Parkland Corporation

Josh Wood - Manager, Investor Relations Robert Espey - President and Chief Executive Officer Michael McMillan - Chief Financial Officer

Derek Dley - Canaccord Genuity Michael Van Aelst - TD Securities Kevin Chiang - CIBC Dirk Lever - AltaCorp Capital Trevor Johnson - National Bank Financial

Great, thanks Josh, and welcome everyone to our third quarter webcast. Parkland has been able to deliver a fantastic third quarter, despite the headwinds experienced by many businesses based in Western Canada.

In this quarter, we've continued to demonstrate the strength of our business model and the value that geographic customer and product diversity contributes to our business and the exceptional work that our team has done to continue to delivery strong results this year. The integration of Pioneer Energy, the largest acquisition in our Parkland's history has been a resounding success, as the business has exceeded our expectations on all fronts.

This is a testament, both to the quality of the business that was built by the Hogarth family and the hard work of the Parkland and Pioneer teams to effectively integrate the business. The first Pioneer site renovation was completed in July and included a refresh of both the exterior up to service station and the interior of the convenient store.

The results of the renovation have been encouraging as we have seen a 25% increase in convenient store sales in the month after reopening. We have plans to perform a refresh at 75 Pioneer sites through the end of 2015.

On our corporate development team, Darren Smart has been promoted to Vice President of Corporate Development. Darren has been with Parkland over a year and was previously with Ontario Teachers' Private Capital.

Darren brings 10 years of dealer experience with him to the role. We believe that he will bring tremendous value to our executive team and to our execution strategy going forward.

In addition, on October 6, we hosted an investor conference in Toronto, which was very well attended by employees, analysts and investors. We appreciate the great support that we received from the investing community and look forward to continue to grow those relationships.

For those who are able to attend, thank you for taking the time to learn more about Parkland's story and for listening to our vision for the future. Another metric that we you know track closely and that is important to us is safety.

On that front, we had one loss time incident in the third quarter, which was not a lasting injury as the individual is safely back at work. Prior to this incident, Parkland experienced over 18 consecutive months without a loss time injury, due to our strong safety culture and program.

As of today, we have gone 80 days without a loss time injury at Parkland and look forward to having a safe winter operating season. At this point, I'd like to ask, Mike, to walk through the financial highlights of the third quarter.

Great. Thanks very much, Bob, and thanks everybody for joining the call this morning.

I'm pleased to say that the business performed very well this quarter, achieving $59.1 million in adjusted EBITDA, driven by a solid performance across all of our business segments. This quarter's success is particularly noteworthy in light of the economic softness currently being experienced by many businesses that have operations in Western Canada.

Our performance certainly speaks to the benefits as well as noted of diversification across geographies, products and our business line. The $59.1 million in adjusted EBITDA earned by the business this quarter marked a significant increase from the $35.2 million that was achieved in the third quarter of 2014.

Two of the primary reasons for this increase included the first four quarter contribution of Pioneer Energy and the Chevron acquisitions, and you'll note that by the largest screen bar on our waterfall. The second item was a significant increase in the contribution of wholesale supply and distribution, the second largest bar on the schedule.

The continued resiliency of our cash flows combined with the recent closing of Pioneer Energy gives us the confidence to reconfirm our adjusted EBITDA guidance for both, 2015 and '16; 2015 being $200 million to $230 million, and 2016, $235 million to $265 million on an annual basis. The Commercial Fuels and SPF Energy segments each generated slightly less EBITDA in the quarter of 2015 relative to the same quarter in 2014.

This is predominantly the result of the impact of weaker economic activity in this region that they serve in Western Canada and the Bakken, and direct result of declining commodity prices. It is important to note, however, that both businesses are realizing the benefits of operational efficiencies and cost management initiatives that have helped us to mitigate economic trends and position the business well to maintain the strong customer service and to build market share when opportunities reveal themselves.

The slight overall increase in adjusted EBITDA derived from the SPF Energy business is also a result of the positive movement in the Canadian U.S. foreign exchange rate, a positive tailwind.

