Parkland Corporation

Patricia van de Sande - Vice President, Investor Relations & Compliance Robert Espey - President and Chief Executive Officer Mike McMillan - Chief Financial Officer

Kevin Chiang - CIBC World Markets David Filion - RBC Capital Markets Michael Van Aelst - TD Newcrest Dirk Lever - AltaCorp Capital

Good morning. And thank you, Patricia.

And welcome everybody to our third quarter 2016 webcast. I'm pleased to announce a strong quarter where the Parkland team delivered better than planned.

Unfortunately, many of our analysts have not reflected the seasonality in our business properly. We will certainly spend some time with you post the call to make sure you get a better understanding of the dynamics in our business.

As I stated, Parkland delivered on our quarterly plan with the CAD 60.4 million in adjusted EBITDA, which was an increase of 2% compared to the quarter in 2015. We delivered 2.7 billion liters of fuel and petroleum products, which were down slightly compared to Q3 2015.

I am pleased to report that on a year-to-date basis, we saw growth in both volume and adjusted EBITDA of 9% and 17% respectively. The EBITDA growth in the third quarter of 2016 has been driven predominantly by our supply and wholesale and retail divisions, who exceeded results in the third quarter of 2015 by 32% and 5% respectively.

Our Commercial division at Parkland USA’s adjusted EBITDA were down against Q3 2015, largely due to continued softness in economic activity and continued cost in Commercial associated with some new business, which we recently won. Using the three key pillars of a five-year strategy, Parkland has been able to grow in a challenging economic climate, again, demonstrating the strength of our diversified business model.

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

Great. Thanks, Bob, and welcome to all those joining us this morning on the call.

Overall, Q3 was a solid quarter that is in line with our annual plan. As you can see, our Retail and Supply and Wholesale divisions performed well against the third quarter, exceeding Q3 2015 adjusted EBITDA by CAD 1.9 and CAD 5.7 million respectively.

Commercial and Parkland US did experience decreases in adjusted EBITDA year-over-year due to economic softness. However, the teams continued to execute well on the aspects of the business within our control.

As an example, in Commercial, the tank installations related to the new propane business we’ve discussed in prior quarters is progressing well ahead of schedule. Our corporate costs experienced a CAD 1.7 million of increase year-over-year in MD&A expense due to a non-cash deferred share unit revaluation expense as a result of the appreciation in Parkland share price in Q3.

The remainder of the year-over-year increase is mainly due to higher planned employee-related costs to support our growth initiatives and M&A activity. Overall, as Bob briefly stated, we're pleased to report a year-over-year increase in adjusted EBITDA of 2% in the quarter.

If you exclude DSU expenses noted, that would be approximately 5%. Moving to the next slide, you'll see more detail around our segment results.

Our Retail segment achieved another solid quarter, with increased fuel volume primarily due to strong same-store sales volume growth in Eastern Canada, which more than offset softer volume in Western Canada. The adjusted gross profit increase was largely due to stronger non-fuel performance, which includes items such as convenience store rents, carwash revenue and sales of selected merchandise.

Costs were managed well. And Retail adjusted EBITDA increased 5% year-over-year.

Although there was a slight decrease in volumes compared to Q3 in 2015, our Supply and Wholesale segment achieved increases in both adjusted gross profit and adjusted EBITDA. The slight volume decrease was primarily due to lower gas and diesel in Ontario and Quebec driven by increased competition there.

This decline was partially offset by an 18 million liter increase in LPG volumes, attributable to new trans-loading relationships, growth in propane, and the 12 million liter increase in crude, asphalt and fuel oil volumes attributable to strong sales. Adjusted EBITDA increase of 32% reflects the significant progress the team has made in improving our supply economics and reducing operating costs.

Our Commercial segment saw a 21% decrease in third quarter adjusted EBITDA, driven mostly by a decline in diesel volumes as a result of reduced economic activity in Western Canada. This was partially offset by growth in Parkland’s propane business and the contribution of additional 2 million liters of propane volume from the acquisition of PNO [ph] in Quebec.

On a year-to-date basis, the Commercial team invested CAD 1 million in two new sites in Western Canada, of which approximately CAD 700,000 of these startup costs were included in Q3 OpEx. Additionally, we have installed over 3,000 new propane tanks to deliver on the previously reported 100-million-liter propane win that will see significant volume beginning to stream in Q4.

The decrease in Parkland USA’s wholesale volume is attributable to reduced economic activity in the Bakken region, and most notably in North Dakota. Adjusted gross profit decreased due to lower activity in the region and resulting competitive pressure in the quarter.

