Parkland Fuel Corporation (OTCPK:PKIUF) Q4 2017 Results Earnings Conference Call March 2, 2018 8:00 AM ET
Executives
Ben Brooks – VP, Treasury and IR
Bob Espey – President and CEO
Mike McMillan – CFO
Analysts
Michael Van Aelst – TD Securities
Kevin Chiang – CIBC
Derek Dley – Canaccord Genuity
Sabahat Khan – RBC Capital Markets
Peter Sklar – BMO Capital Markets
Operator
Ben Brooks
Good morning, everyone, and welcome to Parkland Fuel Corporation’s Q4 and Year End Results Conference Call. My name is Ben Brooks, Vice President of Treasury and Investor Relations for Parkland Fuel Corporation. With me this morning are Bob Espey, President and Chief Executive Officer; and our Chief Financial Officer, Mike McMillan.
I’d also like to introduce a new member of the team with us today, [Dean Morrison], who recently joined as Director of IR and Dean will be the focal point for contact for IR going forward. This morning we will provide you with an update on our business results and performance, as well as update to you on some of our strategic initiatives.
I’d now like to finally go on to my favorite side of the presentation, slide 2. During the call today, Parkland may make forward-looking statements related to expected future performance. Such statements are based on current views and assumptions and are subject to uncertainties which are difficult to predict including expected operating results and discrete conditions et cetera.
Certain financial measures, which do not have any standardized meanings prescribed by GAAP, will be referred to during this presentation and these measures are identified and defined in Parkland’s continuous disclosure documents, which are available in our website on SEDAR. Please refer to our continuous disclosure documents as they identify factors which may cause actual results to differ materially from any forward-looking statements.
Bob and Mike will now walk you through the results of our various businesses and we will then take any questions you may have at the end of the call. I’ll now turn things over to Bob to give an overview of our results.
I will now turn things over to Bob who will give an overview of our quarter.
Bob Espey
Thanks Ben, and welcome everyone to our fourth quarter and year-end earnings call. First off , I’d like to start today’s call by thanking the entire Parkland team who truly came together as one team to deliver results that exceeded expectations. It has been an exceptional year at Parkland, as we demonstrated our ability to deliver on all elements of our strategy to grow organically, build the supply advantage, acquire prudently and integrate successfully.
2017 was a ground breaking year on many fronts for Parkland and I’d like to highlight some of these amazing achievements. We completed two strategic acquisitions for Parkland which almost triples the size of the business, adding significant scale and fuel and convenience. We added industry-leading Chevron and Ultramar brands to our portfolio of fuel marketing brands. We achieved national network coverage in both our retail and commercial businesses.
We improved our Pacific supply position with the Parkland Burnaby Refinery, an affiliated strategic distribution asset including the Burnaby and Vancouver Island terminals. We acquired the pipeline brand from CST providing Parkland with the card lock and proprietary payment systems that can be rolled out nationally, and we refreshed the on-the-run brand to become Canada’s convenient store and created the 59th Street Food Company in private label office.
Our company was built on an entrepreneurial spirit of thinking like an owner. This remains the inspiration of our team today and will remain integral to our success as we grow tomorrow and in to the future. I would like to thank the Parkland team for their continued commitment and dedication to serving our customers and growing our business.
On the acquired front, I would like to start by highlighting the extraordinary efforts the team went through in delivering a successful closing of the Chevron transaction on October 1. This was earlier than our original expectations and enabled us to benefit from a full quarter of strong contributions from the Chevron business. Operations results have been robust, as demonstrated by our positive fourth quarter results. In addition, acquisition synergies, targets are pacing above expectation reinforcing Parkland’s ability and commitment to acquire prudently and integrate successfully.
As you’ll see on slide 3, we achieved record adjusted EBITDA for both Q4 and full year 2017 and continue to deliver strong organic growth in our base business. We also made progress on a number of our key initiatives. We developed and launched a newly refreshed, On the Run/Marche Express store design in Winchester, Ontario, which has ramped up very quickly, the retrofit locations are also performing very well in nearly days of the transition. Our plan is to deliver approximately 40 retrofit sites by the end of the quarter.
We also developed and launched a new private label brand 59th Street Food Company, named after the original head office location of Parkland in Red Deer, Alberta. The initial launch of our 16 skew private label program in Q4 is exceeding our expectations; the bundle 3 for $5 offer is popular with our customers and leads the higher sales per visit. This new offer delivers improved quality and value for On the Run customers. On the back of these strong results, we have developed additional private label product offerings.
