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Executives

Glen Nelson – Manager, IR

Bob Espey – President and CEO

Mike Lambert – SVP and CFO

Analysts

Kevin Cheng – CIBC

Trevor Johnson – National Bank

Derek Dley – Canaccord

Parkland Fuel Corporation (OTCPK:PKIUF) Q4 2013 Earnings Conference Call March 4, 2014 6:00 PM ET

Operator

Good afternoon, ladies and gentlemen and welcome to the Parkland Fuel Corporation’s Fourth Quarter and Year End Conference Call and Webcast. I would now like to turn the meeting over to Mr. Glen Nelson, Investor Relations Manager at Parkland Fuel Corp. Please go ahead sir.

Glen Nelson

Thank you, Mike and good afternoon everybody. As mentioned, my name is Glen Nelson. I am the Investor Relations Manager here at Parkland Fuel Corporation. At this time, I would like to welcome you all to our fourth quarter and year end 2013 conference call and webcast. With me in the room here I have President and Chief Executive Officer, Bob Espey; and Senior Vice President and Chief Financial Officer, Mike Lambert.

After their remarks and the short presentation, there will be a question-and-answer session. And so at this time, all lines have been placed on mute to prevent any background noise. And so please note while talking about our results and answering questions, Bob and Mike may make forward-looking statements. These statements are subject to known and unknown risks and future results may differ materially from those said.

For information or more information on these forward-looking statements and business risks, please look at Parkland’s fourth quarter 2013 Management’s Discussion and Analysis, which along with this quarter’s news release and audited financial statements can be found on our website at www.parkland.ca, as well as on the SEDAR website. Dollar amounts discussed today in the call are expressed in Canadian dollars and have been generally rounded.

With that, I’d now like to turn the call over to Bob Espey to review the year.

Bob Espey

Great. Thanks Glen. I am really pleased to announce a great 2013. As you can see from the results today as we go through them, we have made great progress on the Parkland Penny Plan and I am very proud of the Parkland team and the hard work that they have put in here to achieve this year to achieve these results. As you can see, lot of the strength in 2013 is coming from improvements in the base business and our initiatives. And we are well-positioned going into 2014 as we look forward here.

On the base of this performance, we are increasing our dividend from a $1.04 per share to $1.06 per share. You will also see on the screen, the Parkland Penny Plan scorecard. We have made some adjustments to the scorecard. We have now included our entire business. So, on a year-over-year basis, you will see the impact of the full impact of our acquired businesses this year, which include Elbow River, Sparling’s Propane and TransMontaigne. And again, as you look at our scorecard, you can see that we are tracking well on all dimensions. The two areas that we have tracked below expectation are our organic growth, but I am pleased to say that in Q4, we are seeing some of our initiatives take hold in our commercial business. We saw 23 million liters of new volume added in the quarter. And we have also launched another some other organic initiatives in 2013 that will start to pay dividends in 2014.

And then again on our safety record, particularly in Q4 with a harder winter this year, we have seen some of our safety incidents escalate. I can reassure you that we take these seriously and are continuing to push our safety initiative across the business. As we reflect on our five-year growth strategy, which we laid out two years ago with the objective to double the EBITDA in the business from $125 million to $250 million, we are making good progress.

If I go through our three strategic pillars on the growth side, we grow this business through two mechanisms, one is organic growth and the other is acquisitions. On the organic growth side, again the last couple of years, because we have been repositioning some parts of our business, we haven’t met the full objective. But again, we have launched some good initiatives that are gaining traction. So for example, increased sales effort in our commercial business, the ready-to-roll program, which we have been piloting this year, the addition of Chevron as a brand, and when we look at things like our same-store sales growth in our corporate network, it is tracking at expectations. So again, some good initiatives there that will start to yield dividends in 2014.

On the acquisition side, we have had a stellar year closing four very accretive acquisitions, Elbow River, TransMontaigne, Sparling’s, and SPF Energy, which closed earlier this year. You will also see that in – we have announced and will close in Q4 the purchase of 11 Chevron sites and really want to stress the importance of that. It really speaks to the strong relationship we are building with Chevron and the opportunities that’s bringing us. So we now are an exclusive marketer of the Chevron brands in BC. We have acquired some sites. And we are also building a Chevron site in Chilliwack, so some great organic growth opportunities for the business.

