Parkland Corporation

Patricia van de Sande - VP of Investor and Government Relations and Compliance Bob Espey - President and CEO Mike McMillan - CFO

Sabahat Khan - RBC Capital Markets Evan Frantzeskos - TD Securities Derek Dley - Canaccord Genuity Dirk Lever - AltaCorp Capital Kevin Chiang - CIBC Trevor Johnson - National Bank

Good morning. My name is Patricia van de Sande, and I'm the Vice President of Investor and Government Relations and Compliance for Parkland Fuel Corporation.

At this time I would like to welcome participants to Parkland's results conference call for the fourth quarter and the 2015 yearend, with President and Chief Executive Officer Bob Espey; and Chief Financial Officer, Mike McMillan. During the call today, Parkland may make forward-looking statements related to expected future performance.

Such statements are based on current views and assumptions, and are subject to uncertainties which are difficult to predict, including expected operating results, industry conditions, et cetera. Certain financial measures which do not have any standardized meaning prescribed by GAAP will be referred to during this presentation.

These measures are identified, and defined in Parkland's continuous disclosure documents which are available on our Web site or SEDAR. Please refer to our continuous disclosure documents as they identify factors which may cause actual results to differ materially from any forward-looking statements made.

For today's call, Bob will provide you with an overview of the year, Mike will discuss the results for the quarter and the year, and Bob will then close with an update on enhancements to Parkland's dividend plan. At that point we'll be happy to take your questions.

I'll now turn the call over to Bob to provide an overview of the fourth quarter and year end results.

Thanks, Patricia, and welcome everyone to our fourth quarter and year end 2015 Webcast. I am pleased to report that Parkland has achieved a record year in 2015, with a strong performance in the fourth quarter, despite the headwinds experienced by many businesses based in Western Canada.

In Q4 and throughout 2015, we continued to demonstrate the value of that product, customer, and geographic diversity contribute to our business. Plus, the exceptional work that our team has done to deliver record results this year.

In 2015, Parkland achieved 215.1 million of adjusted EBITDA, comfortably within our guidance range of 200 million to 230 million adjusted EBITDA. In the fourth quarter and in 2015, we experienced both record volume, and adjusted EBITDA.

Our volume increased 12%, to 2.6 billion liters, which contributed directly to our overall 2015 volume increase of 9%, to over 9.6 billion liters of fuel and petroleum products delivered. Adjusted EBITDA is also up for both the quarter and the year 27% and 17% respectively.

At this point, I'd like to ask Mike to walk through the fourth quarter and year end financial highlights.

Thanks, Bob, and good morning everybody. And the business performed well in Q4, achieving 64.9 million in adjusted EBITDA, a strong performance and a record quarter.

This quarter's success is particularly noteworthy when considering the ongoing economic conditions experienced by many businesses that have operated in Western Canada, and the Bakken in the U.S. The 64.9 million adjusted EBITDA earned by the business this quarter marked an increase of 27% from the 51.1 million that was achieved in Q4 last year.

This quarter's results were led mainly by a solid performance in Eastern Canada across all divisions, even in consideration of the warmer-than-normal temperatures there in Q4 and a strong contribution from the supply and wholesale segment. In the next slide, on a full year basis, we've had strong increases year-over-year for volume, adjusted gross profit, and adjusted EBITDA.

These improvements were mainly driven by the strong performance of the retail and the supply and wholesale business. Our dividend payout ratio at 89% includes acquisition, integration, and other costs of which a significant portion related to the Pioneer acquisition, our largest acquisition to-date.

Our adjusted dividend payout ratio of 71% excludes these costs, and is in line with the prior year, reflecting the growth in our cash flow and the shares added in 2015 through the Pioneer acquisition, our convertible debenture conversions and the DRIP program. Our total leverage ratio now sitting at the lower end of our prescribed range, at about 2.1 churns positions us well for continued growth with significant financing capacity available.

To dive into each business in a little bit more detail, you will see the benefits of our diversified business model. Retail showed an increase across the Board year-over-year when measured on the volume gross profit and adjusted EBITDA.

This was mostly driven by the strong contribution of the Pioneer and Chevron acquisitions. However, the base business also had a strong year in these.

Commercial EBITDA was down year-over-year, driven primarily by reduced activity in Western Canada. However, the team's keen focus on cost management and the benefits of industry and geographic diversification have partially offset some of the softness.

The commercial business in the Eastern Canada continues to provide a very solid performance. Supply and wholesale, formally known as WSD demonstrated strong growth year-over-year.