Looking on Slide 5, the increase across all of these financial metrics for the third quarter of 2015 was driven primarily by the strong performance in Retail, Wholesale, Supply and Distribution segments. Maintenance capital and distributable cash flow figures are in line with what we expected in the quarter and are a representative mix of what Parkland's future looks like with Pioneer in the mix.

Perhaps to dive a little bit deeper on the next slide on Slide 6, you can see that there are some differences in how each of the segments arrived at their results in the quarter. Retail showed an increase across the board year-over-year for volume, gross profit and EBITDA.

So this was mostly driven by the strong performance of Pioneer and Chevron acquisitions, as I have noted. The base business also had a very strong quarter despite challenging economic headwinds in Western Canada.

Commercial EBITDA was down a little year-over-year, as one would expect driven mainly by softness in Western Canada, which impacted primarily our non-fuel businesses like lubricants. However, as noted earlier the business is performing well, as it realize it's a benefits of proactive initiatives taken that have improved our operational efficiency and customer service.

The commercial business in Eastern Canada continues to provide a solid performance as well. Also, Supply and Distribution, volume is down slightly on the quarter, but EBITDA increase substantially.

The improvement was primarily driven by the decrease in the cost of fuel supply, as a result of increased company-wide volumes and lower third-party carrier cost combined with strong butane, propane, crude, biodiesel product margins in our Elbow River business. At SPF Energy, our U.S.

operating unit, fuel volume was down slightly as a result of the slowdown in drilling activity in the Bakken region. On a gross profit and EBITDA basis, however, results were flat and slightly positive over the third quarter of 2014, due to the team's ability to manage operating costs and the positive impact of U.S.

Canadian dollar exchange rate. As we have noted in the past with oil prices, which tend to drive drilling activity in the region and that fuel consumption tend to move counter to the Canadian U.S.

dollar exchange rate. And thus, we tend to have a slight positive offset in the cash generating capabilities of the business.

These combined movements resulted in a flat contribution from the base business at SPF this quarter. Adding in the impact of acquisitions, EBITDA for SPF was up slightly, as transactions that we closed in the second quarter of 2015 started to contribute to earnings.

We continue to identify tuck-in acquisition opportunities and good value that enables us to grow in this market. At this point, I'd like to hand the floor back to Bob.

Great. Thanks Mike.

In summary, this has been another exceptional quarter for Parkland with $59.1 million in adjusted EBITDA. With our base business performing well and the impact of our recently closed acquisitions starting to stream, we are reconfirming our adjusted EBITDA guidance of $200 million to $230 million for 2015 and $235 million to $265 million for 2016.

We continue to make good progress across all pillars of our strategy with particularly success on acquisitions and leveraging our supply advantage. We continue to be one of North America's fastest growing fuel marketers and we will continue to look for new opportunities to grow profitably throughout the rest of the year and into 2016.

Thanks, Bob and Mike. At this point, I'll ask the operator to open the line for questions.

I was wondering if you could just comment on, some more color just on how the integration of Pioneer is going. Have you guys been able to leverage some of the best practices at Fas Gas on the merchandized side and Pioneer on the fuel volume side, back and forth throughout the network?

The integration of Pioneer is going extremely well. First and foremost, we focused on the team there and making sure that they are comfortable working with the broader Parkland team and that's been very successful.

The second thing that we've focused on is just making sure that's we can track the business effectively. The business itself has been and certainly continues to be very strong in that area.

And from an integration perspective, we're just starting. I mean, we gave an example there of some work that we've done with a refresh of a site and some of the benefits that we've seen.

We've also held a vendor conference where we brought all of our vendors in from both east and west and looked at opportunities for improvements across the business. And we've also met with all the retailers that operate at sites.

So we had a retailer convention brought them in and certainly welcomed them into the Parkland fold and talked about how we want to operate the business going forward. So at this point, I mean, we've just quested the 100 days and as you can see the results are astounding.

We're making good progress across all of our initiatives and we look forward to seeing continued strong performance here as we go forward.

And just with some of the volatility or even weakness that we've seen in commodity prices, this provided you guys with some more potential acquisition opportunities of some smaller independents that are likely less able to handle this volatility. I mean, how are you guys looking at the commodity price movements and the impacts on your growth opportunities going forward?

