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Good morning, everyone, and welcome to Parkland Fuel Corporation's Q4 and Year-end Results Conference Call. My name is Ben Brooks, and I'm the 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 Martin ], 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 an update to you on some of our strategic initiatives. I'd now like to point everyone to my favorite slide 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, industry conditions, et cetera. Certain financial measures which do not any 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 on our website or 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. 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.
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 a supply advantage, acquire prudently and integrate successfully. 2017 was a groundbreaking year on many fronts for Parkland, and I'd like to highlight some of these amazing achievements. We completed 2 strategic acquisitions for Parkland, which almost triples the size of the business, adding significant scale in 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 and affiliated strategic distribution assets, including the Burnaby and Vancouver Island terminals. We acquired the pipeline brand from CST, providing Parkland with a cardlock and proprietary payment system that can be rolled out nationally. And we refreshed the On the Run brand to become Canada's convenience store and created the 59th Street Food Co private-label office -- offer. Our company was built on an entrepreneurial spirit of thinking like an owner. This remains the inspiration for our team today and will remain integral to our success as we grow tomorrow and into 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 acquire 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 the newly refreshed On the Run/Marché Express store design in Winchester, Ontario, which has ramped up very quickly. The retrofit locations are also performing very well in the early 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 SKU private-label program in Q4 is exceeding our expectations. The bundle 3 for $5 offer is popular with our customers and leads to 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 welcome the 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 Coles as our new Refinery Manager. Alex brings over 17 years of senior leadership and 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. To date, the work -- 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. On 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 $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, $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 full year.
Great. Thanks, Bob. Thank you all for joining us on the call this morning. Turning our attention to Slide 5. Retail Fuels adjusted EBITDA grew 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 costs and MG&A. Commercial Fuels 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 1/3 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 spreads at a Burnaby Refinery. As previously discussed, when we look at our business, the PNW 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 Refinery's margins remained relatively robust despite the PNW 3:2:1 crack spreads experiencing a decline in the latter part of the quarter. We'll speak more on this going forward when we touch on our guidance shortly. Parkland USA's adjusted EBITDA slightly declined in the fourth quarter of 2017, primarily as a result of some one-time expenses. However, excluding these non-recurring costs, adjusted EBITDA increased 5% for the fourth quarter. And corporate expense increased in the fourth quarter of 2017. The increase was primarily attributable to the merging of corporate functions stemming from the acquisitions, which was partially offset by cost control initiatives in the base 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 acquisitions as well as market share gains, strong Retail Fuels 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, the base business grew impressively. The growth was driven by higher propane gas and diesel volumes and related service contributions across the segment from 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, we included -- which included robust crack spreads and strong refining margins, the Supply team did an exceptional job creating value through the execution of our supply initiatives and strategy. Parkland USA adjusted EBITDA increased 6% for the year, primarily due to growth in our lubricants business, expansion in the Retail division with the addition of 3 new sites in Wyoming as well as organic growth at existing sites. 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 Chevron -- 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 back over to Bob.
Thanks, Mike. I'll make -- I'll now take you through some of our KPIs for the quarter. As I said during our Q3 conference call, there are a number of areas where our KPIs look quite different as a result of the addition of Ultramar and Chevron and 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 acquisitions 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 comparisons in a few markets last year. On the positive side, transaction counts continued to rise, which is a good indicator of increased traffic at our sites. Further, we've recently kicked off a number of marketing initiatives as part of our ongoing commitment to invest further to drive growth as we move forward. Company C-Store sales -- same-store sales growth improved to 3.3% for the fourth quarter of 2017 compared to 0.9% for the same quarter -- same period of 2016. This was a 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 full-court 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 3 months and year ended December 31, 2017, driven by 26% and a 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 with crude capacity utilization rate of 94.4% as calculated by measuring crude throughput at the refinery as a percentage of the nameplate capacity, 55,000 barrels a day. This level of utilization was above our expectations, which demonstrates 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 expectations as final planning was being put in place ahead 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 being classified as maintenance CapEx. This resulted in approximately $13 million of costs being classified as capital, which was previously planned as OpEx. I'll now turn it over to Mike, who will discuss the results of Parkland USA as well as our corporate KPIs.
