Parkland Corporation

Robert Espey – President, Chief Executive Officer Michael Lambert – Senior Vice President, Chief Financial Officer Tom McMillan – Director, Corporate Communications

Derek Dley – Canaccord Genuity Damir Gunja – TD Securities Kevin Chiang – CIBC

Good morning. My name is Tom McMillan.

I’m the Director of Corporate Communications for Parkland Fuel Corporation. At this time I would like to welcome participants to Parkland Fuel Corporation’s results conference call for the first quarter of 2013 with President and Chief Executive Officer, Bob Espey, and Senior Vice President and Chief Financial Officer, Mike Lambert.

After their remarks, there will be a question and answer session. At this time, all lines have been placed on mute to prevent any background noise.

Please note that while talking about our results and answering questions, Bob and Mike may make forward-looking statements. These statements are subject to known and unknown risks and future results may differ materially.

For more information, please review the forward-looking statements and business risk section of Parkland’s first quarter 2013 management discussion and analysis which, along with this quarter’s news release and our unaudited financial statements, can be found on our website at www.parkland.ca, as well as the SEDAR website. Dollar amounts discussed in today’s call are expressed in Canadian dollars and are generally rounded.

I will now turn the call over to Bob Espey to review the quarter. Bob?

Great, thanks Tom. I’m going to get right into a review of our scorecard for the quarter and then Mike will talk about the financial results.

As we talked about at our investor day on the acquisition front, we have been doing very well and the environment is becoming increasingly active, so much so in fact that we are now going to adjust our EBITDA to exclude M&A costs to fairly represent the results of our ongoing business. Subsequent to the quarter on May 1, we acquired Scotsburn Co-Op Fuels, based in Pictou, Nova Scotia.

This tuck-in acquisition will add 7.5 million liters in commercial volumes. The TransMontaigne transaction also received Competition Bureau approval to proceed on May 1 and is expected to close on May 13.

Continued softness in our commercial fuels business environment and a 9 million reduction from our Cango operations due to planned closures led to our base volumes contracting by 13 million liters; however, initial evidence indicates that we are doing better holding our own compared to the market and that we are in fact gaining market share. We are on track in our supply area.

Remember, we are limited from saying too much here due to competitive concerns and confidentiality agreements. Costs are down on a cents-per-liter basis in our base business when Elbow River marketing and M&A costs are excluded.

Unfortunately we saw our total recordable injury frequency creep up in the quarter as we had a few more injuries this year compared with last year. I am confident, though, we will maintain our focus on operating in a safe and effective manner and continue to drive towards a zero injury rate.

I will now turn the call over to Mike to review our financial results.

Thanks Bob. Our adjusted EBITDA for the first quarter was 61 million, a 42% increase compared with the first quarter of 2012.

With the acquisition of Elbow River and as a result of our ongoing M&A activities, as Bob mentioned, we have moved to using adjusted EBITDA to account for the forward contracts that Elbow River Marketing utilizes to manage pricing and foreign exchange risk. We also do not want to penalize ourselves for our M&A activities, which tend to be lumpy and which have increased in recent months, so we have excluded these costs from adjusted EBITDA.

The story this quarter is really about continued strength in refiners’ margin, an unexpected but pleasant surprise of 5 million contribution from Elbow River Marketing, and 4 million in lower operating costs from our strategic cost initiatives. These factors more than offset continued weakness in our western commercial business that is being driven by lower drilling for natural gas.

I want to provide more color around Elbow River. Our concern is that analysts are going to take the 5.3 million that we reported in EBITDA for the six weeks that we have had Elbow and apply this run rate across the year.

Please don’t do that. Analysts shouldn’t be applying a yearly run rate of approximately—or they should be applying a yearly run rate of approximately 23 million in EBITDA that I mentioned at our analyst day.

Now for us, that was really good news because when we negotiated the price, we negotiated a price based on starting at 16 million EBITDA and then when we finally negotiated the deal, it was at 20 so we were pleasantly surprised that they ended up at about 23 million EBITDA. So don’t take that 5.3 million that we reported in the first six weeks and multiply it by eight times.

All that said, what a great start. We’re obviously very happy with the way Elbow River has performed right out of the gate.