Costs for the business were being well-managed and the lower adjusted EBITDA corresponds with softer activity as noted. On the next slide, our year-to-date waterfall chart shows that our diversified business model is to drive resiliency in our cash flow and growth.

As we’ve mentioned earlier, our Retail, Supply and Wholesale teams continue to achieve strong results with third quarter being no exception. Overall, as Bob previously noted, we're pleased to report a year-over-year increase in overall adjusted EBITDA of 17% on a year-to-date basis.

I’ll now turn it over to Bob to discuss our operational key PIs.

Great. Thanks, Mike.

The key performance indicator metrics for each division are in place to help provide more insight into our business and are cascaded throughout our organization to ensure all our team members are aligned with these performance measures. We have modified how we are showing our year-over-year comparisons, so that they are now done on a better/worse basis, so positive numbers are favorable results.

Starting with Retail, the division performed well again in Q3 despite overlapping Parkland’s Pioneer – Parkland’s ownership of Pioneer. Net unit operating costs or NUOC was higher in the trailing 12 months as compared to the same period of 2015 due to the higher cost structure of Pioneer Energy, which has a higher concentration of company sites.

However, NUOC has been a steady improvement in the last 12 months post-acquisition of Pioneer Energy as a result of growing our non-fuel margin and successful cost control initiatives. The team continues to drive strong organic growth in convenience stores with Q3 same-store sales growth of 3% nationally and 10.4% in the east.

In the east, same-store sales growth was led by a 48% growth in hot beverages on a year-over-year basis. This stems back to our coffee program that Parkland implemented when we purchased Pioneer.

Our commercial division has been impacted by prolonged economic softness in the west, a familiar theme from last year and a warmer winter season early in 2016. Gasoline and diesel volumes decreased by 6% year-over-year.

However, our propane volume increased 35% year-over-year, which was driven by several propane tuck-ins in 2016 and strong organic growth. Our Commercial team remains focused on winning new business and gaining market share, all while managing cost effectively.

The team signed 20 million liters of new on-site refueling business in Western Canada and renewed its agreement with CANEX, which represents 6,500 residential accounts nationwide. We're continuing to manage costs, optimize operations, drive efficiency and build market share, which is helping to partially offset the economic headwinds that have continued into 2016.

Parkland USA continues to perform well on the retail side, with volumes up 3% compared to Q3 2015. However, Wholesale volume was down by 18% due to lower wholesale gas and diesel volumes and margins as a result of lower economic activity in the Bakken oil region.

Even with the persistent economic softness, the Parkland USA team continues to execute on our long-term strategy to expand our presence in the region, as evidenced by the recent announcement of the signing agreement to acquire two truck stops and one retail station in Wyoming. Mike will now discuss our corporate KPI performance.

Thanks, Bob. On the corporate side of our business, our back office team continues to work hard on managing costs and driving synergies.

As noted earlier, our corporate adjusted MG&A as a percentage of consolidated adjusted gross profit increased largely due to revaluation of our outstanding DSUs, reflecting the appreciation in Parkland share price in the quarter and planned growth related costs. The dividend payout ratio and adjusted dividend payout ratios were 99% and 83% respectively, which increased on a year-over-year basis, mainly – related mainly to higher shares outstanding and the timing of our current tax expense of approximately CAD 6.8 million that Parkland is expected to recover within the next two years.

Our LTIF KPI demonstrates our commitment to ensuring a safe work environment that protects our employees, our customers and the environment. I’ll now hand the call back to Bob to give an update on our strategy, execution and priorities.

Thanks, Mike. Overall, our performance in Q3 continued to deliver on Parkland’s three strategic pillars – grow organically, deliver a supply advantage, and acquire prudently.

Parkland demonstrated our ability to grow organically through excellent same-store C-store sales growth in the east. Our team achieved two firsts for Parkland in Q3.

Our first retail site in Québec located in La Prairie and our first integrated fast gas and on-the-run site located in Hinton, Alberta, which is featured on the cover of our webcast deck. Our Commercial team secured 20 million liters in on-site refueling business in Western Canada and has built two sites and installed thousands of new propane tanks to deliver on the increases in propane volume.

We are very excited to welcome David Wade to the Parkland team in Q3 as our new Senior Vice President of Supply and Wholesale. The Supply and Wholesale team continues to support further growth by maintaining ongoing improvements to our cost of supply as evidenced by their 32% improvement in segment adjusted EBITDA.

