Parkland Corporation

Patricia van de Sande – Vice President of Investor and Government Relations and Compliance Bob Espey – President and Chief Executive Officer Mike McMillan – Chief Financial Officer

Sabahat Khan – RBC Capital Market Kevin Chiang – CIBC Michael Van Aelst – TD Securities Dirk Lever – AltaCorp Capital Derek Dley – Canaccord Genuity Jason Zandberg – PI Financial

Good morning. I’m Patricia van de Sande, Vice President of Investor and Government Relations and Compliance at Parkland Fuel Corporation.

At this time, I would like to welcome participants to Parkland's Results Conference Call for the First Quarter 2016, 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, and other factors. Certain financial measures, which do not have any standardized meaning prescribed by GAAP will be referred to during this presentation.

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

For today's call, Mike will highlight the results for the quarter and Bob will close with an update on our strategy execution and an outlook for the remainder of the year. At that point we will take your questions.

I'll now turn the call over to Bob Espey, our President and Chief Executive Officer to provide an overview of the first quarter results.

Thanks, Patricia, and welcome everyone to our first quarter 2016 webcast. I’d like to take a moment to welcome our new team members at Propane Nord-Ouest and Girard Bulk Services.

It’s great to have you all join the Parkland family. I’m very pleased to report that Parkland has achieved a 9% increase in volume and 4.5% increase in adjusted EBITDA in the first quarter compared to Q1 2015.

The growth from the first quarter of 2016 continues to demonstrate the strength of our diversified business model across product, customer and geography. Our strong Q1 results coupled with our ongoing successful execution of our strategic plan make us confident in our ability to deliver our 2016 guidance of $235 million to $265 million in adjusted EBITDA.

At this point, I’d like to ask Mike to walk through the first quarter financial highlights.

Great. Thanks, Bob, and good morning, everyone.

Thanks for joining us this morning. The business performed well in Q1 achieving $59.7 million and adjusted EBITDA driven by strong performance in our retail division including Pioneer, which is performing very well.

Integration continues to track ahead of plan. The warm temperatures experienced in Eastern Canada also resulted in lower heating fuel volumes in the quarter, but certainly not a concern as this typically happened every several – every couple of years.

The results this quarter are particularly noteworthy when considering the continued economic softness experienced by many businesses that have operations in Western Canada and the Bakken region in the U.S. We saw an increase of 9% in overall volume delivering 2.4 billion litres of fuel and petroleum products compared to 2.2 billion litres for the same quarter in 2015.

The $59.7 million in adjusted EBITDA earned by the business this quarter marked an increase from $57.1 million that was achieved in the first quarter of 2015. Our adjusted gross profit also increased by 11%.

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

This was mostly driven by the strong performance of the Pioneer and Chevron acquisitions. However, the base business also had a very strong quarter.

Supply and wholesale saw a modest decline in the first quarter compared to the same quarter in 2015. Elbow River is also included in this business unit, and they delivered strong results especially in crude, asphalt and fuel oils or CAF in the LPG portfolio.

You may also recall that they had a very strong quarter a year-ago in the LPG portfolio. Commercial EBITDA was down year-over-year driven by two main factors.

A warm winter – a warmer winter and the continued softness in the economy in Western Canada. Though these were significant headwinds in Q1.

The team's relentless focus on cost managements, their ability to win new business and the benefits of industry and geographic diversification has helped to partially offset the headwinds. Parkland USA earnings were also down versus Q1 2015, as one would expect due to lower drilling activity in the Bakken region.

On a gross profit basis however results were slightly positive due to the teams ability to manage operating cost additionally they have benefited from retail and lubes businesses, that are less sensitive to the oilfield activity. Our adjusted EBITDA waterfall gives U.S.

side by side comparison for each of our operating divisions. As you can see our retail divisions performed extremely well in the first quarter.