Now I’m going to move to the balance of the review and all the metrics in terms of the quarterly. Distributable cash flow is our cash provided by operations minus maintenance capital, excluding changes in our non-cash working capital.

Distributable cash flow increased 73% to 45 million in the first quarter of 2013 compared to 26 million in 2012. The increase compared with last year is primarily due to an 18 million increase in adjusted EBITDA and a 3 million decrease in maintenance capital, partially offset by a 3 million decrease in proceeds on disposable of property, plant and equipment and a 1.5 million increase in acquisition-related costs.

As a result, our payout ratio decreased to 39% in the first quarter of 2013 compared to 64% in 2012. We continue to use our cash to pay for acquisitions like Elbow River Marketing, pay down debt and strengthen our balance sheet.

Net debt at the end of the quarter was 308 million, up from 277 million at the end of 2012 as a result of our acquisitions. Net debt to EBITDA was 1.41 times at the end of the fourth quarter.

As a reminder, in the fourth quarter of 2012 net debt to EBITDA was 1.39—sorry, I misspoke there. It’s 1.41 at the end of the first quarter versus 1.39 at the end of the fourth quarter.

The increase in the first quarter of 2013 is due to Parkland acquisitions and the seasonality of our working capital requirements related to commercial activity. Our interest coverage ratio at the end of the quarter was 8.86 compared to 3.67 in the first quarter of 2012, reflecting the continuing strength of our balance sheet.

Now rather than review the business drivers in this call, I’ll direct callers to the business driver update that we produce on a monthly basis for investors. The business driver update for April is hot off the press and available on our website.

You can subscribe to this service on our website at www.parkland.ca. Now I’ll turn it back over to Bob.

Great, thanks Mike. At our analyst day on April 15, we reviewed our plan and progress towards our aspirational goal to double 2011 normalized EBITDA by 2016.

Our plan is to acquire 55 million in EBITDA and then reap an additional 70 million by improving existing business. Some of you have asked us to normalize 2012.

Unfortunately, we can’t do this without giving away our refiners’ margins, profit, and because of confidentiality in that agreement we’re not allowed to do so. So just quickly reviewing our five-year growth strategy again, which we launched in 2011 and gave an update in our recent investor day, our five-year growth strategy is focused around three pillars.

One is to grow the business to 7 billion liters or 10% of the Canadian downstream market. The second is to ensure that we have a material advantage in supply, and then the third is to make sure we are the best operator in the field so that we’re safe, easy to do business with, and have a low cost transaction plan.

As you saw earlier in the Penny Plans scorecard, we’ve made great progress on all three of these through the year. So as most of you will be aware, we’ve been very successful on the growth front by making a number of accretive acquisitions.

Elbow River EBITDA will be closer to 23 million on an annual basis; however, bear in mind that we closed that deal on February 15 so this number will need to be prorated for 2013. Sparling’s EBITDA will be closer to 6 million on an annual basis.

Please note that Sparling’s high season is between January to March. The remaining portion, though, generates approximately 2 million in EBITDA.

Our total acquired EBITDA is likely to be closer to 30 million even before synergies. All we have accounted for so far in this presentation is 27 million.

At the end of this year, our supply contract with Suncor wherein we participated in refiners margins will come to an end. This contract, while very lucrative in recent years, has been very volatile over it’s lifetime; for example, the contract at times was sub-economic relative to our other supply contracts as recent as during 2010.

There are two questions we get when it comes to this contract: will we be able to find the volume? The answer is yes.

The other question is what will happen to the economic benefit? In 2009, we set out to replace the average economic benefit of this contract, excluding outlier years, and we’ve made significant progress on the three supply pillars by negotiating supply contracts that are appropriate to our size and scale, managing our supply carefully, and leveraging our supply infrastructure.

We are ahead of our target for sustainable profit commencing in 2014. Over the past few months, as we reviewed at our investor event in April, we have done much to build our supply and infrastructure capabilities and resources.

Elbow River Marketing provides us with a set of logistical sourcing and marketing skills and relationships that we didn’t have before. TransMontaigne provides us with a strong supply position and strategic supply infrastructure in Quebec.

These developments are significant beyond the earnings they bring. They give us a larger platform for growth and we are excited about what that means for the company and for our investors.