The biggest news in the third quarter was our announcement regarding our agreement to acquire the majority of the Canadian business and assets of CST Brands, Inc. We are excited to add the Ultramar brand to our portfolio.

Our process with the Competition Bureau on this acquisition is proceeding. We are working diligently through the process with the bureau and on track to close the transaction in Q1 2017.

We don't have the number of company-operated retail sites that will be included in the acquisitions, but we’ll provide an update upon closing of the transaction. Also, in the quarter, we closed the previously announced acquisition of the business and assets of Stony Propane, which we will be rebranding to Bluewave Energy.

Subsequent to the quarter, Parkland closed the previously announced acquisition of On the Run/Marché Express from Imperial Oil. Our team is diligently working on the development and rollout strategy for this leading convenience store brand.

We will share more color with you on these plans as they solidify. Also, subsequent to the quarter, we signed an agreement to acquire the business and assets of The Propane Guys, who service customers in Saskatoon, Saskatchewan area.

We also announced and signed agreements to acquire PNE Corporation, a Canadian national provider of propane cylinder exchange services and three sites from 7-Eleven in and around Cheyenne, Wyoming. Despite a strong acquisition quarter, our acquisition pipeline remains robust for all sizes of targets.

Overall, our business continues to perform exceptionally well in a challenging economic environment Western Canada and the Bakken region in the US. Our team's relentless effort on managing operational effectiveness, building market share, and making investments with good returns, delivering resilient results.

Our Q3 and strong quarter-to-date results, coupled with the ongoing successful execution of our strategic plan, make us confident in our ability to comfortably deliver within our 2016 guidance range of CAD 235 to CAD 265 million in adjusted EBITDA.

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

Hi. Thanks for taking my question here.

Maybe just turn to your guidance, you’ve kept the range CAD 230 million to CAD 265 million. I’m just wondering – as you enter this year and you set your guidance, if you assume the midpoint, bake in some macro view, you’ve made some acquisitions, you’ve won some market share of the propane side, I’m not sure how the macro environment has changed relative to your original expectations, I’m just wondering how that flexes within your goalpost.

Are we moving to the higher end of that or are we moving to the lower end of that? And I guess, I asked because when you look at the first three quarters, to get to the upper end of your guidance would require something like CAD 89 million of EBITDA.

Is that even possible in the environment, given we have less than two months left in the year?

That’s a good question, Kevin. Again, we do give a range because the business does fluctuate around over the year.

What I can say is we’re comfortably within that range. We have had some headwinds, particularly in the West, which I would say would tamper the upper end of that.

But, certainly, we’re comfortable within the range that we’ve provided and aren’t adjusting our guidance at this point.

That’s helpful. And just from a cost perspective, it looks like you had a little bit of additional cost on the operating cost line within retail, investing in some of the newer sites, as you noted in your MD&A.

You had a little bit of higher cost in your corporate line as you noted from the DSUs. Just trying to get a sense of if some of these costs are transient or Q3 specific or should we be expecting some of these costs remaining elevated through the next few quarters here as you continue to invest.

And maybe if you can provide a sensitivity around your share price to those DSUs just so that we model that correctly.

Why don’t I start off and Mike you can comment on the MG&A. In terms of operating expenses in Retail, and they will bump around a bit, but, again, the key metric we focus on is net unit operating costs, which is trending in the right direction and which is the non-fuel margin less OpEx less MG&A over the volume.

And, certainly, as we have had shortfalls in the West, relative to our gross profit, our OpEx is a little higher because we do have some fixed costs in there, but the team is working hard to continue to push that down. And, certainly, as we start to see things stabilize and recover, we’ll see that go down on a relative basis.

And just on that too, Kevin, I think, like you say, as you think some of the sites that we acquire, as the company operated location, you would – as you know, you’d note a little higher OpEx. With that, we would see complementary non-fuel and fuel margins as well.

So, a good return on those locations. So, I think when you think of what site additions that the company operated, you’ll note that OpEx will trend a little bit higher.

When I think of the DSU question, the things that are affected by our change in our share price really are just the DSUs and there are some legacy stock option, which were about the CAD 0.3 million in the quarter as well. And it was, as you know, quite a marked increased in our share price.

So around the last quarter, we were trading in around the CAD 22 to CAD 23 range. And so, it was a significant appreciation.

So, we don't expect that to be something that you would experience. But there is a mark-to-market on the DSUs only because they are settled in cash and we’re all beginning to do that.

