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Travel Centers of America LLC (NYSE:TA)

Q4 2008 Earnings Call

March 3, 2009 8:30 am ET

Executives

Tim Bonang – Director Investor Relations

Thomas O'Brien – President, Chief Executive Officer

Andrew Rebholz – Chief Financial Officer

Analysts

Nat Overton – Morgan Keegan

Neil Goldman – Goldman Capital Management

[Scott Fahey – RLCD Asset Management]

[Timothy Stabos – Stabos Asset Management]

Jeff Hildreth – Eagle Rock Capital

[Jeff Geegan – Milwaukee Private Wealth]

[Ernesto Tunisic – Kawa Capital]

Christopher Gable – Wachovia

Operator

Good day everyone and welcome to the Travel Centers of America fourth quarter results conference call. (Operator Instructions) At this time for opening remarks and introductions I would like to turn the call over to the Director of Investor Relations, Mr. Tim Bonang.

Tim Bonang

Good morning everyone. Welcome. The agenda today includes remarks by Tom O'Brien, our Chief Executive Officer and Andy Rebholz, our Chief Financial Officer. After the presentation there will be a question and answer session.

Today's conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and Federal Securities Law. These forward-looking statements are based on TA's present beliefs and expectations as of today, March 3, 2009. TA undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made today other than as required by law.

Actual results may differ materially from those implied or included in these forward-looking statements. Additional information concerning factors that could cause our forward-looking statements not to occur are contained in our filings with the Securities and Exchange Commissions. Investors are cautioned not to place undue reliance on any forward-looking statements.

Now, I would like to turn the call over to Tom O'Brien.

Thomas O'Brien

Good morning. Thank you for joining our call today. I'm extremely pleased to report our results for the 2008 fourth quarter and full year.

2008 was a challenging year for TA as it was for all that serve the trucking industry; the trucking industry itself and nearly all businesses in the U.S. The recession that began in late 2007 and which continues today, the credit crisis experienced through much of 2008 and into 2009, and the general decline in consumer confidence have all affected our business in a negative way.

These macro economic factors in may ways, reduced the need for goods to move by truck during 2008, thereby reducing the demand for the products and services we offer. In 2008, more than 2,600 trucking companies went out of business. Almost 140,000 trucks simply disappeared from the roads.

Historically high fuel prices in place for most of 2008 prompted substantial fuel conservation efforts by truck operators which further reduced demand for fuel. The state of the economy and credit markets caused some trucking companies to increase maintenance meant to bolster their equipment, leaving fewer tire, oil and other maintenance sales opportunities.

Despite the weak macro economic backdrop, I'm very pleased to report that TA management team rose to the challenge as presented. We took advantage of opportunities, eliminated costs and improved efficiencies.

TA took aggressive action very early in 2007 to deal with the issues we saw coming when others were still arguing about the definition of recession. We were in no small part assisted in our efforts particularly during the back half of 2008 by diesel pricing declines from a high of $4.16 in July of 2008 to $1.41 at year end.

In the fourth quarter of 2008, TA again delivered significantly improved results over the prior year quarter. TA's full year 2008 results were also substantially improved over 2007. For the second time since it became a public company, and the second consecutive quarter, TA generated positive net income for the most recent quarter.

This income totaled $1.4 million or $0.08 per share, an improvement of $70 million and $4.94 per share when compared to the net loss in the 2007 fourth quarter. The fourth quarter 2008 is also the third quarter in a row in which TA generated EBITDA and adjusted EBITDA in excess of our cash trends.

For the year 2008, TA had a net loss of $40 million, actually an improvement of $83 million when compared to 2007. However, for all of 2008 TA generated EBITDA and adjusted EBITDA in excess of our cash trends.

I do want to point out that for all of 2008 TA's EBITDA and adjusted EBITDA both were in excess of our GAAP trends which are before taking into account the rent deferral we obtained in August.

On a same site basis for the 2008 fourth quarter versus the 2007 fourth quarter, our gross fuel margin increased about $43 million despite a 14% decline in volume. While we generated a volume driven 4.4% decline in non fuel gross margin, our non fuel gross margin percentage increased by 110 basis points and our site level operating expenses were reduced by 5.1%.

We believe the decline in non fuel revenues was not as great as the decline in fuel volumes because of the attractiveness of our non fuel offerings to our customers to draw them to our sites. Our non fuel offering includes our truck repair business, cable service and quick service restaurants, large retail stores, the most parking in the industry and many other services for drivers.

Improvements in our SG&A costs continue through the quarter. SG&A declined by more than $9 million versus the fourth quarter of 2007. Our recent quarterly and full year results is dramatically improved over the prior year. However, the recession seems far from over. Many of our customers continue to suffer ill effects from the recession. Nonetheless, I remain convinced that our initiatives are producing results.

