Parkland Corporation

Josh Wood – Manager, Investor Relations Robert Espey – President and Chief Executive Officer Michael McMillan – Vice President and Chief Financial Officer Irfhan Rawji – Vice President of Strategy and Corporate Development

Kevin Chiang – CIBC Michael Van Aelst – TD Securities Derek Dley – Canaccord Genuity

Great, thanks Josh, and welcome to our second quarter webcast. I’m proud that Parkland has enabled to deliver a strong second quarter, despite the headwinds experienced by many businesses based in the last.

This quarter has again demonstrated the value that geographic and product diversity contributes to our business, enabling resilient cash flows despite economic softness in some regions. I’m also pleased with the continued success of our acquisition strategy.

In the second quarter Parkland closed three transactions including Pioneer Energy, the largest acquisition in our history. In this quarter we continued to grow the executive team and board capabilities of Parkland and I’d like to take this opportunity for formally welcome two new members to the Parkland team, Melody Appelman has joined us this quarter as a Vice President of Human Resources.

Melody joins Parkland after 11 years of HR experience and 15 years of operating experience. However with expertise in both areas, she would bring a tremendous amount of value to our executive team and we’re delighted to have her.

We also welcome Tim Hogarth, the Parkland’s Board of Directors. Tim was the Chairman and CEO of Pioneer Energy from 1998 through to their acquisition by Parkland.

Under his leadership the company more than doubled in size by measure volume, number of sites and cash flow. We are excited for the leadership and operating experience that Tim will bring to our board.

Another metric that you know we track closely and that is important to us is safety. On that front, I’m happy to report that we just completed another quarter of zero loss time injuries.

The team is quite proud of our safety record over the last year and a half and as of yesterday. I’m happy to say that we have conducted business for 533 consecutive days without a loss time injury.

This further demonstrates Parkland’s dedication to providing a safe work environment for our employees and customers. At this point, I’d like to ask Mike to walk through the financial highlights of the quarter.

Great. Thanks very much Bob and good morning everybody, thanks for joining us this morning.

At this point I’d also like to extend a warm welcome to our new team members of Pioneer Energy. I’m pleased to say that business performed quite well this quarter, achieving $34.1 million in adjusted EBITDA driven by solid performance across all of business segment.

This quarter’s success becomes particularly not worthy and then concerned within the context of the economics that currently being experienced by many businesses based in Western Canada region. The $34.1 million in adjusted EBITDA earned by the business this quarter were the solid performance compared with our second quarter in 2014 where Parkland generated $35.7 million in adjusted EBITDA.

The proven continued resiliency of our cash flows combined with the recent closing of Pioneer Energy gives us the confidence to reconfirm our 2015 guidance range of $200 million to $230 million in adjusted EBITDA for the year. The retail fuel segment – retail fuels, commercial fuels and SPF divisions were each roughly flat relative to Q2 2014 after normalizing for the impact that acquisitions that had on the business in this quarter.

The slight overall decrease in adjusted EBITDA this quarter is primarily attributable to additional operating costs in the wholesale supply distribution and trading business where Parkland continues to grow it’s refined products trading capability and the corporate segment where Parkland continues to invest for anticipated growth. These changes were partly offset by the acquisition of Pioneer Energy, which contribute $1.3 million to adjusted EBITDA in the quarter.

In the next slide, while EBITDA for the quarter was roughly flat. We did see an overall increase in volume driven primarily by increases in wholesale supply distribution and trading and the impact of our recent acquisitions.

Maintenance capital is in line with what we expected to spend in the quarter, well there is a significantly more than expense in Q2 2014, this is a more reasonable reflection of the true cost to maintain the cash flows of the business. Distributable cash flow is significantly lower than it was in Q2 2014 driven primarily by $13 million in onetime items which were comprised mainly on the acquisition costs, a refining billing adjustment, integration cost and other onetime item.

To dive deeper into the segments at the end to be a bit more detail, you can see that there were some differences and how the segments arrived at the results this quarter. Retail is flat year-over-year when adjusting for the impact of acquisitions, however the contribution of acquisitions resulted in a net year-over-year increase in volume and adjusted EBITDA.

Commercial is flat year-over-year, despite the decline in volume for the quarter resulting in less growth profit than expected. The impact of cost initiatives that team has undertaken however have somewhat offset those effects resulting in essentially a flat EBITDA compared to Q2 2014.