This demonstrates the power of our supply advantage, negotiating to buy better than others in our space, how they've executed on supply optionality, they've driven operating efficiency, and they're realizing the benefits of scale. Elbow River is included in this business unit, and delivered strong results in 2015, especially in the crude asphalt fuel oil segments and the LPG portfolio.

Parkland USA, formerly reported as SPF Energy, fuel volume and adjusted EBITDA were down year-over-year as a result of the slowdown in drilling activity in the Bakken region. On a gross profit basis however, results were slightly positive year-over-year due to the team's ability to manage operating costs effectively.

Being a mini Parkland, we have benefited from the business diversification with less impact in the retail and lubes businesses. The Canadian-U.S.

exchange rate also partially helped to offset recent headwinds. We continue to build market share through retail acquisitions by buying locations at good value in this part of our business.

Overall, 2015 was a very good year for Parkland. At this point I'd like to hand the floor back to Bob.

Thanks, Mike. Based on Parkland's strong performance, we are in a good position to fund future organic growth capital.

As of results in April, we will be increasing our annual dividend by 5%, while discontinuing our premium dividend plan. Our regular DRIP program will remain unchanged.

These enhancements will be beneficial for both Parkland and its shareholders. It will provide us with greater control over our capital structure, and reduce share dilution in the future.

For our shareholders, we are providing an increase in their dividend, along with a more favorable tax treatment. In summary, this has been a record year for Parkland, with 215 million in adjusted EBITDA, which is an increase of 17% over 2014.

With our base business performing well, the impact of our recently closed acquisitions, driving synergies and results, and the remarkable performance of our supply and wholesale team, we are reconfirming our adjusted EBITDA guidance of 235 million to 265 million for 2016. We continue to make good progress across all three pillars of our strategy, grow organically supply -- maintain a supply advantage, and acquire prudently.

In 2015, 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 in 2016.

I'd like to thank the Parkland team for all their hard work this year in making 2015 such a remarkable success.

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

Thank you. Just on the retail segment, there was strong year-over-year growth there obviously.

Can you talk about what you're seeing on -- is Pioneer doing better than expected, and maybe what are you seeing across reverse [ph] markets in your existing business prior to Pioneer?

Yes, so Pioneer is going extremely well. The business has performed above plan, certainly in the first six months.

And that's driven by two components. One is very strong year-over-year same store sales growth, and also on the merchandise side we've seen some good year-over-year comps in that business.

And then that's on the retail side, and on the supply side we've been able to realize higher synergies than we had expected initially out of the gate. So the business is performing well both from a retail and an execution perspective, but also with the accompanying supply benefits we've achieved there, it's exceeding expectation.

In the West we do see year-over-year comps down. So, our same-store sales growth is down on the fuel side, and we're roughly neutral on the merchandise side.

So, again, demonstrating that where our C-store capability is certainly strong and outgrowing our fuel sales. And the fuel, I mean again, data –- data lag by six to eight months, but anecdotally we're certainly ahead of where some of our competitors would be in the market, so overall very pleased with the business.

The other thing the team in the West has continued to do is focus on their net unit operating cost and basically bringing those down to budget in an environment where volumes are lower.

All right, thanks. And just following up on the retail side, can you maybe update us on your site refresh plan, and what your plans there are, and over the next year.

Yes, so we've got, I would say, three components to our capital program for 2016. The first, we talked about some examples within the Pioneer business, where we had done some pilots around refreshing some refreshing sites.

I think last call we talked about a site in Grimsby, Ontario, where we'd seen some remarkable lift after putting a small amount of capital in. So that program will continue this year.

And the second area is new-to-industry sites. So one of the things that we -- we achieved a record number of new builds in our network in 2015, completing eight new sites across the network.

And again, it's probably one of the most difficult areas of our business, because it's always difficult to find good locations, but our team has really worked hard to find some phenomenal locations. And a great example of that is we just recently opened a site in Chilliwack, BC.

This site, larger footprint, we've got a great C-store there, carwash, and we've got a QSR, it's a Triple-O. And in that site is a great opportunity for us to show a real push into the non-fuel.

And when that site matures in two to three years it'll produce 50% of its gross profit from the non-fuel versus the fuel. So, I mean those are some of the things that we're doing on the new-to-industry side.

And then the third area is in the legacy Parkland network is we're at the tail-end of a refresh cycle, but continuing to finalize refreshes on a handful of sites in the network. So those are the three capital areas we're pushing into in 2016.

See lots of opportunity to replicate the eight sites that we did last year, this year. And hopefully the team can achieve more than that.

All right, great. And just one last for me, so on the supply and wholesale segment, obviously strong year-over-year improvement, based on your commodity price outlook, do you expect that to continue over the course of 2015, or what's your kind of general outlook on that segment for the rest of the year?

