. And then we also will have the ability to test and learn as we go really and see what resonates.

[Bob Espey:]

Yes, I mean, as we've looked at the market and the consumer need, we're trying to address two things, one is range anxiety, which again, because we have a comprehensive network in NBC, we can offer the consumer a charge point every 100 to 150 kilometers along major roads. And then the second thing is time to charge. And again, with the ultra-fast chargers, we can get – depending on the size of the battery, but a typical battery will charge 80% within 20 minutes, which again, we see as another advantage in that.

[Steve Hansen:]

That's helpful. And just one last thing if I may, is just, I noticed the Red Carpet Carwash, I believe it was tuck-in subsequent to the quarter. I think it was a dozen standalone sites, roughly. Frankly it’s unique, but still complimentary purchase, but just curious how you view that sort of standalone carwash opportunity in the U.S.? I know other parties in the public arena are chasing that market down as well. Is it competitive? How does it fit with your margin profile, et cetera? Thanks.

[Bob Espey:]

Yes, it’s interesting. I mean, the name of the business is a bit deceiving. It is first and foremost, a convenience network with a good car wash offer. So it's not a separate car wash offer. It's a great retail network with great convenience stores in it.

[Steve Hansen:]

Okay. Very helpful. Thank you.

[Operator:]

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

[Elias Foscolos:]

Good morning. And thanks for taking my question. I want to focus a bit on the renewable side of the business. It appears that there has been some appetite for renewable entities. And I was wondering is there a possibility for carving out some Parkland assets into a renewables entity? Is that something on the table or just doesn't fit?

[Bob Espey:]

That's a good question.

[Dirk Maclean:]

Yes, it's a great question – that's not on the table for now. We think that the businesses in the renewable space, which is of course a broad category, but when we talk about, for instance, EV charging or wire processing, that those are complimentary and synergistic to our existing business. So we'll look at it through that lens.

[Elias Foscolos:]

Okay. Thanks. Those were the two assets I was kind of thinking of as I listened to the call and have seen some recent market movement. That's it from me. Thanks very much.

[Bob Espey:]

Great. Thank you.

[Operator:]

Your final question comes from David Newman with Desjardins. Please go ahead.

[David Newman:]

Sorry guys. This is a very quick follow-up. I know it's late in the call. But if I'm thinking about your certainly Integrated Supply Division and how it might be able to leverage a situation, when you look at the potential for an Enbridge Line 5 shutdown, I would imagine your supply division could benefit from that in terms of movement of product to Eastern Canada. Any thoughts on that as you see if that does get shut down?

[Bob Espey:]

Yes, it’s a good question. I mean, we're working with the industry to make sure that we can continue to supply our customers in this critical market. First and foremost, making sure that that line stays open. In the unlikely event that there is a disruption there, I would say you've hit it on the head, our logistics and ability to move product around. And also working with our major supply partners gives us confidence. So we'll continue to be able to supply the market with minimal impact to our customers.

[David Newman:]

Excellent. Thanks Bob.

[Operator:]

There are no further questions at this time, please proceed.

[Bob Espey:]

Great. Well, thank you. Really appreciate everybody's participation today and look forward to having – to catching up again soon and want to wish everybody a great rest of the summer. So take care, bye.

[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.