Parkland Corporation

Tom McMillan - Director, Corporate Communications Bob Espey - President and CEO Mike Lambert - Senior Vice President and CFO

Carson Tong - RBC Capital Markets Kevin Chiang - CIBC Derek Dley - Canaccord Genuity Bill Chisholm - MacDougall Jason Zandberg - PI Financial

Good afternoon. 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 Second 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 Forward-Looking Statements and Business Risk section of Parkland’s second 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 have Mike review our financial results followed by an update on our growth strategy and progress towards that. As many of you know, during the second quarter we acquired two companies, TransMontaigne, which is a wholesale fuel business in Québec and Ontario, and Sparling’s a propane business in Southern Ontario.

Our plans to integrate these acquisitions are tracking according to plan and results from these operations are either in line or above our expectations. Year-to-date, our based volumes are down 57 million liters due to continued softness in the commercial fuel business in the West and an 18 million liter reduction from our Cango operation due to plant closures.

I do want to assure our shareholders that we in the balance of the business we are tracking strongly on our -- on an organic growth base. Our Eastern commercial business is up, our lubricants business is up year-over-year, our now wholesale business is up over year and in our core retail markets we are -- we continue to track that industry.

On the supply side, we continued to track to plan on our supply initiatives. Also please remember that we are limited from saying too much here due to competitive concerned and confidentiality agreements.

Our costs are flat 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 second quarter.

We had a few more injuries this year compared with last year. We will maintain our focus on operating in a safe and effective manner and continue to drive towards a zero injury rate.

I’ll now turn the call over to Mike to talk to our financial results.

Thanks, Bob, and good afternoon, everyone. Our adjusted EBITDA for the second quarter was $58 million, a 7% increase compared with the second quarter of 2012.

This is a reminder from last quarter we have moved to -- after using adjusted EBITDA to account for the forward contract that Elbow River Marketing utilizes to manage pricing and foreign exchange risk and also to exclude the cost of ongoing M&A activities. Now while refiners margins were weaker this quarter than a year ago, Parkland’s supply initiatives buoyed earnings from this area.

In addition, acquisitions contributed more than $7 million of EBITDA. These factors more than offset continued weakness in our Western commercial business that is being driven by lower drilling for natural gas and retail margins that return to normal after a very strong year in 2012.

On the next chart, distributable cash flow is our cash provided by operations less maintenance capital, excluding changes in our non-cash working capital. Distributable cash flow increased 10% to $42 million in the second quarter of 2013, compared to $39 million in 2012, primarily due an increase in adjusted EBITDA.

As a result, our payout ratio decreased to 43% in the second quarter of 2013 compared to 44% in 2012. We continue to use our cash to pay for acquisitions like Elbow River, pay down debt and of course strengthen our balance sheet.

Net debt at the end of the quarter was $246 million, down from $308 million at the end of the first of 2012. Net debt-to-EBITDA was 1.13 times at the end of the second quarter.

Our interest coverage ratio at the end of the quarter was 9.3, compared to 5.9 in the second quarter of 2012, reflecting the continuing strength of our balance sheet. On next slide, we show refiners margins which in addition to wholesale fuel sale are driver of supply and wholesale gross profit.

The differential between Canadian crude prices and Brent crude prices has weaken, thereby lowering refiners margins during the month of July. As Bob mentioned earlier, the supply team continues to make progress on several initiatives that are expected to increase, the proportion of sustainable profits in this business unit.

Rather than review the remaining business drivers detail during 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 July will be sent out as soon as the rig utilization data is available for July.

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

Great. Thanks Mike.

I’ll now review progress on our five-year growth strategy or Parkland Penny plan. As a reminder, our aim is to improve the profitability of our business by $0.01 per liter as we continue to grow to 7 billion liters by 2016.

The plan has three pillars. The first is to grow to 7 billion liters or roughly 10% of the Canadian refined products marketplace through both organic growth and acquisitions.

Second is supply. They have a supply advantage in the marketplace and to leverage our scale and volume to make sure that we have the best supply economics in the business.

And then the third is to be good operator. To make sure that we operate safely, we’re easy to do business with and have the lowest-cost transaction platform, and to enable an additional third of the $0.01 contribution through that pillar.

On of the areas that I talked about in the scorecard is we haven’t -- we’re light on our organic growth. And again when I look across the business, we are making good progress on most fronts.

However, we’re not standing still. We’re continuing to push internal initiative to make sure that we have fresh and new ideas that we can take to market and continue to rally our sales people around and grow the business.

