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Edited Transcript of PKI.TO earnings conference call or presentation 5-Aug-16 12:30pm GMT

Thomson Reuters StreetEvents

Q2 2016 Parkland Fuel Corp Earnings Call

RED DEER Apr 25, 2017 (Thomson StreetEvents) -- Edited Transcript of Parkland Fuel Corp earnings conference call or presentation Friday, August 5, 2016 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Patricia van de Sande

Parkland Fuel Corporation - VP Investor & Government Relations & Compliance

* Bob Espey

Parkland Fuel Corporation - President and CEO

* Mike McMillan

Parkland Fuel Corporation - CFO

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Conference Call Participants

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* David Filion

RBC Capital Markets - Analyst

* Michael Van Aelst

TD Securities - Analyst

* Dirk Lever

AltaCorp Capital - Analyst

* Jason Zandberg

PI Financial - Analyst

* Trevor Johnson

National Bank Financial - Analyst

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Presentation

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Patricia van de Sande, Parkland Fuel Corporation - VP Investor & Government Relations & Compliance [1]

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Good morning. I am Patricia van de Sande, VP Investor Relations and Compliance for Parkland Fuel Corporation. At this time, I would like to welcome participants to Parkland's results conference call for the second 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 relating 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, etc. Certain financial measures which do not have any standardized meanings prescribed by GAAP will be referred to during this presentation.

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

For today's call, Bob will share an overview of the quarterly results, while Mike will provide more color on the results for the quarter. Bob will close with an update on strategy, execution, and priorities for the balance of 2016. At that point, we will take your questions.

I will now turn over the call to Bob Espey, our President and Chief Executive Officer, to summarize the results from the second quarter.

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Bob Espey, Parkland Fuel Corporation - President and CEO [2]

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Good morning and thanks, Patricia, and welcome, everyone, to our second-quarter 2016 webcast. I am pleased to report that Parkland had a very strong second quarter with an adjusted EBITDA of $56.4 million and 2.5 billion liters of fuel and petroleum products delivered in the quarter. This represents a 66% increase in adjusted EBITDA and a 25% increase in volume compared to the second quarter of 2015.

On a year-to-date basis, we saw growth of 16% in volume and 27% in adjusted EBITDA. The outstanding growth in the second quarter of 2016 has been driven predominantly by our retail and supply and wholesale divisions. Our commercial division's adjusted EBITDA was down 23% against the second quarter of 2015, largely due to continued softness in economic activity and capital expenditures associated with new business wins.

We anticipate the revenue from these wins to stream in over the next couple of quarters.

Parkland USA was down 31% due to reduced economic activity, but the team continues to build market share with 23 new account wins. Using the three key pillars of our five-year strategic plan, Parkland has been able to grow -- to continue to grow in a challenging economic climate, again demonstrating the strength of our diversified business model.

At this point, I would like to ask Mike to walk through the second-quarter financial highlights.

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Mike McMillan, Parkland Fuel Corporation - CFO [3]

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Thanks, Bob, and I would like to thank everyone for joining us this morning as well. Overall, the business performed very well in Q2, as Bob mentioned, achieving $56.4 million in adjusted EBITDA, driven by strong performance in both our retail and supply and wholesale divisions. Pioneer continues to perform very well and tracking well ahead of plan.

As the economic softness continues to be experienced in Western Canada and the Bakken in the US, our strong results this quarter are particularly noteworthy. We saw increases of 25% in overall volume, delivering 2.5 billion liters of fuel and petroleum products, compared to 2 billion liters delivered in the same quarter in 2015.

The $56.4 million in adjusted EBITDA earned by the business this quarter marks an increase from the $34.1 million that was achieved in the same quarter last year. Our adjusted gross profit also increased by 35%.

Let's now dive into each segment in a bit more detail, which will highlight the benefits of our diversified business model. Our retail division performed extremely well, with double the adjusted EBITDA in Q2 2016 versus Q2 2015, again led by strong performance in East and reflecting the addition of the Pioneer business.

