Parkland Corporation

Elizabeth Wilcox - Manager, Corporate Communications Bob Espey - President & CEO Mike McMillan - CFO Irfhan Rawji - VP, Strategy & Corporate Development

Derek Dley - Canaccord Genuity Michael Van Aelst - TD Securities Kevin Chiang - CIBC Trevor Johnson - National Bank Benoit Laprade - Scotiabank

Good morning and welcome to Parkland Fuel Corporation's First Quarter 2015 Results Conference Call. My name is Elizabeth Wilcox, Manager of Corporate Communications for Parkland Fuel Corporation.

At this time, all participants are in a listen-mode only. Yesterday afternoon Parkland released its Q1 results which you can find on our website at parkland.ca.

This morning's call is hosted by Bob Espey, President and CEO of Parkland; Mike McMillan, CFO; and Irfhan Rawji, VP of Strategy and Corporate Development. Following the presentation, we will conduct a question-and-answer session.

Instructions will be provided at that time for you to queue up for questions. I would like to remind everyone that today's discussion may contain forward-looking statements that reflect current views with respect to future events.

Any such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. For more information on Parkland's risks and uncertainties related to these forward-looking statements, please refer to the company's annual information form dated March 24, 2015, which is available on SEDAR.

Dollar amounts discussed in today's call are expressed in Canadian Dollars and are generally rounded. Now I'd like to turn the call over to Bob Espey, President and CEO of Parkland Fuel Corporation.

Great. Thank you, Elizabeth.

Good morning and thank you for joining us. Parkland experienced another strong quarter which demonstrated our ability to grow through acquisition, strengthen our supply advantage, and operate efficiently.

As we review the results today, you will see the benefits of our strategy to build a business which is diversified across geography, lines of business, and thousands of customers. Although we did experience some headwinds in the West, you will see that these were offsets by the strength of our business in the East.

We made some great progress this quarter on some key initiatives. We improved our governance and leadership with the addition of Domenic Pilla to the Board, and the promotion of Mike McMillan to Chief Financial Officer.

We announced two acquisitions at attractive multiples which added 11 Chevron branded sites in British Columbia, and five sites in North Dakota. Importantly, we remain Lost Time Incident free since February 19, 2014.

We are now 440 days Lost Time Incident free. This is a huge accomplishment and speaks to the culture of our safety at Parkland.

I will now pass it over to Mike, who will give the highlights for the quarter.

Great. Thanks very much, Bob.

Good morning everybody and thanks for joining us this morning. As Bob mentioned, it was a strong quarter with adjusted EBITDA up above $57.1 million, as you'll see on Slide 4.

On a year-over-year basis, our adjusted EBITDA is down slightly, and this is due mainly to a couple of factors. The first relating to Q1 2014, which was as you may recall, a great quarter with exceptional one-time propane results realized by Elbow River.

The second factor is that as expected we experienced some moderate softness in Western Canada in Q1 2015, which was driven primarily by the decline in crude oil prices and belated economic activity. Although the headwinds in Western Canada did reduce the volume in our retail and commercial business segments somewhat, this was offset by very strong results in Eastern Canada highlighting the key benefit of our geographic diversification.

We also note that overall, we are very pleased with the wholesale, supply, and trading, division performance where Elbow River's refine product portfolio helped us to offset that the exceptionally strong propane market conditions that did not repeat this year. If you flip over to Slide 5, on a comparative basis, you'll see this illustrates our operating leverage in the business.

Volumes were down very slightly and came in overall strongly at 2.2 billion liters. Adjusted gross profit and EBITDA were lower on a year-over-year basis by 3% and 7% respectively.

Distributable cash flow was lower quarter-over-quarter as well, mainly as a result of two things, slightly lower ops results and the timing of our maintenance CapEx, which was higher in Q1. It is important to note that the maintenance CapEx is not a higher business requirement, but rather just simply timing of our spending there.

Overall again, we are very pleased with the results in the context of the prevailing market conditions, the robust quarter that reported in Q1 2014 as well. At this point, I'll turn it back to Bob who can run through the divisional results.

Great. Thank you, Mike.

Again, consistent with the results, this quarter we were able to able to offset headwinds in the West through strength in the East, and also through leveraging our distribution assets through Elbow River on the supply, wholesale, and trading side. In the retail business, lower volumes in the West were partially offset by growth in Eastern Canada.

We did experience strong margins across this business, increased C store contribution, and we had some good cost containment initiatives, which drove year-over-year increases in gross profit and EBITDA. Our non-fuel gross margin has benefited from our recent Chevron acquisition.