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 -- our focus on driving synergies and successful cost management. The dividend payout ratio improved for both the 3- and 12-month periods 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 costs, 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 costs and higher integration costs as planned in the quarter as a result of closing our 2 significant transactions in the year. Our total funded debt to credit facility EBITDA or leverage ratio came in at 2.6x, which is favorable to our projections. Strong Q4 2017 results and higher historic Chevron results as well as the impact of the previously mentioned reclassification of fourth quarter turnaround costs under IFRS. We now expect the total leverage to peak at approximately 3.5x 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 this to be able to drive -- we then forecast to be able to drive it down below 3x by the -- 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.
Thanks, Mike. Based on the strong operating and financial results that Parkland have 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 have 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 be approximately 80% in 2018, primarily 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 conforms to IFRS accounting standards. The PNW 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. 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. We've built a great platform for growth, and we are now extremely well positioned to capitalize on it. 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 2 largest acquisitions to date.
Thanks, Bob and Mike. And at this point, I'd like to ask the operator to open the line for any questions.
[Operator Instructions] Our first question comes from Michael Van Aelst of TD Securities.
The first question actually has to do with just the crack spreads that you were discussing for -- in your guidance for 2018, is it -- so are you actually building in higher crack spreads than normal in the first half of the year and then normal for the second -- then back to your kind of 5-year average annual low in the back half of the year?
Yes. I mean -- first of all, in Q1, 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 a turnaround, but we -- I think the way you've described it is probably an accurate view going forward.
Yes. I think that's right, Michael. Just -- I think there's a number of factors in the first half as well when we look at the -- just the supply takeaway capacity in Western Canada, which is where we get our supply. But we do see a lot of those things, including queries, turnarounds and so 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 a return -- a reversion back to the main, if you will, in the second half of the year. And that's what we've included in the forecast, yes.
And you talked about synergies pacing ahead of plan. Are you talking about timing or total dollars? And are you able to give us what those synergies were in the quarter?
I would say both. Both have done well. We -- and with CST, pretty much similar to last quarter where our cost control and -- again, bringing the 2 businesses together and -- well, now the 3 businesses and the benefit we're getting on the spend side is outpacing expectation. And on top of that, we are starting to initiate some of the operational changes that we planned on the -- one of the things that I do need to -- with both businesses, we're still focused a lot on the IT side where we're currently coming off in both businesses' SAP and on to our JDE system. And that's also progressing very well. So we're very pleased with the progress at this point.
What's your timing on completion for the 2 companies on the IT integration?
Yes. That's a good question. So we are -- on the Ultramar, the former CST business, we are doing the transition from SAP to JD Edwards in -- our target right now is in the month of March, and so within the quarter, basically. For the Chevron business, a lot of planning and so forth. We're -- our current target date right now in transition agreement is geared toward the Q3 cutover of that system as well.
Just -- and just finally. I'm wondering what extent, if any, were you able to take advantage of some of the high differentials in the backup of inventory of crude in the Alberta market. And were you able to take advantage of some of your railcar capacity to get product out of the market? Because it doesn't seem like your volumes were up that much. I think you said your volumes -- your legacy volumes on Supply and Wholesale were actually down on your crude.
Yes. So I'd say that the biggest challenge in Q4 for our rail business was congestion in the system. And both railway, CP and CN have had a busy, busy fall and busy Q4 and -- with basically the moving -- the harvest out of Western Canada. And then on top of that, the differential, it increased demand significantly. And there was a lot of congestion. But that being said, I mean, we still didn't move a lot of product but not more than -- not much more than we did on a year-over-year basis.
Our next question comes from Kevin Chiang of CIBC.
Maybe I'll start off with this. 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 here. 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 were 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 pretty big delta. And I know crack spreads were favorable. But as we go through time, your synergies should provide a tailwind. I'm just wondering what I'm missing. Or is there something you'd want to call out in terms of that pretty big delta in the earnings that you're doing versus maybe what you were guiding to, say, 6 months ago from the same asset base?
I -- so it was a very robust quarter. And the large -- there was a significant contribution because of the abnormally high crack spread in Western Canada in the area that we operate the refinery. So I would say that's a large contributor to that. That being said, I mean, the -- we had a very strong fourth quarter across all businesses. In the Retail business, although 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 all together, I would say it -- the numbers that we've forecast are dependent on 2 things. One is, again, the 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 2 largest drivers. Now the actual marketing businesses, as we experienced in the past, I mean, they tend to perform fairly steadily before and afterwards.