Our retail division drove same-store convenient sales growth up 3% nationally and 11% in the East. This remarkable same-store sales growth in East is largely attributable to growth at Pioneer retail sites, which both demonstrate our ability to integrate a business quickly and effectively and drives C-store operational excellence.

Our supply and wholesale teams made meaningful progress in our supply advantage, resulting in a 70% improvement in segment adjusted EBITDA and a 6% increase in fuel volume compared to Q2 of 2015. The supply team has excelled in developing improved overall economics, with a continuous focus and review of our supply operations logistics in arbitrage opportunities, which positions us well for the future certainly and provides significant value to our shareholders.

Our Elbow River team continues to strategically execute on arbitrage opportunities, and it's noteworthy that our crude asphalt and fuel oil portfolio continues to perform well.

Commercial volume was up slightly in the second quarter compared Q2 2015. However, adjusted EBITDA was down approximately $2 million or 23% year over year. The softness in the economy in Western Canada, as Bob noted, continues to affect our commercial business, with a decrease in rig activity counts of approximately 49% year over year. That said, the team has started delivering on the over 100 million liters of annual propane volume that was announced in Q1 of 2016.

Since then, the team has built new branch offices in Bonnyville and Lloydminster, Alberta, and installed approximately 1,450 propane tanks in Q2. It's also worth noting with this ramp-up that we incurred approximately $1.1 million of expense within the quarter. The revenue associated with this capital will continue to build throughout the fall and into the new year.

As Bob mentioned earlier, Parkland USA's earnings were down 31% versus Q2 of 2015, which we did expect due to the low drilling and related activity in the Bakken region, with the year-over-year decrease in rig activity counts of 47%. The team continues to work very hard, tightly managing their operating costs to help offset the slowdown in oilfield activity, and continues to build market share with 23 new account wins in the quarter.

Our adjusted EBITDA waterfall gives you a side-by-side comparison for each of our operating divisions. As you can see, our retail, supply and wholesale divisions performed extremely well in the second quarter, achieving $18 million and $9.5 million in adjusted EBITDA respectively. Commercial and Parkland USA did see decreases. However, the teams are executing well on the aspects of the business within our control, namely managing costs, optimizing operations, driving efficiency, and building market share. This is helping to partially offset the economic headwinds that continue throughout 2016.

Overall, as Bob previously stated, we are very pleased to report our year-over-year increase of 66% in overall adjusted EBITDA growth in Q2. Our year-to-date waterfall chart shows that our diversified business model continues to drive growth. As we've mentioned throughout the presentation this morning, our retail, supply and wholesale teams have had a phenomenal second quarter, with retail achieving excellent results in both Q1 and Q2 of 2016.

At this point, I will now turn it back to Bob to discuss our operational KPIs.

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Bob Espey, Parkland Fuel Corporation - President and CEO [4]

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Thanks, Mike. The key performance indicators for each division are in place to help provide our investors with more insight into our business, and are cascaded throughout our organization to ensure all team members are aligned around those metrics. Our retail division performed extremely well in Q2. Strong organic growth in our convenience stores, with same-store sales growth up 3% nationally and 11% in Ontario on a year-over-year basis.

We also saw an increase in our trailing 12-month average site volume for both company and dealer site volumes, which were 66% and 10% respectively. The 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 business has been impacted by prolonged economic softness in the West. Gasoline and diesel volumes decreased by 3% year over year. However, our propane volumes increased 20% year over year. Our operating ratio remains high, despite managing costs effectively. We expect this number to start to improve in Q4 as we see the ongoing benefits of our productivity improvements.

Our commercial team continues to win new business and gain market share through their continued focus on organic growth and service excellence.

Parkland USA continues to perform well on the retail side, with volume up 7% compared to Q2 2015. However, wholesale volume was down by 14% to 206 million liters due to the slowdown of drilling activities in the Bakken region. While our volume is down in Minot on a year-over-year basis, the team continues to gain market share and win new business.

Mike will now discuss our corporate KPI performance.