So, we’ll look to make sure that we disclose that as we go forward just so that – if it's material.

That’s helpful. Just on the West, Bob and Mike, the continued challenges, are things starting to stabilize or are you seeing still weakness there as you look at your commercial and retail channels?

I would say, it’s still a challenge, particularly as we roll forward here, we are seeing the year-over-year start to come up. But it’s still negative.

The differences in commercial particularly we’ve offset a lot of the shortfall with some organic growth. In Retail, that takes a little longer to offset because you’re limited by the number of sites and your ability to build new ones.

But we are adding. At the front of the presentation, we showed a new site in Alberta that recently opened and we’re seeing good traction with that capital.

So, again, I can’t predict how long we’ll have the headwind, but certainly we haven’t seen it fully recover at this point.

No, that’s very helpful. And just last one from me, just on the tax comment, I did notice a bigger tax deferral drag on your operating cash flow this quarter.

It sounds like some of that will reverse in the coming years. Can you just walk me through how that cascades over the next few quarters and just how I should be thinking about that line item from a modeling perspective, I guess?

Sure. Yeah.

Thanks for that. The way to think about it is our effective tax rate that you’ve modeled long-term I don’t think should change at all, Kevin, based on the current mix of business and so forth.

What it relates to is just some cleanup of a number of our entities and as we amalgamate a couple of things. Basically, what we've done is, we've paid some tax currently and we’ll get the deductibility here in the coming quarters.

So, we had stated that we thought that we'd recover and we do expect to recover all the tax. It’s more just the timing between current and deferred.

And so, I guess, my guidance here would be that our long-term effective rate shouldn’t change. It’s just going to be a little bit of timing as we cleanup some entities and amalgamate a few things as a result of our acquisitions.

Okay. No, that’s very helpful.

I’ll get back into queue. Thank you very much.

Hi. This is David Filion on behalf of Sabahat.

How are you?

Thanks. Good morning.

Good morning. Could you talk a bit more about what's driving the adjusted EBITDA growth in the Supply and Wholesale business?

And do you think that level of growth can continue into next year?

There’s a couple of drivers there. One is, our team has worked hard to capitalize on our growth and improve our supply advantage.

And that’s certainly – a large portion of that was tied to the acquisition of Pioneer. So, I certainly wouldn’t project that sort of growth going forward in that area.

And then our Elbow River business has done well or continues to perform very strongly, particularly in the LPG site where our propane business is very strong. We've opened up some new customer opportunities down south and also our heavy business, which has asphalt.

HFO and crude continues to be strong as well.

Okay, great. And then, based on your outlook, do you expect leverage to be in a range where you can use that to fund larger acquisitions or would you be looking to reduce leverage first, given potentially you look at other financing opportunities for the right opportunity?

Great question. I think what it comes down to is a little bit around our timing and sequence of some of the acquisitions.

So, when we set up the financing for the CST acquisition, which may close as early as Q1, our objective there was to go to about three-and-a-half times, which is the top end of our range. At that point, what I would suggest is as the cash flows come in, we’ll certainly de-lever in.

Our guidance has been that we expect to take a minimum of half a turn off within the 12 to 18 months, certainly within 18 months post-acquisition as the synergies kick in and so forth. Subject to that, I think as we look at acquiring within a very tight timeframe, what we would likely look at is the –depending on what we pay, we would generally use available debt capacity, but not look to exceed that three-and-a-half times guidance range materially.

So, we may go a little higher than that just on a short-term basis if we see cash flow that’s robust, coming in to help us de-lever. In addition to that, in order to make sure that we stay within our guidance and comfortable range.

We’ve used a little bit of equity if that were the case. But I think we would also look at some other forms of financing depending on the nature of the acquisition.

So, I think it is very acquisition specific as well and time sensitive. So, our guidance is that we would like to have – the reason we set it at 3.5 is we do have the ability to go up to 4.5 times on a total debt basis and that gives us a reasonable buffer just to make sure that we have enough to manage working capital and small tuck-ins, as we need to.

Okay, great. That’s all for me.

Thank you.

Thanks.

Good morning. Apologize if you’ve answered any of this because for some reason the operator didn’t let me in for the first ten minutes, but I’ll follow-up with you after.

On the Commercial side, when you look at the 100 million of propane volumes that you’ll be adding. Have we seen any of that come in yet in Q3?

No. That’s still – we’re still running extra cost to implement that in Q3.

We’ll start to see that kick in here end of Q4, early Q1.

Okay. So Q1, should we expect full volumes by Q1?

