CIBC SOPKI (PKI-SO) hosted an investor day and provided an overview of its operations and longer-term financial targets. This investor event provided a look back over the last five years and refreshed investors to the significant changes that have occurred within the organization. Over the past half-decade, PKI has tripled its throughput, expanded its geographic presence, and increased the scope of its operations. The key takeaways from the presentation were.
1. Focus On Driving Organic Growth: The headlines around PKI over the past few years have been on its growth by acquisition strategy having closed on a number of transformative deals (Pioneer, SPF, Elbow River). But with a strong foundation in place, PKI focused much of its attention around the organic growth opportunities, in which the company is targeting 3%-5% per annum.
i) In Retail, PKI has seen its throughput per site increase 4% annually from 2.26ML to 2.54ML from 2011 to 2014 and is targeting 2+% growth moving forward. On non-fuel sales, SSS growth went from -1.8% in 2011 to 8.3% in 2014 with the target of 3+% looking ahead. The ability to grow retail sales organically, and ahead of industry trends, reflects PKI's strategy of culling underperforming sites and refreshing 4-8 sites a year, which can result in a 5%-25% lift in sales. From a convenience store perspective, with Mr. Peter Kilty now heading up Retail, he has driven increased non-fuel sales through simple "blocking and tackling"... better store products and improved product placement.
ii) In Commercial, volumes have seen no organic growth from 2011 to 2014, but the target is to grow above GDP. The focus on growing Commercial will be through getting more tanks in the field to drive more volumes and customer growth.
iii) Supply & Trading volumes increased ~5x from 2011 to 2014 to 4.4BL reflecting acquisitions. Growth will be a function of putting more assets on the ground and to access more transload facilities and terminals, more surface transportation options (truck, rail), and more human capital. Recently, PKI opened a terminal in Hamilton to drive product from Western Canada and Chicago into Ontario.
iv) U.S.A.: This is a relatively new division and the target is to grow both fuel volumes and non-fuel sales by over 5% annually. The key here is for PKI to use its supply advantage to bring product into North Dakota (which is short) from Western Canada (i.e. Edmonton) which is long gasoline and diesel. Over a short period of time, PKI has doubled the rail car imports into this division and this will be driver of higher throughput.
While none of these strategic initiatives are "earth shattering", it does speak to the opportunity PKI has to drive better organic growth given the increased size and scale of its current operations. Effectively, PKI is targeting EBITDA to increase by an average 3%-5% annually before any acquisitions.
2. Cutting Costs: Back in May 2012, PKI introduced its Penny Plan which was focused on reducing its operating cost by $0.01/L which would yield $70MM in EBITDA. While the goal was to reach this target by 2015, PKI admitted it still has ~$30MM left to go. This is going to be driven by reducing its net operating cost within Retail and driving a lower operating ratio in Commercial and the U.S.A. divisions. Similar to the organic growth story, the focus here is on finding opportunities to leverage its scale to become more cost efficient in how it delivers fuel to the end consumer. For instance, PKI discussed using automation and optimizing its fleet of ~350 trucks to improve efficiency.
3. Acquisition Pipeline Is Still Robust: PKI's corporate development team, led by Mr. Darren Smart, continues to highlight a robust acquisition pipeline with the company noting ~500 targets representing ~$1+B in EBITDA. While not all of these deals will come to fruition, it does speak to PKI's growth opportunities, especially considering it is the partner of choice for refiners. From our perspective, the key to PKI's roll-up strategy is its ability to see immediate synergies as it is able to use it supply cost advantage through a new banner. PKI estimates that it can realize ~20% synergies in two to three years after a transaction closes. And when looking at the last few deals PKI has done, we see that it remains focused on both transformative deals (i.e. Pioneer) and tuck-in acquisitions (i.e. retail sites in North Dakota). While there have been a lot of headlines around the Competition Bureau challenging some of the Pioneer deal, we believe this will not hinder PKI's growth by acquisition strategy. PKI has just 8% of the Canadian retail gasoline market, suggesting a lot of upside. While the Competition Bureau may look at markets on a micro level, we believe PKI will again prove to be adaptable by divesting of some assets in order to remain compliant if need be. We do not view this as a material hurdle for the company's broader strategy.
4. Summary Of Financial Targets: Below we provide a table highlighting PKI's financial targets. This is generally in line with our expectations which assume only organic growth as we have not baked in any acquisitions in our forecast earnings. At a high level, with PKI's capex running at ~$85MM and it generating 10%-15% ROC, on average, EBITDA should be able to grow by ~$10+MM annually.