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Mike McMillan, Parkland Fuel Corporation - CFO [5]

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Thanks, Bob. On the corporate side of our business, our back-office team continues to work diligently managing costs and driving synergies. We saw an improvement of our corporate adjusted MG&A as a percentage of consolidated adjusted gross profit to 7.7%, with improved economies of scale and cost management initiatives.

The dividend payout ratio and adjusted dividend payout ratio were 96% and 74% respectively. The improvements year over year were mainly due to higher distributable cash and adjusted -- and higher adjusted distributable cash in Q2, driven mainly by earnings and lower M&A integration costs. However, partially offset by higher taxes, maintenance capital, and share count. Our total leverage ratio shown at 1.67 times also positions us extremely well to fund our growth, both organic and through acquisition. Our LTIF safety KPI also demonstrates our continued focus on safety throughout the business.

I will now hand the call back to Bob to give an update on strategy, execution, and our priorities for the balance of 2016.

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Bob Espey, Parkland Fuel Corporation - President and CEO [6]

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Thanks, Mike. Overall, our performance in Q2 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 same-store sales growth of 11% in the East year over year, and with the opening of new retail sites such as the dealer site in Whistler, BC.

The commercial team is starting to deliver on the 100 million liters of new annual volume in the West through two new sites, one in Bonnyville and one in Lloydminster, Alberta, and the installation of approximately 1,450 new tanks. As we have mentioned, our supply and wholesale team made significant progress in driving our supply advantage through negotiating better buying prices. We have seen the upside of these efforts in our Q2 results and will continue to see the benefits moving forward.

In the second quarter of 2016, we also welcome the team from Girard Bulk Services, who will serve commercial and residential propane customers in Southeastern Saskatchewan under the Bluewave Energy banner. This acquisition complements our existing operations and is a growth area for Parkland's commercial business.

Subsequent to the quarter, Parkland purchased the propane assets of Stony Propane for approximately $3.8 million. We would like to welcome the employees of Stony to the Parkland team. Stony Propane operates an established residential and commercial propane business in the Stony Plain and Spruce Grove region west of Edmonton. Parkland will be servicing new customers under the Bluewave Energy banner. The transaction is expected to close on or prior to August 31, 2016.

Overall, our business continues to perform well in a difficult economic environment in Western Canada and the Bakken region in the US. Our team's relentless focus on managing operational effectiveness, building market share, and making investments with good returns is delivering resilient results. Our strong Q2 and year-to-date results, coupled with the 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.

We are one of North America's fastest-growing fuel marketers, and we will continue to look for new opportunities to grow profitably in 2016. We remain confident in our ability to achieve our 2016 guidance of $235 million to $265 million in adjusted EBITDA.

I will now hand it over to Patricia.

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Patricia van de Sande, Parkland Fuel Corporation - VP Investor & Government Relations & Compliance [7]

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Thanks, Bob and Mike. At this point, I will ask the operator to open the lines for questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Sabahat Khan, RBC Capital Markets.

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David Filion, RBC Capital Markets - Analyst [2]

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Hi, this is David Filion on behalf of Sabahat Khan. How are you?

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Bob Espey, Parkland Fuel Corporation - President and CEO [3]

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Hi, David, how are you?

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David Filion, RBC Capital Markets - Analyst [4]

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Hi, I'm good. So just on the commercial segment volumes, they looked quite good, given the headwinds in Western Canada. Are there any industries that you serve or parts of that segment that were particularly strong there? And what's your outlook for the commercial segment for the rest of the year?

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Bob Espey, Parkland Fuel Corporation - President and CEO [5]

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So volume growth in that segment is primarily through new wins, particularly in the West. In the East, we were pretty much static on a year-over-year basis from a volume perspective. As well, there was a small amount -- not really material amount -- from PNO. I believe that was 4 million liters that was added in the quarter.

