Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Carlynn Finn - Manager Investor Relations

Andrew Rebholz - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Treasurer

Thomas O'Brien - Chief Executive Officer, President, Managing Director, Member of the Office of the Chairman and Director

Analysts

Brandon Osten

Marc Cohen

Smedes Rose - Keefe, Bruyette, & Woods, Inc.

Dennis Wurst - vFinance Investments

Vadim Perelman

Andrew Gadlin

Benjamin Brownlow - Morgan, Keegan & Company, LLC

Philip Benedict

Brian Tran

Adam Wyden

TravelCenters of America LLC (TA) Q4 2010 Earnings Call February 18, 2011 10:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the TravelCenters of America Fourth Quarter and Year End 2010 Financial Results Investors Conference Call. [Operator Instructions] I would now like to turn our conference over to Carlynn Finn, TA's Manager of Investor Relations. 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, February 18, 2011. 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 is contained in our filings with the Securities and Exchange Commission. Investors are cautioned not to place undue reliance upon any forward-looking statements.

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.

Thomas O'Brien

Good morning, and thank you for joining our call. I'm here to report our results for the 2010 fourth quarter and full year, both of which reflected significant improvement over 2009 periods.

Our 2010 fourth quarter net loss was $15 million better than the prior-year quarter. And our EBITDAR was $48 million, an increase of $16 million or 50% over the 2009 quarter. For the 2010 full year, our net loss improved by $24 million versus 2009. And our EBITDAR was $237 million, an increase of $35 million or 17% over 2009.

On February 1, 2011, we announced the terms of completed amendments to our leases with Hospitality Properties Trust, or HPT, our principal landlord. The principal financial effects of these amendments include a reduction in our future rental obligations by about $47 million annually, the elimination of interest on previously deferred rent, which would have amounted to an additional $18 million annually, and the extension of the payment date for that $150 million deferred rent obligation until 2022 and 2024. Andy will remind you of more of the details on these amendments in a moment.

On a pro forma basis, assuming the amendment agreement had been effective for 2010, instead of reporting a $66 million net loss for 2010, TA would have reported a net loss of $5 million. Further, TA's EBITDAR of $237 million compares favorably to pro forma cash rent obligations of $185 million.

As excited as I am to have been able to reach mutually acceptable resolution of these matters with HPT, I'm even more excited because our 2010 results continue to improve over the prior-year period, and excited further still that nearly all aspects of our business contributed to that improvement. Fuel sales volumes, fuel margin and non-fuel revenues, all were up over the prior year on a same-site basis. Non-fuel margin percentages on a same-site basis improved versus the 2009 periods. Operating expenses as a percentage of non-fuel revenues were improved over the prior year. Franchisee royalty revenues were up on a same-site basis, and the SG&A expenses were held in check at only 2.4% increase.

Our EBITDAR in 2010 outpaced 2009 EBITDAR by $35 million, as I said. 2010 did start out rough. Our first quarter 2010 EBITDAR had declined by $20 million versus the 2009 first quarter, but that decline was overwhelmed by improvements of $19 million, $20 million and $16 million in the second, third and fourth quarters of 2010, respectively.

Even more importantly, we continued to succeed in improving the experience of our customers at our sites. During 2010, we rolled out our industry-leading loyalty program, UltraONE. We invested nearly $60 million in capital items to improve our facilities, and we invested in new customer service training programs for all of our employees. We believe we have made TA and Petro a better choice for trucking fleets and truck drivers, and we believe our results in 2010 reflect a positive response by customers to the programs we've implemented and the investments we've made.

And now, Andy Rebholz, our Chief Financial Officer, will review our fourth quarter and full-year results in more details. After his comments, I'll make some closing remarks, and then we'll try to answer questions.

Andrew Rebholz

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

First, I will cover our fourth quarter results. In the fourth quarter of 2010, TA generated a net loss of $30 million or $1.71 per share. In the fourth quarter of 2009, TA had posted a net loss of $44.6 million or $2.65 per share. For the fourth quarter of 2010, TA also reported EBITDAR of $48.3 million, an increase of about $16 million versus the fourth quarter of 2009. EBITDAR in the fourth quarter of 2010 fell short of cash rent and interest by $5.1 million and fell short of GAAP rent and interest expense by $17 million. As Tom just noted, the improvement over the prior year results is attributable to improvements in nearly all areas of our business.