On the supply side, in 2013, we positioned the business extremely well to go into 2014 without the impact of the Suncor contract. We have exceeded our initial targets as we set out in our plan on the Parkland supply side and we have really strengthened our supply capability with adding Elbow River. And as I reflect on Elbow River and the synergies that we have achieved on that, they far exceeded expectations. We see Elbow supporting both parts of our business, the propane business. We really saw that come into effect here over the cold winter, where our business had a guaranteed supply through a tough period.

And then on the refined products side, where especially with the addition of SPF Energy, we are now able to see how the Elbow River team can really assist those businesses from a supply perspective. And we will start to see some good organic growth on the refined products side out of the Elbow River team.

On the operate side, we continue to make good improvements on the base business. Operationally, we have in 2013 again our OpEx initiatives are on track and are tracking the plan. The MG&A is tracking slightly higher mainly due to the increased M&A activity and some of the additional resources we have to bring on in that area to support M&A and integration. So how are we doing, again on the target of growing to $250 million, we are over half way there two years into the plan. That includes $47 million in acquired EBITDA and $19 million in base business improvement. I am very pleased with the progress that we have made and we are well positioned to go into 2014.

I would like to now turn it over to Mike who will talk specifically about the year end results.

Mike Lambert

Thanks Bob. For the purpose of this call we are going to focus on the full year results. Earlier today we released our results for both the fourth quarter and the full year and we are happy to answer any questions you may have specifically regarding the quarter following the formal call – the formal portion of this call where we will cover the year. So looking at the year, Parkland delivered adjusted EBITDA of $207 million in 2013 which was a 4% improvement over the record we set in 2012. Due to the strong performance of acquisitions we made in ‘13 robust refiners margins offset by lower business activity in the commercial divisions during the first half of 2013. However, we made up some ground in the second half with the new addition of $46 million of annualized volumes in the maritime.

In our retail business gross profits are slightly lower as a result of margins readjusting to more normal levels. In other words, last year the margins were unusually high. Expenses increased 40% in 2013 compared to 2012 principally resulting from $24 million attributable to Elbow River $0.5 million to Les Pétroles Parkland, $1.3 million Sparling’s Propane and $6.9 million in acquisition related costs. Supply and wholesale profits were down slightly. We saw modest contribution from Bowden terminal during the fourth quarter as we worked with refiners to show the utility of this terminal and that it has storage and there is a distribution hub for Southern Alberta.

What was a little different this quarter is that our operating and direct costs in 2013 included legal provision of $9.8 million to adjust for one-time liabilities Parkland assumed with acquisitions. When we make acquisitions, we do you provide for legal liabilities we are ultimately taking on. This is really actually a truing up of those forecasts with the available information that we have today.

Now, I am going to go to the next slide and dig a little deeper into the year. Volumes for 2013 increased by 57% to 6.7 billion liters from 4.2 billion liters in 2012, primarily due to 1.9 billion liters from the acquisition of Elbow, 494 million liters from Les Pétroles and 90 million liters due to the acquisition of Sparling’s Propane. This was partially offset by 32 million liter reduction in volumes from the Cango network due to site rationalization and reduced activity in key industries including oil and gas and construction and the discontinuation of low margin agreements in Northern Alberta.

Adjusted gross profit for 2013 increased by 14% or $62.8 million to $500 million compared with $437.2 million in 2012. Total fuel and petroleum products adjusted gross profit increased by 17% or $414.7 million due to the inclusion of $83 million combined adjusted gross profit from Elbow River, Sparling’s and Les Pétroles partially offset by lower refiners margin.

Net earnings were $92 million, an increase of $7.1 million compared to 2012. This increase was primarily due to $7.1 million increase in adjusted EBITDA, $7.9 million decrease in income tax expense, $1.8 million decrease in finance costs, and $1.3 million unrealized gain from the change in fair value of commodity related contracts. The offsets include $5.5 million increase in acquisition related costs, $2.7 million increase in amortization and depreciation and $2.2 million increase in loss on disposal of property, plant and equipment.

Operating and direct costs increased by 24% to $190 million in 2013 compared to $153 million in 2012 primarily due to the $32 million related to the acquisitions of Elbow River Marketing, Les Pétroles and Sparling’s Propane – excuse me, $9.1 million and the legal provision of $9.8 million. MG&A expenses increased by 40% to $111 million in 2013 compared with $79.6 million in 2012. MG&A expenses in the year of 2013 increased by $26 million as a result of acquisitions and $5.5 million in additional acquisition related costs.