So the other thing, and Mike noted it, we did incur higher operational expenses. As we indicated, we opened two new branches, one in Lloydminster and the other in Bonnyville, to service new accounts in those areas that have recently been won in our part of that ramp-up in volume. And in the results, there is approximately $1.1 million of additional operating expenses that wouldn't have been there on a year-over-year basis as we ramp up that volume.

So as we look out into the next couple of quarters or the back half of the year, again, the team remains focused on three key areas. One is continuing to implement the new wins that we have, and we will start to see those stream, particularly in Q4. The second thing is operational effectiveness. So the team is still deploying a number of operational improvements that are driven mainly by technology in the area of route planning that should allow us to capture some more efficiencies and service our customers better.

And then the third area is more wins. The team has been working very hard on its pipeline, and we do continue to win business, both from the propane and diesel areas. Now that offsetting, again, I would say continued softness in the West. We are seeing that start to level out here. So I'm hopeful we will start to see that business grow on a year-over-year basis.

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David Filion, RBC Capital Markets - Analyst [6]

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That's great. Thanks for the color. So looking at the retail side then as well, so you said you are starting to see the conditions in Western Canada kind of stabilize there. Do you kind of see that on the retail side as well with respect to the operations in Western Canada?

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Bob Espey, Parkland Fuel Corporation - President and CEO [7]

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Yes, I mean, we are still down on a year-over-year basis in the trailing quarters. We're not down as much as we were the previous year. Again, we are seeing that slow down. The question is -- and I don't really have a lot of -- as we look forward into the second half. Again, I do expect it to be lower in the West. We are adding sites. We did talk about opening a new site in Whistler, which we did with a partner of ours who's a dealer, and we've got a number of new sites in the pipeline in the West. But unlike commercial, it takes more time for these things to ramp up, so you won't see the impact as quickly.

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David Filion, RBC Capital Markets - Analyst [8]

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That's great, thank you.

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Operator [9]

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Michael Van Aelst, TD Securities.

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Michael Van Aelst, TD Securities - Analyst [10]

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Good morning. Just a clarification. On the commercial fuels, did you say that volumes were going to increase in Q3 or just that the trend would improve?

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Bob Espey, Parkland Fuel Corporation - President and CEO [11]

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Yes. We should actually see them go up in Q3. Again, there is continued softness, so it's difficult to predict whether the wins will offset the losses at this point. But I would expect as we start to stream that 100 million liters of new wins in propane, we will start to see, certainly on the propane side, year-over-year increases in volume.

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Michael Van Aelst, TD Securities - Analyst [12]

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Do you expect to see that volume from the new wins hit full run rate by Q4, or only early next year?

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Bob Espey, Parkland Fuel Corporation - President and CEO [13]

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Yes, I would say by Q1 of next year, we will be full run rate, but certainly in Q4 we will start to feel it quite nicely.

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Michael Van Aelst, TD Securities - Analyst [14]

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Okay. Is that business, that propane business, is that typically margin dilutive to the segment?

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Bob Espey, Parkland Fuel Corporation - President and CEO [15]

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It is a change in mix. So again, if you think about our commercial business, at a macro level there's two major -- well, there's actually three types of customers within that budget. One is the home heat, small drop propane and home heat, which tends to be quite high margin. And then you've got your commercial business which tends to be larger drops, so there's lower OpEx involved with that and it tends to be a lower margin.

Then we do have a small wholesale business within that which would be very low margin. So as we implement these new wins, which are all commercial in nature, you will see that the mix is changing and the overall margin will start to come down somewhat.

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Michael Van Aelst, TD Securities - Analyst [16]

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That's helpful, thank you. Then looking at the Pioneer synergies, are you able to quantify them at all at this point and give us some kind of indication how they are split between costs and revenues?

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Bob Espey, Parkland Fuel Corporation - President and CEO [17]

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That is a good question. I think we should follow up on that. We certainly do track that and we have a look back on it, but I can't just speak to that to the top of my head. Always the challenges, once you integrate the business, you have to isolate your existing business from the new business. But certainly on an overall basis, we have seen strong performance on same-store sales, both in nonfuel and fuel.