I would say the outlook is certainly -- what we're seeing is it should be consistent year-over-year. There are certain pushes and takes within that business depending on, particularly the -- some of the LPGs that we used to support our propane business.

But certainly on the refined products side, very steady, don't see a lot of fluctuation there. And on the -- certainly on the propane side, there are some good economics currently that we see persisting here well into Q1.

Thank you.

Hi guys, it's Evan in for Mike. Just getting back to the retail fuels divisions, how are the same-store sales and volume trends looking so far in Q1, now that we're two months into the quarter?

So I would say, I mean, consistent with last year, but I would say we're seeing things a little more robust in the East in the network. And in the west, although down, not as far down as last year because we're rolling now a complete year into the slowdown here.

But –- and again, the same trend where fuel is slightly off but our merch sales are doing very well, and certainly where we would've targeted them for the year.

Okay, great. And just a housekeeping question, would you be able to give us the EBITDA contribution from the acquisitions in the quarter?

In the quarter, I mean, really the only significant one would be Pioneer, which is integrated into our retail numbers.

Yes, and we don't split that out, Evan. But I think I mean year-over-year basis you'll get an estimate -- a rough estimate there.

Okay. So looking at the commercial business, can you talk a little bit about the volume trends that you've seen so far in Q1, both in the east and in the west.

Yes, so the volume -- so let's just take a step back to last year. We -- I would say where the business performed well was on the propane side.

And last year, we saw, other than in west in Q4, we saw some good strong volumes on propane. And when we look on the diesel side, we're up slightly in the east, and down in the west and that particularly relates to activity related to oil fields activity specifically.

The team's done some great jobs -- done a great job at diversifying. We do have customers in forestry and other natural resource segments that haven't seen a fall-off.

We've also won some new business year-over-year. So translate that into Q1, again similar softness.

I mean, we are seeing similar softness in the west, where volumes are down. Propane and the heating oil, we're having a very warm winter, so that is having an impact.

What the team's done remarkably well to offset that is on a year-over-year basis they were able to reduce their OpEx by 9.2 million, and their MG&A by 1.7. And that's just been done through prudent management.

We're also seeing the impact of a number of automation activities we put in place last year around the fleet in terms of truck technology and routing technology, we're still in the early phases of piloting the routing technology in one area, and would expect to see further benefits as we roll that out across the business. So I would say the story there -- again, we have had some headwinds in the volume side, the team's done a remarkable job in offsetting that through managing their costs prudently.

And kind of expect to see the same thing going into certainly Q1 of this year. But again, the team working hard there to offset that shortfall just through efficiencies in the way they operate.

Yes, one other thing I'd add to that too, Evan, is we talked a little bit in prior quarters about how the commercial business was building some market share as well. So some good accounts where we're building some volumes, and becoming, basically, a vendor of choice for them.

And that I think also will prove well as things go into the year where we're building some good volume with some strong customers, and building some market share in this environment.

Great, thanks very much guys.

Hi guys. Can you give us an update on your CapEx budget for 2016?

Yes, I think, Derek, based on what we've disclosed, I think the way to look at it in terms of a full-year basis, you would see roughly equal split between maintenance and growth. Maybe a little bit higher on the growth side, factor in a little bit more on the Pioneer on a full year basis as we look at the refurbishment programs, and things that we talked about earlier today.

So we should see some additional capital there on site refurbishment on the test cases that we did this year that were very positive. So, again, I think from the investor day, what we showed at the time, we were about the 85 million to 90 million, about half of that was growth capital.

And I would still stick to that projection subject to -- in addition to that what we'd look at is some tuck-in opportunities in small acquisitions which we tend to plan separately from that. And they stand on their own from a business case perspective.

Okay, perfect. And then just on that point, can you just comment on the acquisition environment.

Are you guys, I mean given some of the softness in -- out West, maybe in the commercial side of things, have you guys seen more potential acquisition opportunities surface?

I wouldn't say the level of activity has changed. I mean, we're still quite busy.

And I would say there are opportunities out there that we look at on an ongoing basis.

Okay. Thank you very much.

Great. Thanks, Derek.

Thanks very much, and good morning to you. I wonder if you could just give us -- you gave a 5% increase.

Could you just give that in dollar figures on a monthly basis? And the dividend, it is $0.09 now, what is it going to?

On a monthly basis -- yes.

Yes, so about -- another 5% on the back eight, right, so we can wing 1.13.

Yes, it goes to 1.13, okay, so there should be $0.945.

Roughly.

