Parkland Corporation

Tom McMillan - Director, Corporate Communications and Investor Relations Bob Espey - President and Chief Executive Officer Mike McMillan - Vice President and Treasurer

Kevin Chiang – CIBC Derek Dley – Canaccord Genuity

Good afternoon. My name is Tom McMillan and I am the Director of Corporate Communications and Investor Relations for Parkland Fuel Corporation.

At this time, I would like to welcome participants to Parkland Fuel Corporation’s Results Conference Call for the Third Quarter of 2014 with President and Chief Executive Officer, Bob Espey; and Vice President and Treasury, Mike McMillan. After their remarks, there will be a question-and-answer session.

Please note that we are having technical issues with our newswire provider. They have been unable to issue the release that they were requested to release at 3 PM Mountain Time and 5 PM Eastern Time.

So, for those that have not received the release, we are anticipating them getting that across the wire any moment now. 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 risks sections of Parkland’s third quarter 2014 Management’s 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.

And before I turn it over to Bob, please note that I have posted the Management’s Discussion and Analysis and the financial statements for this quarter to our website for those that are on the call and are looking for materials. I will now turn the call over to Bob Espey to review the quarter.

Bob?

Thanks, Tom and thanks for joining everyone. In this third quarter, I am very pleased with the progress of the business post the expiry of our Suncor contract.

Although the adjusted EBITDA of $35 million is slightly below where we would have liked to have been versus our guidance, we have had some very strong performance across the business. Particularly our retail business in our company network compared to 2013, we have had some phenomenal same-store sales increases 2% year-to-date and our average convenience store sales has increased in the 10% range.

Our average volume per site across the network is up 2% on an annual basis and these are all great signs that we are achieving our organic growth targets within this segment. On the commercial side, we did see some growth year-over-year 10 million liters in the quarter and our Elbow River group has also had significant increases on the amount of volume that they moved in the quarter year-over-year, which calibrates back to the fact that we started to increase the number of railcars that we have.

So by doing that, they were able to move another 285 million liters of product in the quarter. Our acquisitions are all performing on track, particularly SPF Energy, is exceeding our expectations at this point in terms of volume growth.

And the impact that we have been able to – the benefit we have been able to give that business through our supply capability in Elbow River has exceeded expectations at this point. I am also very pleased to again report that we announced the largest acquisition in our history.

Pioneer Energy was certainly a big story this quarter and I will go over some more details about Pioneer later in the presentation. At this point, all of our supply remains on track and we are certainly hitting the targets that we have set out.

In terms of headwinds, the business experienced headwinds in three areas. One is in our wholesale business, we continue to see margin compression in that business in certain markets, where again in some markets we have chosen to defend and others we haven’t, but we do see that as not a long-term trend.

Although we did grow 10 million liters in our commercial business, it’s a little slower than we had anticipated. So, we would expect it to have more volume growth coming out of the summer and that can be attributed to softening in some of the industrial activity in Western Canada.

However, in the East, we have seen strong growth within that segment and certainly have exceeded our expectations. And then the third area where we are experiencing some headwinds is on the crude side of the business, the differentials narrowed somewhat for Elbow River and the Elbow River marketing team.

On the operational side, we have done very well with lower OpEx and MG&A on a per liter basis as the business has continued to manage costs carefully. The only exception again with Elbow River with taking on more railcars in the short-term we have seen the OpEx go up somewhat to take advantage of growth opportunities and high-grade their fleets.

The final thing is on our health safety. We have continued to make great strides on our health and safety in the business.

Our lost time and total recordable injuries are down well below our target for the year and certainly speak to the strength of our operations and a lot of the initiatives we rolled out earlier this year with respect to the health safety and the environment. So, all in all, a good quarter.

I will turn it over to Mike McMillan. Mike is our VP and Treasurer.

He will go over the financial highlights. So, over to you, Mike.

Great. Thanks very much, Bob.

Parkland’s adjusted EBITDA was $35 million for the quarter. And as we mentioned although this was $6 million lower than our seasonal EBITDA contribution estimate, we really are very close to where we thought we would be at this point on a year-to-date basis, and we will demonstrate this further shortly.

The headwinds that Bob just covered again are really three things that you’ll notice in the waterfall chart. First, competitive margin compression in our wholesale division.