We have seen -- and that's been driven -- a lot of the nonfuel has been driven by executing new operational and marketing programs. We have really seen in all the categories that are within the store some good growth on a year-over-year basis. Again, we can provide you with more details on that subsequent to the call.

And then on the supply side -- so part of what you are seeing on the supply growth is due to us being able to basically get improved supply economics around that large volume of gasoline, the 1.8 billion liters of gasoline that we run through the Pioneer channel. And we have been able to improve our economics well above expectations.

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Mike McMillan, Parkland Fuel Corporation - CFO [18]

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Yes, and distribution as well with that.

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Bob Espey, Parkland Fuel Corporation - President and CEO [19]

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Oh yes, on the distribution side -- actually, on the distribution side, Pioneer runs -- when we acquired Pioneer, one of the things we were able to acquire there was their distribution business, and they run a really efficient distribution model. It's a broker model. And we have been actually able to roll that out to Parkland sites and get some cost improvements in our existing business.

So again, just from my perspective, Pioneer has significantly overperformed our expectations in terms of the scale benefits that we've achieved. And then also the operating improvements we have been able to make to that business, I think, have been significant.

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Michael Van Aelst, TD Securities - Analyst [20]

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So if I read it all correct, obviously the Pioneer is doing very well. The legacy business in the West is seeing volumes decline still, and I would assume seeing a same-store sales decline as well. But you also had growth in OpEx and MG&A excluding Pioneer. So now that you are cycling the Pioneer, do you feel that the profit growth in the East can continue to offset the declines in the West?

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Bob Espey, Parkland Fuel Corporation - President and CEO [21]

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I would say certainly we still see some room for growth in the East and the business that we have there. So I would expect that trend will continue as we get into next year. What I can't predict is how low for how long. If oil does bump back down in a significant way, that could put more stress on the Western economy.

But again, I would also highlight that a large part, we are starting to offset that through gaining market share with new wins, both on the wholesale side and on the commercial side. The one thing we didn't really talk about, the other thing is on our supply business and wholesale business. We have also, on the propane side specifically, have opened up a number of new export accounts into the US and have really ramped up our propane business. So that has been a great offset as well.

So the question is will the year over year? I'm sure we will do that. Again, I can't predict where the economy is going exactly in Western Canada, and I would say that's the variable that is unknown right now.

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Michael Van Aelst, TD Securities - Analyst [22]

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Right, I was trying to get specifically at retail. Because that business has two very different yet similar -- obviously, the same business but in two different geographies that are performing.

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Bob Espey, Parkland Fuel Corporation - President and CEO [23]

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I think in retail, again, I am feeling very bullish around our Eastern business and the continued improvements that we are making, many of which we have only had that business a year. So these improvements are still flowing through on a year-over-year basis because it took us a while to ramp up and start making the changes. So I'd expect that we should be able to offset the softness in the West with those improvements as we go forward here.

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Mike McMillan, Parkland Fuel Corporation - CFO [24]

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One of the things, Michael, we look at a little bit too is the conversion from forecourt to backcourt. And the programs that Bob mentioned, certainly in the East we are seeing a nice trend in terms of more foot traffic into the back, into the C-store. I think a tailwind that we also talked about in the past is just general regional economics. When you think of Eastern Canada or Ontario, even the Canadian dollar, it's not as sensitive as many think in terms of gasoline, but I think we are seeing a bit more activity in the East.

We are seeing, given this time of year, you tend to see maybe more people staying home on vacation than driving, and more traffic from the South into the tourist areas in the East. So those aren't massive changes. We're talking a percent maybe, but we are seeing some favorable tailwinds as well on that side of the business.

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Michael Van Aelst, TD Securities - Analyst [25]

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Last quarter you gave us some metrics in terms of the key category growth inside the store at Pioneer. Can you talk a little bit about that again?

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Bob Espey, Parkland Fuel Corporation - President and CEO [26]

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Again, we will follow up with you on it. We do have that. I just don't have it on -- it's broken down quite nicely, actually.