Okay. That's helpful. And if I were 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 at 4, 5 years, 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?
Sorry. That's on which side of the business?
Just across the board. Like when we look at Retail, Commercial, it seems like you have a lot of balls in the air in terms of things that can really drive value within your organization. When it's all done and these synergies are booked and you've completed your C-Store refreshes and the private-label SKUs are at the levels you want them to be, is there a sense of what that all adds up to in terms of what type of EBITDA you can generate within your network, say, 4 to 5 years from now?
Yes...
Do you think it's materially higher than maybe what we thought the business could do before?
So -- no. And I would say -- and we chatted about this at the conference in Whistler recently. I would say we look at the base business in 2 areas. One is the base growth of 3% to 5%. And that's where we've got -- we're very confident we can achieve that over the long term. It'll bump around. And then on top of that, the initiatives provide further growth opportunities. And I would say that the 3% to 5% is -- we're again highly confident we can get that. The initiatives start to depend on things. Like we talked about investing in more C-Stores. 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 up 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. So -- and the 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're organic or the opportunity to put new sites in or acquire existing operators. But they, of course, depend on the pipeline of opportunities. So again, 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. So...
That's helpful. And just last one from me. On leverage, you exited the year at 2.6. That's, as Mike noted, a favorable position to be in relative to maybe what you're thinking as your deals are being closed. Does that change your free cash flow priorities just given the leverage ratio is lower than maybe you had anticipated?
Kevin, yes. It's a great question. I mean -- and I think we're very pleased with where the leverage came in given the cash flow. And we -- and I think we covered some of the drivers there. I think -- our priorities, I think, would remain, and the discipline would remain the same. I mean, it's really -- as you're aware, it's really a returns-based business. And so when we look at opportunities for growth, I mean, it certainly does give us capacity, but we're very cognizant of -- the debt balance that we have, we want to remain within our comfort zone, a full turn of capacity that we expect to have in place by -- going into 2019 does give us the ability to continue to execute on our strategy. But again, it would be -- our capital priorities are -- and our return expectations haven't changed. And so you should expect that discipline. It probably would just allow us to use leverage more effectively but again with great discipline. So...
Our next question comes from Derek Dley of Canaccord.
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, I guess, about $68 million in turnaround costs. What should we expect for maintenance and growth CapEx for the rest of the business? I noticed you guys are planning to retrofit 40 stores into a flagship model. So I was just wondering if we could get an update there.
Yes. Thanks, Derek. I would say -- and we've talked about in the -- a new business. So with all -- as all 3 businesses come together, we'll be somewhere between $80 million and $100 million on an annual basis. This year, we're projecting to be about $150 million, 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 -- well any of -- any new sites that we put in On the Run would be growth CapEx. The refreshes will be part of the maintenance.
Yes. That's right. Yes, yes. So just round numbers. I would suggest that the legacy and CST businesses that we're -- we typically talk about would be $35 million to $40 million legacy. And CST you could add $15 million, $18 million to that. So we're probably in about the $55 million range. The new business on -- from Chevron, both marketing and the refinery, we would look to see about -- you mentioned about $68 million on the turnaround. There'd be some sustaining maintenance capital that we normally would expend as well. And so I would look at it from a -- on a maintenance basis in around the $140 million range. With the turnaround, perhaps $150 million. And so we'll monitor that and report out on the turnaround results as we get through the quarter as well.
Okay. That's great. That's helpful. And you mentioned in your -- in the Supply and Wholesale division that while volumes were a little bit weak. And I think you just addressed that with the conversation on congestion on the rails. 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 networks, have we seen that -- have we seen any relief on that in Q1?
So we -- in Q1, we have seen it loosen up a bit, but it's still is -- it's harder to move product out of Western Canada right now. The -- in terms of other supply initiatives, I mean, it's really a number of items. We continue to work on our import program in the East where we've had some success in the -- in Q4. In the West, we're starting to optimize around the Burnaby distribution assets, both in Burnaby and in -- 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 marketplace.
Okay. And then just the last one. On the private-label strategies, it sounds like you've had have some good initial success with that rollout. Can you just -- like -- what's the penetration of private label? I mean, where do you see this private-label business eventually evolving to? And I noticed that a lot of it was driven by the 3 for $5 offering. So are there other initiatives that you have surrounding that offering that you think could augment the private-label strategy?