I think the environment in the west has provided a couple of opportunities. So one is around, we've seen some of our customers go into the market and try and consolidate split spend.

They've gone to RFPs. And we've been quite successful in those processes, and again, it speaks to the strength of the underlying business and the geographic coverage we have where we can be one points or one supplier across many locations, particularly in our commercial business, and we've been able to successfully leverage that for new sales.

On the acquisition side, we really don't disclose what our opportunities are. All I can say is that our team is busy.

We're continuing to hire people in that area.

And then just one final one from me. Just in terms of your organic growth, could you just give us some more color on how it sort of shook out regionally, at retail, I'm referring to.

So I mean, was same-store sales at west down in the sort of low single-digits offset by some strength in the east?

Yes, I would say, in the west. And then again, the west is big, right.

So we've been hit hardest in Alberta. On the retail side, we were below previous year.

And then as we go further east, what we saw in Ontario was quite robust, same-store sales growth throughout the products. And then also in D.C.

we saw some decent year-over-year growth in that market as well.

Derek covered most of my questions, but you mentioned in your press release about synergies. I don't know if your synergies or integration had a schedule.

Are there any synergies in the numbers this quarter? And if so, are they in the retail or do they fall into the wholesale side?

They would fall in both areas. I would say, predominantly into the wholesale supply side.

And then, is that where we would be seeing the improvement in the Q3 margins for wholesale, because typically the last few years the Q3 margins has been your weakest, and this not wasn't the case this quarter. So is there something structural that's changed or is it simply a function of the market or is it the synergies?

I would say two things. One is the synergies, and the second component would be in Elbow River we've seen robust margins on the propane and the butane sides throughout the quarter.

So that's more of a function of the market, I'd assume?

That is, yes.

And then heading into winter or fall winter months with low oil prices. You had said that the bottom end of your guidance was, I guess, an event of low commodity prices and the high end was if the commodity environment improved.

Is lower oil prices at this stage concerning you at all? I know you've reiterated your guidance, so I'm not asking if you're going to miss guidance, but does it create more challenges for you now going into the winter than what you were hoping?

I would say at this point, we could still see some further downside on economic activity. Again, we've also had some wins, so we need to see how that pans out here in the fourth quarter in terms of the wins minus the softness.

The bigger variable in the fourth quarter is weather. So cold weather is great for our business, warm weather is a less good, because people aren't consuming as much propane and heating oil.

So we're far more sensitive in the winter months here to the heating oil and propane markets.

Let me just follow-up on some of the earlier questions. When you look at the negative organic growth in SPF and in Commercial, given the exposure to more energy related economies, are you getting a sense that things are bottoming there or accelerating to the downside, especially as you look into 2016?

At this point, I would say, am I getting a sense its accelerating? I would say, if I look at where those both of those businesses are performing, they are certainly not down as much as activity, so which again would speak to the breadth of the model and the fact that we're not just dependent on oilfield services.

And in fact in our North Dakota business, our volume is off by 15% to 20% versus direct in the field is off 60% to 70%. So again, it shows that we're not just dependent on that oilfield component.

It's tough to say where it's going to go. I mean, I'd like to think that's we won't see a lot more downside, but again, it's difficult to predict how long the low prices will persist and what the broader impact will be.

Maybe just turn to Elbow River. I'm just trying to get sense, and I know you don't split it out, and I'm not asking you to provide actual earnings for these operations, but just trying to get a sense of how this has been performing?

If I recall, when you acquired it, it was a run rate of like $25 million EBITDA give or take. And then the subsequent year, they had this blow out year, where I think it ran at a much higher level.

I'm just trying to get a sense, what do you think normalized earnings out of Elbow River should be? And then concurrently, when you budget for your guidance, how does Elbow River play a role in that?

Do you just assume kind of a base level and any uptick is above that or do you try to assume how your trading revenues are going to flow in any given year, based on your forecast for commodities?

So you're right in saying that we don't break it out, so a little bit sensitive to provide direct guidance on that. But I would say, that again, Elbow River, what we're seeing in that business is, as we talked about in the past is we broadened our portfolio to include some refine products and so forth.

And what we're seeing in the business is it is performing above our original expectation. It is blended within our Wholesale, Supply and Distribution segments.