We’ll be up and running in Q1.

Full run rate, yeah.

Full run rate.

What we’ve seen so far, Michael, has not been material.

It’s interesting that we actually had to install 3,500 tanks in the field. Our team did it in record time.

Actually, finished it ahead of plan. So, we did incur OpEx.

We started up two new branches. It's interesting.

Those two new branches in Western Canada and Bonnyville, Lloydminster are currently just servicing one large customer. But being in those communities as a new participant in the market there has led to some other incremental growth.

So, it's been a real enabler for us to add and expand our footprint and ultimately our product offering to two markets that we weren’t previously in, without really having to make a speculative investment. So, it's been a great opportunity for us to drive into new markets and get some good organic growth.

So, you’ve added 3,500 tanks, is that – are you supposed to go up to 6,000 or is that the total?

Yeah. That was the projection.

But the primary things, I would say, like all the major installs have been done. And now it’s sort of a secondary and smaller tank deployment at this point.

And then the – when you talked about the increased competitiveness from the higher – the excess supply of diesel, and that’s been driving the lower commercial propane margins. How long are you locking in to these lower margins and is there something we could view as transient and could up quickly if demand picked up?

Well, I would say a couple of things. So, in the commercial business, there’s two drivers on our gross profit.

One is the fuel margin. Certainly, in the West, we've seen that tighten, particularly as we’ve retained listing business.

The other component is the non-fuel component, which is the delivery component where just due to a reduction in activity, we’ve seen that come down on a year-over-year basis. So, that's the money that we get paid to deliver fuel, particularly to large commercial accounts.

Okay. You talked about lower margins in Western Canada, is that something that you expect to stick around?

Like, when you’re having to lower your margins to keep the business, are you locking into that for a year or two years?

So, two things, lower margins is mix, is one thing. So, as we've taken some larger accounts in the marketplace, I wouldn't say that our margins are lower than what we would anticipate.

It’s just that our mix has shifted to larger accounts. Again, relative to the economic softness in the marketplace, we do track our wins and losses.

And we’re not seeing any lawsuits that we need to be concerned about. I would say the dynamics in the market is that some of the smaller accounts we’ve seen volume decline more significantly than the larger and we’ve been shifting our mix here more just through the decline in the marketplace than by design.

We haven't stated as an objective to go after larger accounts at the expense of smaller accounts. I would say we’re well poised when that comes back to capture that activity as we see the economy here turn around and start to grow.

All right. Thank you.

Thanks very much. Good morning, gentlemen.

Maybe you guys can touch on, rolling out of the backcourt across the Pioneer brand. I know I asked this last quarter.

What success have you had to date? Is it encouraging you to roll it out faster?

Are you starting to see where it's location specific?

So, we haven't started to roll out the OTR brands in Pioneer. What we have done is we’ve renounced our first fast gas site in Hinton where we launched – we built a new site and we put On the Run brand.

Again, the team, particularly, for this acquisition, there’s is a big franchisee base that comes with it. I think it’s roughly 78 sites.

And the focus has been on getting the business transitioned. There’s a lot of underlying back office and support that we needed to transition across.

The team continues to work on their approach and their strategy which they expect to deliver by the end of the year and then we can provide some more insight on that rollout. We have, however, continued to see strong growth in the Pioneer backcourt driven and we talked about it on the call.

One example there was on the coffee program which we saw a 48% lift on a year-over-year basis. And also – I’m just looking through my notes here to find the – so we’ve seen food service is up by 26% year-over-year, prepaid gift cards up by 28% and coffee up by 48%.

And again, Dirk, that goes back to just getting the basics right and focusing on merchandising, making sure the merchandising is relevant to the consumer, that the mix is right in store so that the category management is appropriate and it’s in the right location. And then the other big push has been forecourt to backcourt.

So, a number of marketing programs that have started to push consumers into the backcourt. So, right now, we’re still capitalizing more on the executional side.

As we get our plans solidified with OTR, we’ll update our analysts on the subsequent call.

Thanks very much.

Sorry. I’d like just like to add one thing.

Again, I do ask you to look at our seasonality. It’s one of those quarters where the Parkland team is doing high-fives because we did very well against our plan, yet we weren’t able to communicate that effectively to you.

So please do revisit that and we’ll spend some time with you to make sure you understand the economics or the seasonality within our business. Again, I will reiterate that we’re on track to be comfortably within our guidance range for the year.

Okay. So, thanks very much for taking the time to join our call for the 2016 Q3 results.

Thanks very much.