The first calendar quarter has historically been the slowest period for business activities in the trucking industry. In the current recessionary environment, we expect the current quarter to be particularly difficult for our customers and for us. We remain hopeful that the initiatives that we've put into effect will carry us through the current difficulties and position us to continue to realize improving results when this environment changes, hopefully toward the second half of this year.

With that, I'll turn it over to Andy Rebholz, our Chief Financial Officer who will review our fourth quarter and full year 2008 results in detail, and after Andy's comments, we'll answer questions.

Andrew Rebholz

I would like to discuss some of our key financial results for the fourth quarter and full year 2008. In this discussion I will refer to same site results which are the results that only those sites that we, our predecessor or the prior owner, Petro, operated for the entire quarter or year as the case may be in both 2008 and 2007.

Our fuel volume on a same site basis declined by 14% in the fourth quarter 2008 versus the 2007 fourth quarter and by 15% for the year 2008 as compared to 2007. We believe these decreases are consistent with those experienced by others within our industry and reflect the drop in business volume that resulted in the sharp decline in trucking activity in the United States as the U.S. economy struggled through a recession throughout 2008.

The decreased fuel sales volume also resulted from the reduced fuel consumption due to fuel conservation practices implemented by truckers to combat the historically high cost of fuel that persisted throughout 2008, reduced motorist traffic as a result of significantly higher gasoline prices, and in part due to our continued cautious bidding on lower margin fuel business from Fleet.

Despite the fuel sales volume declines, our year over year fuel margin on a same site basis increased by 93% for the fourth quarter 2008 and 36% for the full year 2008 as compared to the 2007 periods. In total, our 2008 fourth quarter fuel margin was approximately $44 million or 98% more than in the comparable 2007 quarter, and for the full year our 2008 total fuel margin was approximately $104 million or 61% more than in 2007.

Part of the increase for the full year resulted from the fact that we operated the Petro brand for less than a full year ion 2007. During the second half of 2008, the fuel markets cooperated by providing generally declining costs. These conditions stood in stark contrast to those that existed during the second half of 2007 when TA's fuel margins suffered in large part due to dramatic increases in these costs.

We believe we have been able to generate gross fuel margin that takes into account the balance of cost, working capital investment and competitive factors.

Our non fuel revenue during the 2008 fourth quarter declined by $18 million or about 6% on a same site basis versus the 2007 fourth quarter, and by $50 million or about 4% for the full year 2008 as compared to 2007.

We believe that these declines in non fuel sales reflect the smaller number of vehicles on the highways and miles driven in 2008 than in 2007, increased maintenance intervals instituted by truck owners and the general effect of the recession on disposable income and consumer spending.

Our non fuel gross margin as a percentage of non fuel sales increased by about 110 basis points on a same site basis to 57.9% in the 2008 fourth quarter. For the year, the non fuel gross margin percentage increased by 1% over 2007 to 58.1% on a same site basis.

This margin improvement reflects, we believe, the continued effect of both volume purchasing opportunities we have had as a result of our May 2007 acquisition of Petro, and various improvements that we have been able to implement at our Petro locations since the acquisition.

Our 2008 fourth quarter site level operating expenses decreased by a little over $8 million or about 5% on a same site basis versus the 2007 fourth quarter. For the full year 2008, our same site operating expenses decreased by about $7 million or about 1% from 2007.

These decreases reflect our labor expense control implemented to adjust to decreased sales volume levels, including our March 2008 work force reduction, offset somewhat by increases in unit labor costs. Offsetting these labor cost savings, were increases in utilities, credit card fees and other costs including our continued significant investment in maintaining our operating locations.

The negative effects of utilities and credit card fees were slightly less in the fourth quarter as a result of falling energy and fuel costs.

Our selling general administrative costs of just under $20 million for the fourth quarter 2008 represented a decrease of almost $10 million versus the comparable 2007 period. And for the full year 2008 our SG&A expense decreased by almost $11 million from 2007. Both periods benefited from decreased personnel costs that largely reflected the effects of our March 2008 reduction in work forces and the elimination during 2008 of the former Petro headquarters.

For the fourth quarter of 2008 as compared to the fourth quarter of 2007, SG&A labor costs were down over $3 million. Expense related to retention and severance expense was down about $1 million and legal fees and settlement expense was down about $2 million.

Regarding the full year 2008 SG&A expense as compared to 2007, labor costs were down about $10 million and retention and severance expense was down about $9 million. These improvements were offset somewhat by an increase in 2008 versus 2007 in legal fees and settlement expense which was up over $9 million including the $5 million related to the settlement we reached in the Flying J litigation in 2008.

The remainder of the differences in SG&A costs between the 2008 and 2007 periods resulted from our other cost saving initiatives and the effect of a full year of Petro in 2008.

Our adjusted EBITDA for the fourth quarter 2008 increased by approximately $49 million as compared to the 2007 fourth quarter and adjusted EBITDA for the full year 2008 increased by approximately $87 million over 2007 principally as a result of margin improvements, a full year of Petro and our improved cost controls.