Second, slower growth in our commercial segment than you expected and crude differentials narrowing in the quarter for Elbow River marketing team. That being said, if you do look at the waterfall chart, you will see that both retail and commercial are ahead of last year.

The SPF Energy business delivered $6.1 million of EBITDA in the third quarter, you’ll notice that in the acquisition column, which is green. Retail EBITDA was up for the quarter as a result of continued success in growing our same-store fuel and merchandise sales in the company’s retailer-operated gas station network and slightly lower operating costs.

These were partly offset by lower volumes from our dealer business. If you look at the commercial segment, commercial EBITDA increased year-over-year due to increased propane sales and lower OpEx and MG&A costs.

These were partially offset by a decrease in low margin volume. As you would expect, supply and wholesale EBITDA was down again this quarter compared to last year, primarily due to the end of the refining margins – refiner margin contract with Suncor.

While our supply initiatives are tracking very well, they were partially offset by the competitive margin compression in wholesale that began in the second quarter and became dominant – a dominant theme here in the third. Excess refine product in certain supplier, which is currently being aggressively marketed through the domestic channel as well.

Corporate costs increased by 0.7 year-over-year, and this is really mainly to handle growth and integration activities. Turning now to the year-to-date picture.

Overall, you would say that we see good performance of the entire organization on a year-to-date basis. In retail, again same-store sales are tracking ahead of plan and leading the industry with same-store merchandise sales growing in excess of 9% year-over-year.

Commercial volume has increased by 10 million liters year-over-year, despite some of our Western markets experiencing continued economic softness. As expected, the reduction in EBITDA due to the end of the refiner margin contract and slightly higher cost in our corporate segment related to the growth and integration activities are currently taking place.

Basically we would sum up by saying we're right where we expected to be on a year-to-date basis, and I think you’ll see this clearly on the next slide. If we apply our seasonal EBITDA contribution estimate to our guidance of $188 million in adjusted EBITDA, you get the top bar or Parkland’s 2014 full year forecast.

If we look at how the actuals have stacked up so far in 2014, represented by the second bar, you’ll see that the first quarter – in the first quarter we were ahead, the second quarter we're even, the third quarter we were behind our forecast. On a year-to-date basis, our adjusted EBITDA was $132 million at the end of the third quarter compared with $133 million anticipated by our forecast.

So we are currently tracking – on track with our guidance and despite some headwinds we are comfortable with the guidance as it stands. At this point I’d like to take a moment to review some the macroeconomic themes as we head into the fourth quarter.

We have seen a decline in crude pricing, and we have witnessed this recently, essentially the impact there is it reduces our value of inventory levels, but also you’ll notice in our MD&A, this tends to have a positive impact on Parkland’s marketing business. These two impacts tend to offset each other.

Differentials between the North American crude benchmarks have recently contracted and shown volatility in the last few weeks. These differentials, which drive the crude by rail business, are returning to what we would consider normal levels.

As you know, Elbow River marketing trades in a diverse portfolio of products with their history of finding and exploiting emerging arbitrage opportunities, we're confident that the business will have continued success. I’d like now to review some of the key metrics in our financial highlights for the quarter.

On a year-to-date basis, year-to-date we were – we are where we expected to be from a payout ratio and a distributable cash flow perspective. It’s important to note that seasonality and significant increase in acquisition costs related to our pending acquisition of Pioneer Energy played a role in moving our third quarter payout ratio upwards.

Given the importance of this acquisition to Parkland, the long-term accretion to our shareholders, we're not concerned about this blip of 117%. But again on a year-to-date basis that payout ratio at 70% is tracking well within our guidance.

More information on distributable cash flow is also found on Page 20 of our MD&A, where you will find that we have updated the table to provide greater visibility of what goes into this ratio. Our balance sheet remains very strong, with a net debt-to-adjusted EBITDA ratio currently sitting at the low end of our target range, between 2 times and 3 times.

Many of you will note from today's press release that we have elected not to force the conversion of our Series 1 Convertible Debentures that mature on November 30. Even so, with a conversion price at $14.60, we expect most, if not all of the debentures to convert in November.