Now, I am going to turn to the next slide. Distributable cash flow, this is one of my favorite slides because it shows that with very strong results a lot of the metrics that we focus on improved. And one of the metrics that I would really like point to on this slide is how strong our balance sheet is and that’s both in terms of net debt to EBITDA, but also in terms of interest coverage and ROCE and of all of the numbers are very strong. Essentially we kept the cash flow that we made this year and we bought some businesses which contributed to continue to distribute cash flow. And then right at year end of course we made another acquisition. And you will see on this slide the net debt to EBITDA year end is 1.66 and even with the acquisition we made just subsequent to year end which was SPF our net debt to EBITDA is still just under two times which is a very strong – which indicates a very strong balance sheet.

And now I am going to go to another new favorite slide, which is the next slide and this is our forecast for the upcoming year and I am just going to talk to 2014, I think many of you heard me say that I think we are the only company on the planet that has guided for the next three years but hasn’t guided for 2013 and that’s because we couldn’t guide to 2013 because we have the refiners margin contract that refiners margins contract is now behind us and yet we were able to reconfirm our guidance for the upcoming year and you see that our guidance when you take the expected EBITDA is $200 million. And I am happy to say that with what we have seen in the first two months it essentially supports the assumptions that have allowed us to give that guidance and so I am pleased to say that we are reconfirming that guidance. Also you will see from the press release and from the quarterly report that we are giving a sense of what the seasonality is inside the quarters. Now, we are not giving guidance on the quarters, but essentially you can do the math yourself.

And with that I will turn it back over to Glen.

Glen Nelson

Thanks Mike and so that concludes the formal portion of this presentation. So we would like to open the call up and pass it back over to the operator for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question is from Kevin Cheng from CIBC. Please go ahead.

Kevin Cheng – CIBC

Hi congratulations on some good Q4 results there. I guess just a reconciliation question, when I look at your base level of EBITDA of $125 million building off of that $66 million in EBITDA you have added to that that gets me $191 million, but when I look at your low case excluding acquisitions that assumes $178 million in EBITDA just looking at that last slide there. How do I reconcile that $14 million delta, are you assuming negative organic growth, is there – are there parts that I am not understanding just trying to get a sense how I should be reconciling those two numbers?

Mike Lambert

Okay, thanks Kevin. I think what you’re saying is we don’t know how to add.

Kevin Cheng – CIBC

Well I’m saying I don’t know how to add. I’m not sure how to get the two numbers to match up.

Mike Lambert

Yes, one of the things that as you see in terms of the scorecard and how we’re doing is we’ve identified the synergies of $8 million, those synergies come in over time. And so one of the things is assumed in our forecast is that not all the synergies will come in, in the current year. And so you can actually take almost reconcile the one to the other, you’d have to make an assumption that only part of your synergies will come in the current year.

Kevin Cheng – CIBC

Okay. And then just on the Elbow River front, how much of Elbow River do you build into this three year guidance in terms of the run rate because this seems like you’ve been above and beyond the EBITDA you thought you were acquiring when this acquisition was made about a year ago?

Mike Lambert

Well in terms of the guidance so we’re very pleased first of all let me say that. And I’m going to use your question as an opportunity to talk a little bit about how we continue to invest and how pleased we’re and the team that we have in Elbow River. Bob talked in his prepared remarks about how the team is really doing well and how it has improved our supply capability. In the fourth quarter we invested almost $10 million in a new rail handling facility in the Peace River area. And that’s a new asset for Elbow River to take and market around. And so that’s one of the things that is going to help us continue to improve the Elbow results.

I think if you take back to when we first acquired Elbow we said that Elbow River had – we thought EBITDA of about $20 million by the time they firmed up their yearend they were at $23 million. And that during the year we’re going to – we’re expecting that they would actually improve on that and they ended up the year in terms of contribution for – to us at almost $30 million which is a significant increase over what we thought we had acquired. And so I thought about Elbow River in terms of when you acquire a new acquisition you have buyer’s remorse right after. We actually have the opposite to negative buyer’s remorse. So the Elbow team has done fabulous. We don’t want to give them all the credit because part of their improvement has been working with the Parkland supply team. And so they’ve – another asset that they market around is our Bowden facility. And so that’s another area that they’ve been able to contribute to our total earnings.

Kevin Cheng – CIBC

On the Elbow River front though I see that in Q4 it was $9.8 million in EBITDA. Is Q4 a seasonally strong quarter for Elbow River or is there something that – or is there something in those numbers that should prevent it from say annualizing that over 2014 or in future years?

Mike Lambert

Where did you pick that? I’m a little confused about the $9.8 million Elbow in the fourth quarter.

Kevin Cheng – CIBC

Acquisition of Elbow River marketing contributing $9.8 million to adjusted EBITDA in the fourth quarter, $9.3 million sorry.