Wholesale supply and distribution in trading volume was up substantially on the quarter. Our EBITDA decreased as a result of the affirmation increase in operating costs mainly related to investments in the refined products [indiscernible].

At SPF which is our U.S. operating unit, the business was down both in volume in earnings when examined in local currency, and I would stress that.

As a result, a favorable exchange rate fluctuations however the base business before acquisitions was flat year-over-year. [Indiscernible] prices which tend to drive drilling activity in the region and thus fuel consumption tends to move counter to the Canadian U.S.

dollar exchange rate and thus we typically experience and offset in cash generating capabilities of this business. These combined movements resulted in flat contribution from the base business at SPF.

Adding the impact of acquisitions, they were up year-over-year, as transactions which closed early in the quarter started contributing to our earnings. Overall again, we’re quite pleased with the performance in the quarter.

At this point, I’d like to hand the floor back to Bob Espey.

Great, thanks Mike. My team would like to welcome the Pioneer team to Parkland and thank them for their patience as we close that transaction.

In summary, this has been another positive quarter of Parkland with $34.1 million in adjusted EBITDA with our base business performing well and the impact of our recently closed acquisition starting [indiscernible]. We are reconfirming our guidance for the full year of 2015 of the range $200 million to $230 million.

We continue to make good progress across all three pillars of our strategy, with some particular success on the acquisition front. This quarter our acquisition strategy has continued to make us one of North America’s fastest growing fuel marketers and we will continue to look for new opportunities to grow profitably.

Thank you, Bob and Mike. At this point, I’ll ask the operator to open the line for questions.

Hey, good morning everybody.

Hey Kevin.

Maybe first question from me, just from an modeling perspective. It looks like acquisition cost and M&A cost went hot this past quarter.

Just wondering how we should be thinking about that through the back of the year, should that continue along that trend or should we see that step down given the closing of the Pioneer acquisition? And then just looking at some of the adjustments related to refinery billing adjustments at other onetime cost, if can you just provide some color there that’ll be helpful.

Thanks for your question Kevin, it’s Irfhan, good morning. And I’ll take the first of that which is on the acquisition part then I’ll pass it over to Mike on the refinery billing of adjustment and the [indiscernible] costs and other costs.

So, on acquisitions, the way to think about it is probably three – there is three categories in there. The first is, what’s the base cost of running our M&A team.

And so the way to think about that in terms of just salaries and costs that we’ve taken in the call we do this because we think it’s cheaper to in-source it that it is to outsource it, so we think it does save us money overtime. It’s about $1 million and $1.5 million a quarter, not just the base cost providing the team’s salaries, bonuses all of the things you would expect in that.

The costs that are above that this quarter were twofold, first was closing acquisition, so closing [indiscernible] acquisition, the chevron acquisition and the pioneer acquisition, so that come with some cost. So you’re going to see that ramp up in the quarter before and the quarter that we do close in acquisition.

So the quarter before is our diligence cost and sometimes we doing diligence and not doing [indiscernible], so that has some variability to it. And then if we do closing acquisitions, you’d expect those acquisition costs to ramp up in the quarter that we closed.

And so you obviously saw that with three acquisitions closing this past quarter, so we were running significantly higher than normal. And then the third category is, we are in litigation with the competition bureau and so that does come with me in good costs as well that you saw in that quarter, and that does continue as well.

So, if I was to think about the revenue for the rest of the year I’d run with the $1 million to $1.5 million per quarter base cost and then I’d look at our activity to try to figure out to see about the one times that’s coming through. So hopefully that gives you some clarity in terms of thinking about cash flow modeling.

So Kevin, yeah it’s Mike McMillan here. So, just on the other two part of your question, pardon me.

The refinery billing adjustment is really some invoiced adjustments from one of our refiners, and it doesn’t relate to the current period. So it was just a correction that we’d put through that we had brought [indiscernible], I’m surely it’s onetime in nature, we don’t expect this to recur to be – or to have any other ongoing issues at this respect.

So we thought it was best to break that out separately.

Okay.

The integrate – sorry, go ahead Kevin.

No, no, keep on going, sorry.

Okay. The integration costs, again higher than normal.

I think the way I would characterize is it’s related to organizing some of the acquired companies to meet our business objectives and plan. And I think again, little more significant than we would see we’re showing some adjustments but I would say into some the integrated businesses that we’re talking about were performing extremely well, so not unusual in that respect.