I’m really pleased to announce the new agreement with Chevron in BC where we have the retail marketer agreement which we signed with Chevron in the quarter in British Columbia, which enables us to distribute that brand in British Columbia. And for those of you who we talked to in the past, we’ve highlighted that one of our weaknesses is that we didn’t have access to a major refiner brand in this region of British Columbia and that gives us access to it.

And we expect that to enable good strong, robust growth in our dealer channel as we go forward. The other area we did highlight previously was the Ready to Roll offer which is an in-fleet fueling offer which we launched about 10 weeks ago in Toronto.

We've seen some good traction there. The growth that we’ve achieved to date has exceeded our projections and we’re adding additional capability in Toronto and now planning to expand that into a market in West Canada this year.

So again two examples of where we’re continuing to push to get -- two examples of many areas where we got initiatives in place to make sure that we are the leading, independent in the marketplace and get traction on our organic growth on a year-over-year basis. During our analyst day, we introduced the forecast you see here, which reflects our expectations for 2014 through 2016.

We did not give guidance for 2013 as a volatility of the refiners margins makes it difficult to provide a forecast with accuracy. There has been no change to our forecast for 2014 and beyond at this point.

In conclusion, we continue 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’ll now open the call up for questions.

Hi. My first question is with regards to the acquisition pipeline and can you give us any color on recent transaction multiples.

Are you still seeing three to five times EBITDA as a viable purchase price range? And my second part to that question is, if you're still looking to do more acquisitions this year or are you going to look to reload in 2014?

Yeah. Certainly I mean, as we’ve always indicated and still will our pipeline of opportunities is robust.

And we do see a lot of activity in the space. And we can project when those will land, as there are many facets for doing a deal which impact the timing.

Now, in terms of pricing, now that generally we’re seeing pricing, we’ve paid previously in the market. At this point, we don’t see inflation.

My second question is with regards to the Ready to Roll, how should we think about the bottom line financial impact if it were to be rolled out successfully either across Toronto, western Canada or across Canada? In other words, how big can this potentially get?

Yeah. That’s a very good question.

At this point, the impact isn’t that significant because it’s really in one location. As we rollout the pilot and pilots within other areas, that will give us more confidence to actually come back with some concrete figures around it.

At this time, we can’t provide that.

And Carson, one other thing that we think is really -- very positive thing about the concept is it’s making better use of our existing assets because we can direct the Ready to Roll concept that of our existing branch. What we like about the proposition is that it -- the news service line is that it continues to add -- it really plays to our strength on the delivered distillate side and allows us to add more value to our customers.

So we can actually, by being able to deliver fuels directly into their vehicles, they can eliminate onsite storage. They eliminate shrink risk in terms of shrink of product.

We’ve got a new information portal that we’ve launched concurrently with it, gives them custom information by vehicles so that they can look at the fuel consumption by vehicle. There is a lot of other features to the offer that we’ve been able to bring to that and features that we’ll be able to roll out in other areas of business particularly the information piece.

We’re piloting a new customer portal that we anticipate rolling out to more customers next year some time.

Okay. Thanks guys.

Thanks Carson.

Hi, thanks. Maybe just following on that last question there, how big is the market size for this in-fleet refueling.

I thought I read one of the major competitors calling this market roughly a billion plus liters. Is that how you see the market in terms of the opportunities here?

Yeah. I mean it’s the market were competing with is the card locks.

So it’s the fuel transportation side of the business which is the largest consumer of diesel in the market place. So if you look at road transport and the main channel there is the card locks and we do participate in card looks in our rural network.

We don’t haven urban card lock network. So we’re competing directly with those card locks.

If you then carve out sort of fleets that would be target in that market, it would be delivery fleets, fleets that are coming back to home based every night and would need fuel every night. So when you sort of define it as that, it's in the 1 billion to 1.5 billion liters.

That would be a good estimate. So, it’s a big market and a big opportunity and right now, like I say, our pilot site has performed above expectations.

And apologies if you mentioned this already, but how long will it take during this call it ramp up stage before you're fully up and running? It sounds like Toronto is doing well.

You mentioned offering this product out west. How long before it's offered throughout your whole entire network?

At this point, we’re using the pilot to learn. And once we've completed the pilot in Toronto and look at another stage in the West, will be in a better position to chart out the full roll out across our network.

Okay. And then just turning to the organic growth initiatives and some of the comments you made, it sounds like some of this is self-inflicted, given some of the site rationalization.

When do you think that's going to be over with so that it's no longer headwind?

So, it is over, so we’re just rolling it through now on a year-over-year basis.

Okay.

Closures are done. Now do understand that in a retail network and we've talked about this previously.

one of our any good retailer is fanatical about network management. And so we're always closing and opening site.