If we assume the vast majority of the debentures convert, and after we provide the total consideration for Pioneer Energy, our net debt-to-EBITDA ratio will be comfortably in the middle of our 2 times to 3 times target range. At this point, I’m going to pass it back over to Bob.

So, I’d just like to – thanks Mike. I want to add one thing around our payout ratio, just to clarify that that number per Mike's comments, it does include our risk management in our acquisitions.

And as you're aware with the purchase of Elbow River, our risk management does tend to bounce around a bit, but it does not net itself out over the course of the life of a trade that we have on the books. So if you back that out, the payout ratio for the quarter is really within a comfortable range at 73% and on a year-to-date it's 59%.

So those are well within the areas we’ve have targeted at this point in terms of the Penny Plan, and where we projected our payout ratio as we look forward. So thanks, Mike.

Thanks for giving us more in-depth review of the financials. As we look to our strategy, again we're making great progress.

The three pillars of our strategy continue to be there, we want to grow our volumes through successful organic growth, and again we had some great examples of organic growth in the business this quarter. And also through allocating capital effectively by buying great businesses at great value, and again adding Pioneer is a great example of how Parkland can work with a vendor to meet their needs and ours and create value for our shareholders.

On the supply side, again all initiatives are on track. As Mike indicated, when you do look at the waterfall charts, the big red is really backing out the impact of the Suncor arrangement, but year-over-year that – the benefits we’re getting out of our supply group is exceeding expectations.

On the operate side, again great strides, not only on the safety side, where we launched our Drive to Zero program, and again you can see the impact of that on our TRIF’s and our lost times are down significantly, but also on just the base of – base systems of the business, so we’re seeing great improvements on efficiency ratios, whether that’s in retail, our commercial businesses brought it's OpEx and it’s MD&A down, and also in terms of the accuracy and the reliability of our systems, they tend to keep going up and improving year-over-year. So operationally, the business is very sound.

And again on the acquisition side, we did talk about Pioneer. And our pipeline remains active.

So again growth supply operate as we look forward and go into next year, we will have achieved the Penny Plan, and there are certainly more opportunities to keep growing. Some highlights on the Pioneer transaction for those of you who haven't heard in on previous calls.

Again, this is the premier independent brand in Ontario. And we're very pleased to bring that brand into our portfolio of retail brands and certainly welcome a very capable team to Parkland that will continue to service that market.

It will add 2.2 billion liters in fuel volume. So taking us well above the 10 billion liters on an aggregate basis, which again when you look back three years ago, when we started the Penny Plan we were at 3.5 billion liters.

So the team – the Parkland team has done a great job, growing the business and certainly adding scale across it. It will add $55 million in annualized EBITDA, roughly $0.26 per share in distributable cash flow, again driving that payout ratio down.

Synergies are expected to be quite significant, but will take us some time to get to as we have articulated in the past, by 2017 we expect to see $10 million in synergies out of this business. The process of obtaining the consents and approvals to complete the Pioneer transaction is proceeding as expected, and we certainly don't foresee any delays in closing this.

So again, as we look at Parkland and particularly out retail business, this really does enhance us into a national player. We really get that corporate network that we were looking for in the East.

And I'm proud to say we’ve really picked up – we now have the two best independent brands in Canada, in the West, Fas Gas, in the East, Pioneer, and it really gives us a great retail platform to continue to grow off. So as we look forward here, again our guidance.

Our guidance was reduced last when we did announce Pioneer transaction, because of timing of acquisitions, but those remains within the 1.78 to 1.94 range for the year. And as we look forward to next year, our range is from 2.35 to 2.65.

The seasonal EBITDA contribution estimates that we provided this year seen in the bottom right, will only be relevant until the end of this year. And again I do remind you, they are seasonal and they are very dependent on weather patterns, so they are not exact, but certainly give magnitude of where quarterly the results should be.

Following the completion of the Pioneer acquisition, we’ll expect to see our seasonality to flatten out considerably on a quarterly basis. One of the things that recently happened in our industry, and I'm certain that you want to ask questions about is, there was a recent announcement that Canada’s largest credit card company will reduce their transaction fees to an average of 1.5%.

Well, likely this will have a net positive impact on us, at this point. We really don't have enough information to quantify what the impact is.