On the supply side, we welcomed Chevron team, brand and refinery and Burnaby refinery to Parkland. The first quarter of operations of the Burnaby refinery was very successful with refinery utilization running ahead of expectations at 94.4%. We also welcomed Alex [Cole], as our new refinery manager. Alex brings over 17 years of senior leadership in management in the refining and marketing business, including refinery operations, project management and business development.
The turnaround of the Burnaby refinery started as planned on February 1. Today the turnaround has been progressing on schedule and on budget. We look forward to announcing its completion at the end of March.
Now turning your attention to slide 4, we delivered 59% more fuel and petroleum products in the fourth quarter of 2017 compared to the same quarter last year. Upon an annual basis we delivered 28% more fuel and petroleum product compared to the same period last year. We achieved a record adjusted EBITDA in the fourth quarter of 2017 of a 197.8 million, representing a growth of 150% compared to the same quarter of 2016.
On an annual basis, Parkland achieved a record adjusted EBITDA of 417.8 million in 2017, representing 65% growth compared to 2016. This exceptional growth was supported by the Chevron and Ultramar acquisitions as well as strong organic growth and performance in the base business operations across the retail fuels, commercial fuels and the corporate segment supporting the growth.
I’ll now turn it to Mike, who will provide you with a more fulsome review of our business results for Q4 and the fully year.
Mike McMillan
Thanks Bob. Thank you all for joining us on the call this morning. Turning our attention to slide 5, retail fuel’s adjusted EBITDA grew a 183% to $94.4 million for the fourth quarter. This increase was primarily driven by the addition of 773 sites to the Parkland network and business improvements as Parkland begins to leverage our scale to drive synergies, gain further efficiencies and ultimately EBITDA growth.
2017, as Bob noted is transformative, however it is important to note that excluding the impact of acquisitions, the base business performed well in the fourth quarter of 2017, primarily driven by improved fuel margins and a keen focus on operating cost and MG&A.
Commercial fuel’s adjusted EBITDA grew 76% for the fourth quarter of 2017, compared to the same period in 2016. The growth was largely attributable to contributions from Chevron and Ultramar acquisitions, in addition we saw exceptional results from the base business which saw higher margins and strong growth in propane and diesel volumes as a result of focused organic growth efforts and the impact of recent customer wins.
Now in terms of our supply business, it’s worth noting that the supply segment now includes the Burnaby refinery as well as the wholesale business we acquired with Chevron which currently supplies approximately one-third of the Vancouver International Airport’s current requirements for jet fuel. Adjusted EBITDA for the fourth quarter of 2017 grew to 93.1 million. This was primarily due to the impact of the acquisitions and continued efforts in executing Parkland’s supply strategy. This growth was further aided by robust crack spread at our Burnaby refinery.
As previously discussed when we looked at our business, the P&W 3-2-1 crack spread remains the most relevant indicator of our refinery margin performance and correlations are generally quite good. That said, the fourth quarter represents a period where the Burnaby refineries margin remained relatively robust despite the P&W 3-2-1 crack spread experiencing a decline in the latter part of the quarter. We’ll speak more on this views going forward when we touch on our guidance shortly.
Parkland USA’s adjusted EBITDA slightly decline in the fourth quarter of 2017 primarily as a result of some one-time expenses; however, excluding these non-recurring cost adjusted EBITDA increased 5% for the fourth quarter. Incorporate expense increased in the fourth quarter of 2017, the increase was primarily attributable to the merging of corporate functions stemming from the acquisitions, which were partially offset by cost control initiatives in to these business and integration synergies. Overall MG&A as a percentage of gross profit improved slightly versus the fourth quarter of 2016.
Moving to slide 6, you’ll see very strong performance across all business units for the year. Overall you’ll see some strong annual results for our retail, commercial and supply segments. Retail adjusted EBITDA increased 66% to 230.9 million in 2017. This was driven by the impact of the Ultramar and Chevron acquisition, as well as market share gains, stronger retail fuel margins and company C-store same store sales growth in our base business. Commercial adjusted EBITDA grew 43% in 2017, compared to 2016.
Excluding the acquisitions, our base business grew impressively. The growth was driven by higher propane gas and diesel volumes and related service contributions across the segment and focused organic growth efforts.