It’s just that when we took over the Cango network, there were far more closures than we would normally do after seeing a year-over-year decline.

Okay. And maybe I’m not sure if you can answer this, but given the tragedy out there in Quebec and it seems like greater focus on fuel being transported by rail, any read through here or any insight in terms of what that means for Elbow River, given that is a key part of their business overall?

Are you fearful that there'll be more regulation that will impact margins there or just overall volumes that get pushed through that network?

Yeah. So, that was a horrific accident and certainly at Parkland our hearts go out to the community that was impacted.

The whole industry is waiting for the results of the investigation and that will really drive what changes will happen to the industry? So, we’ll have to wait to see what the full impact is.

Certainly in the short term, we haven’t felt an impact on our business.

Okay. Perfect.

That’s it from me. Thank you.

Yeah. Hi, guys.

Just looking at your guy’s commercial performance, it's quite a bit better sequentially in terms of volumes, adjusted down 1%. This is in comparison to a 15% decline in overall drilling activity.

Can you comment on where the delta was there? Are you guys gaining market share?

A very small part of it was the Ready to Roll, but what other initiatives do you guys have going on?

We’ve seen some goods strong sales in our eastern business. So that’s certainly helped and our lubes business has performed well year-over-year.

Where we are still off is in the west and that is impacted by lower drilling activity.

Okay. Can you quantify that?

I mean, how much, what percentage decline did you guys see in the west?

That, I mean, I don’t have that number off-hand, but it is certainly, we have seen a decline in the west, again offset by volume increases in the east.

Carson, are you looking for…

It’s Derek

Okay. It’s Derek.

So, Derek, in round numbers about 20% decline in the West. And what that is when you’re looking at the rig counts, the rig count is a little bit mitigated by oil, so gas drilling is down a lot and we tend to service the gas drilling -- drill rig.

So the 20% decline in the west was offset by an increase in each.

Okay. Thanks for that color.

And just with your agreement with Chevron, what’s the percent or what number of new dealers could this represent for you guys, new dealer adds to your network?

Again, it’s early days in the relationship, as unlike other relationships, like the one that we have with Imperial Oil, where we actually acquired a dealer network, that’s not the case here. So this will be organic growth on a side-by-side basis.

And the team is excited to get it. It’s difficult to anticipate the exact growth rate of that, although, again, we do anticipate there’d be growth through that channel.

Okay. That’s great.

Thank you.

Yeah. Good afternoon.

Hi Bill.

Okay. I guess a question on the risk management aspect.

I'm sort of surprised at the size of the risk management items this quarter.

Okay.

$11 million hit and $14 million liability on the balance sheet.

Okay.

Could you elaborate on those things a little bit?

Well, thanks for the question, Bill. I was hoping somebody would ask it, because it is -- it’s a big complicated, if you don’t understand the Elbow River business.

And so I’m going to use the question as an opportunity to explain it a bit. One other things that we like about the Elbow River team is they don’t -- they mitigate the risks wherever possible, and so I’ll give an example.

So let’s say they are moving a commodity, they’ve got a buyer and a seller. They buy the product today and they sell the product to a customer that it takes 30 days to get to.

What they’ll do is, they get into a contract that hedges that commodity 100%. That transition or that transportation may cross over a quarter end in which case in this quarter end many of those transactions crossed the quarter end, and we have a market-to-market policy, which means the hedge instruments are all mark-to-market, whereas the underlying commodity doesn’t actually get materialized until it reaches the destination or the customer.

And so we’ll get this kind of lumpiness every quarter. And so I just wanted to alert everybody and that’s one of the reasons that we’ve identified adjusted EBITDA to exclude these kinds of adjustments.

Okay. So the -- most of the liability or risk is in both -- risk is Elbow River as opposed to the regular refining side of the business?

Yeah. Most of it, I mean predominantly.

Okay. That’s fine.

The other question on Elbow River itself, certainly appears to be doing quite well with, like gross profit about $25 million in the first five months of the year you've had it, $15 million in the latest quarter, is this level sustainable?

It’s not just gross profit but…

Yeah. Yeah.

Gross profit. Yeah.

Gross profit.

Yeah. Yeah.

It’s interesting, it’s funny, I think I’ve said at previous calls, lot of times when you make an acquisition you have buyers remorse, we’ve got the opposite. When we first negotiated this transaction, we thought it would be around EBITDA of about $16 million, they ended up the year last year about $20 million, and then of course, they had a nice surprise in the first quarter.