Commercial Parkland USA in supply and wholesale did see decreases, however the hard work of our teams in these divisions to manage cost operate efficiently and build their businesses helped to partially offset the economic headwinds that have continued into 2016. As Bob mentioned earlier, we’re very pleased to report a year-over-year increase of 4.5% on overall adjusted EBITDA in Q1.

I’ll now turn it back to Bob to discuss the operational KPI’.

Thanks, Mike. New in this quarters reporting are some key performance indicators for each division.

Many of you may recall that we announced during our Investor Day last fall that we planned to provide a set of measures for each business going forward to help provide the investment community with more insights into our business. Importantly, these measures are cascaded throughout our organization to ensure all our team members are aligned.

Our retail division performed extremely strong in Q1, with the strong organic growth in our convenient stores with same stores sales growth of 7.5% nationally and 15% in Ontario year-over-year. We saw an increase in our 12-month average site volume for both company and dealer site volumes, which were 57% and 8% respectively.

This improvement was driven by the Pioneer sites, which have a higher average volume throughput and ongoing efforts to improve the productivity of our sites. Our commercial division has continued to see some challenges as a result of prolonged economic softness in the west.

Temperatures were warmer than normal with heating degree days down 23% in the east versus the same quarter a year-ago. Rig counts declined by 47% year-over-year.

These factors have led to volume decreases year-over-year. However, we’re very proud to note that our commercial team continues to win new business and gain market share to their continued focus on organic growth and service excellence.

Parkland USA has performed well on the retail side with volume up 16% compared to Q1 2015. However, total volume was down by 18% to 218 million litres due to the slowdown of drilling activities in the Bakken region.

While our volume is down [indiscernible] on a year-over-year basis, we’re seeing increases in area such as Fargo and Billings indicating we’re growing market share in a challenging economic environment. Mike will now discuss our corporate KPI performance.

Thanks, again, Bob. On the corporate side of our business our backup of team continues to drive synergies and manage cost.

We saw an improvement in our corporate adjusted MG&A as a percentage of consolidated adjusted gross profits by 0.7 percentage points to 6.3%, which is mainly due to improve the economies of scale and a keen focus on operating cost. The dividend payout ratio and adjusted dividend payout ratios were 77% and 68% respectively.

The increases resulted mainly from higher share counts that drive higher dividend commitments and slightly higher maintenance capital due to the growth in the business versus a year-ago. It is worth noting that we had our last convertible debenture mature in Q4, which was well into the money and resulted in the vast majority of the bonds going in our converting into equity.

The total funded debt increased largely as a result of the Pioneer acquisition, which many of you will now closed in Q2 last year. I’ll now hand it back over to Bob to give an update on our strategy of execution and priorities for 2016.

Thanks, Mike. Overall, our performance in Q1 continued to deliver on Parkland’s three strategic pillars, grow organically, acquire prudently and deliver a supply advantage.

Parkland demonstrated our ability to grow organically through C-Store – same store sales growth of 7.5% year-over-year and adding over 100 million litres of new annual propane volume across Canada. In the first quarter of 2016 alone, we announced the acquisition The On the Run/Marché Express brand from Imperial Oil and the Propane Nord-Ouest or PNO acquisition.

The On the Run brand allows – provides us with a tremendous opportunity to grow a leading convenience store brand in Canada. The PNO acquisition additionally provides us with exclusive access through propane terminal in Val d'Or, Quebec, which will leverage our Elbow River Marketing's supply capabilities in that area.

With our base business performing well in a difficult economic climate, the impact of recently announced acquisitions, which will drive synergies and results, further gains in our supply advantage and the dedication of our team. We’re confirming our adjusted EBITDA guidance of $235 million to $265 million for 2016.

We’re one of North America's fastest growing fuel marketers and we will continue to look for new opportunities to grow profitably in 2016.

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

Operator? Operator, at this point, I’ll ask you to open the line for questions please.

Thanks. This question on the gross profit on a cents per litre basis, it was higher year-over-year and the retail and the U.S.

segments. Can you maybe talk about what the drivers there were and whether you expect that to continue into the rest of the year in terms of the year-over-year improvement.