Now this next chart is one of my favorites that we showed at the investor day. This shows the EBITDA growth that we’ve achieved vis-à-vis our forecast, and so as a result of our progress on the three pillars of our strategy – growth, supply, and operate – we’ve achieved roughly 45 million of our $125 million goal since 2011, and we presented less than about a year ago almost to the day at our first investor day when we unveiled the Penny Plan.

This stems from approximately 27 million in acquisitions, 7 million in acquisition synergies that we have identified, and 11 million through our strategic cost initiatives, and we’re feeling pretty good about the number that we put down because, as Bob just mentioned, those numbers are actually a little bit higher than we’d built into this chart. On the next slide, during the analyst day we introduced the forecast that you see here which reflects our expectations for 2014 to 2016.

Now you know we didn’t give guidance for 2013 as the volatility of the refiners’ margins makes it difficult to provide a forecast with any accuracy. As you can see, we’ve incorporated a $10 million hit into our commercial marketing division to account for the current headwinds in this area of our business.

Overall, the feedback from the investors and analysts about the event was pretty positive; however, shortly afterwards our share price took a bit of a beating and I’ll review our current understanding of what happened following our investor day a little bit later in the presentation – actually, on the next page. So you’ll see on this next page the share price had a bit of a rise up, and then of course right after the quarterly results that we gave at the end of the year and then of course after our analyst day, it took a bit of a dive.

We think part of our share price performance following the analyst day was related to a perception gap amongst some investors that may have not had a strong understanding of our earnings potential and the impact refiners margins have had on our results since 2011. Now, the good news about the analyst day is we addressed this gap and reset expectations among those investors that were previously unfamiliar with our story.

What we’ve discovered since our investor event is that in large part, those investors coming out of the stock were primarily from the U.S. Many expressed a dim view of Canada’s macroeconomic outlook in general and have been actively exiting their positions in many Canadian public companies other than Parkland.

To date we’ve done little to reach out the U.S. institutional investors and we now understand that active outreach is important, and that’s our plan is to have an outreach for our American investors.

Now I’m going to turn it back to Bob to conclude.

Great, thanks Mike. In conclusion, we continued to make great progress on our five-year growth plan.

We have delivered on many of our objectives and we are well positioned to continue this track record of accretive growth for our investors. I would now like to open the call for questions.

Investors listening in to the webcast can also submit their questions through the webcast portal and I’ll read those questions out as they come in.

Yeah, hi guys. Just wondering if you could give us an update on what you guys are seeing right now in terms of volumes, particularly on the commercial side.

Have we seen a little bit of a pickup since Q4 in Q1, or are things still a little bit weak on the oil patch?

Yeah, again our business is east-west, so in the west it has been soft; in the east, however, we saw some good year-over-year volume growth. Again, in the west we’re still—the economic activity is down.

Okay, great. Can you comment on the acquisition environment?

Obviously it sounds like you guys have a robust pipeline of acquisition targets in front of you. What are you guys seeing in terms of multiples?

Can you just remind us again of sort of your internal targets in terms of multiples that you’d be willing to pay?

Derek, you know, it’s funny – we haven’t changed our view since the investor day. One of the reasons we want to keep the balance sheet as strong as it is right now is we do have some potential acquisitions right in front of our nose, I think we said at the analyst day.

But we don’t overpay, and so there is some good negotiating tension going on. The multiples that we have achieved in the three or four that—actually Bob just announced the small little tuck-in that we did subsequent to the quarter end.

If you add them all together and you add the EBITDA that we’ve acquired, we’re actually in the four to five times area. I think in round numbers, it added about 30 million, maybe a little bit more than 30 million, and in round numbers we paid just over 120 million for the EBITDA we’ve acquired so far.

Obviously the seller wants to get more and obviously we want to pay less, but most important thing is we want to get the quality of earnings that we’re happy with and identified synergies to go forward.

Okay, thanks. And then just finally in terms of your cost reduction initiatives, the Penny Plan – on the operating costs, I believe your target was $0.036 a liter by 2016 and you’re already well under that, even if we exclude the additional liters from Elbow.

Just wondering – is there room for that go lower? Is that something you guys might be looking at adjusting or relaying a new goal to the market going forward?