Yes. I know for sure the marketing team is working on a broader range. The initial test has been extremely favorable. The intent is over the next 24 months to replace roughly 20% of the SKUs 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. We're looking at other salty snacks that we can convert over.
I'm sorry. You said that 12 -- that was a 24-month initiative to get to 20%?
Yes.
Our next question comes from Sabahat Khan of RBC Capital Markets.
So just quickly on -- you talked about the crack spreads. It did pull back in -- late in Q4, but you continued to do well at the refinery. Look, what are some of the -- if we think about it over the long run, what are some of the drivers that would cause you to potentially outperform in some quarters where the market data might be indicating the other way?
Yes. 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 PNW. And then on top of that, there are different factors that influence that, that are unique to that market. So things like Western Canadian crude discounts which affect our ability to buy better than WTI, which would be the basis for the PNW crack. And also put -- it has an impact on pipeline -- the toll on the pipeline. Again -- yes, again, that's a big determiner of the local crack spread is what we can buy crude for. And what happened in Q4 was with the Keystone pipeline going down for a couple of weeks, that really drove the price of crude down 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 with other refiners. That wasn't an impact in Q4. But in this year, at the -- in the first half of the year, we would see a number of refiners that are going -- actually, all the refiners are going through turnarounds in Western Canada. And that usually does put some pressure, upward pressure on the crack spreads. Gasoline pricing in Vancouver compared to PNW is another thing. I mean, they are independent markets and they do -- although they are correlated, they do fluctuate. And then everything down -- right down to L.A. and what's happening in the Gulf Coast will be a driver as well. So -- and then obviously, our ability to -- the utilization of the refinery. So a number of factors there that will cause that market to deviate from the PNW. But over a period of time, the PNW correlates quite tightly with Vancouver.
All right. And then, I guess, as we think about normalized margins for your various businesses on a cents-per-liter basis, obviously, this quarter came in stronger than we're looking for across a couple of the segments. How should -- can we begin to use Q2 as a good proxy per se?
No. 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'll take a full year for that to roll through.
And then lastly, just a housekeeping question. So would this change that allows you to capitalize about 85% of the turnaround costs -- I guess, can you remind us how that's different from -- initially, I think we were expecting that none of the costs related to the turnaround would be adjusted, be it -- were adjustable. So is this kind of a net benefit? Would this rule change?
Yes. Great question. I think a couple -- just for some context here, Saba, 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 perform our analysis on what the spend would look like, given the nature and scope of the turnaround under IFRS versus U.S. GAAP, right? And so previously, we talked about largely the spend would be OpEx, which would be consistent with the former ownership under U.S. GAAP. So I 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 into it. And so under IFRS as we look at the nature of the work being done there, we did find that under IFRS, about 85% of the work would be CapEx. And the other thing I would look at is -- so that comes into earnings. From a cash flow perspective, certainly, we're very mindful of the total spend irregardless and have factored that into our forecast for leverage and so forth. So hopefully, that gives you some context. I think our ability to take on the business early and get 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 into this year and in helping us refine our guidance as well.
So if we think about -- I guess, in terms of forecasting, should we assume -- is it fair to assume that 85% of the $80 million would be adjusted back with the net benefit? Just to make sure we capture that properly.
Yes. That -- 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's about 85% of the spend would be deemed CapEx. I mean, that may move a bit depending on -- as we complete the turnaround. I would caution, as we go forward, it'll depend on the scope of the work that we're doing. And so as we -- in a few years' time, when we look at another -- albeit a smaller turnaround, we will be at the front end of the process and we'll provide some guidance around that as well. So we'll be able to give a better indication as we move into the future events.
Our next question comes from Peter Sklar of BMO Capital Markets.
On your leverage ratio, I just want to make sure I understood what you're saying. I believe you said that it peaks at 3.5x at the end of 2018. Is that correct?
Yes. That's right, Peter. What -- 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 3.5x subject to some of the factors in the business, of course.
Yes. So why is it that the ratio doesn't peak in Q1 and then starts coming down in Q2 as the turnaround is completed?