Supply adjusted EBITDA grew from 96.7 million in 2016 to 158.6 million in 2017. Although acquisitions contribute significantly to this growth, which included robust crack spreads and strong refining margins, the supply team did an exceptional job creating value through to the execution of our supply initiatives and strategy. Parkland USA adjusted EBITDA increased 6% for the year, primarily due to growth in the lubricants business, expansion in the retail division, with the addition of three new sites in Wyoming, as well as organic growth at existing sites. The effective operational controls further contributed to strong performance.
Corporate adjusted EBITDA expense increased 25% for the year as expected, however, as noted earlier, this increase in corporate expenses was primarily due to combining the corporate functions of the Chevron and Ultramar acquisitions. This again was partly offset by cost control initiatives in the base business and integration synergies of which are tracking ahead of plan.
At this point, I’d like to pass it back over to Bob.
Bob Espey
Thanks Mike. I’ll now take you through some of our KPIs for the quarter. As I said during our Q3 conference call there are number of areas where our KPIs were quite different as a result of the addition of Ultramar and Chevron on the resulting changing mix of our business.
On the retail front, volume same store sales growth was down 2.2% for the fourth quarter of 2017 including acquisition and down 1.7% for the year excluding the acquisitions. Same store volumes were softer than we would have expected in 2017, but also came on the back of difficult comparison in the few markets last year. On the positive side, transaction counts continue to rise, which is a good indicator of increased traffic at our sites. Further we have recently kicked off a number of marketing initiatives, part of our ongoing commitment to invest further to drive growth as we move forward.
Company C-store same store sales growth improved to 3.3% for the fourth quarter of 2017, compared to 0.9% at the same quarter same period of 2016. This was the result of the acquisitions as well as 2.3% growth in company C-store same store sales for the base business. This growth experienced in both western and eastern Canada was driven by improved National category management and promotion planning with improved scale as well as focused execution on converting forecourt sales, fuel sales to backcourt C-store sales.
Average volume per site decreased 10% for company sites and increased 12% for dealer sites, as a result of changing mix in our business. On the commercial front, base business fuel volumes grew for both the three months and year ended December 31, 2017, driven by 26% and 36% growth in propane volumes respectively. The increase in propane volumes was attributable to strong organic growth and the impact of business acquisitions completed in 2016.
The trailing 12 operating ratio improved from 74.9 to 73.2 primarily due to improvements of approximately 1% on our base business as a result of successful cost control.
In supply, we’ve added refinery KPIs to our quarterly reporting analysis to help our investors better understand the impact of the refinery. The refinery had a great quarter, the crude capacity utilization rate of 94.4 is calculated by measuring crude throughput at the refinery as a percentage of the name plate capacity of 55,000 barrels a day. This level of utilization was above our expectations which demonstrate the strength and capacity of the team in Burnaby.
Crack spreads were strong despite most of the closely correlated benchmarks falling off from recent highs in the third quarter. Turnaround costs were in line with the expectations as final planning was being put in place a head of the shutdown that was executed on plan at the start of February. Results benefited from approximately 85% of fourth quarter turnaround for [bated] expenses deemed classified as maintenance CapEx. This resulted in approximately 13 million of cost deemed classified as capital which were previously planned as OpEx.
And now I’ll turn it over to Mike, who will discuss the results of Parkland USA as well as our corporate KPIs.
Mike McMillan
Thanks Bob. For Parkland USA wholesale volumes increased 3% for the fourth quarter of 2017, primarily due to new customer wins. Retail volumes increased 19% primarily due to acquisitions in late 2016. The TTM or 12 months trailing operating ratio continues to improve, coming down by nearly 1% as a result of successful cost control initiatives.
Looking at our corporate KPIs on a consolidated basis, Parkland achieved a meaningful improvement in corporate marketing, general and administrative expenses as a percentage of Parkland’s adjusted gross profit. This KPI improved from 5% to 4.8% in the fourth quarter of 2017 and from 6.6% to 5.5% for the year. These improvements were primarily a result of economies of scale achieved and are focused on driving synergies and successful cost management.
The dividend payout ratio improved for both the 3 month and 12 months period ended December 31, 2017, as compared to their respective periods in 2016. This improvement was the result of higher cash flow available for distribution in proportion to the higher dividends declared as a result of more shares outstanding due to our acquisition financing.