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Michael Van Aelst, TD Securities - Analyst [27]

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Last question then. Can you comment on what you think your debt capacity is right now? And given what seems to be an active M&A environment, whether you are seeing valuations that you still consider reasonable?

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Mike McMillan, Parkland Fuel Corporation - CFO [28]

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So on the first part, I think we mentioned our total funded debt has dropped down to about 1.6 or 1.7 times. That includes our high-yield and our senior debt, so we are really well-positioned. At this point I would say on our revolver, for example, we could write a check for in excess of $300 million for an acquisition, and we do have an accordion feature for $200 million beyond that.

So we would have, I guess, a couple things. We would have about, call it, availability of the $0.5 billion there; not that we'd utilize it all. We always like to keep a bit of a buffer for working capital. But also we have the shelf prospectus that we put out there, and that could allow us to go out and raise a bit of money if we need to, fairly effectively in both debt and equity.

The at-the-market program we put out there, again, is something that is there to fine-tune our capital structure. It's not something we would raise capital with to replace a bought deal, but it is there to help us over time raise a little bit as we need to. And we haven't exercised that yet, haven't had a need to.

So I would say all combined if you looked at a revolver and our shelf, we are well-positioned for funding, and the market seems to be pretty receptive at the moment in terms of essentially access to capital, especially for a good story. I think we've got some pretty positive feedback out there in the last little while as we've talked to investors around our story and growth opportunities.

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Bob Espey, Parkland Fuel Corporation - President and CEO [29]

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I would say the only thing I would add, you know, I think -- you are absolutely right, the market is quite active, and we don't comment on any one particular process. Again, what we demonstrate and we demonstrated in the quarter, there's also some small M&A that's quite attractive, closing to propane businesses at attractive valuations.

We are buying these businesses in the 5 to 6 times range. Not only are they great little tuck-ins, but they tend to expand our footprint where we can roll out our diesel and lubricants offer as well. So we do see a good pipeline of small opportunities as well that we continue to chisel away at.

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Michael Van Aelst, TD Securities - Analyst [30]

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Are you able to comment at all on what you think the expectations are there for the larger ones, whether they are reasonable or --?

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Bob Espey, Parkland Fuel Corporation - President and CEO [31]

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That's a good question. You don't really know until they transact whether they were reasonable or not. So yes, I mean that's -- again, we have always said that good assets will be expensive. And certainly if you can add the value through synergies, and we have demonstrated that we have got through Pioneer great opportunities through scale, not only on the supply side but on the operating side, you can start to see that there is certainly value there at higher prices.

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Michael Van Aelst, TD Securities - Analyst [32]

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In the past you've commented about 20% lift in EBITDA from synergies. Are you -- given you've gone through a large deal like Pioneer, are you seeing or would you be comfortable raising that expectation on future large deals?

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Bob Espey, Parkland Fuel Corporation - President and CEO [33]

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I would say we are tracking ahead of that in this particular opportunity. I would say it is dependent on the opportunity, and certainly if we were to do a larger transaction we would give an indication of the synergies that we would expect over time.

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Michael Van Aelst, TD Securities - Analyst [34]

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All right, thank you.

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Operator [35]

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Dirk Lever, AltaCorp Capital.

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Dirk Lever, AltaCorp Capital - Analyst [36]

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You've announced about the closing of On the Run in October. So how quickly can we expect you to roll this out at Company sites, and then how quickly could it be out at the dealer sites?

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Bob Espey, Parkland Fuel Corporation - President and CEO [37]

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It will take a while. It will take, I would say -- and we haven't finalized the plan yet; the team's still working on it here. But it will take a good 24 to 36 months to roll it out completely. And then on the dealer side, we will be buying a number of franchise agreements through that. So our first and foremost, we will be focused on retaining those and then building that through improving the offer.

One of the opportunities that we see is we certainly believe that as a smaller organization, Parkland, we can interface much closer with those franchisees and work much closer with them to make sure that the offer is relevant. The other thing, Dirk, that we would do is once we have the brand -- again, we don't have it yet -- is we would run some pilots as well, just to make sure that we can prove our hypothesis around same-store sales lift before we would go in a major program. But we do expect that it will have significant benefits to our business overall.

