Parkland Corporation

Ben Brooks - Vice President, Treasury and Investor Relations Robert Espey - President and Chief Executive Officer Mike McMillan - Chief Financial Officer

Kevin Chiang - CIBC World Markets, Inc. Michael Van Aelst - TD Securities Inc.

Trevor Johnson - National Bank Financial Derek Dley - Canaccord Genuity

Good morning, everyone and welcome to Parkland Fuel Corporation’s Q2 Results Conference Call. On the call again today, is myself Ben Brooks, Vice President of Treasury and Investor Relations.

With me in the room Bob Espey, President and Chief Executive Officer; and our Chief Financial Officer, Mike McMillan. They’ll be providing an update on our business development and performance as well as updating you on some of our strategic initiative.

Pointing everyone to my favorite Slide, Slide 2 of the presentation. 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 meanings prescribed by GAAP, will be referred to during the presentation.

These measures are identified and defined in Parkland’s continuous disclosure documents, which are available in our website 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.

Bob and Mike again walk you through the story of the quarter and the results of our various businesses, and then following this, we would take any questions you may have at the end of the call. With that, I’ll turn things over to Bob.

Thanks, Ben, and welcome everyone to our second quarter earnings call for 2017. On the front page of our presentation is a photo of the first Ultramar Parkland dealer site we opened post CST close.

It's located in Scarborough, Ontario and it’s a great example of what the team can deliver, and why we're so excited about what the Ultramar team will bring to Parkland. Another important milestone for PKI is our IT team.

This team recently finished the major upgrade project to Parkland’s ERP environment. This was a complex project involving just about every function within Parkland to deliver, but spearheaded by our technology team.

It was a project that had been worked on for over 18 months and was delivered on-time and demonstrates what the Parkland team can do as we start to integrate our new businesses into Parkland. I would like to thank the project team for their exemplary performance.

Looking at Slide 3, we delivered adjusted EBITDA CAD 53.6 million in the second quarter. While our underlying KPI’s are strong the quarter was a bit lower than we anticipated as a result of a softer quarter in our more volatile Supply and Wholesale segment.

On the positive side we saw some strong flow in our retail fuel segment as well as Parkland USA and we closed our CST transaction and welcome the Ultramar team to Parkland. Overall we continue to be confident in our base business and growth plans and with the closing of CST we are increasing our full-year guidance range to CAD 310 million to CAD 340 of EBITDA.

On a year-to-date basis Parkland has achieved a record adjusted EBITDA of CAD 123.6 million in the first six months of 2017 which represents 6% growth as compared to CAD 116.1 million achieved during the first six months of 2016. Strong performance was driven by growth in commercial fuels Parkland USA and Supply and Wholesale segments.

Commercial fuels grew by 18% driven by increased fuel volumes strong organic growth efforts in customer wins. Parkland USA grew by 17% as a result of growth in the Lubricants business, the contribution of new sites in organic growth at existing sites.

From a volume perspective we achieved a 2.1% growth in volume delivering approximately 2.6 billion liters of fuel and petroleum products in the second quarter of 2017 compared to the 2.5 billion liters in the second quarter and 2016. Volume increases driven by growth in propane volumes in commercial fuels in Supply and Wholesale segments and growth in gas and diesel volumes and retail fuels in Parkland USA.

We delivered 5.3 billion liters of fuel in petroleum products in the first six months of 2017, representing growth of 7% compared to 5 billion liters in the same period of 2016. This volume increase was driven by growth in all of Parkland segments particularly in the Supply and Wholesale segment or propane volume grew by 60.1%.

I'll turn it over to Mike, who will provide you with an update and how our business segments did in Q2.

Great. Thanks Bob.

Thank you all for joining us on the call this morning like to extend a warm welcome to our Ultramar team in the east as well. Parkland’s retail fuels adjusted EBITDA for the second quarter of 2017 grew to CAD 37.4 million compared to CAD 36.1 million for the same period in 2016.