Yes. Hi Sabahat, thanks for your question.

I think if you take a look at the retail business again, we comparatively year-over-year, we have the Pioneer business in there and I think the initiatives that that team has put forward through some refurbishments of the site and so far we’re seeing stronger results in the non-fuel part of the business. So the C-Stores as Bob mentioned especially in the east where we’re seeing comparative increases of over 15% in that space.

On the field side again slightly higher throughputs in the east and so forth and a larger complement of company operated site. So those of you that are familiar with our mix of business in retail last year, we had about 150 sites roughly in the company side of the business and with the addition of Pioneer we now have 300 sites in the company side, which typically bring with it higher margins, but also more operating cost rate.

So you would see bump there on the fuel side on a cents per litre basis.

Okay. And then just kind of into falling into Pioneer, can you maybe talk about how far longer with integration, you called out that synergies are ahead of expectation.

So we can maybe talk about where those are coming from and any update there.

Yes, it’s Bob Espey. The synergies fall into three areas.

So the first would be supply and we’ve seen some very good synergies there on the supply side on the fuel side. As we’ve moved the Pioneer supply platform onto ours.

The second is the operational and we’ve really focused on driving non-fuel and the execution in the field and that’s a combination of two things where we’ve been very successful. One is we have put some refreshed capital into the network.

We’ve refreshed upward to 40 sites now. And then there has been a real focus on the merchandising site.

So those two factors combined. We’ve driven one of the investments when we bought Pioneer one of the things we noticed is that there the transition of people that come to the forecourt by gas mentioned going to the retail site was quite low.

So we’ve started to see an improvement in conversion. And then secondly we’ve offered some new categories for example.

We’ve really expand a coffee program in those sites. And then the third thing is we’ve really focused the merchandising and making sure we’re utilizing the stores effectively from a sales per square foot basis.

So that’s been particularly successful and I would say that’s the component that’s has out delivered expectations and significantly at this point. And then the third is the back office and we’re still working on that.

We’ll start to see the impact of that in starting in Q3 and Q4 of this year.

Yes. Just a follow-up as well you’d mentioned – you’d asked about the margin, I think we experienced in Parkland USA and I would look at that as a mix of business.

We noticed, I think in some of our disclosure that as you look at that business, we’re seeing a little decline in the wholesale business, but the retail side and lubricants business have performed quite well. And those certainly have slightly higher margin that gives us a bit of a higher blend if you will.

Alright thanks. And just one last one for me, just on the On the Run acquisition of the franchise business to the extent that you can talk about it.

Should we expect the rollout of that to be kind of a 2017 event given that you expect the transaction to close later this year. And secondly, would you hope to keep that bit or that – banner as a Parkland banner, or would you still continue to think about potentially franchising it out kind of on a long-term basis just about there.

Yes. So on the franchise side, we certainly welcome the franchises to Parkland and I want to make sure we retain and grow that relationship on the Parkland side the intent is that’s a rollout that brand over the subsequent 24 months after we close transaction.

Thank you.

Hi, thanks for taking my question. Maybe the first one for me just following up on the On the Run discussion.

Is there any additional capital investment as you think about rolling this out relative to the budgets you’ve provided historically. I think your CapEx runs between kind of 70 million to 80 million all in and then when I look at your C-Store organic growth or same store sales in Q1 it was a very strong 7.5%.

And you’ve noted a number of initiatives you are pursuing. Would you expect the rollout of On the Run to be additive to this, so that your C-Store sales continued to grow at this elevated pace or does it just extend out kind of this above average growth rate longer than you would have originally anticipated without this banner.

Well, in terms of capital there will be incremental capital, but that will be backed up by business case, which we would always do. And when we budget for next year, we’ll have to see how that fits in with our other growth opportunities.

So would come into the growth side versus the maintenance side of the business, because we would expect to get incremental lift on our same store sales? In terms of the magnitude of that I mean a very difficult to predict.