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Dirk Lever, AltaCorp Capital - Analyst [38]

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Right. Then do you have an expectation for how much you could get on a fuel lift by increasing those backcourts?

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Bob Espey, Parkland Fuel Corporation - President and CEO [39]

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That's interesting. Generally, when we talk about Pioneer -- is that in relation to Pioneer where we are --?

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Dirk Lever, AltaCorp Capital - Analyst [40]

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No, it's more in relation to the On the Run, particularly on Company sites, and maybe even on some of the dealer sites where you could get greater traffic.

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Bob Espey, Parkland Fuel Corporation - President and CEO [41]

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Certainly, I would say anecdotally if you can pull people into the site, you will get more gasoline sales. What that conversion rate is, I think it would be hard to predict it. But I would say intuitively, it should -- one will drive the other, but no specific stats on that. And again, as we get more comfortable with our plan and start to prove it through the pilots, we will be able to get much more -- we will be able to provide much more color on that. So stay tuned. We will give you the information as we get it.

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Dirk Lever, AltaCorp Capital - Analyst [42]

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All right, and good luck with it.

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Bob Espey, Parkland Fuel Corporation - President and CEO [43]

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Thanks.

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Operator [44]

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Jason Zandberg, PI Financial.

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Jason Zandberg, PI Financial - Analyst [45]

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I just wanted to ask, you mentioned that you are exporting some of your propane. The propane number was up pretty strong, up 20%. Can you quantify how much of that was the export?

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Mike McMillan, Parkland Fuel Corporation - CFO [46]

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Yes. We don't actually break it out, Jason, in terms of the export and it does vary by market, in terms on quarter over quarter or seasonally as well. I think what we are alluding to is just developing some new opportunities, certainly with Elbow River and the rail business, as they continue to put in some locations where we can do some transloading and interim storage, developing new markets and so forth.

We will probably provide a little bit more color, especially as we get into the fall, and we will be able to give you a little more indication. But again, it is something that we tend to contain within that segment and don't break out specifically.

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Jason Zandberg, PI Financial - Analyst [47]

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Okay. And then, hopefully, you can answer this question. I see that you closed on the 17 Esso-branded dealerships that were part of that On the Run transaction. You closed that on July 8. Can you provide the total value of those 17, now that it's closed?

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Mike McMillan, Parkland Fuel Corporation - CFO [48]

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Again, on that one what I would say is that we didn't disclose the transaction, but I think -- and part of that is there's two aspects to it, I guess I would mention. One is we did operate the 17 sites under lease, and now we operate it and own it. So we will see a bit of a shift between the owned and leased sort of expenditures.

But I would also just sort of characterize it as we got great value securing those sites and acquiring those sites, but it wasn't something that was material enough to disclose, and so we didn't break it out at this point. And you'd see it in our leverage as well. You wouldn't see much of a move in our leverage as a result of that closure.

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Jason Zandberg, PI Financial - Analyst [49]

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Okay, no problem. Then just lastly, you continue to rationalize all your retail sites; see that they were reduced by 10. Obviously, you have been an effective procedure for you guys, and able to get more efficient sites running and the inefficient sites closed. Do you expect that to continue the same pace for the rest of the year or what's -- do you plan all these closures, or can you give us some color on that?

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Bob Espey, Parkland Fuel Corporation - President and CEO [50]

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Yes, that's part of our network planning, and our team metrics or our key metric in that business is average volume per site. So in an industry that is effectively flat, gasoline demand flat or slightly increasing, and I think we're seeing in the last few years, we've seen about 1% growth in gasoline demand. By pruning the underperformers, you drive the volume into your higher -- your larger, more productive sites, which then impacts your net unit operating cost. So your net unit operating cost comes down. So, in essence, site count is not a great metric. It's more about the productivity of individual sites.