Mike Lambert

$9.3 million, yes. So there I mean the results for Elbow have been very strong and so what you’re saying is should we take that season and multiply times four. Is that your question...?

Kevin Cheng – CIBC

Right. Is there something is Q4 a seasonally strong quarter for Elbow River or is there something that would prevent it from achieving those types of numbers in future quarters?

Mike Lambert

There is nothing. And when you look at Elbow by the way they don’t tend to be seasonal, it tends to be very specific around gross profit around the commodities that they carry. What did help in the fourth quarter was we did find some margins and some commodities were long. We don’t like to give the specifics around those commodities because there are competitors out there.

Kevin Cheng – CIBC

Okay. So it’s if I’m reading between the lines then it sounds like there is some upside in Elbow River’s results outside of say the $23 million or $25 million EBITDA that you’ve guided to when this acquisition….

Bob Espey

Again when – it’s Bob. When we look back at Elbow River we’ve been surprised by the strength of the base business. When we initially purchased the business we weren’t sure about the crude and how long that would last and that’s proven to be longer. The other pieces, the extent which that business can support our base Parkland business has been greater than we expected.

Kevin Cheng – CIBC

Okay. And just last question from me here. You provided good information on the seasonality of your commercial and retail business. How should we be thinking about the seasonality of your wholesale business moving forward now that the refinery (indiscernible) contract?

Bob Espey

Those seasonalities for the entire business in the press release.

Kevin Cheng – CIBC

Okay. And looking ahead I guess even with the refinery margin contracts rolling over there shouldn’t be significant – we shouldn’t be thinking of it too differently in 2014 onwards from a quarterly modeling perspective?

Bob Espey

No, I would say I mean again it’s going to be plus or minus but that’s generally the seasonality you’ll see quarter-per-quarter. We tend to be weighted more towards the winter months.

Kevin Cheng – CIBC

Okay. That’s it from me. Thank you.

Mike Lambert

Kevin, just to firm up on that, so we did remove the refinery margin contribution from that percentage. So that’s…

Kevin Cheng – CIBC

Okay. That’s helpful. Thank you.

Mike Lambert

Yes.

Operator

Thank you. Our next question is from Trevor Johnson from National Bank. Please go ahead.

Trevor Johnson – National Bank

Hey good evening folks.

Mike Lambert

Hi, Kevin.

Bob Espey

Hey Kevin.

Trevor Johnson – National Bank

Just – can you just talk about the first two months post the removal of the Suncor contract, the supply agreement? Just curious – is there been a change, positive or a negative on that front?

Bob Espey

Well again we don’t give guidance on the quarter specifically. And I mentioned it in the overview when I look back on 2013 and the initiatives we put in place we’re well positioned for 2014 both from an economic perspective than a supply availability perspective. So and that’s further embodied in the guidance that we continue to give and continue to reinforce that will be within that range that we’ve guided to.

Trevor Johnson – National Bank

I guess what I’m getting at it is just logistically have there been any change day-to-day for your workers or is it just more of a status quo Jan 1 versus December 31 with that contract now and they hand to someone else I suspect?

Bob Espey

No, no, I mean that’s we bought every refiner in across the country, we did that before and we’re doing that afterwards in maintaining that. I mean certainly some of the volume is shifted around a bit within the portfolio but it hasn’t changed our day-to-day operationally in the business.

Trevor Johnson – National Bank

Great. Weather has had kind of a mixed impact, it look some positives and some negatives. Can you just kind of sum up in that view from your standpoint in terms of what weather impact there was in Q4?

Mike Lambert

It’s funny, both was looking at each other because we’re now into Q1 I mean we had mixed in the sense that the weather our balance was positive but more of the positive happened in January, February.

Trevor Johnson – National Bank

January, February, yes, okay.

Bob Espey

I would say in Q4 the weather didn’t work against us but it wasn’t particularly beneficial.

Trevor Johnson – National Bank

That’s helpful. And then just you mentioned $10 million in CapEx for growth expenditures at Elbow. Just curious what the other 12ish was for growth CapEx in Q4?

Bob Espey

So our growth CapEx was a mix between retail where we built new sites. We actually built three new sites into the network. And generally our bills all come in the fourth quarter because we do a lot of our building in the summer so that’s when you tend to see that hit. We finished the number of refreshes in our corporate network where we upgraded stores. And on the retail side also we brought on a number of dealers just organically so that contributed to that. On the commercial side we finalized some consolidation in our business particularly in the area of Dawson Creek where we invested in a new facility there and added capability in other areas of the network in terms of propane into certain markets.