I mean we’re – I think we’re confident that there will be an increase. It will take some time to roll that out.

I know our team is currently working and developing an implementation plan that looks at a 24-month rollout across different sites. I mean there are certainly some surface where the brands fits well.

And then other sites where we wouldn’t have the brand standards required for that brand and we would probably not use it. So we’d expect that we could rollout the OTR brand on roughly 60% of the network.

That’s helpful. And then when I look at your long-term organic growth target you talked about targeting roughly 3 plus percent just above what the market is doing.

You are seeing good growth in the C-Stores as you noted you’ve seen some weakness in your volume growth given the economic backdrop. To touch your 3% organic growth do you need a better economic outlook or kind of productivity initiatives you highlighted earlier.

Can I get to the 3% even if the economy stays where it is at today?

I would say so if the economy stays where it is at I mean we will, if it basically – basically we have reached the bottom, we will start to grow up that base, particularly in our commercial business. That being said we have – we’re gaining market share in all of our segments particularly in commercial.

We did highlight over 100 million litres of new propane wins, which is pretty significant given that our business currently is in 350 million to 400 million litre range this takes upto the 500 million litre range. So a 20% growth on an organic basis is pretty impressive.

So again, we will start to as activity starts to level of, we’ll start to see that growth kick in. I mean our hope is and again the growth isn’t linear on an annual basis just over a period of time certainly as we get into our five years here.

We would expect that there will be some recovery here in the west and that will be a nice tailwind for us at that time. Because the team is still pushing very hard to put productivity and technology improvements in place that should allows us to scale that business without adding significant amount of cost to it.

Okay. And just last one from me and thank you for that.

Last one from me, the 57% improvement in your average volume for company site, are you able to breakdown how much of that was due to Pioneer versus the productivity improvements.

Yes. At this point, most of it is due to Pioneer.

Okay, okay.

Where we do start to see, so we see on our sort of organic site, the average volume per site gets driven by network management and better marketing and on an overall basis, our same store volume is down and largely driven by shortfall in the last and so the benefit that we’re getting right now is through the network management piece, but it would be small compared to the impact of the Pioneer volume.

Perfect. That’s it for me.

Thank you very much.

Good morning. I just to start off with a clarification, did you say that the same store sales excluding Pioneer were down.

On the volume side, on the merged side, so the in-store it was up by 7.5%.

That’s on the national basis including Pioneer.

Including Pioneer on a national basis if you just look at Pioneer was up 15%.

How about if you look at the legacy business excluding Pioneer? Are those businesses able to grow despite the economic situation?

Well. So they were hindered, right.

So the total average being 7.5%, right, so they were below. But again in the last year that the – we do have an economic headwind.

So we’re seeing that come through on our retail side on the same store sales.

Understand.

Yes. On the legacy business Michael in the west, I think in east again, we’re seeing some pretty resilient cash flow in that site given the market is different in the C-Store site, generally what we’re seeing sort of directionally with effective less volume, but the C-Store has been performing it is down a bit.

But it’s about half what the volume decline has been in a last couple of quarter, so directionally some resilience in the C-Store in the west as well.

Great. And then can you give us a little bit of color on the increased competition that you are pointed out in Ontario and Quebec wholesale business and how you plan on competing this.

Yes. So on the wholesale side, in fact in this quarter, we’ve actually made some good win.

So you should start to see that come back here in the balance of the year as we’ve won some new accounts and they start to stream. So again that wholesale market quite, being in the wholesale market is great for us.

I mean we do, it gives us good a idea of where the market is at and how competitive we’re. There are times where we need to push hard and we’ve had to do that here to want back some market share and in fact we’ll replace what were down in the balance of the year.

And do you – I guess when do you expect that to only get back to the full run-rate by the end of the year. And secondly, this is come at the cost of slightly lower margins.

No, not on an integrated basis. So it’s again its working both the sale side and the cost side in making sure that we retain and grow that volume.