This increase was primarily driven by higher margins on gasoline and diesel sales and higher non-fuel adjusted gross profit from investments made in the merchandised marketing programs partially offset by higher operating cost as a result of new large format company sites being introduced into the market, and marketing, general and administrative expenses due to increased investments in our marketing campaigns. Commercial Fuels adjusted EBITDA for the second quarter of 2017 was CAD 5.5 million compared to CAD 6.5 million for the same period in 2016.

Volumes in both diesel and propane grew. The primary driver of the slightly lower EBITDA was due mainly to lower average fuel margins due to the shift in our customer mix towards larger accounts reflecting our customer wins.

Parkland USA saw an exceptional quarter that is outperforming the regional business environment with its second quarter adjusted EBITDA growing to CAD 5.1 million compared to CAD 3.4 million for the same period in 2016. The 50% increase in Q2 was primarily driven by growth in the lubricants business which saw improved margin year-over-year, growth in the retail division with the addition of three new sites in Wyoming as well as organic growth at existing sites.

Supply and wholesale adjusted EBITDA in the second quarter of 2017 was CAD 17.8 million as compared to CAD 23.1 million in the second quarter of 2016 primarily driven by tighter margins mainly in the crude and propane business. Corporate MG&A expenses increased due to higher acquisition integration and other costs incurred primarily as a result of the CST Brands Canada and Chevron Canada acquisitions.

Excluding the impact of these costs, corporate adjusted MG&A expenses decreased due to cost control initiatives and lower variable compensation. As a result corporate adjusted EBITDA expenses improved from CAD 12.7 million to CAD 12.2 million.

Moving to Slide 5, you'll see some more detail around our segment results on a year-to-date basis. Importantly, what you'll see is that we've experienced growth in almost all of our business year-to-date.

Retail on a year-to-date basis, retail fuels adjusted EBITDA was CAD 62.8 million in 2017 compared to CAD 64.5 million in 2016. This was primarily due to higher marketing, general and administrative expenses as investments were made in merchandise marketing programs whose results were not being realized until later in the second quarter of 2017 and are anticipated to continue into the balance of 2017 and beyond.

Commercial on a year-to-date basis, our commercial fuel segment adjusted EBITDA grew to CAD 34 million as compared to CAD 28.8 million for the same period in 2016. This 18% increase was primarily driven by increased fuel volumes and related service contributions across the segment.

Strong organic growth efforts, the impact of recent customer wins in contributions from P&E, our recently acquired propane cylinder exchange business. Parkland USA saw its year-to-date adjusted EBITDA grow to CAD 8.1 million as compared to CAD 6.9 million for the same period in 2016.

Previously mentioned this increase was primarily driven by growth in our lubricants business which saw improved margin year-over-year, growth in the retail division with the addition of the new sites in Wyoming as well as organic growth at existing sites. On a year-to-date basis, supply and wholesale adjusted EBITDA grew from CAD 39.3 in 2016 to CAD 41.1 million in 2017 primarily due to higher than normal propane sales experienced in the first quarter of 2017, higher company volume and the benefits made to our supply economics in optionality that continued throughout the end of the first quarter.

This team is committed to driving ongoing improvements to our supply economics and optionality as part of our strategy to build our supply advantage. In the second quarter of 2017, the Retail Fuel segment fuels volumes increased primarily due to the increased number of retail sites from acquisitions in 2016 and 2017 as well as organic growth through a greater number of dealer sites.

Adjusted gross profit improved 6% year-over-year driven by non-fuel adjusted gross profit increasing primarily due to strong company convenience store, same-store sales growth from investments made in the merchandised marketing programs as well as royalties collected from on the Run franchise acquired in October 2016. This was partially offset by lower car wash margin contribution due to the inclement weather in Eastern Canada.

In addition, we saw higher fuel and petroleum product adjusted gross profit as a result of slightly higher margins on gasoline and diesel sales. In the Commercial Fuel segment, fuel and petroleum product line increased primarily as a result of 26% growth in propane volumes, driven by strong organic growth and the impact of business acquisitions completed largely in 2016.

Adjusted gross profit increased mainly due to an increase in non-fuel adjusted gross profit, primarily attributable to the contribution of P&E’s propane, cylinder exchange business acquired in December. This was offset due to the lower margins, due to a change in our customer mix I’ve noted.