The adjusted dividend payout ratio, which excludes acquisition and integration cost improved by 18 percentage points to 46% for the fourth quarter and 12 percentage points to 59% for the year, mainly as a result of higher adjusted EBITDA. We saw modest growth in our distributable cash flow per share as the benefit of the acquisition cash flows were partially offset by one-time acquisition cost and higher integration cost as planned in the quarter, as a result of closing our two significant transactions in a year.
Our total funded debt-to-credit facility EBITDA or leverage ratio came in at 2.6 times which is favorable to our projections. Strong Q4 2017 results and higher historic Chevron results as well as the impact of previously mentioned reclassification of fourth quarter turnaround cost under IFRS, we now expect the total leverage to peak at approximately 3.5 times at the end of 2018, which is lower than previously expected as a result of the benefits of the strong performance in Q4 and historically.
We then forecast to be able to drive it down below three times by 2019. We continue to put safety at the forefront of all of our operations and have inherited some exceptional safety processes, people and culture within our acquisitions.
I’d now like to turn it over to Bob, who will provide some comments on our updated 2018 adjusted EBITDA guidance.
Bob Espey
Thanks Mike. Based on the strong operating and financial results that Parkland has delivered in 2017 and with the benefit of a full year contribution from both the Ultramar and Chevron acquisitions, I am pleased to announce our adjusted EBITDA guidance for 2018 at approximately 600 million with a range of plus or minus 5%.
On slide 10, we’ve outlined a few key items that underpin our 2018 guidance. In addition to the factors related to our marketing businesses that we had provided in previous years when providing guidance, we now are outlining some of the assumptions and factors related to our new refinery business. Our annualized utilization is expected to approximately 80% in 2018 primary as a result of the turnaround in the first quarter.
We expect utilization rates to normalize post turnaround in Q2 through Q4. The turnaround costs are pacing as expected and projected to be approximately 80 million in 2018 based on the spend we have incurred to date. As mentioned earlier, we now expect approximately 85% of these expenditures to be classified as CapEx as opposed to primarily OpEx which confirms the IFRS accounting standards.
The P&W 3-2-1 benchmark shown here was strong throughout 2017. While this indicator fell in Q4, crack spreads remained strong at the Burnaby refinery. We expect the factors that drove this to continue in the first half of 2018 and then normalize during the second half of the year. Thanks Mike.
Mike McMillan
To conclude, that was a fantastic year, and I do really want to thank the Parkland team for all the hard work they’ve done to make the year so successful. As I look forward I’m more excited than ever about the opportunities at Parkland which is a great platform for growth and we are now extremely well positioned to capitalize.
In closing once again I’d like to thank the team and I’d like to thank everyone for joining the call this morning. I’m extremely proud of all the work that has been achieved not only this quarter, but throughout the year. We’ve continued to drive growth in our base business while closing our two largest acquisitions to date.
Ben Brooks
Thanks Bob and Mike. And at this time, I’d like to ask the operator to open the line for any questions.
Question-and-Answer Session
Operator
[Operator Instructions] our first question comes from Michael Van Aelst of TD Securities. Your line is open.
Michael Van Aelst
First actually has to do with just the crack spread that you’re discussing. In your guidance for 2018, are you actually building in higher crack spread than normal in the first half of the year, and then normal and then back to your kind of five year average annual low in the back half of the year?
Bob Espey
First of all in Q1 the refinery is down for a couple of months. So the earnings will be lower in Q1 at the refinery because of the fact that it’s undergoing the turnaround. But I think the way we have described it is probably an accurate view going forward.
Mike McMillan
That’s right Michael. I think there’s a number of factors in the first half as well when we look at the supply takeaway capacity in western Canada which is where we had our supply, but we do see a lot of those things including prairies turnaround and forth like the schedule that we see ahead of us normalizing, resulting in normalized projections and some of the external forces that we referenced as well seem to be forecasting our return, our reversion back to the mean if you will in the second half of the year and that’s what we’ve included in the forecast.
Michael Van Aelst
And you talked about synergies pacing ahead of plan, are you talking about timing or total dollars, are you able to give us what those synergies were in the quarter?
Bob Espey
I would say both, well, and with CST pretty much slimmer to last quarter where our cost control and bringing the two business together and well now the three businesses and benefit we are getting on the spend side is outpacing expectations. And on top of that we are starting to initiate some of the operational changes that we planned. One of the things that I do need to with both businesses we’re still focused a lot on the IT side where we are currently coming off in both businesses SAP and on to our JDE system, and that’s also progressing very well, so very pleased with the progress at this point.