Okay. And then finally on the when you look at the low commodity price environment and the challenges and some of your markets there.

Are you seeing more opportunities for M&A then and which segments in particular are you seeing most activity?

We don’t comment on the sales or the M&A pipeline. I mean it is – there are opportunities out there.

And they tend to be evenly distributed across all of our segments and businesses. So its fits well with our slogan of acquire prudently.

It’s just making sure we find the right value to transact. I think the deals that we’ve just announced On the Run, PNO and Girard are great examples of very accretive.

Small, but very accretive deals for Parkland and we expect to continue to do those going forward.

Okay. And when you said that you’ve got on putting the On the Run banner and I think it was 60% of your network, are you talking about 60% of the corporate stores.

Yes. Yes, I mean we would continue to push On the Run to franchises in our dealer network.

But at this point, what we can certainly predict is penetration within our own network.

Okay, thank you.

Thanks very much. I just wanted to follow-up a little bit more on the wholesale side from the last line of questioning.

When you look at the competition for the diesel side is, is that because of increased volumes with the change in mix from the line nine coming on. And then when you look at the western side, we must have excess diesel.

Is that going into the eastern market adding competition or is that going state side.

Yes, so in terms of the product flow, I mean reversing line nine does enable those East Coast refiners to produce more diesel. We certainly haven’t seen that impact our market.

So on the – in the west, there is both – well, there is two things. There is the market is on diesel and gasoline, but there are a number of turnarounds.

That are scheduled right now, so a lot of that extra capacities are being used to balance the markets with the turnarounds. Any excess product would still be going into the mid-continent or off the Pacific into Vancouver into that Pacific market.

Okay. And then when you look at the propane side of the business and there is pretty good indications that that will be fairly strong.

When you compare the margins you get on a per unit basis relative to the diesel, I mean how much more compelling is it.

Well, I mean it is a different offer, right, so with the propane business. Our mix certainly and it will start to change with these new wins.

We just won as in Parkland’s very much weighted towards Home Heat in east, which tends to be a higher margin, because it’s a higher cost business. There are lower volumes more frequent, so you’ve got higher OpEx.

We’re as in the wholesale side, particularly in the west tends to be a larger drops where the margins are lower. But the operational costs are lower as well.

So compared to fuel, I mean very similar to fuel, right. If you got Home Heat, which is kind of big portion of our business in the east.

And again, the big sensitivity to weather unfortunately because of that and when you see our – the 23% difference in heating degree days in Eastern Canada. I mean that has a big swing.

I would say in the commercial business over half of the gross profit shortfall is due to the impact of weather directly related to our heat – home heat business versus other weather related items, which are very difficulty to quantify. And the diesel business on large commercial accounts, it’s really much the same thing.

The margins tend to be lower, but your cost to service is a lot lower.

Okay. Just on that to Derek, I think on the propane side, we tend to have a little down on the service revenue side and rental side too, right.

So little more sticky in that business with tanks and service at times it depends, like Bob says, on the distribution to the customer for delivery charges, and so forth.

Okay, well, I mean I am going to be lows to hope for cold weather next winter, but probably for your business. Great segue to my – maybe you could touch on expectation guidance for cash taxes for 2016.

Yes, I don’t see a big shift there, Derek. We’re certainly going to a little bit of a change in the business, but I wouldn’t – I don’t see anything affecting that side of our business dramatically outside of what you’d expect to normal growth.

Okay. That’s my lines of the question and thank you very much and congratulations on a nice quarter.

Great, thanks, Derek.

Great, thanks, Derek.

Yes, hi, guys. I apologize I had to hop for a second here so there’s nobody been asked.

But with some of the new acquisitions that you could put in Quebec, is this going to lead to an opportunity to continue to grow your supply arbitrage ability going sort of east west as opposed to what we’ve seen in the past, which has been predominantly more so?

Well, certainly, the opportunity within P&L and because they do have a great terminal that were the exclusive market around to move product in there. That arbitrage swings around between moving products out of Ontario, what are the refiners in Ontario and out of the west.