The increase in Parkland USA’s fuel volume is primarily attributable to the acquisition of three service stations I noted earlier in Wyoming and the implementation of a competitive strategy to increase market share of fuel resellers in a Bakken region. Adjusted gross profit increased 16% in the second quarter of 2017, primarily due to growth in the lubricants business.

We saw improved margin year-over-year growth in the retail division with the addition of the new sites in Wyoming, organic growth at existing sites in greater Company C-Store sales. In Supply and Wholesale, fuel volume decreased primarily due mainly to volume decreases in the crude and gasoline blend stocks businesses.

This was partially offset by growth in our diesel and biodiesel business. We saw volumes grow by approximately 22%, as previously highlighted, adjusted gross profit decreased primarily driven by tighter differentials particularly in crude and propane businesses.

I'll now turn it back over to Bob to update our key performance indicator – performance for the quarter.

Thanks Mike. In the retail business, our net unit operating costs was higher in the trailing 12 months ended June 30, 2017 compared to the same period in 2016, primarily due to higher marketing, general and administrative expenses for investments in marketing initiatives to drive long-term future growth.

Although same-store sales growth was minus 0.2% in the second quarter of 2017 and lower than the second quarter of 2016. The metric improved by 1.1 percentage points compared to the first quarter of 2017.

This was attributed to year-over-year improvements in the Western Canada market and modest growth in Eastern Canada. Company C-Store same-store sales growth improved to 6% showing positive growth both in the east and west, primarily due to strong backcourt convenience store sales driven by investments made in On the Run and other merchandise marketing programs.

This is a continuation of positive Company C-Store same-store sales growth quarter-on-quarter as a result of ongoing initiatives refinements and store refresh programs. Average volume per active company site and dealer site remain stable year-over-year.

In Commercial Fuels, fuel and petroleum products growth – adjusted gross profit on a cents-per-litre basis decreased primarily due to lower margin – lower fuel margins driven by a change of customer mix due to the addition of larger lower margin commercial accounts. Operating costs in the cents-per-litre basis increased due to the impact of P&E’s propane cylinder change business that has the higher operating cost base during the spring and summer months.

Parkland continues to implement cost control initiatives, including the rollout of fleet routing and dispatch automation in order to reduce costs. And at Parkland USA, fuel and petroleum product adjusted gross profit increased on a cents-per-litre basis mainly due to increased retail volumes, which have higher margins than the wholesale business.

The trailing 12-month operating ratio remained relatively flat year-over-year as Parkland continues to implement cost control initiatives, despite softer adjusted gross profit results. I'll now turn it back to Mike, who will discuss the results of a number of our corporate KPIs.

Thanks Bob. MG&A expenses increased due to increased acquisition, integration and other costs incurred primarily as a result of the CST Brands Canada and Chevron Canada acquisitions, which includes legal, consulting, IT and professional expenses.

Parkland is working with strategic partners to successfully integrate these acquisitions and drive synergies. Excluding the impact of these costs, corporate adjusted marketing, and general and administrative expenses decreased due to cost control initiatives and lower variable compensation.

The dividend payout ratio increased as expected from 96% to 146% and the adjusted dividend payout ratio increased from 74% to 84%. These results and some of the impact seen in some of our other key financial metrics are being driven by the pre-funding of the Chevron transaction we completed in the second quarter.

The completed equity offering results in an increase in the dividend obligation and the corresponding operating cash flows will follow later in the year. These temporary impacts are expected to remain until the fourth quarter when we anticipate the Chevron transaction closing in cash flows to start to stream.

Distributable cash flow per share decreased by $0.10 primarily attributable to the acquisition integration and other costs, which were primarily related to the closing of CST brands acquisition on June 28, 2017 and a preparation for the closing of our Chevron Canada acquisition. Our total funded debt-to-EBITDA or leverage ratio is lower than we originally had forecast on the closing of the CST transaction again driven by the Chevron transaction pre-funding.

Access cash as a result of the financing offerings closed in the quarter is offsetting our reported debt reducing this ratio which is expected to remain low until the fourth quarter. Excluding the impact of the pre-funding the leverage would have been in line with our previously communicated estimates.