Trevor Johnson – National Bank

Great. And then last one from me, just it looks like Les Pétroles Parkland was more or less EBITDA neutral in Q4. Just curious of that (math size) and what might be behind that?

Bob Espey

I’m not sure about that.

Mike Lambert

When you say EBITDA neutral in terms of so Les Pétroles Parkland it had not been – be a significant contributor right out of the bad. So it wasn’t a significant contributor to our total EBITDA…

Bob Espey

But it certainly met plan.

Mike Lambert

And met plan.

Bob Espey

So there is no issues there.

Trevor Johnson – National Bank

Okay.

Bob Espey

Again it is a wholesale business so it’s high volume low margin.

Trevor Johnson – National Bank

Very good. Good job guys. Thank you.

Mike Lambert

Good.

Bob Espey

Thanks.

Operator

Thank you. Our next question is from Derek Dley from Canaccord. Please go ahead.

Derek Dley – Canaccord

Yes, hi guys. Just on the commercial side of the business, organic lines were up $23 million. How is the commercial outlook continuing into Q1? And on that note, on your guidance of ready-to-roll platform, have you guys rolled that out into other markets outside of Ontario?

Bob Espey

So again, we don’t give guidance, but the macro indicators are weather and economic activity. We have seen improvements in both. And we think most parts, okay I am not sure what it’s like in Vancouver these days, but it’s been a cold tough winter across the country. The ready-to-roll we did pilot that in Ontario. So, it was a pilot program and we finished the operational side of that and the plan is to roll that out in other city next year in Western Canada.

Derek Dley – Canaccord

Okay, great. With SPF, I know it’s still very early days, but how is the integration of that coming along so far? And have you guys given any thought or are you able to give us any update on potential synergies from that acquisition?

Bob Espey

So, that is again, when we bought that business we are very clear. It’s a scope acquisition. So there is not a lot of integration. So we really – and we bought an excellent team down there and we really want to give that team freedom to maneuver and continue to grow their business, where we did see Parkland able to assist that business was with supply in a particularly leveraging Elbow River and the refined products team there. And we have added incremental supply into that business that should enable them to grow organically. So, that’s the key area where we will see upside is in the growth piece.

Mike Lambert

Also I give you some anecdotal stuff. We have already been down a few times meeting with the management team and chatting with them. And we do have a 100-day plan just in terms of the things that we do want to do, but what we see there is an engaged workforce and an engaged management team. And we see some long-term growth opportunity.

Derek Dley – Canaccord

Okay, great. And that supply – incremental supply that you are referring to is that supply that’s been brought down from Calgary like from a market that has oversupply?

Bob Espey

Well, from Western Canada and also other parts in the U.S. So again by having the flexibility of the rail, we have been able to look to supplement supply, particularly in the winter months where diesel tends to be quite short.

Derek Dley – Canaccord

Okay, great. And then just finally just with regards to the strategic plan, in terms of your guys’ balance sheet metrics, obviously balance sheet is still in great shape. Is your guys sort of internal target or internal leverage level still that two to three times as the balance sheet still under leverage and what is the acquisition outlook, have we seen any changes in the acquisition environment since we last talked?

Bob Espey

The answer was yes, it looks robust and we are on track. Yes, I mean, I will let Mike talk about the ratios, that’s….

Mike Lambert

Yes. We can answer the first part of that question, just so leverage here, the balance sheet is very strong. And I think, Derek, we have said publicly that if anything we are leaning towards the two times as opposed to the three times, because we think it gives us great leverage when we are in negotiations. We are still guiding to two to three times. If we are under two, we think we are under-levered and if we are over three, we are over-levered. Right now, we like where the balance sheet is, because we do see a robust pipeline. I will let Bob talk about the acquisitions.

Bob Espey

Yes, again, if I look back on the last four acquisitions we have done very pleased with the deals that we have done, the teams we have inherited and the level to which they are performing against plan.

Derek Dley – Canaccord

Okay, that’s it for me. Thanks very much. Great quarter, guys.

Bob Espey

Thanks Derek.

Mike Lambert

Thank you.

Operator

Thank you. (Operator Instructions) And we have no further questions sir.

Bob Espey

Okay, well thank you very much everyone for taking part in the conference call today. I welcome you to come back and get in touch with myself if you have any further questions. And we’ll be happy to chat a little further. Thanks again.

Operator

Thank you. The conference call has now ended. Please disconnect your lines at this time and we thank you for participating.

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