I think we did feel it’s prudent to break it up separately and we typically – we did typically do show those integration costs. So you wouldn’t see that run rate going forward.

Okay. If I could just, let me step in here, just on the $1 million to $1.5 million of based acquisition costs, would you be deducting that or would you be adjusting your EBITDA for that as well or would that be embedded within your kind of run rate EBITDA because as you mentioned you could have studying that every quarter as part of your internal team there?

Yeah, so right now we are adjusting that on quarterly basis in terms of those costs, and I think that – it’s a great question about how you think about that overtime. We had been ramping that scene as you know, Kevin, in terms of building it.

We do view that skill set and we do think internally around that is that an individual that’s in the company that’s doing things that are non-M&A related or is it purely M&A related. We do think about that skill set as being something that is an in-source cost.

So [indiscernible] consultants or other M&A advisors you would build that as separate in onetime that’s associated with an acquisition. And so if you view that skill set that we’re receiving is something that we would have outsourced traditionally and adjust for it.

Yeah, and it’s Bob Espey here. I would say looking back we would have spent far more on advisory services than we are currently spending by in sourcing that activity.

The other thing is the quality of the diligence that we view, I think has improved significantly by having that team in-house because we have people now that are modeling that understand our business and live with the results, right. So, I think that’s in a very positive move for Parkland to take on that traditional costs, and I think there is been a tremendous value offset that we weren’t capturing previously.

And again to further build on that, I think when I look at how we’ve evolve our M&A capability, the effort that’s flowing in upfront and we reduced on money is on, I would say consulting services where we’re looking at specifically at three areas. One is quality of earnings, due diligence and then really digging into that and making sure that we understand the cash flows from where they’re coming from and can improve those.

The second area is around taxes and making sure that we do offer little understanding tax implications of businesses. And the third area would be, looking at business processes we’ve gotten much more sophisticated around making sure that we understand and can factor in the cost of integration.

And so again on seeing tremendous value out of that expense and certainly we’ll continue to generate good value to our shareholders going forward here.

That’s great color. And maybe just another accounting question, I know you mentioned in your prepared remarks your corporate expense run rate is running a bit harder now just because of some of the investments you’re making now to build out your team and to prepare for much larger company.

And we saw I think the run rate around $11 million this quarter, just trying to get a sense, is that a good run rate over the next coming quarters as you continue to invest or do you see that kind of ramping down in the near future, and as a lot of those investments behind you at this point in time?

Yeah, thanks Kevin. Good question.

I think to answer your question I think you sort of answered at a tail end of your point. What we would see of that is a sustainable run rate, and we don’t see additional growth in that area.

It was really to invest in some of our wholesale trading area and so forth. So I think as you think about that going forward we put in our referring products group, that group is starting to provide great contribution.

And we think when we look at the structure of that business now, it’s built for scale so we do see additional upside on that and we don’t see a large investment for us coming.

Okay. And maybe last one, just on Elbow River, I know the rails have basically been taking down their assumptions around volume growth related to their energy portfolio basically assuming zero or negative growth in 2015 now.

Just trying to get a sense of how Elbow River is performing in this more challenged commodity price environment? And if I recall correctly, when you had acquired this it was about a $20 million EBITDA run rate, are you still hitting those levels or you above those levels if you can provide some color there that’d be great.

Yeah, that’s great question. I think hitting on an important area for us.

So, we don’t disclose the Elbow segment separately, we do included in wholesale supply and trading but it’s like to say that it’s performing very well. I would say that, maybe I’ll start and Bob can provide some operation color too.

As I mentioned the refined products capabilities, so we have seen reduce volume in the crude [indiscernible] side of the business. We are seeing some great strength in LPG, we are seeing the refined products portfolio contributing significantly well.

So I would say overall characterize that as a nicely balanced portfolio. So at refine capability and [indiscernible] helped us as we go forward.

And I think we’ve talked at past of 13 or 14 commodities that they do trade and they’re able to reallocate and that strategy is proving well for us.

Yeah, I’d confirm that. Again the beauty of the Elbow business is the flexibility of the commodities and the assets.

We – our measure for that business is the number of rail cars which are staying roughly constant at about 2,000 and what the teams able to do is flex that fleet around into different opportunities as they see various opportunities open up across North America, and that’s been quite positive for us.

That’s great color. Thank you very much guys.

Thanks, Kevin.

Hi team, good morning.

Good morning.