Yes, and then on your capital maintenance, it seems to me it's not just maintenance, but you're actually expecting a return from this. Can you give us an idea of what kind of return you're expecting to get from your maintenance, because a lot of it is refurbishment, and that brings in activity?

Yes, Dirk, I think the one -- I would say what we've really tried to do in our capital definition is, I suppose, a little bit conservative building on the Investor Day. Within our maintenance capital we do have a component on, call it, site refurbishment, where it's existing sites.

And we do typically see an increase in activity, especially where we do refurbishment at the backcourt, and so forth. So there is a component there.

I wouldn't break it out, like we don't disclose separately what it is. But I would say that in the past we would have included some of that in our growth capital.

And what we've tried to do is really tighten that definition, so growth was truly new acquisition tuck-ins, and things that attract EBITDA along with it. And then we'll see a slight increase as a result of maintenance.

Yes, I would just to add to that, Dirk, on the maintenance side, if you look at it by business unit, as Mike is saying, in retail there is component of refresh, which we've pushed it into maintenance. We believe that belongs there, because we're extending the lifecycle of the site versus seeing it start to decline.

And generally in retail, I mean there's a nice little graph you can draw that shows sort of we did in about 10-15 years that we start to see -- looks like its tired and volume will drop off in the site. And so putting that capital in extends the life for that site.

So that's kind of what we measure is look at how far we've extended it. So, via pure definition you're extending existing earnings so it would be maintenance versus growth.

Right.

The second component in retail is just keeping the sites looking clean and well-operated, right. We want our customers, the consumer to always have a positive sharp experience when they're at one of our sites, and that means maintaining the facility in a way that it looks and feels like a place that you want to do business.

On the commercial side, it's mainly replacing rolling stock. I would say one of the areas that the team has done very effectively is with some of the new technology we put in, we've been able to get more hours on the better utilization of the fleet and the team is really focusing on this.

So in the short-term we'll certainly see that come down because we won't need to replace trucks as frequently, but then obviously once you get into a cycle of -- we've got to replace your trucks every sort of eight to 10 years in the type of business we're in. So you can't -- again, we need to give our employees the tools to succeed, so want to make sure that we've got the best equipment for them in the field.

And then the other bucket would be IT, right, we've got the systems that we're replacing, and again we put those in maintenance, they're not in growth. Generally we're expending -- and I would say, you do see some efficiencies out of that new technology as rose, so you know it's probably in that borderline maintenance growth.

And then the growth capital is new sites, its new trucks to service growth, and new tanks, those are the big areas that we would see. And then on the supply side, looking at some of these transload operations we've put in very capital light, but it's just -- you'll spend a $1 million or a $1.5 million on one of those.

Okay. Other question for you, on the wholesale side, have you got enough capital equipment to meet the increasing volumes that are coming out on the dishload [ph] side of the business or you're going to need to spend a little bit of capital to meet the increased supply coming on stream in the next two years?

Yes. Again, when we spend capital, we'll be tied to a pretty rigorous business case.

We've got quite a disciplined look back process where we -- once we spend, we review it on a R12, R24, and R36. So we do a look back.

And it doesn't matter what segment of the business we would do that. So what I'm trying to say is any capital that we'll put in should support future growth within the earnings, so whether that's additional infrastructure to support link from the diesel market or other segments of our business.

Okay, thank you very much.

It's great. Thanks.

Hi, thanks for taking my question. Can we just -- the first one, just going back to wholesale, it sounds like you're expecting this to be pretty consistent year-over-year as we look out into 2016; reading between the lines there's something Elbow River was a big driver here in terms of the improved profitability.

I'm just trying to get a sense is the earnings contribution from Elbow River now taken a step upscale and does that reflect the current volatility in energy prices or is it a function of maybe scale or product mix? I'm just trying to get a sense of what's happening specifically with that wholesale that affectively allowed you to increase EBITDA pretty substantially on flat volumes?

Yes. So I would say -- so, first of all, the breakup between the Parkland site and the Elbow River site, I mean, Elbow does support Parkland quite extensively.

So it is hard to break them out and attribute the impact from one site to the other. So we do look at them as a whole.

Secondly, I would say there are areas where we've seen, I would say better-than-expected margins. One would be on the propane side, actually for -- the butane side has been quite robust as well.

We do have a small crude operation that surprisingly it's hung in given the low crude prices out of proprietary terminal in Northern Alberta. And that continues to remain strong throughout 2016.

We're in fact fully booked in that facility for the year. And then fourth area is on the refined products side, with good growth on both the Elbow site and the Parkland site as the team there continues to work more efficiently and also look for arbitrage opportunities across North America.