Michael Van Aelst
What’s your timing on the completion for the two companies on the IT integration?
Mike McMillan
It’s a good question. So we are on the ultra (inaudible) or CST business, we are doing the transition from SAP to JD Edwards. Our target right now is in the month of March and so within the quarter basically for the Chevron business lot of planning and so forth where our current target date right now and transition agreement is geared towards the Q3 cut over of that system as well.
Michael Van Aelst
And just finally wondering what extent if any were you able to take advantage of some of the high differentials and the backup of inventory of crude in the Alberta market, and were you able to take advantage of some of your rail car capacity to get product out of the market, because it doesn’t seem like your volumes were up that much or I think you said your legacy volumes on supply and wholesale were actually down on the crude?
Bob Espey
I would say the biggest challenge in Q4 for our rail business was congestion in the system, and both railways, CP and CM have had a busy fall and busy Q4, and with the basically moving the harvest out of western Canada and then on top of that the differential did increase demand significantly and there was a lot of congestion, but that being said we still did move a lot of product not much more than we did it on a year-over-year basis.
Operator
Our next question comes from Kevin Chiang of CIBC. Your line is open.
Kevin Chiang
I’m trying to get a sense of what the earnings power you have now within your network now that you’ve closed these deals this year. Like when I look at Q4 and when I look at some of the disclosure, it looks like your pro forma EBITDA is running let’s say 775 million to 800 million a year. And if I recall as you’re closing these deals, we thought these businesses would generate roughly 625 million of EBITDA before synergies and we’re pretty early here in terms of synergy contribution. So that’s a big delta and I know crack spreads are favorable, but as we go through timing, our synergies should provide a tone. I’m just wondering what I’m missing or is there something you want to call out in terms of that pretty big delta in the earnings that you’re doing versus may be what you were guiding to six months ago from the same asset base.
Bob Espey
It was a very robust quarter, and the large – there was a significant contribution because of the normally high crack spread in western Canada or in the area that we operate through refineries. So I’d say that’s a large contributor to that. That being said, we had a very strong fourth quarter across all businesses. When in the retail business the volumes were steady, margins were higher and the commercial business had some good tailwinds from the weather and new business wins.
So as you bring it altogether, I would say the numbers that we’ve forecast or dependent on two things, one is again robustness of the crack spread which again was very, very strong last year, so you have to be careful projecting that forward. And then the second thing is the ability for us to continue to deliver on the synergies. Those are the two largest drivers of the actual marketing businesses.
As we experienced in the past, they tend to outperform fairly steadily before and afterwards.
Kevin Chiang
That’s helpful. And if I had to take a step back here, you highlighted a number of initiatives you’re doing internally to drive more earnings through the network, the private label initiative, the refresh of your C-stores. When it’s all said and done we look out four or five year, is there a sense of what kind of EBITDA you can generate without any type of major M&A as you folded in these strategic initiatives.
Bob Espey
That’s on which side of the business?
Kevin Chiang
Just across the board, like we know within retail commercial and it seems like you have a lot of balls in the air in terms of thing that can really drive value within your organization. When it’s all done and the synergies are booked and you’ve completed your C-store refreshes and the private label skews are at the levels you want them to be, is there something what that all adds up to in terms of what type of EBITDA you can generate within your network say four to five years from now. I think it’s maturely higher than maybe what we thought the business could do.
Bob Espey
And I would say, when we chatted about this at the e-conference in (inaudible) recently. I would say we look at the base business in two areas, one is the base growth of 3% to 5% and that’s where we’ve got – we are very confident we can achieve that over the long term. It will bump around and then on top of that the initiatives provide further growth opportunities.
Now let’s say that the 3% to 5% is – we’re again highly confident we can get that. The initiative start to depend on things and we talked about investing in more C-stores. Well one of the biggest challenges is always just finding the best sites and getting planning permission to build sites right, so we can have an aspirational target to put 30 to 50 new sites on the ground on an annual basis and it’s not fully in our control and also we don’t want to commit to a number that starts to force us to make bad decisions.
And same on the propane side, where we’ve highlighted the number of opportunities to grow the business. We’ll do that as we see opportunities that unfold in front of us whether they are organic or the opportunity you put new sites in or acquire existing operators. But they of course depend on the pipeline of opportunities. So when we think about growth, we think about the 3% to 5% is the base case and then on top of that the various initiatives start to depend on how they track in terms of an implementation perspective.