I'd now like to turn it over to Bob who will touch on how this last quarter delivered on our strategy and how it positions us well for the balance of the year.

Thanks Mike. To wrap up Parkland continues to the lever on a strategic plan.

Grow organically our Q2 results show continued organic growth in volume with 2.6 billion liters of fuel and petroleum products delivered and outstanding company convenience store same-store sales growth at 6% as a result of continued marketing efforts in Parkland’s convenience store offer. Also saw exceptional growth at Parkland USA with the second quarter adjusted EBITDA growing to CAD 5.1 million compared to CAD 3.4 million for the same period in 2016.

On a year-to-date basis Parkland has achieved a record adjusted EBITDA of CAD 123.6 million in the first six months of 2016, which represents 6% growth as compared to CAD 116.1 achieved during the first six months of 2016. Parkland also continued to deliver a supplied advantage on a year-to-date basis supply and wholesale adjusted EBITDA grew from CAD 39.3 million in 2016 to CAD 41.1 million in 2017.

On the acquisition front we closed one of our most significant acquisitions to date. The majority of the Canadian business and assets of CST Brands, Inc., the Parkland teams are now actively engaged with our new members in Eastern Canada to move to the next phase of this business integration.

While our synergy expectations continue to be in line with our previously communicated plans. We also announced that we have entered into an agreement with Chevron Canada Limited to acquire all of Chevron Canada's downstream fuel business, which will strengthen our supply focus.

Focus business model and add significant scale with the premier Chevron retail brand in network and British Columbia. The integration efforts are well underway across the Parkland team and the transaction is continuing to track towards a Q4 close.

As a result of the closing of the CST transaction Parkland it's reconfirming it's 2017 based business guidance and increasing the guidance range to 310 - from CAD 310 million to CAD 340 million to factor in the impact of having six months of the contributions from this new business. Now this guidance does not include any contribution from the previously mentioned Chevron transaction.

In closing, I'd like to thank all of you for joining us this morning and we extremely proud of the significant work the Parkland team has put into not only our based business results but also closing our largest acquisition today. Announcing the largest acquisition in our history as well as completing a very successful ERP upgrade all in the space of three months.

Thanks, Bob and Mike. At this point, we would like to turn it over to the operator to open the lines for questions.

Hi. Good morning and thanks for taking my question here.

Maybe just a couple of modeling questions to start off. You noted that MG&A and op costs are a little bit harder in retail given some of the investments you're making now.

Just wondering how we should be thinking of that line item either on a cents per liter basis or whatever you think makes sense over the – call it the near to medium term here? And when do you think those expenses start to roll off here?

Hi Kevin, good morning. It’s Mike here.

Yes, it's a great observation. I think for the balance of the year, we'll continue to invest in a couple of things along those lines, so in terms of marketing campaigns around the On the Run investment.

On some of the marketing private label that we mentioned, things like that as we pilot a few of these campaigns and so I don't see it persisting into 2018 throughout the entire year, but I would say for the second half I would suggest that you model something reasonably close, and it'll taper a little bit towards the end of the year at times, right.

Perfect. That's helpful.

And then secondly just on supply and wholesale, you’ve provided a lot of good color there. I know this is a bit of a catch all division for your company, but just wondering when I think of the variability or the goalposts of profitability within supply and wholesale, is there anything you could help us with in terms of EBITDA on a cents per liter basis.

Just to get a sense of how volatile that can be in a given quarter or in a given year based on some of the inputs?

Yes Kevin, it’s Bob Espey. The reason why we tend to focus on the annual – giving annual guidance and not doing a quarterly is we do have volatility in that segment.

And we expect that it will bounce around quarter-to-quarter, but on a full-year basis, we're not changing our guidance.

Okay. Even on a annual run rate those are – is there a way to think about how much variability there's in supply and wholesale relative I guess to your base assumptions in terms of what can drive it higher or what can drive it lower through the year and even just outside of the quarter, but just kind of through the year?