As Tom will detail in a moment, our cash balance at year end 2008 was modestly higher than the balance at the end of the third quarter despite the fourth quarter typically being one of the slower quarters for our business. In a very difficult economic environment, TA has thus far been able to weather the storm and conserve its cash.

And now, I turn the call back over to Tom.

Thomas O'Brien

I'd like to give some more details about TA's cash and liquidity position. During the fourth quarter of 2008, our cash balance changed as follows; we began the quarter with $144 million of cash on the balance sheet. We spent $12 million to fund capital projects. We invested about $7 million in our joint venture that we expect will undertake construction of one new travel center in 2009, sold to HPT $8 million of improvements to properties that we lease from HPT.

We generated EBITDA and interest income in excess of our cash print by $33 million. We increased working capital by about $20 million and all other items net totaled about $1 million. We ended December 2007 with a little over $145 million in cash on the balance sheet.

At the end of the year 2008, a portion of our credit line used to support letters of credit was approximately $69 million, a slight decrease from September 30, 2008 and our $100 million credit facility is otherwise undrawn.

At December 31, 2008 we had approximately $16.8 million remaining of the original $125 million allowance from Hospitality Properties for certain TA branded property improvements that can be sold to HPT without a rent increase.

As a reminder, TA has the option to defer us to $5 million of rent each month through December 2010. Interest begins to accrue on the deferred amount in January of 2010 and all rent amounts deferred and interest accrued is payable to HPT not later than July 1, 2011. Through December 31, 2008 we had taken advantage of the full amount of deferral available to us through that date of $30 million.

We remain focused on conservation of cash as discussed here today, a number of initiatives and successes in controlling costs and enhancing revenues and margins. Our capital spending plans have been ripped apart and built back from the bottom up. During 2009 we expect to spend about $60 million on capital expenditures including about $10 million of investments to further enhance our information technology infrastructure.

Our team including our corporate staff, and of course our managers in the field have thus far responded to industry and economic challenges. Unfortunately, the economic troubles in the U.S. appear to be continuing and some argue that elements of the recent bail out plans will merely serve to prolong this economically agonizing period.

In January 2009 alone for example, the trucking industry lost 25,000 jobs as volumes declined by most reports dramatically versus 2008 levels. While we expect to report a net loss on a GAAP basis in the first quarter of 2009, we expect EBITDA to cover all or the vast majority of our cash rental obligations.

Before I take questions from participants, I do need to remind you that we're currently in litigation with a shareholder who has brought a derivative claim which we believe is unfounded. We'll be unable to answer any questions about this law suit or its subject matter.

Andy and I will now take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Nat Overton – Morgan Keegan.

Nat Overton – Morgan Keegan

With the fourth quarter run rate of G&A expense be a reasonable quarterly run rate to anticipate going forward?

Thomas O'Brien

Yes, we think that would be a reasonable run rate.

Nat Overton – Morgan Keegan

Given your capital spending plans and all the various cash flows of your company's business model, would you expect to maintain, increase or decrease your cash balance in 2009?

Thomas O'Brien

Our goal is obviously to increase it, but 2009 if it's anywhere near as volatile as 2008, obviously that can be positively or negatively impacted. I think if we see a run up in diesel prices or fuel prices running into the summer, we could expend a fair amount of cash funding our working capital needs, although a lot of that is behind us as you heard us say with the posted letters of credit and things like that.

In the current environment, coming out or starting to come out of the first quarter, I see more opportunities to increase cash. I think lower volumes still haven't taken effect fully on our inventory levels for example. And so again, our goal, I'm not providing guidance here, but our goal is to increase it.

I think there's a balance of factors that exist today that suggest that we can be successful in that. However, obviously we're subject to changes in the market and the economy just like everybody else.

Nat Overton – Morgan Keegan

One crystal ball question for you, and I recognize that it is, but long term, over three, four, five years down the road, where do you think fuel margins could reasonable be expected to stabilize?

Thomas O'Brien

Yeah, that is a crystal ball question. I think that the fuel margins that we've seen in 2008 and all of our competitors have seen are a product in part of declines in fuel prices. I think there is some more recognition in the industry today that fuel margins are flat, are not necessarily healthy when prices are increasing and it costs to more to deliver those fuel gallons.

But whether or not that hinting will hold for the long term is the crystal ball question, is the million dollar question. I think we have had some cement in our industry that could have an impact on fuel margins depending on how they shake out, although I haven't seen any material impact yet.

Of course I'm talking about the bankruptcy filing of a competitor ours. Again, haven't seen anything yet, but that's a wild card in there as well.

Operator

Your next question comes from Neil Goldman – Goldman Capital Management.

Neil Goldman – Goldman Capital Management

Let me just understand something on the balance sheet. The letters of credit are against the oil inventory?