Kevin Chiang
And just last one from me on leverage, you exited the year at 2.6 as Mike noted a fair proposition to be in relative to maybe what you are thinking as the deals are being closed. Does that change your free cash flow priorities, just given the leverage ratio was lower than may be you had anticipated.
Mike McMillan
Kevin it’s a great question. I think we’re very pleased with where the leverage came in given the cash flow, and I think we covered some of the drivers there. I think our priorities would remain and the discipline would remain the same. As you’re aware it’s really a return to base business and so when we look at opportunities for growth, I mean it certainly does give us capacity, but we are very cognizant of the debt balance that we have, we want to remain within our comfort zone. Our full turn of capacity that we expect to have in place by go in to 2019 does give us the ability to continue to execute on our strategy, but again our capital priorities and our return expectations haven’t changed and so you should expect that discipline that probably would just allow us to use leverage more effectively, but you must have great discipline.
Operator
Our next question comes from Derek Dley of Canaccord Genuity. Your line is open.
Derek Dley
I was just wondering if you could give us some guidance on your CapEx plans for next year, obviously now that you’re going to be capitalizing about $68 million in turnaround costs. What should we expect for maintenance in the growth CapEx for the rest of the business, I noticed you guys are planning to retrofit 40 stores in to your flagship model, so I was just wondering if we can get an update there?
Bob Espey
I would say, we’ve talked about in the new business so as all three businesses come together we’ll be somewhere between 80 and 100 on an annual basis. This year we’re projecting to be above 150 including the TAR in there. So that gives you an approximation of where we’ll be on a maintenance CapEx and then a lot of the – any new sites that we put in On the Run with the growth CapEx, the refresh will be part of the maintenance.
Mike McMillan
So just around numbers, I would suggest that the legacy in CST businesses that were we typically talk about with the 35 to 40 legacy in the CST could add 15 -18 to that. So we’re probably in about the 55 range. The new business from Chevron both marketing and the refinery, we would look to see about you mentioned about 68 on the turnaround there’d be some sustaining maintenance capital that we normally would expand as well. And so I would look at it from a maintenance basis in around the 140 range with the turnaround, perhaps 150 and so we’ll monitor that report it around the turnaround result as we get through the quarter as well.
Derek Dley
And you mentioned in the supply and wholesale division that a lot of volumes were a little bit weak and can you just address that with the composition or congestion on the rail. You did say that you made meaningful progress on your supply strategy, can you just elaborate on that a little bit. And then as it relates to that congestion on the rail network have we seen that recently relief on that in Q1?
Bob Espey
In Q1 we have seen it loosen up a bit, but it still is harder to move product out of Western Canada right now. In terms of other supply initiatives it’s really a number of items. We continue to work on import program in the east, where we’ve had some success in Q4, and in the west we are starting to optimize around the Burnaby distribution assets both in Burnaby and on Vancouver Island. And then we’ve had some, we’ve been working with our other partners, our refining partners across the country to look at ways to improve the way we purchase products which enables us to be more competitive in the market place.
Derek Dley
And just the last one, on the private label strategy it sounds like you had some initial success with that rollout. With the penetration of private label would you see this private label business eventually evolving to and I noticed that a lot of it was driven by the 3-4-5 offering. Are there other initiatives that you have surrounding that offering that you think could augment the private label strategy?
Mike McMillan
I know for sure the marketing team is working on a broader range. The initial tests has been extremely favorable. The intent is over the next 24 months to replace roughly 20% of the skews in the store with private label, so we’ll expect to see some significant wins and upside there as we continue to roll that out. Other categories, things like drinks, water, carbonated beverages, looking at other salty snacks that we can convert over.
Derek Dley
And so you thought that it was 24 months initiative to get to 20%.
Mike McMillan
Yes.
Operator
Our next question comes from Sabahat Khan of RBC Capital Markets. Your line is open.
Sabahat Khan
Just quickly when you talked about the crack spread they’ve pulled back late in Q4, but you continue to do well at the refineries, like what is some of that if we think about it a bit longer. What are some of the drivers that would cause you to outperform in some quarters where the [bulk] data might be indicating the other way?
Bob Espey
The crack spread has many factors in it and I would say the largest challenge we have with Vancouver is there isn’t a posted crack spread. So the best proxy for that is the P&W. And then on top of that there’s different factors that influence that that are unique to that market or things like Western Canadian crude discounts which effects our ability to buy better than WTI which would be the basis for the P&W crack, and also it has an impact on pipeline, sets the toll on the pipeline.