Yes. It's really a function of the metric being a 12-month trailing number and the strength of the acquired business as well as our performance, like our results. So I would say it's a couple of things. It would be -- if you look at our business acquisition report and you look at the performance of the Ultramar and really the Chevron business, it was very strong given the crack spreads they saw historically. And so that'll still be in the Q1 number trailing for the 3 quarters where Q3 was very robust. The second part would be the CapEx classification we talked about. So that does add back some EBITDA into the equation. Leverage stays the same, but it also -- those are the 2 factors, I would say, that we'll take -- as we go through the year and depending on where crack spreads are for the balance of the year, our forecast would see more normalized crack spreads in the second half of the year. And when they lap Q3, where Chevron was particularly strong, we would see that leverage ratio come back to what we expected and below. And then we get a full year benefit of the business as we lead into 2019 plus the synergies and the initiatives. And we should see that drop into that 3 and below range.
Okay. On another issue. On the initiative you have for the On The Run banner where you're building new stores as well as refurbishing existing units. Can you let us know what the CapEx is for -- roughly for a new backcourt build and what the cost is for a renovation?
Yes. So if -- on a complete new build -- so we talked about Winchester, Ontario, where it was -- a raise in rebuilds, you'd be looking at roughly $2 million to $3 million for that. If it's a brand-new site, which in -- and we have 2 formats. So we do roughly a 2,000 square foot. And then the larger one is just over 3,000 square feet, which would have a QSR in it. 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, a raise -- or a rebuild. And then on a refresh, they're anywhere between -- depending on what needs to be done, $50,000 and $250,000. So on average, about $100,000 a site, I would say.
Yes, depending on format. And just the range as well, Peter, on the raise and rebuild, like -- as we look at formats, for example, if we include a carwash -- another thing, it's more towards the higher end where the -- the new format, depending -- would be into that $2 million to $4 million -- $2.5 million to $4 million and then another -- up to $5 million depending on the location, as Bob mentioned.
Yes. Okay. So on a new build, though, does that include -- like these numbers you just provided us with, does that include the forecourt as well?
It does. On a new build, it would include -- going from a -- it's a vacant lot, a piece of land to a functioning site. So a few years ago, we -- a couple of years ago, we launched -- we have one in Chilliwack, BC. And that's on the other side where it's a $5 million site. And we would've done fuel, car wash, C-Store. We put QSR in -- Triple O, and that would be sort of our largest format site. And at the time, we had to swallow hard to spend that money, but it turned out very well for us.
Okay. And another topic. Bob, could you talk a little bit about your M&A strategy in the U.S. for your Retail business? Are there opportunities to acquire? Would you acquire? Would your intention be to acquire in adjacent markets? And also, I would think there would be other consolidators out there. So how does all that -- can you just kind of give a bigger picture?
Yes. We've -- so we do have a footprint in the U.S. 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 U.S., Doug Haugh. He comes out of a large independent in the U.S., where they've done a number of acquisitions. And as we've started to shape the strategy there on how we move forward, there isn't -- there is a large opportunity to consolidate. And our focus would be among our 3 business lines, so wholesale, commercial and retail. And a lot of the independents in the marketplace have that mix of business, so it fits very well with our business model. And there are roughly 3,000 to 4,000 independents in the U.S. So it still is a very fragmented market. Our first -- 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 in, which, for us, has a supply benefit as we have a pretty robust export out of Canada into that market, which works very well for us on the supply side.
Okay. And just lastly. Actually, I don't know this, do you have any units in New Finland?
We do. Actually, through CST, we picked up some retail and also some cardlock and commercial business.
And on the retail, are any of them corporate?
That's a good question. I think there are a few, but we can follow up on the exact number.
Yes. Where I'm really driving at with this is -- I'm just like have you thought through how you're going to handle the cannabis opportunity in New Finland. I know that the expectation there that a lot of it will be sold through -- like a -- that retail -- that convenience store outlets that'll be a category for them.
We're monitoring the changes in legislation. And I'd say across the country, there's a lot of -- we're trying to -- I guess, across the country, legislatively and regulatory, trying to figure out how to roll out that new category. I would say gas stations are a great -- a great outlet because we are -- we're very used to selling controlled substances, whether that's cigarettes or alcohol. So we hope New Finland and others allow us to sell.
There are no further questions. I'd like to turn the call back over to Bob Espey for the closing remarks.
Great. Thank you very much, and we look forward to connecting next quarter.
Thank you.
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.