So we don't tend to break it out. But we are seeing, as Bob mentioned earlier, some strength in the LPG side.

We're still doing a fair bit of crude business. Refine product length in the west has tightened that market up, but what we are seeing is there seems to be some great opportunities that come up by product portfolio.

We have enough depth in our portfolio to allow them to reposition their infrastructure and move product. I think the way we think about the budget, we do as we sort of describe, think of it is as sort of a base plan.

And they generally are somewhat conservative I think, the culture there is conservative, but we look at a base level. And then certainly throughout the course the year, we reforecast on a monthly basis because they do realize the number of different opportunities that present themselves, as market dynamics change, right.

So that's a little general for you, but I think overall we're very pleased with where that business is and it continues to provide some strength for us.

And just to add to that, I mean I would say that business continuous to perform, where it performed after our first year. So we've continued to see the strong earnings that we experienced in the first year.

And to Mike's point, it speak again of the number of different commodities that the team is in. It also, one of the key areas of growth we've seen there is in the refine product space, where when we purchased Elbow, they weren't in that business and we brought them into that to support the Parkland business and we've seen some good growth there, which has offset some weakness on the crude side.

So that crude business that you saw when we first bought Elbow really took off. That's moderated, and the earnings have been replaced by the growth in the refine products business.

And maybe just last one from me. When I look at SPF, your gross margins year-to-date are up like a third of a set per liter versus the first nine months of last year.

And I'm just wondering, because you have a currency impact there, just wondered what the puts and takes are when I think of that improving profitability? How much should I think of that -- how much of that is due to the currency versus your supply advantage, given you rolled this into your network?

And then versus maybe the offset that it is a weaker environment, so maybe you're seeing some margin pressure from just the overall economic environment. I'm just trying to get a sense of how I should be thinking of that margin being split out over those kind of broad three variables?

Yes, so there is number of elements to your question there, Kevin. I think one of the factors your mentioned currency and it's certainly is the significant contribution, when we think of where the rates are today, right.

So we are seeing as Bob, mentioned, I think -- one thing to keep in mind that the mix of business. So as we see a decline in those servicing oil sectors and so forth, those are generally larger, smaller, lower margin customers and so forth and certainly we see a decline there.

On other hand, you've seen us from the last several quarters announced the acquisition of some retail sites, some of them as far as, is Bismarck, and in the markets where they're less impacted by oil services in that segment. So I think what you're seeing a bit there is, to think about it, is a bit of mix between, call it the, retail side of the business and the wholesale side.

So it is a combination of fact, I think between the currency and mix of business, if you will. Certainly, there are some opportunities that we look at on the commercial site, but again, they are larger -- they are our larger customers.

Again, the dollar certainly helps. If you take out the impact of the dollar that business is down, but it's down a lot less than what demand has fallen off.

So the good news is that businesses has kept, and in fact, gained share. And the second item is we have changed the mix.

So we have bought a number of retail sites. When we first bought the business, we had 12 corporate sites and we're now up to 22.

So we've effectively doubled the volume within that segment of the business. And the other thing is we've also added new dealers.

A big portion of that business is a dealer. We have roughly a 150 dealers that we service in that market, and we've been adding new dealers as well.

And as those of you who have followed Parkland for a while know that the volume in the retail network is quite stable and really is somewhat impacted by the economy, but it is more sensitive to population and miles driven, which we haven't seen a dramatic fall off in our retail volumes at this point. So the third component of that business is our lubricants business.

And the lubricants business, again, is held up pretty well. One other things that that team has done effectively is they've focused on supporting gas transmission and have basically, I think there is nine gas transmission plants in North Dakota and all of those are serviced by SPF with the mobile lubricants.

So that's a very stable business that that isn't going to be impacted by the slow down.

When you're looking at the volumes that you did this quarter, and then looking out over the year, are you on track to do your 11.5 billion liters?

So year-to-date our volumes are off year-over-year, but certainly we're on track to hit our target of exceeding 11 billion liters on an annualized basis.

That's what I was referring to, yes.

So if you look into this time next year we should be reporting that on the trailing 12.