On the commercial side, we did experience headwinds in Western Canada as oilfield activity declined. The volume decline was offset by increase coming from propane and home heat customers and our commercial business in Eastern Canada.

On the wholesale, supply, and trading side, we were happy with the contribution of this segment to Parkland. The division has come a long way over the last couple of years and I am excited by this transition.

The volume increases in this division were driven by increased refine product volume from Elbow River. Again, the year-over-year gross margin decreased reflects the exceptional one-time propane results which Mike alluded to previously, realized by Elbow River in the first quarter last year.

Our SPF business performed strong in markets where there has been slowdown due to reduction in oilfield activity. But what we do see is the strength of the diversified nature of that business where we also have a strong retail business.

We saw some growth in our lubricants business, which partially offset some of the decline in our wholesale business in that market. So prior to concluding today's presentation, what I'd like to do is ask Irfhan Rawji; our VP of Corporate Development to provide an update on Pioneer.

As many of you are aware, there have been a couple of Press Releases over the last few weeks, which have updated our shareholders on the situation with the bureau and Irfhan will give an update.

Thank you, Bob and good morning everyone. And I wanted to make sure that at this time that we did provide some more clarity on our discussions recently with the Competition Bureau, their News Release last week, and our response to the same.

So few comments to share at this time for our shareholder base. Firstly, I said we were surprised by the Competition Bureau application, given we put forward a proposal to the bureau to a dispose of assets and most of these affected markets to mitigate the anti-competitive impact that were perceived by the bureau.

We do believe this acquisition will benefit consumers and achieve efficiencies in the marketplace, as we have discussed previously. And as we've already announced, we plan to contest the application therefore.

We obviously have a difference of opinion with the bureau regarding the assets referred to in the application, which were a mix of company and independent dealer-operated assets. And on this matter of principle, we will vigorously contest the application before the Competition Tribunal.

As you are aware, the bureau has identified 14 communities of concern. Parkland has reviewed this issue and estimates that the total volume of fuel for the Pioneer station in the communities identified by the Commissioner to be more than a -- sorry, to be no more than 200 million liters of fuel.

As a reminder, Parkland has previously disclosed that the Pioneer transaction represents over 2 billion liters of fuel in total. At this time, we continue to move toward closing the transaction and we have not revised our expectation of closing in the second quarter.

Should this expectation change, we will certainly provide an update as required. As our shareholders and analysts know, we do pride ourselves on being transparent with our shareholders and stakeholders and we will do as much as possible as we move through this litigation process.

As we move forward, we will be as transparent as we can within the boundaries that we can. But at this time, any further matter -- any further comments on this matter will be speculative and we will be stating our position clearly to the Tribunal.

Great. Thanks, Irfhan.

Thanks for the update. We'll now open the line for questions.

Yes. Hi, guys.

I was just wondering if you could give an update on the how volumes progressed during the quarter on both the commercial and retail. I mean, I know we saw some softness likely at the beginning of the year but have volumes started to pickup in last couple of weeks?

Hi, Derek, it's, Bob, thanks for the question. The -- so what we did see in both commercial and retail in the first quarter was softness.

In commercial, it really was isolated to our business that services the oilfield. And we expect that to continue here through this summer.

Our business is seasonal in commercial and our low months are through the summer period here. The question will be is, what we see happening in the fall and whether we see that come back.

I know the team is working hard to -- on the sales side to post some additional sales with other customers to offset a portion of that loss. On the retail side, again the retail business performed exceptionally well this quarter.

Our understanding is that we performed above market, particularly in our corporate network. In the West, same-store sales were down on a fuel basis but up on a merchandized basis, which again continues to demonstrate that we can execute quite effectively in that channel.

The one area that when we do look at the network and particularly, our rule of sites that are in areas where economic activity is driven by oilfield, they have come off. But in areas where we're not exposed to that for example on Eastern Canada we're seeing considerable strength, and in fact, quite remarkable year-over-year same-store sales growth.

So again, as we look forward, we are expecting that a very similar story that we will be able to offset some of the headwinds in the West with the strengths of our business in the East.

Okay that's great. And just to be clear, in terms of the commercial volumes, were any -- was any of the softness related to the low margin volumes that you guys have given up or have we fully lapsed that as of Q1?

We -- I'd have to get back to you on that, but my understanding is we fully lapsed that and the volume decline is driven to activity and not to losing customers.

Okay, great. And well, go ahead.

I was going to say customer wins losses something that we monitor on a weekly/monthly basis. So we're on top of that and again we're not showing losses that would be a concern at this point.