Thomas O'Brien

No. Those letters of credit, part of them, a portion of them support our, secure our payables to companies for purchases of fuel. There are also pieces in there, the letters of credit that support things like fuel taxes, our insurance bonds, things like that. So those letters of credit represent security to people that we owe money to.

Neil Goldman – Goldman Capital Management

Okay, but those are also marked as your payables on your balance sheet, correct?

Andrew Rebholz

No.

Neil Goldman – Goldman Capital Management

Those liabilities are on you balance sheet as a current liability, right?

Andrew Rebholz

Correct.

Neil Goldman – Goldman Capital Management

So if I look at $145.5 million in cash, and then the lease hold improvement receivable, is that from Hospitality Trust payable this year?

Thomas O'Brien

Yes.

Neil Goldman – Goldman Capital Management

Okay, so essentially where the $160 million of cash less the $30 million of your liability to Hospitality Trust or $130 million in cash, correct?

Andrew Rebholz

I follow you.

Neil Goldman – Goldman Capital Management

Okay, and since we have $16.6 million shares, $7.83 in cash.

Andrew Rebholz

Yes.

Neil Goldman – Goldman Capital Management

And we also have a tangible book of 22.10 so if stock is selling at 10% of tangible book and selling approximately 27% of net cash, I don't understand why we haven't been aggressive in terms of buying back stock or changing the business model. If mean if we're company public at 90% discount from net tangible assets, unless those assets are impaired, and since you just had a year end audit and nothing was written down, I assume they're in great shape.

Thomas O'Brien

I think the prospect of repurchasing shares is one that is considered continuously. I think that the year that we just completed, if it told us anything, it told us that it's a rough and tumble world when you have the net income we're producing versus the revenue that we're generating. Obviously there's a very small margin business.

An increase in fuel prices, failure to find the bottom in the economy or in the trucking industry, those are huge, huge issues that I don't want to stack up against parting with cash at this time. And that's the reason for not repurchasing shares.

As far as the business model, I think that over the long term, although it doesn't seem like it now, the capital markets that are available to public companies are superior and frankly more numerous than those that may be available to private companies, and that's the answer to the second part of your question.

Neil Goldman – Goldman Capital Management

How much inventory should we expect in terms of reduction given the current levels of volume from this $128 million?

Thomas O'Brien

Excluding fuel, which obviously goes up and down with fuel prices, and coming into the second and third quarters which are our busiest will increase, we're probably talking in the $5 million to $7 million range of potential inventory reductions between our shop business and our store business over the next six months or so.

Neil Goldman – Goldman Capital Management

On that $60 million as of now capital expenditures, how much of that is going to be reimbursed by Hospitality Trust?

Thomas O'Brien

I think we're talking about $20 million to $30 million of that may qualify. We have $16.8 million of the remaining of the original $125 million of capital improvement funding which we could sell up to $16.8 million for no increase in rent and the remainder would come with a formula of increase in rent.

Neil Goldman – Goldman Capital Management

We would be using you're saying between $30 million and $40 million of our cash for the CapEx this year?

Thomas O'Brien

That's about right, yes.

Neil Goldman – Goldman Capital Management

And how much is true maintenance CapEx at this point other than expansion of new operations?

Andrew Rebholz

I think most of it probably is.

Thomas O'Brien

I think we've talked about $25 million to $30 million a year.

Neil Goldman – Goldman Capital Management

So that would be our maintenance CapEx. And against depreciation and amortization on a yearly basis of? Last year it was $45 million right?

Andrew Rebholz

That's about right.

Neil Goldman – Goldman Capital Management

Would that be our ongoing depreciation and amortization?

Andrew Rebholz

That's reasonable.

Neil Goldman – Goldman Capital Management

So basically, we'd be picking up $15 million to $20 million between maintenance CapEx and depreciation and amortization in terms of cash generation.

Thomas O'Brien

That's the difference between those two numbers. You're right.

Neil Goldman – Goldman Capital Management

Okay, so it's another form of major cash flow coming in to this company. What has been, I mean you made a comment about Flying J, but have you seen anything from their bankruptcy issue in terms of the environment? Have they started selling off assets or got rational in their pricing, or whatever.

Thomas O'Brien

I haven't seen very many changes on either of those things.

Operator

Your next question comes from [Scott Fahey – RLCD Asset Management]

[Scott Fahey – RLCD Asset Management]

I followed your company in Petro before the acquisition so I'm trying to get caught up here and just get some context. Obviously a lot has transpired and the prices have changed a lot, most notably TA common stock price. Where are we today using whatever you want to use, EBITDA or cash flow, net earnings versus at the time of the spin or when you did the $41.00 secondary, I'm just trying to get my bearings as to what good looks like. It seems to look pretty good right now to me, third and fourth quarter if that were sustainable.