Yeah, we have made great progress on that and certainly commend our operators for the work that they’ve done to achieve that. It’s interesting – one of our key levers here as we grow is scale; however, as we grow, particularly on the retail and commercial side, we will be adding operating costs in as we go, so.

And as we add various businesses in, we’ll adjust the targets depending on the mix and what those businesses bring to us.

That’s great. That’s very helpful.

Thanks a lot. Great quarter.

Thank you, good morning.

Hey Dam.

Just wondering if you guys can elaborate a little bit on the Elbow outperformance for that short period. Was there something opportunistic that came up for them or--?

I mean, it was a strong quarter for that group. One of the big drivers was crude, so they’re very active in the space and have been growing that side of their business, so that was a key contributor; but that being said, the LPG business was strong as well in the quarter.

Okay, thanks.

Hi, congratulations on a good quarter. First off, can you just provide some detail as to why the big increase, either year-over-year or quarter-over-quarter, in your accounts receivable?

I think you mentioned some working capital issues with commercial, but with commercial volumes down year-over-year I’m surprised your receivables gapped up as they did in Q1.

Yeah Kevin, it’s interesting. I’m glad you’re raising it because I think it allows me to actually talk a little bit about the movement in the balance sheet.

You’ll also see movement in accounts payable. Our working capital, we’re actually pretty pleased with what we did in the quarter, and as you can imagine when you acquire a new company that requires working capital – and that’s Elbow River – you’re worried that are they going to manage it as effectively as they projected that they would, and will we continue to have our focus on our working capital.

We still continue to have that focus on working capital because it affects capital employed, and the big bump basically is Elbow River. Elbow River has accounts receivable and accounts payable.

They have both sides because they do both sides of the transaction. They don’t take—as a matter of fact, we’re really pleased with the credit risk management they have.

They haven’t had a credit risk write-off for quite a few years and they will continue to focus on that. They’ve also managed their working capital in the first quarter quite effectively, actually being cash positive on the working capital basis in the first quarter.

So everything we see about that management team, we like; and it’s also reflected on the balance sheet.

And with the closing of TransMontaigne in May, should we expect—because I believe there is significant working capital with that. With that acquisition, should we see a bump up again in accounts receivable and accounts payable as you absorb that company?

Yeah, you should; and actually I think what we said at investor day is that we acquired that company essentially for the working capital. So you’ll see a working capital bump.

We’re already reviewing their accounts. Keep in mind – we haven’t closed yet and we’re not allowed to actually manage them until we close, but we already have a sense of which accounts we may not want to keep just because of the dating.

Our team is pretty good at that, and so we’re looking forward to managing that working capital down. But you’ll see—again, I’m glad you’re raising the question because you’ll see in the quarter a bit of a bump related to TransMontaigne, but we’ll manage that down.

Perfect. And just quickly – you’ve done a great job on the acquisition front, but I guess on the organic growth front you’re down just over 42 million liters over the past five quarters here.

I know your goal is to add roughly 100 million liters a year. When can we start seeing a turnaround in that organic growth, and at what point does it become too much of a gap to make up given the market seems to be growing, based on your estimates, roughly 2 to 3% a year?

Should we start seeing that turn around in the back half of this year, or is it more of a 2014 story?

Yeah, so just to put some color on the shortfall in the last 12 months, the key drivers there are twofold. One is on a year-over-year basis, we did shut Cango sites, so if you carve those out our retail business grew at—our corporate network grew at industry through that time period.

So we do monitor our business units on a same store sales or same branch sales basis to make sure that they are growing year-over-year. In the west, again against industry, so we do monitor the industry through StatsCanada, we carve out road transport on the commercial side because that’s a sector we generally don’t participate in.

We have been consistent with the market in that area. So from a market perspective, which is what we measure ourselves against, we are pleased that we are getting the growth that we’ve set out to achieve.

Again, the drivers are closure of sites and then a softer economy in the west. We expect that to pick up.

As the economy recovers in the west here, we’ll see some lift there, and then as we flow through the closures of the Cango sites we won’t see that impediment.

Perfect. That’s it for me.

Thank you.

Great. Well thank you very much for listening in today, and look forward to connecting at the end of next quarter.