Wanted to follow-up on the corporate development team and the cost being put into that division. Early you put a lot of on expense and to building that’s in-house capability, can you talk a little bit more about I guess other parts of the improved M&A process other than the due diligence that you mentioned, and also on the level of activity you’re seeing right now considering some of the weakness in Western Canada and the Bakken.

Good morning, Mike, thanks for the question. It’s Irfhan again.

So, I’ll take those two questions. The first is in outside of diligence what else that we improved.

The skill set that we’ve acquired helped us also, we’re thinking about things like not just a modeling in the diligence but also sourcing capability because we’re upgrading people that have got corporate development historic experience as well. So, as a team what’s interesting is, we have been hiring but also I think the same time unfortunately for me and my colleagues have also been stealing people out of my team.

And so even though we’ve hired a number of people over the past 18, 24 months since I’ve been at Parkland, I think our net STE count to that point I think is two, I think there is about eight of us that work in the corporate development now. We also help with integration planning as well and so there is sourcing capability, integration planning capability and also due diligence capability.

The team also is quite experienced because of – sourcing experience in negotiating transactions as well, and so I think we’re getting a number of skill sets that are important for M&A. The second question which was – I can’t remember what that question was.

Related to the level at M&A activities.

Other level of activity, yeah, so one of the things I think we’re really proud of actually this quarter, while we’re still trying to corporate Pioneer Energy acquisition, I think there are many folks [indiscernible] with the company were worried that we weren’t going to be able to do other transactions while we were working through that and I think we proved this quarter that not only we were able to source with the transactions, but we close with the transactions in the [indiscernible] transaction and the chevron acquisition. I’d say that we continue to see activity, the pipeline continues to be as strong as it has been historically, we’re seeing activity on both sides of the spectrum.

The small tuck ins like you’ve seen here with the [indiscernible] and the chevron tuck in of the 11 sites in British Columbia, and there’ll be a large transactions that continue to occur. Recently I’d say, and this is in the top four to six weeks we’ve seen a little bit more activity in Western Canada, I think that there is beginning to be with some of the smaller operator, some of the smaller companies a little bit more either concerned or potentially close to, if not yet financial distress.

So that could create an opportunity for us for smaller tuck ins in Western Canada as well. But time will tell and I think that this fall will hopefully create those opportunities for us.

Okay. And on the residential side, can you talk a little bit more about the underlying trends in the same store volumes and the same store sales that you’re seeing in both sides of the country?

So when you say – sorry Michael, it’s Bob Espey, residential, are you referring to home increase?

I’m sorry, I meant to say retail.

Oh on the retail side. Yeah, so the trends that we’re seeing there are strength in the East and weakness in the West.

The same store sales in overall are down but again we’ve got an offset in the East. The good news is with Pioneer coming off and we’ll continue to offset that because we’ve seen same store sales in the East above the West and expect that to continue to offset as we go forward.

So, in terms of the same store sales are you – is it strict with just an economic play and Western Canada is putting in pressure or is it…?

So it’s interesting, so again there are same stores fuel. So we try to see metrics, same stores fuel and then same store sales merchandise.

And it’s interesting our same store sales merchandise is about 5% above our same stores fuel. So, and the two generally correlate together.

And so to me what that indicates and the continued confidence that I have in our retail team and their ability to continue to deliver and create marketing programs and merchandise our stores in the way that were growing above industry. So, I would say our execution is still very strong.

The other thing that I would say is impacted us more in the west is the nonurban nature of our network in the west. A lot of the economic activity and the median impact has been in the nonurban markets, I mean if you think about our network the core corp network tends to be in Central Alberta and then Northern Alberta DC, Saskatchewan and then on eastern side of DC.

And those areas have felt the slowdown probably first, so we put some context around that.

Okay. And then just finally on the commercial side there, when you look at the propane prices out there, are you – to what degree have you been able to capitalize on the lower propane costs at this point and so that you can boost your profitability come winter time?

No, that’s a good observation and certainly propane pricing has been favorable for companies that sell propane. The biggest leaver for propane will be when the winter starts and how cold it is, so it’s very tightly correlated to weather and heating degree is, and that’ll be the primary driver and volume.

We’ve expect the margins will be healthy but ultimately that will come down to when the cold weather stops in and to what level it is cold.

Thank you.

Yeah, good morning guys. Just a couple of more as housekeeping questions, can you just remind us of what the oil and gas volume related exposure in your commercial division, is it around 50%?