Thomas O'Brien

I would say two things. One, we're probably catching you up from free spin and free Petro to today is something that we can take time to go through with you offline. But in terms of where we're at, I think particularly in the fourth quarter that in all of the details that I've taken you through here in this call, as well as those that Andy has taken you through, are moving in the right direction.

We've lowered our operating costs. We're lowering SG&A, not by a little, by a lot. I mean these are aggressive actions we've taken. We've increased gross margin percentages. The thing that we do not have, and haven't had here recently is any sort of cooperation from the marketplace or the industry or the economy as a whole.

And so while we have improved materially due to our efforts, we haven't been helped by any outside forces so I'm actually in some sense, as agonizing as all this has been financially over the last six to nine months, in some sense I'm very pleased with the progress that we've made and feel like perhaps we may not have hit upon all the successes if we had not been put under the pressure that we had.

So with that as a backdrop, I think we can continue to successful, that is to generate cash flow in excess of our rents longer term. We'll have bumps in the road. As I said, the first quarter, I don't expect to generate net income.

But longer term, I think that things that we've done are going to serve us very well if we can get a new wind at our back.

[Scott Fahey – RLCD Asset Management]

I don't doubt that. You've done a great job on the cost side and I understand the headwinds with the economy etc. and obviously diesel costs as well. What I'm getting at, there seems to be a lot of emphasis on just covering your rent and the biggest criticism out there in the market amongst the small group of analysts who cover you is that they think you have a bad deal on your lease, and I don't think it's a sustainable situation. Do you feel that way?

Thomas O'Brien

No, I don't. And perhaps the context, you have to understand why we talk about or I talk about covering rent as much as I do is because by far it is the lion's portion of our financing cost is an understatement. And that's why I focus on it, because it's a big number. It's also if you will the last number that we have to get through before we generated income value for shareholders which is where my focus is on.

[Scott Fahey – RLCD Asset Management]

But the fact is you're in deferral on it and I mean it seems like a free option for the time being so I think I would take a free option as well but you can see how that would just kind of embolden some with that point of view.

Thomas O'Brien

I'm sure it may. I think that the rent deferral agreement is something we put in place last year because we felt that the economy wasn't helping us, but I didn't put it in place with the intent of not repaying those amounts. I think that that is still the goal, always has been in terms of getting through that and getting to that layer where we're actually generating cash that adheres to the benefit of our common shareholders.

[Scott Fahey – RLCD Asset Management]

Tying in with one of the other gentlemen that was focused on cash currently and build or drawdown, you had mentioned that you hoped that cash was higher at the end of the year than it is now. While generating cash is obviously the goal, I was kind of surprised that you'd want to still be husbanding it 10 months from now from what seems to be already high balance.

Thomas O'Brien

I think that's part of the nature of the kind of questions in today's environment is wildly different than six months ago and my comments there really talked about where I thought we might be if nothing changed today, which is the only answer to that question. However, that assumption that nothing's changed isn't something that I'm counting on or I think anybody is.

[Scott Fahey – RLCD Asset Management]

Diesel's covered three handles this year, do you do any hedging? Do you plan any hedging?

Thomas O'Brien

No. We have very little diesel inventory on hand. We don't make futures purchases until, as long as we're managing inventory level and turning rather rapidly, in effect we have natural hedging, and when prices are declining, then when they're going up, but over the longer period of time, it's naturally hedged.

Operator

Your next question comes from [Timothy Stabos – Stabos Asset Management]

[Timothy Stabos – Stabos Asset Management]

Does the rent deferral agreement preclude a stock buy back until the rent is paid?

Thomas O'Brien

It requires us to have the permission of the landlord prior to engaging in a stock repurchase.

[Timothy Stabos – Stabos Asset Management]

I want to agree with the points that were made by the earlier gentleman about the cash per share. We've got $130 million in net cash. Even announcing a $3 million stock buy back, that 2%, 2.5% of your cash hoard. That could buy back 10% of the stock outstanding at the current price. I know the price wouldn't, you wouldn't be able to get that many shares at $2.00 I'm sure, but when you put the whole picture together of the lack of any announcement of stock buy back, there's an implication of the faith of management and its ability to keep the business model successful. You've been successful the last few quarters.

Lack of insider buying on the open market, and we've still got a rent deferral going on, so I really think that casts a pall on the stock and that the street trusts that the improvement is real for you. They may think that there's a disaster waiting to happen. I'm a shareholder and I think the company is dramatically undervalued and it's just frustrating to me and I know there's others that feel the likewise, that we're almost shooting ourselves in the foot here by essentially being silent to the street. I mean, how about some road shows or something that we don't believe that despite the fact that you've been successful, your SG&A costs are fantastic, and I think this is a great acquisition and merger. So you see the picture I'm creating here?

Thomas O'Brien

I do, and I think that much of the last six months has been, not a lot of folks have seen me on the road for example, mostly because we've been singularly focused on trying to deliver. That doesn't mean that anything is as you say, the sword is not dangling so far as I know, and I ought to know.