Kevin, it’s Ben. I mean I think when we look at supply and wholesale, I mean probably the way to think about it on an annualized basis is, probably volatility in that kind of 6% to 8% range which is obviously slightly higher than on retail and commercial businesses, so that's how I think about it.

Okay. That's helpful.

And just lastly for me, you noted the piloting of the On the Run, just any updates there in terms of as your strategy or how you tweaked that strategy as you run through these pilots? Are they coming as expected in terms of returns and what you thought you'd be doing with this banner or any update there would be helpful?

Yes Kevin, it’s Bob. I would say it's very early days, we just launched that this summer, so we really don't have any results yet that we can report against.

What I can say is you would asked previously about the higher MG&A in retail and that team has been very busy working on the relaunch of On the Run, our private label offer which we do have concepts now that we're working with and testing in front of consumers and our loyalty program which we’ll expect to see rolled out next year. So a lot going on in that space and a lot to look forward to as we continue to add retail sites to Parkland.

That's helpful. Does it change your view on terms of long-term split between company sites and dealer sites?

It seems like a lot of these initiatives – you get increasing operating leverage if you add more company specific sites?

Yes. I would say the initiatives impact both, our company and our dealer business.

We also do have agents and franchisees on the convenience-store side that will benefit from this, so we see it is helping the broader network.

Okay. Thanks for that.

And congrats on closing the CST deal.

Great. Thanks Kevin.

Hi, good morning.

Good morning, Michael.

You had some strong performance on the KPIs, but the margins in the commercial and supply and wholesale were closer to the bottom end of the historical ranges you mentioned. Can you explain what was level – what was different in Q2 in each of those segments?

I was a little confused by the commercial comments because in the press release you talked about margins being hurt by the length of diesel in Western Canada and lower commercial propane margins? And then on the call you mentioned a shift towards larger accounts.

Are they connected?

I would say the impact of that is a shift of the mix, not the length in the market. So what we've done there is and as you're aware we've added a number of large commercial accounts both in propane and diesel and they tend to be a lower margin, but much higher volume.

So from a contribution perspective, they’re great pieces of business. And they also allow us to have significant efficiencies within our distribution.

So overall great pieces of business they have impacted the – mix has changed in the margin is somewhat lower.

So if I'm not mistaken, this is the last quarter that you'll see and then you're going to lap propane business. Is there – was there more propane or diesel business that kicked in this quarter on top of that that shifted the mix further?

And so we continue to win in the marketplace. We have one more commercial business, not the same extent to which we've done in previous quarters.

And we’ve also been winning diesel business as well. So a number of large accounts there.

So not expect to see continued margin pressure there as we go forward for the balance of the year.

Okay. If you turn to the retail side, the 6% jump in the same-store sales were – it was quite impressive, particularly when it came off with the back of a flat Q1 performance.

Can you update us on some of the key programs that led to that jump?

Yes, so the key programs there would be – we’ve been in adjusting our cigarette offer, particularly in Western Canada to have more favorable pricing and our convenience team of category managers have been pushing aggressively on the offer making sure that we're placing. We've been looking at our velocity of items and then making sure we're pulling the low performers quicker than we would normally do.

So I'd say it's changed in the cigarette offer, continuing to refine the merchandising and then there's also been left because of the cigarette offer and increase traffic. What we've seen also is an increase in conversion for court to backcourt.

So that's a metric that they’re being monitor and we've seen that come up as well. So some good comps there all around, which are linked and that one is linked to promotional activity where we've – and we’ve talked about this in the past, but we've had a shift in our promotional activity from fuel focus to get fuel and drive traffic into the backcourt and we see that paying off.

And. I guess the final question for now is just on the CST synergies.

I think you had mentioned CAD 25 million lost in terms of what you're looking for, given the fact that it took longer to close this deal. Do you think you got a head start on planning this and therefore it can hit the ground running and generate a higher percentage of – in year one?

No, we're still confident with the original projections at this point. One thing is that we're doing is engaging our Ultramar team in the east to help us with our planning.

And should we feel that we can deliver those quickly – quicker will update accordingly.

So is 20% in year one, reasonable or is should be higher?

So our original projection was CAD 25 million by the end of year three.

Right. So how would you split that up over the three years?

