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Executives

Carlynn Finn – Manager, IR

Tom O'Brien – Managing Director, President and CEO

Andy Rebholz – EVP and CFO

Analysts

Ben Brownlow – Morgan Keegan

Smedes Rose – KBW

TravelCenters of America LLC (TA) Q2 2010 Earnings Call Transcript August 9, 2010 10:00 AM ET

Operator

Good day and welcome to the TravelCenters of America second quarter 2010 financial results conference call. This call is being recorded.

At this time, for opening remarks and introductions, I would like to turn the call over to the TA Manager of Investor Relations, Carlynn Finn. Please go ahead.

Carlynn Finn

Thank you. Good morning and welcome, everyone. Our 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 Laws. These forward-looking statements are based on TA’s present beliefs and expectations as of today, August 9th, 2010. 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 our forward-looking statements not to occur is contained in our filings with the Securities and Exchange Commission. Investors are cautioned not to place undue reliance upon any forward-looking statement.

The recording and retransmission of today’s conference call is strictly prohibited without the prior written consent of TA.

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

Tom O'Brien

Good morning, everybody and thank you for joining our call today. I’m here to report our financial results for the 2010 second quarter. For that quarter, we generated net income of $1.2 million, a $16 million improvement over the 2009 second quarter bottom line. EBITDA for this period was $75.8 million, which was a $19 million increase over 2009 second quarter EBITDA.

Fuel gross margin per gallon was a significant contributing factor to the variations in results between years for the second quarter. A higher level of fuel gross margin per gallon during the current quarter combined with a 6.4% increase in fuel gallons sold generated $15.5 million more fuel gross margin in the 2010 second quarter than in the previous year.

While fuel margin was a big part of the story in the second quarter as it has tended to be recently, it was not the full story. Not only has the U.S. economy slowly improved, so too have the businesses of many of our trucking company customers. A significant contributing factor to TA's results this second quarter was the continuing impact of our internal efforts to increase revenue and EBITDA.

On a same-site basis, fuel sales volume was up 7.1% for the quarter and non-fuel revenues were up 6.5%, each over the 2009 second quarter while the non-fuel margin percentage increased and site-level operating expenses were held in check. Site-level operating expenses, as a percentage of non-fuel revenues on a same-site basis, was 52.2% in the 2010 second quarter, 30 basis points better than in the 2009 second quarter.

Our second quarter 2010 results are encouraging in the current economic environment. We have continued to focus on our customer. There really is no one else in this industry that is doing the things TA is doing to make the customer experience first grade. A few examples of this are – on July 26, we rolled out a blockbuster change to our brand's loyalty program to combine the separate Petro and TA programs under a single new umbrella called UltraOne. The new card provides drivers with the ability to earn and use points at all 229 of our locations.

TA has trained its truck service personnel on the changes that drivers and fleets are facing with CSA 2010. CSA 2010 is a comprehensive safety analysis conducted by the Federal Motor Carrier Safety Administration. CSA 2010 will have a profound impact on the way drivers and fleets will conduct their maintenance activities and how drivers and fleets will interact with one another. TA is of course leading the way in the travel center business because of our extensive nationwide maintenance facilities.

We have adapted our full service restaurant menus to meet changing customer tastes. There is now a salad bar at every TA restaurant. Our "All You Can Eat" program and our newest low-calorie options are both, believe it or not, the result of direct customer interaction we solicited through our Driver Council program.

TA's new national shower standards, points promotion, and substantial customer service employee training commitment are leading the way to show drivers and customers the advantages of a full service travel center, both from the standpoint of driver satisfaction and comfort and from that of customer business optimization. These are just a few examples.

Maybe the TA's plans are different than those of our competition, because TA is dominant by many measures of size versus the new Pilot Flying J. However, we intend to continue to focus on advantages of the TA and Petro full service offering that will provide us with some of the keys to successfully operate in the future, despite the new and admittedly challenging landscape of our industry.

I will now turn the call over to Andy Rebholz, our Chief Financial Officer, who will review our second quarter results in detail. And after Andy's comments, we will come back to answer questions.

Andy Rebholz

Thanks, Tom and good morning, everybody. I will discuss some of our key financial results for the 2010 second quarter. In this discussion, I will refer to same-site results, which are the results at only those sites that we have continuously operated since April 1st, 2009.

In the second quarter of 2010, TA generated net income of $1.2 million or $0.07 per share, while in the second quarter of 2009, TA posted a net loss of $15 million or $0.90 per share. For the second quarter of 2010, TA also reported EBITDA of $75.8 million, an increase of about $19 million versus the second quarter of 2009.