When you look at your margins, and particularly on the retail and commercial, do you think that what you saw this quarter, because this is the first time we're getting to really see the Pioneer, do you think these are indicative of your margins rolling forward then?

I can't predict back to retail margins what they will be. All I do know is that operationally, both businesses, and as we bring them together, the key metric that we focus on is making that operating costs with the non-fuel gross margin, which we're seeing some lift in year-over-year in both businesses, less the OpEx and MG&A divided by the volume, so that's breakeven cost.

And although on an aggregate basis that's gone up, because we've added Pioneer network and we'll start to see that come down as we make improvement into the business.

And then on the G&A side, what you've incurred then in the third quarter, could this be a good indicator of your G&A going forward, on a quarterly basis or do you see cutting back there? How should we be looking at this?

I think it is a reasonable run rate for us. I mean, what we do is essentially in terms of, when we think of our headcount and that sort of thing, we don't see any dramatic change in that.

Whatsoever we've been pretty lean that and very focused on optimizing that structure. Outside of our MD&A reported, like Bob mentioned, we're looking to add selectively into our corporate development group.

But as far as the business, we have added a couple of positions on a full year basis and then Q3 is probably not a bad approximation, so for example, we added a VP of HR earlier in the year and few things like that. So those things, I don't think would be material change in that run rate.

The other thing I was just going to mentioned that you may see is just a function of growth rates. So within the MG&A at times, we do have slightly higher cost in terms of just public company related items, such as shares and that side of the spending profile, but otherwise discretionary spend, I think is trending fairly consistent.

And then the last thing. On your forecasted EBITDA guidance the range, how much have you factored in for reorganization costs within those numbers in ballpark?

Sorry, for reorganization --?

Yea, because usually you take out -- that's an adjustment to your EBITDA numbers.

So a restructuring charge?

Correct.

Yes, at this point, Derek, we really don't have any planned reorganization or structural change or restructuring charges. I think we have incurred a few earlier in the year just to reflect some of the changes that we had in the group, but we don't see that as an on going charge.

And should something change, I mean, we certainly would look to communicate that as clearly as we can, right, but nothing material there planned at this point.

Just wondering in terms of the Pioneer acquisition, now that you've queued off and getting it integrated and what not, acquisition opportunities to come on the back of that given their customer list and given the folks that they know, has there been any maybe updates in terms of opportunities that you could parlay just on the back of the Pioneer acquisition itself?

In terms of that leading to further M&A activity?

Yes, like just obviously on a standalone basis, if they were to grow and stay very ambitious, just wondering now that you've observed it if there is anything that maybe you've been introduced to on the back of that transaction above and beyond just Pioneer?

I would say not through Pioneer. I think certainly Pioneer would know the same independence that we would deal with, so I don't think that, which either make the M&A space more attractive or not at this point.

And just in terms of your ability to leverage your network, your silos to arbitrage opportunity, are you still seeing the ability to move fuel and take advantage of mispricing? And is that getting easier with your size and critical mass and systems in place?

Yes, I would say, certainly one of the things that we've been able to demonstrate is that with scale our supply advantage improves. And it's interesting that, I don't know if you've seen the Investor Day material, but there is a slide in there that shows relative improvement based on our supply cost versus the volume growth and that supply improvement has outpaced volume growth.

So we continue to see that there is a benefit to scale. The second item is on the arbitrage side where, and we've talked about this previously, we've announced they were opening a terminal in Hamilton with the objective of servicing the Pioneer network and that will allow to take advantage of some arbitrage out of the Mid-Continent into Ontario on the gasoline side.

So again, further examples of where we're continuing to create advantage supply, both through our scale and being able to exploit market efficiencies, and do that in a very capital light way.

And then more big picture, I'm not even sure if you'll be able to comment, but any early stage kind of opportunities or threats on the back of the federal government change with regards to your business that you see?

That's a good question. I would say we haven't identified any at this point.

So yes, I think it's a little early to say, Trevor, in terms of any other policy change or anything like that. I think we're interested to watch how things develop, anything that comes out that would be significantly different.

And we monitor each region. I think we tend to see things move more regionally than federally, but I guess, we'll continue to monitor in month of those emerging changes, right.

Well, thanks for joining our call and look forward to talking to you in the New Year.

Thank you.