It doesn't mean that I have no plans or desires to get out and talk to people face to face and I think you'll see that happening over the next year. I kind of think that actually here over the last nine months of being able to point to almost as I said, almost every line item in the income statement and show improvement while at the same time juggling the economic factors that we're facing, the industry factors, the declines in volumes.

I mean these are obviously very, very tough times and I believe that my best position, my best efforts are focused on the company. That doesn't mean there is no place for some of the things that you suggested, it just means that over the last six to nine months, those things took a back seat to what I deemed to be the most important things.

[Timothy Stabos – Stabos Asset Management]

Could you comment specifically on the notion of a purchase for example of $3 million out of $130 million on a stock buy back and why that isn't a good risk/reward ratio? That's not going to be a difference of you going bankrupt or not if you spend $3 million out of $130 million.

Thomas O'Brien

I've been clear on this with the prior caller and I think you pointed out the limitations that I have while I'm in a rent deferral period. I frankly don't have $3 million. I don't have the ability to take any amount and repurchase shares. I mean debt to my landlord by $30 million today, I expect that balance will grow in the current economic conditions, and while I'm in that position of not having paid in full an entity that's senior in the capital structure to become shareholders, the best I can do is to focus on making that cash balance so large that by the time the economy improves, by the time we can see better where we're at, what the run rate, where fuel margins have stabilized, I hope at that time I'll have the capital available to repay my debts and focus on returning, making returns to shareholders.

[Timothy Stabos – Stabos Asset Management]

Maybe I misunderstand you. They will not give permission to buy back stock then.

Thomas O'Brien

I have not asked for permission.

[Timothy Stabos – Stabos Asset Management]

Haven't asked permission as a matter of respect to them I presume, right?

Thomas O'Brien

It's really a matter of the difference it seems to be surfacing is a difference in my opinion and yours. That is to say, there are practical reasons for not undertaking a share buy back today, but there are also philosophical reasons for not doing so, and you and I perhaps don't share those views.

[Timothy Stabos – Stabos Asset Management]

At what point do we consider paying off these, and when do we say, well we've made a few good quarters, whatever.

Thomas O'Brien

There's options to defer and there's options to repay. The options to defer each month and take each month as it comes, and the option to repay exists at any time. Until we see a bottom in the economy, I think that we're likely to continue to defer and not repay.

[Timothy Stabos – Stabos Asset Management]

What happens this time if oil goes back to $80 to $100 a barrel in a relatively short period of time? Are you more confident that because of what you dealt with a year or so ago that it won't be as cataclysmic?

Thomas O'Brien

There are two things that happened there. One I hope that the industry and I'm including TA in this will recognize the increased costs and have them reflected sooner rather than later, certainly sooner than we all did last time around, the first time that happened. So I suppose the industry gets a little bit of a pass because it never happened before and we had no experience dealing with it. I hope the industry will recognize it faster.

I also believe that today, even with diesel in the $1.40 range versus where it was nine months ago over $4.00, most of the facilities that we have in place in terms of our credit with suppliers really are reflective of conditions that existed several months ago. And that is to say, in my view, we have room for a modest increase in diesel prices without coming under further pressure from the credit situation on the payables side.

However, it's not necessarily my view that counts. You're dealing with oil companies that may take a wildly different view and we may be dealing with increases that are just as dramatic if not more so then they were again during 2008. I think in there is the answer to your question.

Operator

Your next question comes from Jeff Hildreth – Eagle Rock Capital.

Jeff Hildreth – Eagle Rock Capital

With respect to the revolver, the press release said that a portion is not drawn. What's drawn on the revolver?

Andrew Rebholz

I guess that comment is referring to the fact that we've got about $69 million while not drawn, it's not available because it's covering the letters of credit. There's nothing drawn.

Jeff Hildreth – Eagle Rock Capital

So it's just the LC's. Which are a component of the $100 million, correct?

Andrew Rebholz

Yes.

Jeff Hildreth – Eagle Rock Capital

Is there a provision in the revolver that if you drew down on the revolver, is there a prohibition of buying back stock in the revolver?

Thomas O'Brien

I don't recall. I believe there are probably some limitations and things like that, but I don't think it's a flat out prohibition. I haven't looked at that in quite some time.

Jeff Hildreth – Eagle Rock Capital

I think just the optics of a share purchase plan whether it's exercised or not would be a very positive thing. There's lots of ways to raise money in the market place. One of them is this equity so it's certainly below fair value that perhaps over time if the equity gets to some sort of reasonable value, hat could be a source of liquidity and funding. I'll repeat some of the comments that were made earlier and lend support to them and I'll talk you later off line.

Thomas O'Brien

Thank you.