But obviously any fee reduction for a fuel marketer is welcome. The fee reductions will be made in April 2015 and some sources have said that commitment made by the Canadian credit card companies represent an average reduction of 10%.

Again, that could be more, it could be less depending on exactly what those are. This sets further analysis will be required to validate the specific impact on Parkland and we've not incorporated any impact into our forecast.

So I’d like to thank you for listening in today. Again, I am very proud of what the Parkland team has achieved here and certainly as we look forward into 2015.

We're quite excited about bringing the Pioneer business into the fold, integrating that business in, and continuing to grow our business. As I’ve said, we expect to be a year early in delivering the Parkland Penny Plan, we launched in 2012.

That said, we're not going to stop, we are going to continue to grow the business organically and certainly our pipeline remains very strong at this point. Our business case is running well and we're tracking closely to the financial guidance we’ve provided to investors.

We will now open the call for questions. Operator?

Hi, thanks for taking my question here. Are you able to quantify those three headwinds that had you roughly $6 million like relative to I guess what you are expecting in the third quarter?

And then given that you’ve maintained your guidance here for $188 million and EBITDA for the full year, so just about $56 million in EBITDA for that fourth quarter. I guess what gives you that confidence, because it doesn’t sound like some of these headwinds have necessarily updated here as we exit 2014?

Yes, so Kevin, in terms of the headwinds, so I would say probably the largest one that impacted was wholesale, it was a combination of some margin compression. And then we also did get hit with some inventory charges as the price of product fell, particularly in the East, probably to the tune of $2.5 million on a combined basis.

Okay.

On the commercial side, the business is operating extremely well. It really was volume growth that we've anticipated, and that broke into a couple of things, we had one particular contract, which we were awarded, but then the work never progressed, so it was servicing a certain customer that was going to do some exploration in a certain area, and they didn't proceed with that.

And then secondly, our earning sales are a little lower than I would've anticipated at this point. On the Elbow River side, difficult to quantify the exact impact of the lower margins, but probably in the $1 million to $1.5 million range.

And then just in terms of maintaining the guidance suggest, there is some sort of lift you see in Q4 to make up for. I guess to make up for what you have been looking for or not looking for?

So again, year-to-date we are on track Kevin….

Yes.

In terms of where we expect it to be. So, I mean we did have a very strong Q1 that was stronger than anticipated.

As we get into Q4, the factors that drive Q4 are weather in the commercial business, and somewhat in the Elbow River business. And so again, how is that panning out?

I mean, the East has kind of come out a little colder than anticipated and it’s a litter warmer in the West, but it's too early to really assess the impact of that. And then the balance of it really depends on our retail businesses and our big wholesale business in the U.S., which has performed very well year-to-date.

So if I step back, the biggest risk is probably related to the commercial business and the weather impact of that and then continued volatility in some of the margins within Elbow River.

And just on the wholesale side of things as you mentioned some of these headwinds don’t look like they are long-lasting, are you starting to see that a bit, are you starting to see some of the competitive pressure ease here, and should we see margins on a cents per liter basis out of wholesale, retch it back to save around $0.03 or may be north of $0.03 that we saw in the first half of 2014. In 2015, is that a reasonable expectation in terms of the profitability for wholesale looking out to 2015 and may be on road?

So, again, I mean just (indiscernible) wholesale supply, distribution also includes our Elbow River business.

Right.

So – and I would say margins have been impacted on one side, it’s the crude side, where we've seen them compress a bit with some of the larger macro dynamics. But there is still a viable business there, it’s not like that business is falling off, but we will have to see how that pans out.

We know that the Western Canadian select differential has widened out again in the last couple of weeks. So we'll have to see what the impact of that is on the business.

On the wholesale side, on the refined product wholesale side, again, we continue to see the challenge on the margin side, but as I have indicated in the past we've been very disciplined in that. And I’d say at this point we haven't seen signs of that changing, but our experience is that that will change over time.

Okay. And just last one for me, just in terms of your $250 million EBITDA guidance for 2015.

Can you remind me again what you're assuming in terms of commercial and wholesale, just because of like you said there has been a lot of volatility in the commodity price, which can impact those divisions? Are you assuming some sort of organic growth, are you assuming some sort of continued pressure there to get you to $250 million?