Okay. And then just switching gears a little bit, can you and may be Irfhan, you can comment on this.

What are you seeing in terms of the acquisition pipeline? Is it still very robust, have you seen any more opportunities arise given the volatility that we've seen in energy prices?

Thanks, Derek, it's a great question. And I'd say right now the pipeline continues to remain incredibly robust across business type whether its retail, wholesale, commercial and across geography, as well as across size, $1 million EBITDA businesses the things that are north of $50 million, $1 million, or $100 million of EBITDA.

We haven't seen it change, we were hoping to see it change I'd say two or three months ago in terms of the commercial businesses, specifically in Western Canada potentially some retail businesses in Western Canada but the commercial ones tend to be more hit because they're more GDP oriented refined. And so we haven't seen that dynamic change yet although we are hopeful that that will continue to be a bigger opportunity for us and we certainly do think at times like this when there is some short-term economic change in the market but we don't fundamentally believe there is a long-term sustainability, the cash flow is impacted.

This is an opportunity to buy and so our team is certainly focused on trying to -- try and use those opportunities right now and are hopeful that we'll see more, but I would say that the pipeline over the past quarter has remained strong, robust but consistent.

Okay, great. Thank you very much.

Thank you. Couple of questions for you, first of all just, can you just clarify on the how many stations are affected in those 14 contested markets?

Hi, Michael, it’s Irfhan, here. Thank you for the question.

I mean, I think that at this point given we're in litigation with the bureau we're not disclosing much more than what we have already which is we believe that this represents no more than 200 million liters of fuel on acquisition that we've said is over 2 billion liters of fuel. As you've probably seen in other markets, other geographies, one of the things that bureau does look at is how you define a market.

So I think it's difficult for us to comment specifically on that right now.

Okay. And when you -- based on your discussions with them in general, do you think the challenges in certain markets are more acute in retail versus what might be the case if you were to make some acquisitions in commercial?

Yes, Michael again given we're in litigation with the bureau I think it’s probably any comments we would make would be speculative and probably not in the best interest of the company and our shareholders right now on that question specifically.

Okay. All right.

When you look at the improvement in the margins on the commercial side in the quarter is that something that you think is a reflection of the industry adjustments to lower volumes and therefore trying to get a higher margin to sustain profitability or is that more just commodity movement based?

Yes, I would, Michael, its, Bob Espey. The margins in the business -- I would say when the prices of crude does come up; you do tend to see a short-term lift, that's not always the case.

The trend of the margins in the quarter, again difficult to predict that would continue going forward. As a business, I mean, our philosophy is to manage our costs effectively and continually manage those down on a per unit basis so that we're less sensitive to rumors and you'll see that across all of our divisions particularly in retail and commercial.

In retail, we focus on net unit operating cost and getting those down on a continual basis. So again getting the benefits of scale in the business, and then in our commercial business we focus on the operating rate and driving that down quarter-over-quarter which makes us less sensitive to manage utility.

Okay. And last question, on the wholesale side last year in the second half you had -- you pressed for some market share gains I think in, in the Eastern Canada, are these gains -- wins that you expect to be able to hold on to this year or is that kind of a one-time lift last year that you won't be able to maintain this year?

No, we've seen some good wins in the East. I think our sales force and -- I presume you're talking about the commercial business, is that where your question is, or just in general in the East?

If I remember correctly, I think in Q3 last year you had some bigger gains in wholesale if I'm not mistaken, Bob?

Yes, I mean our wholesale business. So I would say across wholesale and commercial, we've had consistent growth on the sales side in Eastern Canada, which reflects the strength of the team that we have on the ground there and their ability to sell the fuel.

And on the retail side, the last few years in the East with the economic conditions and the higher prices have seen a pretty stagnant growth across the market. And in this quarter we actually saw some good growth in our network.

And we don't get industry data right away that tends to trail by about six months. But sort of anecdotally when we talk to our suppliers they're seeing similar trends within the market place.

Thank you.

May be just firstly on the commercial side, you put up a good gross profit on a cent per liter basis looks like some nice mix benefit from propane and heating oil. I'm just trying to get a sense of when I look out to the balance of the year or even may be further out that that should that be a, should we view that as a structural list to how you look at profitability out of commercial i.e.

increasing exposure to heating oil and propane out in Eastern Canada, may be lifting that overall profitability number or is this more of a Q1 impact?

No, again I was consistent with the theme of the call, the headwinds in the West which commercial diesel into the oilfield has been offset by cold weather in the East. So again the fuel that we sell in the East into the home heat channel whether that's propane or distillate is correlated to heating degree days.