Operator

Your next call comes from [Jeff Geegan – Milwaukee Private Wealth]

[Jeff Geegan – Milwaukee Private Wealth]

In your press release you stated that there were certain operating initiatives that contributed to your improved results. Specifically could you elaborate on the termination of your fuel and marketing arrangement as well as the fuel purchase and pricing strategies and how those relate specifically to improved fuel margin you experienced this quarter and as a result in part your initiatives and in part the market and can you allocate those results between the two please.

Thomas O'Brien

Let me break it down here. The thing I can give you definitive answers on are, I think what you're referring to is the fuel marketing arrangement that existed since Travel Centers of America LLC was formed, and that is with a company called Simon's Petroleum. We terminated that agreement. There was a wind down period under which we and the counter party agreed or were required by contract to cooperate in some fashion.

That agreement was in essence a fairly sizable portion. I'm not talking about a majority, but 20% of our diesel fuel volume was marketed by this counter party and in effect, TA and the counter party, if you think about it, we've split the fuel margin on those gallons.

The termination of that agreement did have an impact certainly. Splitting $0.08 a gallon. Splitting $0.19 is another, and in fact, almost without exception, we're talking about in the high 90% range of the customers that this counter parties customers ran through that agreement, became our direct customers when this agreement ended in September of 2008.

And so that's the back drop of that marketing agreement that you were talking about. If you had projected backwards, we'd be talking about having taken a haircut of $0.03 to $0.04 a gallon on the volume that ran through that. Of course, identifying the positive impact of that on the fourth quarter is difficult because the volumes are wildly different as well as lathe margins.

But that was a strategic move for us and having gotten through that has simplified our lives and made our gross margins higher.

The remainder of your question is really about pricing strategy and how the not only TA but the market tends to price. I think what I can tell you is we all tend to price similarly. We all tend to discount business in exchange for volume with large fleets. We tend to post prices based upon our costs which generally speaking are I think similar amongst the large truck stop operators.

With regard to specific pricing strategy, I think all I can say there is today it's more important for us than it had been in the past to make sure that underlying cost changes are rapidly reflected in our pricing, particularly on the retail side. I do see a more rapid response to pricing changes by our competitors. I think that's what I can say about pricing strategies.

Give the final part of your question. In my lengthy answer, I seem to have forgotten it. If you wouldn't mind repeating it, I'll try to address it.

[Jeff Geegan – Milwaukee Private Wealth]

My second question actually related to the non fuel margins, and I thought Andy suggested that the original non fuel margin at TA was higher than the non fuel at the Petro and that during the course of the period you've improved those Petro margins. It appears that the collective margin has stayed pretty close to that 58%. Do you anticipate if the Petro margin for non fuel sales improves that the total non fuel margin may actually continue to improve above that 58% where it stands today?

Thomas O'Brien

I don't think that we're predicting significant further increases. I think that a lot of the things that we worked through since May 2007 and most particularly during 2008 at the Petro sites in particular have kind of already born their fruit if you will. I think that we've gotten all of our sites from a non fuel sales and margin perspective, operating expense perspective, all those sorts of user angles, operating similarly.

Will there be further improvements? We certainly hope so. Will it be a material increase in that overall 58% sort of a neighborhood? I wouldn't expect that.

Andrew Rebholz

I would add to that a lot of the things that we are focused on are obviously in revenue enhancement, margin enhancement, but also cost control. All of those bring to bear on that percentage. I remind you that we're talking a percentage that's applied to non fuel revenues which are about $1.2 billion a year, and so even a slight .1% improvement in that is a little over $1 million a year.

So there's a lot of opportunity there, and it's something that we do focus on every day and actually cast quite a wide net over.

[Jeff Geegan – Milwaukee Private Wealth]

Opportunistically, with Flying J's condition what would you envision a year from now had the opportunities looking backwards to take advantage of what's happening at Flying J?

Thomas O'Brien

I think that the Flying J bankruptcy caught most of the industry by surprise, and yet they are a private company. The public information that is on file at least at face value, and I have to reason to value it any other way suggests that their issues are short term liquidity issues arising out of some of their vertical investments and they haven't filed things like operating statements with the court.

And so today, Flying J seems to be in control of Flying J. and opportunities that may exist today I don't believe haven't really presented themselves. Obviously although there's been no real noticeable affect on our business, it's another potential impact depending on how all of the bankruptcy issues stir out.

It may be that nothing happens which is what we see today. It seems like in bankruptcy, they may have a balance of advantages and disadvantages. The advantages being that they don't have to pay currently their historical debt. The disadvantage may be that customers may not want to do as much business that may be under pressure because it's in bankruptcy.

But today I think as of right now, there's a balance of those things and we haven't seen opportunities either to let's say invest or to take advantage of changes in their behavior because we haven't seen that.

Operator

Your next question comes from [Ernesto Tunisic – Kawa Capital]

[Ernesto Tunisic – Kawa Capital]

My comment would be to express support for the share buy back that was proposed earlier. Then the second thing was as far as site level operating expenses, it seems like that was a little bit down from previous quarters. Could you provide some color on that?