Again that’s a big determiner of the local crack spread is what we can buy crude for or what happened in Q4 was with the keystone pipeline going down for a couple of weeks. That really drove the price of crude gallon across Western Canada and we were able to benefit from that because of the ability to sell the product at a Pacific based price. Other things that influence that are turnarounds that are predicted because of the refiners. That wasn’t an impact in Q4, but in this year in the first half of the year we would see a number of refiners that are going, actually all the refiners are going through turnaround from western Canada and that easily does put some upward pressure on the crack spread.
Gasoline pricing in Vancouver compared to P&W is another thing. I mean they are an independent market, although they are correlated, they do fluctuate. And then everything right down to LA and what’s happening in the Gulf Coast will be a driver as well, and obviously our ability to the utilization of the refinery. So a number of factors there that will cause that market to deviate from the P&W, but over a period of time the P&W correlates quite tightly with Vancouver.
Sabahat Khan
I would think about normalized margins for your various businesses on cents per liter basis. Obviously did the quarter come in stronger in than we were looking for or across a couple of segments? Can we begin to use Q2 as a good proxy per say?
Bob Espey
Unfortunately what you’ll see is because the mix is changing in the network to more of a corporate owned network, you’ll see that on a – you’ll start to see the margins on an annual basis stabilize at a higher number because in the dealer business we have less margin. So it will take a full year for that to roll through.
Sabahat Khan
Lastly just a housekeeping question, so with this change that allows you to capitalize about 85% of the turnaround cost, I guess can you remind us how that’s different from initially I think we were expecting that none of the cost related to the turnaround would be adjusted – were adjustable. So with this kind of a net benefit will this change?
Mike McMillan
I think just for some context or some I think I would suggest that we took over the business here in October and at that time we certainly could dig in and get very intimate with the plan and pro forma analysis on what the spend would look like given the nature and scope of the turnaround under IFRS versus US GAAP. And so previously we talked about largely the spend would be OpEx which would be consistent with pro forma ownership under US GAAP. So can’t really speak to their policy, but as we did our evaluation we said we thought 90% or more of the spend likely would be OpEx until we could dig in to it. So under IFRS as we look at the nature of work being done there, we did find that under IFRS about 85% of the work would be CapEx.
The other thing I would look at is, so that comes in earnings. From a cash flow perspective certainly we’re very mindful of the total spending regardless, and have factored that in to our forecast for leverage and so forth. So hopefully that gives you some context. I think our ability to take on the business early gets the full benefit of the quarter and then spend the time with the teams to be able to do the assessment that was very helpful for us, as we lead in to this year and helping us refine our guidance as well.
Sabahat Khan
I think in terms of forecasting should we assume is it fair to assume that 85% of 80 million would be adjusted back with the net benefit, just to make sure to capture that properly?
Mike McMillan
I think that’s our best call for this year. So when you look at the nature of the turnaround this year and that’s what we’ve stated in our guidance there. So about 85% of the spend would be deemed CapEx, so I mean that may move a bit depending on as we complete the turnaround. I would caution as we go forward, it will depend on the scope of the work that we’re doing, and so as we on a few years’ time when we look at another, albeit a smaller turnaround, we will be at the front and the process will provide some guidance around that as well. So we’ll be able to give a better indication as we lead in to future events.
Operator
Our next question comes from Peter Sklar of BMO Capital Markets. Your line is open.
Peter Sklar
On your leverage ratio, I just want to make sure I understood what you’re saying, I believe you said that it peaks at 3.5 times at the end of 2018, is that correct?
Mike McMillan
That’s right Peter. Essentially what we’d expected to see was as we moved through Q1 with less contribution from the refining business, we would see the EBITDA and downtime would affect the leverage ratio, but where we would have predicted the leverage ratio by the end of the year moving maybe more towards the high 3s, we don’t expect it to exceed more than 3.5 times subject to some of the factors in the business of course.
Peter Sklar
So why is it that the ratio doesn’t peak in Q1 and then starts coming down in Q2 as the turnaround is completed?
Mike McMillan
It’s really a function the metric being a 12 months trailing number and the strength of the acquired business as well as our performance like our result. So I would say its’ a couple of things. It would be – if you look at our business acquisition report and look at the performance of the Ultramar and really the Chevron business was very strong given the crack spread they saw historically. And so that will still be in the Q1 number trailing for the three quarters where Q3 was very robust.