And if you look back the last two winters have been exceptionally cold in the East and hence will drive above average volume. So you need to tamper that.

Our expectation is this, as we go through the summer here and into next year, we'll offset some of the decline in the oilfield with an increased focus on sales in the West here and bringing in some incremental volume to offset the decline.

Okay. That's helpful.

And just thinking about organic growth more broadly speaking, I know it's been a number that's been tougher to achieve on a consistent basis, they kind of say 2% to 4% organic growth and obviously headwinds out of Western Canada aren't helping. But strategically, can you speak to may be some of the initiatives you're pushing through to maybe get that organic growth to normalize at a kind of modest positive growth number that I think you're targeting?

And, Kevin, I would say when you look at a top-line volume number it's always difficult to pull out of there what the organic growth is within various divisions, right. So again if we look at our corporate or our retail business, very strong, again, we don't have industry data yet but we understand that we're growing above industry, which again we've asked our team to grow above industry.

And then we did see although year-over-year same-store sales growth was off in the West, in that network, on the merchandise side it was above. So again to me that is an indicator that we're executing effectively and that our strategic marketing initiatives in that channel are paying off.

We talked about what do we do strategically there. The focus is loyalty and driving loyalty in our independent brand Fas Gas.

And the second is execution. So again is making sure that the site is safe, well lit, and clean, and the service is exceptionable through our third-party independent operators.

And then merchandizing making sure that our merchandizing is leading edge by being a quick follower in the marketplace in terms of trends. So again, we've demonstrated in the past that we can do that effectively and I'm confident that we'll see that trend going forward.

On the commercial side, we've seen some very good growth in the East. Again, our branch growth in that channel, that part of the country has been exceptional and strong, even when you do normalize for heating degree days.

We are growing above industry, both on the home heat side. The propane business is a strong growth business for us.

And then on the commercial side, we've been winning certainly ahead of where the economic growth is. Again, the challenge has been in the West.

Instrumentally we've made a lot of great changes in that business recently and have seen the benefits of that, unfortunately there are just some headwinds right now that are economic and out of our control. And again, I do see the team reacting very well to that both on the new sales initiative side, some new marketing programs, and then also by containing and controlling cost.

That's helpful. And maybe the last one from me just more of a housekeeping question.

Your share price has obviously had a bit of a move here since the Pioneer deal was announced. Can you just remind me how the issuance component related to that deal would work and what type of share price I should be thinking about assuming the deal closes in Q2, just from a modeling prospective?

Yes, Kevin, it's Irfhan here, it's a great question. So the number of shares that we had agreed to issue as part of the consideration in call was about $259 million in cash as well as a number of shares that we issued as consideration in total for Pioneer asset.

Those were fixed as of the date of the announcement. And so the number of shares is 5.8 million.

I think the exact number is 5,829,731 shares. So you can do the math on what that is on an average share price.

Thank you very much, and that's a pretty good memory.

Just wonder if we could dig in a little bit on SPF. Obviously we expected there to be a little bit of softness just given some of the headwinds in their markets.

So can you just give us some color on may be what you're looking at for the net rest of the year and how they're combating that?

Yes, so I would -- certainly we were surprised with how well that business is held up. So and again, it’s our first year or we're into our second year now with that business.

What we did see is again the diversified nature of that business. So it has three components: there is a wholesale component; there is a retail component; and then a lubricants business.

And what we saw is retail held, it was off slightly, but not in a material way. And we grew our lubricants business in that market and continue to grow it where we're a distributor for ExxonMobil, and we’ve got a great partnership there with Exxon, where the team works closely with the Exxon technical representatives to win significant accounts.

In fact one of the markets that the team is really focused in on there is the gas transmission plant, which use a lot of oil, lot of lubricants, and have continued to win and maintain those accounts in that market place. The third are is the wholesale business, and interestingly the volumes haven't formed as much as we would have anticipated.

It was a software margin environment in that market, in the quarter. And again, as we look forward, the risk in that business is in the wholesale business.

Again, we would expect the retail and the lubricants business to perform quite strongly throughout the balance of the year.

Is there anything you can draw from there lubricants exposure and practice that you could may be apply to help things in Canada or is it just completely separate customer base and markets et cetera?

And certainly very similar customer base so that we're aligned with the different brand in Canada. So in Canada, we do distribute the Shell brand and we do have similar support from Shell in the marketplace to go to markets.

And basically, the Lubricant Shell is a differentiated offer; it is sold more on a technical basis. And there's a lot of funds and efforts that goes into sell.