Yes. I don't have that exact split Michael.

We can follow-up with you on that.

All right. Thank you.

I think part of the way to think about it is we've always sort of talked Michael is around like the three areas that we generally see the synergies flow in. And I think in this case because of the supply side, it is tied somewhat into the rail contract and we're just getting into some of those things.

It will take a little bit more time on that side, but operationally it will be contingent on the transition of systems in integration side. I think we want to be reasonably conservative on the timing and how we bring the businesses under the same platforms.

Really that’s the ERP, our point of sale in front counter systems and so forth and then how we realize some of those benefits. I think we'll be able to do something in terms of purchasing merchandise and just streamlining a little bit of our execution and so forth operationally just with tighter geographies and so forth.

But just to give you a little bit of flavor, I would say it's more operational in back office and pending is on the supply side until we get into that.

Good morning, gentlemen. Just looking at Parkland USA, you mentioned that it seems like you're outperforming your peers in the area across the number of your verticals there.

Just curious if you could just give a bit more color in terms of the underlying dynamics that might be causing that and then the sustainability of this – of the beat in terms of Q2 results?

So in the U.S., again the team has done a fabulous job on a number of fronts. One is we've seen them gain some market share in the markets on the wholesale business.

We've seen some of our long-term customers increase their volumes because there is – the activity is slowly starting to come back. The team is also really focused on cost control and continues to look for every opportunity there to run the business efficiently and we're seeing that payoff in the quarter as well.

And then the lubricants business has done very well. And again if you recall from previous conversations that the lubricants business there, the teams always made sure that they've got a diversified customer base and it's not specifically tied into the oil and gas business – certainly oil business and as a result we've seen some good margin growth in that business over the last quarter.

Great, and I know your team and your balance sheet is a little bit tough right now in terms of much in terms of M&A, but curious if you're able to maybe make some tuck-ins in markets where it might make sense i.e. the U.S.

given that you’re starting to get more traction there. It looks like just curious what the appetite maybe for smaller tuck-in M&A over the 12 months?

I would say first of all, we're always pushing the business for underlying organic growth first and foremost and have a robust program in place to continue to invest in the base business. On the small tuck-ins, as always we tend to be as opportunities arise or evaluate those and look to purchase some.

At this point, we certainly haven't some consciously slowdown on the tuck-ins as we integrate these businesses.

Answer – but just curious what the political of landscape in D.C. subsequent to your Chevron announcement?

Does this change anything from your end or is there anything that you guys are dealing in just to me be cater to the new provincial government there that might be a bit different to what the legacy government was aiming to do and accomplish?

I would say we're in different to the government. We're still very – have a high conviction around our investment thesis there and what we're seeing is certainly working to get that deal closed and integrated in the change in governments from our perspective will have no impact on the business case.

That's great. Thanks so much, guys.

Great thanks.

Yes, hi guys, just following up on that last question, in terms of the propane market given the consolidation that we’ve seen in that space between Superior and Gibson. Have you guys seen any potential acquisition opportunities come up there and customers are maybe looking to diversify out of there supply base?

Our team is always active on the sales front. I would say at this point that those businesses still remain independent and are still operating very well as they've done in the past.

They both have always been good competitors and we certainly have been able to compete effectively against some and we’ll have to see once they close and how the integration goes to how that [indiscernible].

Okay. And on the retail side, you guys have slight improvement here in terms of your same site volumes on the fuel side.

Can you talk about just cadence of the volumes during the quarter? Did you see improvements throughout the quarter and obviously Western Canada still little bit weaker, but it sounds like and it is improving?

I would say overall the year we've had a slow improvement throughout the year. We started off in January, February actually quite far behind the previous year and we've seen a catch up here over the subsequent months.

So again always tough to predict how things will unfold for the second half of the year, but we are seeing activity or certainly the volume go in the right direction here, as we go through the year.

Okay. Thank you very much.

Great. Thanks Derek.

Thanks Derek. End of Q&A

Okay, great. Well, thank you very much.

I appreciate the opportunity to talk about Parkland in our second quarter results and we look forward to touching base in November when we announce our third quarter results.