And again, our focus is always to have the best sites in terms of the strongest-performing sites within the communities that we operate, and to invest in those and build those and gain market share. And again, in an environment where the market is mature and growing on a relatively slow, I think our average volume per site outpaces that quite significantly. So that to me is a key indicator.

Like I say, net site count is not great. A great example there is you may close a 1 million liters site, but you have opened up a 5 million liter site. So, in effect, if you've lost five 1 million liter sites but opened one 5 million liter to offset the volume, you've got far better productivity and far better profitability on a per site basis.

So once these sites tail off to a certain extent, they do just become marginally profitable, and it doesn't make sense to keep them going.

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Mike McMillan, Parkland Fuel Corporation - CFO [51]

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The other aspect, Jason, that we look at certainly is around -- you look at the sites, a larger site, the same-store sales, so the backcourt; and we call it the nonfuel component of our business and the focus on that side, too. So certainly the volume throughput that we are trying to drive in terms of fuel volume but also a higher proportion of nonfuel in the form of, say carwash, C-store and other parts of the operation certainly gives us resilient cash flow, stable margins on a good component.

And as Bob mentioned, as we execute productivity across each of the sites, then that will drive our net unit operating costs, especially with non-fuel contribution.

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Jason Zandberg, PI Financial - Analyst [52]

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That's great. Thanks, guys.

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Operator [53]

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Trevor Johnson, National Bank Financial.

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Trevor Johnson, National Bank Financial - Analyst [54]

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Good morning, gentlemen. Just a quick one. With all the success that you're having from the C-store same-store sale growth in the East, is there any marketing or promotional initiatives or anything like that that you can highlight that you may be able to kind of cross-pollinate to your existing legacy stores that have been working? I'm just curious if there's any strategies that might be involved there.

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Bob Espey, Parkland Fuel Corporation - President and CEO [55]

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We actually now have combined our marketing groups, so we have one marketing group and they are running national promotions. We will obviously change those for the different brands, but the actual underlying promotion is identical. So we have recently run promotions around fuel tied to loyalty, and they have been consistent across the country so that we leverage scale across both businesses.

It's interesting, with our combined loyalty in the two businesses, we have a loyalty plan that has 1.2 million members between our Fas Gas Litre Log and the Pioneer Bonus Bucks, which that's a big loyalty program nationally. I think we looked recently and were quite surprised that we were at sort of a top 10 in terms of Canadian loyalty programs and participation in that.

So one of the initiatives that we have is to really leverage the loyalty data that we have, reward our existing loyal customers, drive more people into the loyalty program. You can't participate in the promotion unless you do have a loyalty card, so we have been able to increase the members in the loyalty program, which improves committed customers that come back on an ongoing basis.

The second thing that we've done is this effort to drive forecourt into backcourt. So a number of promotions there that are pump side to drive people into the store, to buy within the store. So again, some good -- some great focus marketing there that's both across the country. It's difficult to get same-store sales on a local basis, so whether we are outperforming in Alberta and Saskatchewan.

Where we are seeing softness, again, BC is up year over year, upward; Saskatchewan down; Manitoba is consistent year over year. It's hard to benchmark and say where are we at against industry in the short term. Over the long term, we get a better view of that. But again, my expectation is that we are doing better than industry in those markets.

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Trevor Johnson, National Bank Financial - Analyst [56]

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That's great. Thanks, Bob.

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Operator [57]

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Thank you. There are no further questions registered at this time. I would now like to return the meeting back over to (inaudible). Please proceed.

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Bob Espey, Parkland Fuel Corporation - President and CEO [58]

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Well, thank you. Thanks for listening in to our second best results. We do appreciate your ongoing support and look forward to chatting with you at the end of Q3.

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Mike McMillan, Parkland Fuel Corporation - CFO [59]

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Thank you very much.

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Patricia van de Sande, Parkland Fuel Corporation - VP Investor & Government Relations & Compliance [60]

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Thank you.

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Operator [61]

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Thank you, the conference has now ended. Please disconnect your lines at this time. We thank you for your participation.