The oil and gas exposure…

Yeah Derek, it’s Irfhan here. I think we historically haven’t disclosed our industry segment exposure but we have disclosed historically our volume exposure in commercial Western Canada versus Eastern Canada and products.

So, if you were to look at our most recent disclosure which is probably about three months on a TTM basis, about 34% of our commercial fuel volumes that’s not gross profit, but volume is based in diesel in Western Canada. So, a subset of that would be exposed to oil and gas.

From a gross profit perspective, it would be less than that because propane and heating oil have higher gross profit and our other products division have a higher gross profit. So propane, heating oil and other products for us would be approximately 50% of our total volume, but significant more as a percentage of gross profit, diesel would be the other 50% of volume in commercial but less than that for gross profit.

So again less than 34% of our gross profit exposure would be in oil and gas on Western Canada, [indiscernible] breaking on little further on that, when you look at diesel in Western Canada being 34% of our volume in commercial, there is a number of industries that are in that but if you got – you definitely have oil and gas in there but you’ve also got construction, you’ve got mining, you’ve got municipalities. And so it would be a stretch to say that the majority of that volume would be around that.

So the other thing to do add to that is, we’ve also seen some good opportunities in the market, as despite the slowdown what’s happened is especially the larger exploration companies, the larger service companies have gone out and tendered their fuel. A typically or historically that fuel spend is tended to be quite fragmented, among multiple suppliers than what they’re doing is consolidated that.

And we’ve had some good winds, in fact, we’ve won an additional and annualized basis, additional 100 million to 120 million liters, again that’s to offset some of the client we’re seeing, so it’s not an ad on the current run rate. But what it shows is, it speaks to the strength of our underlying business, the geographical spread that we have to our locations because what we can offer a potential customer is a one point service.

So, when they deal with Parkland they’ll deal with one company rather than multiple other companies. And as a result, we’re able to come with an offer that allows them to reduce their costs, but for us we can gain some volume on the back of that.

So Bob just – and Derek, I just want feel on bit more free there just to have some context on the numbers that Bob have just given you. So, that 34% that I sort of highlighted for you before in diesel in Western Canada is about 500 million liters, there has been some promotion there.

And that 100 to 120 that we’ve recently won would be any of that stream in the second quarter or is that?

No, that’ll be Q3, Q4.

Yeah, so we started to see some erosion as you guys saw in the numbers in this quarter but we think that we’ve been able to also win some business to offset some of that. And so that’s part of why you’re seeing us so confident and we’re confirming guidance.

So while we’re seeing softness we’re also see our ability to capitalize on opportunities [indiscernible] at this time.

And again it speaks to the strength of the sales team that we have in place in our commercial business, and again the ability for a customer to come and basically get one point of service across a whole geographic region.

Okay, now that’s a very good answer. Thank you for the color on that.

Just one more quick one, what is your CapEx forecast for the year including Pioneer, I know Pioneer was lower CapEx for the rest of the business typically but where you guys projecting?

For the balance of the year Derek, is that what you’re seeing?

Yeah. Or for the full year, if you can provide for full year would be great.

Yeah, if you think of where we typically have run on CapEx, both maintenance and growth and we’d be in the – call it mid 50s, right, 55 range. We add pioneer under that [indiscernible], we typically would be looking at that as maintenance CapEx so we’d be in the close to mid 60s range in monitoring that very carefully.

And the split, I think if you think that’s – the 50 that I mentioned 55 or so on the base business, you’d say about 20 to 25 that could be maintenance probably more towards the lower end.

On the base business.

On the base business, yeah.

So with pioneer, we say that your maintenance CapEx is probably in the mid 30s and growth would be above that Michael?

Yeah, yeah, we combine it now.

There were a number of things Derek as well on the gross side that we think that Pioneer business will give us, so we’re not a 100% clear on our growth CapEx on that business yet. We’re still aiming about the opportunities but now I think from your cash flow modeling to put in 35 plus or minus for maintenance CapEx, and then if there is growth on that you should be seeing a good incremental cash flow going through the business.

Yeah, perfect. Thank you very much.

Thank you very much. Bob, any closing remarks?

Great. Well, great quarter, great to get Pioneer closer and certainly welcome the Pioneer team to Parkland.

And really appreciate your ongoing supports and have a safe rest of the summer and we’ll chat after Q3. Thanks.

Thank you.

Thanks a lot.