Thomas O'Brien

I think that generally speaking that improvement has come because of the initiatives and the cost controls. Even more specifically I think the fourth quarter of 2007 was really right on the heels of shuffling back, I think we announced in August or September of 2007 a change in our methods of operation in the field and I don't know if you recall that.

We changed a lot of positions in the field personnel and I think that that activity in 2007 certainly is behind us and 2008 and coupled with cost controls associated with lower volumes and trying to create opportunities are the things that really went into the decline and the reduction in that number.

[Ernesto Tunisic – Kawa Capital]

So the 154, is it a likely run rate for the business?

Thomas O'Brien

I would say it may be a run rate for the quarter. Remember the biggest component of site level operating expenses is labor, and that does fluctuate with volume not just cost of servicing of customers, but it also particularly in the shop business where we generate revenue by expending labor dollars to a certain extent.

Like when you take your car in to the shop, they charge you X dollars an hour for labor, and so when we get into the heavy periods, you'll see that number increase.

Operator

Your next question comes from Neil Goldman – Goldman Capital Management.

Neil Goldman – Goldman Capital Management

Given that we're selling at $0.10 of tangible book, why don't we consider selling off some regions raising cash and then using that to pay down the revolver with the Hospitality Trust and buy back stock simultaneously since the street's not paying for our value, why don't we increase our value incrementally by doing that?

Thomas O'Brien

That's obviously one way that those types of things could be accomplished. There's two major problems. One is the impact or potential impact of our ability to continue to attract the kind of nationwide fleet business that we attract today if we're missing a region of the country. And frankly, I think having classified pool of stops smoothes out.

As much as we've been impacted by the volatility, if we were a regional operator, I think we would be in a much different light, so I think there's some diversification advantage from maintaining the network at the size that it is. That's the first issue.

The second issue is I'm not sure that we would be overly successful in finding anyone who's making these types of investments. We have for example a handful of properties that we do believe might make sense for us to cull. However, we have been unsuccessful in finding buyers in this market.

Operator

Your next question comes from Christopher Gable – Wachovia.

Christopher Gable – Wachovia

First question relates to the lease with the landlord, and I'm wondering, I've heard talk on the call about it's a big number and that's your main focus in just meeting the rent, and I'm wondering how is it that the company got into a situation where it has that kind of a lease obligation and what are the potential prospects for maybe lowering that cost later of such a big hurdle and what Hospitality would do with a bunch of real estate on a bunch of truck stops.

Second, relates to incentives and are there conflicts of interest today that would cause the employees of travel centers to go easy so to speak in their negotiations with Hospitability?

Thomas O'Brien

I'll take the second part of your question first. There are no incentives for anybody at TA to favor anybody but TA. They have no incentive to discount my effort if you will on something that makes up the vast majority of my personal net wealth. A reason aside from the fact that acting that way is what I get paid for.

In terms of the history of the lease obligation, it was Hospitality properties that purchased Travel Centers of America Inc. back in January of 2007 and Travel Centers of America LLC was created by Hospitality Properties Trust and the vast majority of our properties are financed as they're owned if you will by HPT. The vast majority of our lease obligations came out of that spin of.

TA LLC was spun off the Hospitality Properties Trust shareholders in January of 2007 and that's really the origin of that.

Operator

Your next question comes from [Timothy Stabos – Stabos Asset Management]

[Timothy Stabos – Stabos Asset Management]

I appreciate that disclosure you just made very, vey much. You said the vast majority of your personal net wealth is in TA?

Thomas O'Brien

Yes.

[Timothy Stabos – Stabos Asset Management]

I appreciate knowing that. That makes me fee good to know that you're aligned with us in that way. What about insider buying, the window. The window opens up tomorrow, or three days from now or what?

Thomas O'Brien

Three days after the release.

[Timothy Stabos – Stabos Asset Management]

Are you pretty much all in or do you think the stock is attractive at these levels personally?

Thomas O'Brien

I think that I can only speak for myself. Obviously you've got different folks doing different things with their lives and their money. I think that TA's share price is today attractive from my personal perspective. I have to weight things like anybody on this call weights with their own personal wealth which is the percentages and available cash flow and things like that.

[Timothy Stabos – Stabos Asset Management]

The window opens up Friday or Monday?

Thomas O'Brien

Friday.

[Timothy Stabos – Stabos Asset Management]

Do you believe based on the historical fuel margins in the last decade, but throwing out the last year and a half because of the volatility that this company can and should be able to be profitable and earn a reasonable return on equity?

Thomas O'Brien

Yes. I'd doesn't look like we have anyone else in the queue. I want to thank everybody for participating in our conference call, for your interest in TA, and look forward to talking to you soon.

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Source: Travel Centers of America LLC Q4 2008 Earnings Call Transcript
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