Let me emphasize an important point. EBITDA in the second quarter of 2010 exceeded cash rent by about $29 million and GAAP rent expense by about $17 million. These favorable comparisons to the prior-year quarter results are primarily attributable to the increase in fuel gross margin between quarters as Tom noted earlier, and also to increases in non-fuel sales and gross margin, while we controlled operating and SG&A expenses.

Fuel gross margin was $15.5 million more in the 2010 second quarter than in the 2009 second quarter. This increase is the net effect of both an increase in the fuel gross margin per gallon and an increase in fuel sales volume. As we have noted previously, although other factors may have an effect, fuel gross margin per gallon tends to be lower during periods of rising fuel prices and higher during periods of falling fuel prices.

During the second quarter of 2010, fuel commodity prices generally trended lower. However, during the second quarter of 2009, fuel commodity prices generally trended higher. This dynamic facilitated our gaining a higher margin per gallon in the current-year quarter.

Our same-site fuel sales volume increased by 7.1% in the second quarter 2010 versus the 2009 second quarter. We believe that this increase resulted from increased levels of trucking activity and a larger number of trucker and four-wheeler customers at our sites. On a same-site basis, our 2010 second quarter fuel gross margin was $16 million or 28% higher than in the comparable 2009 quarter.

Our same-site non-fuel revenue during the 2010 second quarter increased by $18 million or about 7% versus the 2009 second quarter. We believe that the increase in non-fuel sales reflects the increased number of customers at our sites as economic activity has increased.

Our same-site non-fuel gross margin, as a percentage of non-fuel sales, increased by 70 basis points to 58.2% for the 2010 second quarter. This improved margin percentage reflects a shift in the relative mix of non-fuel sales to sales of relatively higher-margin goods and services, as well as a reduced level of price discounting and lower purchase prices for certain of our inventory items.

Our site-level operating expenses increased by $8.7 million or 5.9% on a same-site basis versus the 2009 second quarter. This increase was largely due to the increase in fuel and non-fuel sales activity at our sites during the quarter. Operating expenses as a percentage of non-fuel sales for the second quarter of 2010 improved as compared to the 2009 quarter.

Site repair and maintenance expenses were up over the prior year quarter as we work hard to keep our sites as attractive as we can, especially now that the trucking activity levels seem to be beginning to increase.

Our selling, general, and administrative costs of $20 million for the second quarter of 2010 were $400,000 more than in the 2009 second quarter, due mostly to personnel cost increases of about 2%.

Now, I will give some details about TA's cash and liquidity position. Our cash balance increased by $15 million during the second quarter. We began the quarter with $155 million of cash on the balance sheet. We spent $10 million to fund the capital projects; we received a $1 million distribution from our joint venture; we received funding of about $2 million from HPT for improvements to properties we lease from HPT; we generated EBITDA in excess of cash rent of $29 million; and we had $7 million of negative working capital and other changes, to bring us to $170 million in cash at the end of the quarter.

At June 30, 2010, the portion of our credit line used to support letters of credit was approximately $63 million. This $100 million credit facility is otherwise undrawn. Also at June 30th, 2010, we had $3.6 million remaining of the original $125 million tenant improvement allowance from HPT for certain TA-branded property improvements to be funded by HPT without a rent increase.

In an improving, but still difficult economic environment, TA has thus far been able to continue to conserve cash, meet all of its obligations, and maintain its travel center sites. It is fair and important to note that the ability to defer up to $5 million of our rent to HPT each month has been an integral factor in maintaining our cash balance.

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

Tom O'Brien

Thanks a lot, Andy. With that, really I'm just going to open it up to questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). We will pause for a moment to assemble our queue. We will go first to Ben Brownlow with Morgan Keegan.

Ben Brownlow – Morgan Keegan

Hi, good morning.

Tom O'Brien

Hi, Ben.

Ben Brownlow – Morgan Keegan

I guess, just (inaudible) at what point do you think you would be comfortable at kind of setting goals and giving guidance for things that are under your control, like site-level expenses?

Tom O'Brien

I'm sorry; I didn't catch the last part.

Ben Brownlow – Morgan Keegan

Just in terms of guidance, at what point do you get a comfort level with giving guidance – annual guidance for things that you can control – certain operating expense items?