Great example there which we've sited in the past is the Hamilton transload that we started, we saw some good opportunity through that and we continue to see just great opportunity throughout the market place there to move product around. As Derek had alluded to earlier, I mean there is length in Western Canada on both the gasoline and the diesel side and that has provided opportunity for both the Elbow team and the Parkland team to capitalize on that.

Okay, that's helpful.

So I would say we should see that trend continue here through the year.

And maybe just going back to the capital program you highlighted and around building new sites for retail, last year and then potentially little more this year; I was under the impression that acquiring retail assets provided a higher return on capital verse us a Greenfield project. I'm just wondering as well as economics have changed recently or does this reflect maybe a different regulatory environment and that maybe given some of your run ins with the Competition Bureau does impact your ability to maybe make wholesale acquisitions or bigger acquisitions within retail?

So we continue to make progress with the Competition Bureau on our productive manner and hopefully we'll be concluding that. At this point we don't see an impact on our ability to acquire or build singe site.

So that shouldn't be a consideration. In terms of building sites, I mean, it's versus acquiring -- again, we like both, right?

Building sites, so is a great way to grow organically within our existing footprints, and I would say the returns are probably very similar, right?

Yes, yes, over the longer term I think what you see, Kevin, as we acquire a site is it's a little bit of a different profile. A new site might take a year around, a year to two years to ramp up to its more optimal contribution, not where something you acquire comes in day one, but at the end of the day we still do the same analysis on a return basis and they do stack up very close.

So I think -- and what we've said in the past too I think the key there on the new builds is really acquiring good dirt, because you know we're pretty disciplined in terms of where we put sites in the robust process we do to evaluate site potential to make sure that we can generate those returns and then we follow it up with the look back. So I think that's one of the considerations between the two, right?

It's just finding good locations whether you're buying them or building them, right?

That's it from me. Thank you for taking my questions.

Yes, thanks.

Hey, good morning folks.

Hi, Trevor.

I know it's probably early for you to comment, but just curious with our Federal government looking at carbon footprint and the potential to maybe curb some of that down the road. Have you guys thought or put together any teams to maybe assess how that could impact Parkland and be prepared for anything that might come down the pipeline eventually?

Yes. That's a great question.

So we do participate through industry associations in monitoring the impact of these regulatory changes. I would say -- and specifically we belong to the Greenfield Association, we belong to the CIPMA, which is the independent petroleum marketers association, and we also belong to CIGMA, which is the U.S.

organization. And so, it does give us a good overview of the regulatory trends that are coming down and allows us to look at the impact.

I would say in the low price environment, the consumer is probably pretty not significantly impacted by these. I mean, ultimately the increase burden of these programs tends to flow back into the consumer.

So, and again, as long as that's done consistently, it's the impact people are still driving their cars, right. So I would certainly say in the short to medium-term, there is very little impact.

One of the things that we push for is harmonization across different jurisdictions, because what we run into is when we have different provinces taking different approaches. It does lead to some extra back office cost for us, because we have to make sure we're paying the right taxes in the right area.

So I would say that's a bit of an overhang on this to Parkland. Long-term, our approach is to manage the business.

So, first of all, to this point, we really haven't really seen demand destruction in certainly in Canada. And any decline that we see added to efficiency or change in consumer behavior had been offset by population growth.

And again the long-term trend is that the industry has continued to grow at sort of 1% to 2% a year. Where that started to flatten out?

Our approach is being prudent on how we deploy capital, so we want to make sure that on the retail side we've got, as Mike has alluded to, good strong sites, the Chevron site that we have on the first page of the presentation here is a great example of that where we're in a great location, and we will continue to attract consumers into that location for years to come, right? So -- and then on the commercial side, same thing, we just want to make sure that we're locating ourselves in areas where demand won't be impaired [indiscernible] to happen.

The third area is, I mean, we do look at what are some of the competing fuels, and we see propane as a great offset. Propane continues to grow certainly from -- GHG emissions are better than gasoline and diesel, and that continue to sort of look at other potential fuels that may start to take market share.

And at some point we will have to look at where the reinvestment goes, so…

That's helpful. Thanks, Bob.

Yes. Thanks, guys.

Just a quick follow-up; on Pioneer as it relates to the synergy, you guys said you are ahead of schedule on that, can you provide us an update there? Are you still expecting 10 million in synergies over three years, or it can be a little more front-ended loaded now than what you have been expecting previously?

No, I would say that's a reasonable timeframe. Again, we're slightly ahead of that, but it is -- we're certainly tracking toward that plan.

Okay, perfect. Thanks.

We thank everybody for joining the call today, and we look forward to chatting with you out at the end of the next quarter.

It's great. Thank you everybody.