And the great news is, I just want to you do and account the cost of change is quite high so sticky.

Okay. I know its small on the whole scheme of things and for the transaction with Pioneer.

But just curious, if the Competition Bureau complications have changed any of the processes or protocols you guys go through when you're bidding deals?

Hi, Trevor, it's Irfhan. And I would say that at this point, given that we haven't had our RDN [ph] from the Tribunal, I'd be speculative to say that we would implement any changes.

Yes.

We obviously, are -- we obviously do review historic precedence and in the market to make sure that when we're looking at our pipeline that we're appropriately positioned in terms of when we put our energy, we've historically done that, we continue to do that. And as we said before, when we announced the Pioneer transaction, one of the reasons we really like the transaction was that there was an over lot we see in Parkland historic network in Pioneer.

Okay. And just so I get Irfhan, in terms of the -- your team and the build-out our team since you joined PKI, I'm just curious if you could talk about that momentum and exactly what you've done from a staffing standpoint?

Yes. I mean, I think Trevor; we've talked about this historically.

I mean one of the things that we have tried to do is add capacity and capability internally. Given that acquisitions are key pillar of Parkland's growth strategy; we do think that in-sourcing that capability long-term is a strategic advantage for the company.

And so we've been hiring skill sets that come out of investment banks, consulting firms, and private equity shops, because we believe that across those skill sets that's how you build a team that can do better diligence, more diligence, and ideally more deal. And so when we look at the size of our pipeline, we would continue to argue that there is much larger than the current capacity of the team.

So we continue to try to hire into that and overtime get people to internally to have the -- their reps on doing deals so that the capacity and the muscle to do deals continues to grow. So we're continuing to hire.

Our last hire is probably two months ago, we added John Koontz who came to us actually out a strategic marketing background and brings compliment to the team that is slightly different, but we think really adds a new perspective and continue to look for guys like John to join us.

Great. Thanks so much.

I appreciate it.

Can you just refresh us in terms of what do you expect to spend on total maintenance for this calendar year and how much of it would be maintenance?

Yes. Thanks, Benoit.

I think on a regular run rate basis, generally speaking what we would see is in the ballpark of about $20 million in maintenance CapEx on a full-year basis. Our total CapEx is in and around of $45 million to $50 million range, including growth.

And that would be excluding acquisitions of course and may include some small tuck-ins and that sort of thing.

Great. Thank you.

Great. There is one question that came in via email here.

And I'll turn it over to Elizabeth to ask a question.

Yes. The question is from William Redman.

Is Parkland taking advantage of the low crude oil prices by locking in more future purchases?

So thanks for the question. We don't tend to speculate on forward prices of commodity.

The very nature of our business is it's a margin business. And the margin tends to float on top of the price of the underlying commodity.

And I would say that's the beauty of our business. We are not really taking a large exposure from a commodity perspective.

And then we do have some working capital in the inventory that fluctuates around. But in terms of our acquisition cost, they tend to flow with the market.

We tend to pass those through to customers and hence really take very little commodity risk in quite a volatile market so something that we avoid intentionally. And from a shareholder perspective, I think that derisks the investments significantly.

Mike, one other things that you may want to talk about is the balance sheet and some of the great work the team has been doing there to improve that.

Yes. No, thanks, Bob.

It's very topical. I think as you look, as Bob mentioned, you think of our segments business and how we look at our commodity holdings in risk.

Generally it's characterized by pretty high turnover as well. So any -- any time that we do hold inventories and so forth they do turn very quickly and that allows us some pretty good flexibility.

On the trading side, I would also say that a lot of that is back-to-back and there is direct hedging on that. So there isn't really a lot of open positioning that we would take.

So our appetite for risk, I think, as Bob mentioned, is pretty low. When we think of the balance sheet it's been a great quarter from a working capital perspective and it comes down to a couple of initiatives, certainly commodity price plays a part in that and we're foreseeing the benefits of a lower commodity price flowing through our receivables and payables inventory positions.

In addition to that, one of the things that comes to mind is certainly in the western environment is the economic conditions and our credit and our sales teams have been working very hard on terms with customers in monitoring risk in that area and they have done an exceptionally good job. They've reduced our DSO by two to three days and overall when you consider the working capital benefits you'll see in our financial statements, we've had a benefit of about $53 million in terms of net working capital across receivables, payables, and so forth.

So some really great work in ensuring that we're managing credit risk, as well as our inventory position.

Great. Well, thank you very much for joining the call today.

Look forward to catching up next quarter. Thank you.