Tom O'Brien

We don't give guidance overall. And I don't expect us to give guidance on individual items. The operating expenses tend to be managed along with revenues. And so they are going to go up and down as revenues go up and down. We need to match, for example, labor with the customer levels. So I don't expect that we are going to give point guidance on individual items or a change of policy going forward with regard to overall guidance.

Ben Brownlow – Morgan Keegan

Okay, okay. Can you comment a little bit – are you seeing anything in terms of competitive pricing or any change in the composition for fleet business with – following the merger?

Tom O'Brien

As of right now, no. That is a pretty major unknown, the impact of that – that merger – the recently completed merger of Pilot and Flying J, for anybody on the phone who doesn't know what we are talking about.

We – I closely follow the FTC process. I'm a little bit surprised at the FTC's approval, particularly given the Obama administration's get-tough policy on antitrust enforcement. But as of right now, although we are closely monitoring Pilot and Flying J's actions, I want to see how they use their combined market power. I want to determine whether or not we have got any basis to complain if and when they may abuse that power. But in the meantime and falling short of that, we are redoubling our efforts to compete in this changed marketplace.

We continue to emphasize driver and fleet needs. We are the only travel center chain, which has full service restaurants which are not outsourced. We have got nationwide road service. And we intend to continue to be as aggressive as possible on fuel pricing. It's really a long answer to your question; it's really a bit too early to tell, but those are things we are going to focus on going forward.

Ben Brownlow – Morgan Keegan

That's helpful. And just one last question. These fuel margins – I mean, the fuel margins are always encouraging to see when commodities are coming down.

Tom O'Brien

Yes.

Ben Brownlow – Morgan Keegan

But I guess, under a more normalized fuel margin environment, how – can you just talk about the rent structure and how you feel under a more normalized environment, being able to – the company being able to support current rent, especially at the close of this year, and maybe discuss some of the financing options that you are considering to pay down the deferred lease as they are – they come due?

Tom O'Brien

Yes. The entire rent situation, the deferral and we continue, as you know, to make that – to take advantage of that deferral. I expect that we'll – we will have a resolution with HPT, if not by year-end, soon after we tally up the fourth quarter results. And the deferral amount at that time and other terms of lease possibly will be dealt with then.

As to the fuel margin part of your question, we haven’t had a normalized fuel margin environment for a long time. And it's encouraging to see the fuel margins where they were in the second quarter. Even though the commodity prices came down, they came down about – around 10% from around $2.20, $2.25 to close to $2 at the end of the quarter, they are up a little bit since then, but we have had up days and down days.

And so whether the – I guess, I don't have a great deal of visibility today on whether the fuel margin environment is going to, absent competitive factors, settle in at somewhere in the mid-teens or somewhere closer to 10% or at some other number. The big factor there possibly is the impact of the recent merger, which I don't think we have seen the full impact yet and I'm not sure whether it will be positive or negative, frankly. That's another long response. I am not calling it an answer, because I guess I don't have an answer at this time.

Ben Brownlow – Morgan Keegan

Excellent. Thank you.

Operator

(Operator Instructions). We will go next to Smedes Rose with KBW.

Smedes Rose – KBW

Hi.

Tom O'Brien

Hi.

Smedes Rose – KBW

Could you talk to us a little bit, I guess, about what you are seeing so far in July in terms of commodity fuel prices, sort of are they continuing to trend down and maybe just anything you can talk about this at the – at your business thus far in the third quarter?

Tom O'Brien

Yes. I think end of the second quarter commodity – diesel prices are around $2. Today, they are around $2.16. So a slight trend upwards. I think that in July – what I can say about that is that we have not seen in terms of preliminary bottom line results a change in direction from where we were – where we came out in the second quarter. And I think I'm going to leave it at that. To sum up, so far, directionally – the direction hasn't been affected by the modest increase in commodity prices.

Smedes Rose – KBW

Okay, that's helpful. And then can we – should we just assume that you are still kind of at your policy of deferring rents? I believe, you have till [ph] the end of the year, right, and then they are due by July 2011? Is that fair?

Tom O'Brien

That's a good assumption.

Smedes Rose – KBW

Okay. Thank you.

Andy Rebholz

Thanks.

Tom O'Brien

Okay. Thanks a lot. Have a good day.

Operator

It appears there are no further questions at this time. Mr. O'Brien, I would like to turn the conference back over to you for any additional or closing remarks.

Tom O'Brien

Well, no, I'd just like to thank everybody for their calling in today and I'm looking forward to visiting with you in a few months about Q3.

Operator

That concludes today's conference. Thank you for your participation.

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