And we said to anybody that once we model them that in new model you should project $20 million for the year. I think today we’re feeling even more optimistic than that, and so we’d expect that they’ll do better than that this year.

We don’t know how high is high because they are in a communities market, it can turn any -- at any time. But right now we’re feeling pretty good and we think we’re going to meet the expectations of run rate of about $20 million EBITDA.

Yeah. Very good.

They expanded their fleet or they still with the 1,200 so cars?

Still with 1,200 cars.

Okay. Okay.

On the retail side, the margins obviously are down, any particular markets where that is more pronounced or is that right across the country?

I think you need, Bill, let’s talk, you need to take it in the context of last year and last year the margins were exceptionally high. So if you look at the way it track retail margins, just look at MJ Urban at that website and you’ll see on an annual basis that they track, we were back to normal in the last quarter.

So it really was again an exceptional quarter than the previous year.

I guess here in Ontario, Bob, where you convert some of the stations from Cango to Race Trac, is there any impact on the resulting volumes after you make the conversion to the brand name?

Generally not, no, the Race Trac is our fighter brand. It’s really used, again you get a brand into the markets, it wouldn’t have, it would be equivalent to Cango, I would think from a brand equity perspective and we have taken a few of those Cango sites branded them to the SO brand and there we generally do tend to get less, we get two things, we get the volumes lift and some -- a lift in mix as well.

Okay. The Elbow River acquisition, obviously, is doing better than you expected and did you say the TransMontaigne in Montreal was tracking equal to or ahead of expectation?

It’s tracking at expectations. That’s a -- it’s a large wholesale business.

The integration is on track, we did have a bit of a pump and we first went to integrate them on getting some of the AR moved across, making sure that we were invoicing properly. But we are through that team.

Our internal team did a great job doing that and we certainly got those employees and the operation fully integrated in there.

So you are able to retain most of the customers at there….

Yeah. In fact, we have actually exceeded our expectations in terms of what we were able to retain.

So we factored in some potential loss and the bulk of that did not happen.

Okay.

One of the challenges with that business, in some cases we actually shared customers and there is always a fear that strategically a customer maybe looking for two or three sources of supply, and again, for the most part that volume is transferred over and we have lost any volume.

Okay. Very good.

And I guess, I see you maintained the DRIP program so that acquisition pipeline must be quite robust?

It is a very good observation, Bill

Okay. You are going to be debt free pretty soon, if you keep this up.

Okay. That’s it.

Good stuff.

Thank you, Bill.

Yeah. Just wanted to get stack on to Bill's comment there in terms of long-term debt reduction, you made a substantial reduction this quarter.

What is the outlook for the balance sheet, do you want to continue to pay down debt and to what level would be where you want to sit?

And, yeah, thanks Jason. Actually, I think, it’s a great question for us to talk more about.

Our balance sheet and what we said on the -- our Analyst Day is, we will guide, especially for those of you who would like to have financial models. You should guide long-term, that will be between 2 to 3 times in terms of net debt-to-EBITDA and we are well below 2 times.

But it is in our intention to fix the balance sheet, meaning, get the leverage up to about between 2 to 3 times, as long as we see good potential acquisitions in front of us and right now we do see good potential acquisitions in front of us. And so we like that we have a balance sheet with low debt.

So we have debt capacity to make the acquisition.

Well, make the assumption then that any acquisition in the near-term will be funded by debt facilities?

Yeah. That will be our intention.

The only caveat to that would be that sometimes we have sellers that want to take some of our stock. They obviously see the opportunity.

There is also a potential patch deferral. And so we negotiate some then to take back on in terms of our stock and it, like Bill said, it doesn’t help us increase our debt.

So that is the only caveat. But we have the ability to pay for sizable acquisition with our balance sheet.

Okay. And then just last question on risk management just to clarify that, you took the $11 million -- sort of $ 11 million (inaudible) as you mentioned that was sort of contracts were crossed over.

So in my, to assume that that would be reversed in Q3, we’d actually see a gain all things else equal?

Actually, you won’t see gain, yeah, keep in mind these are mark-to-market at quarter end. What you will see is that the underlying commodity essentially will offset this.

So when the sale, actually the transaction is completed, it will offset this. And so next quarter end, whatever mark-to-market hedges are still in place that is the amount you see at quarter end, could be going the other way or could be also sale out.

Okay. Great.

Thank you very much.

I think we, well, some investors are unclear, it’s actually just an artifact of catching in sort of between the transaction and eventually net to zero.

Yeah. It does net to zero but it could be in the middle of the quarter.

That’s right.

Great. Well, thank you very much for joining our quarterly conference call and we look forward to talking to you next quarter.