The second part would be the CapEx classification we talked about. So that does add back some EBITDA in to the equation, and leverage stays the same. Those were the two factors I would say that will take as we go through the year and depending on where crack spreads are for the balance that your forecast would see more normalized crack spreads in the second half of the year when they lap Q3 where Chevron was particularly strong, we would see that ratio to come back to what we expected and below, and then we look for the benefit of the business as we lead in to 2019 plus the synergies and the initiatives and we should see that drop in to that three and below range.
Peter Sklar
On another issue on the initiative you have for the On the Run banner, were you building new stores as well as refurbishing existing units. Can you let us know what the CapEx is roughly for a new backward build and what the cost is for renovation?
Bob Espey
On a complete new build so we talked about, Winchester, Ontario where it was raised and rebuilt, you would be looking at roughly 2 million to 3 million for that. If it’s a branding site which – and we have two format, so we do roughly a 2000 square foot and then the larger one is just over 3000 square feet, which would have a QSR and then we’d be in the range of 3 million to 5 million all in on a new site depending where it is and the underlying value of the property is a big driver there. But it gives you an idea of roughly what we would do for a new site, again raise our rebuild and then on a refresh, there are anywhere between, depending on what needs to be done $50,000 and $250,000 on average, about $100,000 site I’d say.
Mike McMillan
Depending on format, and just a range as well Peter on the raise and rebuild, like as we look at formats, for example, if we include a car wash and the thing is more towards the higher end where the new formats depending would be in to that 2.5 to 4 and up to 5 depending on the location as Bob mentioned.
Peter Sklar
So on a new build though does that include like these numbers you just provided us with does that include the forecourt as well?
Mike McMillan
It does. On a new build it would include going from a vacant lot, a piece of land to a functioning site. So a few years ago or a couple of years ago we launched (inaudible) and that’s on the other side worth of $5 million site and we would have done fuel, car wash, sea store, we put QSR in, a light (inaudible) and that would be sort of our largest on that site and at that time it was hard to spend that money, but it turned out very well for us.
Peter Sklar
Another topic, Bob could you talk about your M&A strategy in the US for your retail business. Are there opportunities to acquire or would you acquire, would your intention be to acquire in adjacent market and also I would think there would be other consolidators out there. So how does all that – can you just kind of –.
Mike McMillan
So we do have a footprint in the US that’s in North Dakota and our Parkland USA business there is primarily a wholesale business, but we do have a retail footprint as well. And as we’ve looked at that market, we recently hired a President of the US, Doug Haugh, he comes out of a large independent US where they’ve a number of acquisitions.
And as we started to shape strategy there and how we move forward, there is a large opportunity to consolidate and our focus would be among our three business line, so wholesale, commercial and retail. And a lot of the independence in the market place has that mix of business, so it fits very well with our business model. And there are roughly 3,000 to 4,000 independent in the US, so it’s still is a very fragmented market.
Our intent is to build out around our business in North Dakota. So basically if you were to look at a circle starting in Seattle and going to Minneapolis that would be roughly the area that we’d be looking to build out and which for us has the supply benefit as we’ve had a pretty robust export of Canada in to that market which works very well for us on the supply side.
Peter Sklar
And just lastly, actually I don’t know this, but do you have any units in New Finland?
Mike McMillan
We do actually through CST we picked some retail and are also some card lock-ins and commercial business.
Peter Sklar
And on the retailer, any of them corporate?
Mike McMillan
That’s a good question. I think there are a few, but we can follow up on the exact number.
Peter Sklar
Where I’m really driving at with this is, I’m just – look have you thought through how you’re going to handle the Cannabis opportunity in Newfoundland. I know that the expectation there that a lot of it will be sold through like convenient store outlets that will be a category for them.
Mike McMillan
We’re monitoring the changes in legislation and I’d say across the country there’s a lot of – I guess across the country legislatively and regulatory trying to figure out how to rollout that new category. I would say gas stations are a great outlet, because we are very used to selling controlled substances whether that cigarettes or alcohol. So we hope Newfoundland and other will allow us to sell.
Operator
There are no further questions. I’d like to turn the call back over to Bob Espey for any closing remarks.
Bob Espey
Great. Thank you very much and look forward to connecting next quarter.
Operator
Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone have a great day.
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