And that enables our Elbow River team to optimize around that asset and also to grow volume in that market.

Okay, great. And just in terms of the very strong same-store sales that we saw here at Pioneer, and I know you mentioned coffee.

I believe Pioneer didn’t have a coffee program or coffee in the stores in the past, is coffee now in most if not all of the Pioneer locations?

We have been rolling it out. Certainly as we do the refreshes, we’ve been doing that.

The exact number, I can’t give you. You can follow-up with that.

Okay, that’s fine. And can you just remind us at your Investor Day, I believe you outlined a new sort of leverage comfort range of 2.0 times to 3.5 times net debt-to-EBITDA, is that still the case today?

Yes, that is, Derek. I mean I think what you see in our numbers today is 2.2 times.

And I think as we – as you see us go forward, we’ll continue to use the revolver for small tuck-ins and sort of things. So you shouldn’t see that number move around into cash and operations, we’re going to continue to just de-lever and leave that capacity open.

So the range that you mentioned there is well up to 3.5 times. It’s still our guidance in terms of our comfort zone and you should think about it in that way.

Okay, perfect. And just one quick follow-up on that, what is your CapEx guidance for the year?

Yes, so we’ve got about $85 million to $90 million right now between growth and maintenance, so slightly more on the growth side, right. So, we would be at about 40 to 45 on the maintenance side and then I know we’d be sitting about 45 for growth as well.

Great, thank you very much.

Yes. And that would be subject to some other small tuck-ins and the few opportunities that come on the growth side, that would come in the strong business case.

Yes, understood. Great, thanks.

Thanks, Derek.

Hi, guys.

Hi, Jason.

Hi good morning.

I just wanted to look at a bit closer to this retail strength. You talked about the same-store sales growth on the convenience store in Canada.

I assume that none of the Parkland USA retail, I know it’s a lot smaller, but any data on how the specific retail component of that Parkland USA is performing on a convenience store level, I’m not even sure what level of convenience sales there are on that that segment, but could you sort of contrast what’s happening there?

Yes, I mean, in the U.S., we have 20 retail sites. And from a non-fuel gross profit perspective, Mike, do you now have the number?

Yes, it’s about 20% roughly, upwards; I guess maybe closer to 30% on a sales basis as far as mix goes. But I think regionally what you’d see there Jason is we’ve been growing that business like, for example into Bismarck and other public markets that are more stable.

So, if you look in the minor area, where we’re seeing although the less activity due to the Bakken and drilling. We’re seeing some change there, much like we see in Northern Alberta.

But when you look at the periphery and into Minnesota and Bismarck, we’re not as tied to that type of activity. We’re seeing some pretty resilient results.

And I think our teams continue to work with the retail guys wait on hand and foot to drive productivity at the site level as well on those markets.

Okay. Is there an opportunity to bring on the run into the U.S.

or is that not possible?

No, we only have rights in Canada to the brand, so that was part of the – somebody else has the rights in the U.S., I believe constructed.

Got it. Okay, thanks guys.

And we have one question that came in online directly to us, which I will readout. Congratulations on the strong quarter.

I was impressed by the 7.5% C-store same-store sales growth. Can you give us some color on what drove the increase?

Whether there’s some promotions or are there marketing campaign?

So again, two things: one is conversion of forecourt to backcourt and that was a key driver, mainly driven to the refresh and then some promotional item set the pump to basically link the forecourt purchase to the C-store. And then the other item is strong merchandising.

You know some great examples here confectionary up 5%, beverage is up 8%, gift card is up 11%, tobacco up 15%, so those are all great examples of really focusing on the merchandising the mix and making sure that the offer is relevant to the consumer that’s visiting the site.

Operator, we have no more questions that have come to us directly. Are there any online?

Okay, thanks. Thank you very much.

Thanks for joining the conference call today. I appreciate everybody’s support and look forward to talking to you next quarter.

Thanks.

Great, thank you.

Thank you.