Our $250 million, again, we haven’t broken it out, but at a high level it would be the acquisition of Pioneer, and then it would be organic growth in the base business, and also the continued progress of our acquisitions program. So those three things would bring us to the $250 million for the year.

Perfect, that’s it from me. Thank you.

Okay, great. Thanks.

Hi guys. Just a question on the recent decline in the oil price, have you seen any potential slow down in the commercial business?

And is there a sort of a level where you would expect actively to either accelerate or decelerate?

So it very – I mean this is just very recent, right? So I would say we're not seeing a slowdown in activity, but – and we will have to see how it pans out here.

I would say the other thing is again our commercial business is very focused on natural gas, right? So in terms of our Parkland commercial business tends to be in more natural gas rich areas.

And what we've seen there is an increase sort of in the wet gas side, but the dry gas side has been tough, because of the persistent low price gas.

Okay, thanks. That’s helpful.

And…

I mean the flip side of low oil is low retail gas prices, so if it’s persist, I mean it’s a good time to double down on retail, because we should see some – there is definitely some elasticity in demand.

Yes. And I suppose on the margin side as well, fuel margins on the retail side should expand?

Well again, I don’t project margins. They are what they are.

And we just run our business very, very tightly to make sure that we minimize the impact of that volatility.

Okay. No, that's great.

That’s very helpful. On the convertible debenture, that’s due at the end of this month.

Have you guys – in the last month have you seen a lot of redemption?

Yes, thanks Derek. We have started seeing a little bit of a bump in activity there.

But certainly if you look at our financials, you’ll see there's about $77.6 million of principal amount out there. So there is still quite a bit to go.

So we expect to see as we approach the middle of November, an acceleration or redemption there.

Okay great. That’s good for me.

Thanks.

Hi. Just a housekeeping question for me.

I was wondering is there a seasonality we should be thinking about in terms of commercial margins, because I’ve noticed that you are up year-on-year, but it looks like at least in the past couple of third quarters, it was below $0.4 for that year. And I'm just wondering, I know you called this a $0.10 business, but just wondering, what’s the seasonality aspect we should be considering?

There is. I mean as we swing into winter, our mix shifts to home heat, and that tends to have a higher margin compared to the commercial business.

Okay. Can I get a sense or is there a range we should be thinking about in terms of how that will trend between the high season and the low season.

Is it kind of between $0.08 to $0.12 – $0.08 to $0.11, is that kind of the range we should expect?

No, Kevin, that question we can follow-up with you on that.

Okay.

This is Tom. I will follow-up with you on that.

Yes. I mean, again the Q3 tends to be like Q2, it kind of depends how long it's cold and on the – which drives when industrial activity kind of falls off and picks up, and then it’s the same in the fall, right?

As when it starts to get cold, the farming season, there is a number of things that need to happen to make it work.

I think the other thing we got to say about that margin number. There is a lot of noise in that number, because you had shifts in our business where we've gotten rid of a lot of…

That’s true.

Lower margin significant data, which we used to do on behalf of Rich Weiner, and they are at a very, very low margins. So now that that’s sort of a mix, that’s going to impact and fluctuate our margin in a positive manner, but again it's not necessarily – there is a lot of noise in that number.

So I think you got to be careful on how you evaluate it.

That would be great if – may be we will take this offline a little bit. And just back to one of your original comments, with the decline and spreads and that impact on the Elbow River business.

If I remember correctly, I think plus including the synergies on the back of that acquisition, I think this is about a $25 million EBITDA run rate operational at least for the big pickup in crude opportunity. Is that how you see this business longer term, when you look at this business or do you see opportunities to build on top of that $25 million in EBITDA, some other synergies or opportunities?

Yes. No.

For sure I mean we see Elbow River as first of all great business for us, very complementary. And our growth opportunity within Elbow is to refine products business.

So what the team there has done is really make a push into the refine products space and we're starting to see the impact of that now on our North Dakota business. So that's a great example, where we're getting the synergy there.

And the other business that we are quite bullish about is the LPG business, the propane business, which continues to grow as well. And again hence you see the year-over-year growth within that business, right?

That’s it from me. Thank you.

Great. Thank you for joining the call today.

We look forward to speaking to you next quarter.