Our fuel sales volume on a same-site basis increased by 2.3% in the fourth quarter of 2010 versus the 2009 quarter. On a same-site basis, our 2010 fourth quarter fuel gross margin was approximately $10.3 million or 20.8% more than in the comparable 2009 quarter.

Our fuel revenue for the four quarter of 2010 reflected an increase of $219 million or roughly 21%. The large majority of this variance results from increases in commodity fuel prices between the 2009 and 2010 fourth quarters. The increased level of fuel sales volume also contributed to the revenue increase.

Our non-fuel revenue during the 2010 fourth quarter increased by $21.2 million or about 8.2% on a same-site basis versus the 2009 fourth quarter. We believe that the increase in non-fuel sales reflects the effects of the improving economic conditions on trucking companies and drivers, including increased use of our truck maintenance and repair services.

Our non-fuel gross margin as a percentage of non-fuel sales increased by 20 basis points on a same-site basis to 57.6% for the 2010 fourth quarter. Our site level operating expenses increased by $6.8 million, or 4.6% on a same-site basis versus the 2009 fourth quarter. This increase reflects the higher volume of sales in the 2010 quarter.

Although the dollar amount of operating expenses increased, the ratio of operating expenses to non-fuel revenues improved, declining by 200 basis points to 55.3% in the 2010 fourth quarter from the 2009 fourth quarter. Our selling, general and administrative costs of $20.7 million for the fourth quarter of 2010 were slightly more than in 2009 by $300,000 or 1.5%. We believe we've been able to continue to control our overhead costs in response to business conditions. Now, I will turn to the results for the full year ended December 31, 2010.

TA's net loss for the full-year 2010 was $65.6 million, or $3.78 per share compared to a net loss of $89.9 million or $5.38 per share for the 2009 full year. EBITDAR for 2010 of $237.1 million was about $35.3 million greater than for 2009. Our fuel sales volume on a same-site basis increased by 6% in 2010 versus the 2009 year. On a same-site basis, our 2010 fuel gross margin was approximately $32 million, or 14% more than in 2009, as a result of the increased sales volume and a slightly higher margin per gallon.

Our fuel revenue for the year of 2010 reflected an increase of $1.2 billion or 34%. Again, the bulk of this increase resulted from increases in fuel commodity prices, with a smaller effect from the increased sales volume. Our non-fuel revenue during 2010 increased by $68.6 million, or about 6.3% on a same-site basis versus 2009.

Our non-fuel gross margin as a percentage of non-fuel sales on a same-site basis was 57.8% for the 2000 [sic] year as it was for 2009. Our site level operating expenses increased by $32.1 million or about 5.4% on a same-site basis versus 2009. This increase reflects the higher volume of sales. While the amount of operating expenses increased in 2010 over 2009, the ratio of operating expenses to non-fuel revenues improved, declining by 40 basis points to 53.9% for the full year 2010.

Our selling, general and administrative costs of $80.6 million for the year 2010 were $1.9 million or 2.4% more than they were in 2009, reflecting the focus on controlling these costs. The increase was primarily attributable to legal expenses and personnel costs.

Now I will summarize some data regarding our liquidity position. During the year 2010, TA's cash balance changed as follows: We began the year with $156 million of cash on the balance sheet. We spent $59 million to fund capital projects, which spending was more heavily weighted to the second half of 2010. We received funding of about $7 million from HPT for improvements to properties we lease from them, and we received a $1 million distribution from a joint venture.

We generated EBITDAR in excess of cash rent and interest of about $27 million, and we had $7 million of certain working capital and other net uses of cash to bring us to the $125 million in cash on the balance sheet at the end of the year. At December 31, 2010, the portion of our credit line used to support letters of credit was approximately $62 million. This $100 million credit facility is otherwise undrawn.

I also want to provide a review of the details we announced on February 1, 2011, about our amendment agreement with HPT. Under this agreement, effective January 1, 2011, TA's rent payments to HPT were reduced by $42 million annually. A $5 million rent step that was originally scheduled for February 1, 2011, was eliminated. The payment date for the $150 million deferred rent obligation that TA accumulated under our prior rent deferral agreement was extended from July 1, 2011, such that $107.1 million will be due in December 2022 and $42.9 million will be due in June 2024.

The interest expense on the deferred rent obligation that began on January 1, 2010, ceased effective January 1, 2011. And subject to court approval of a settlement we reached in our pending shareholder derivative action, HPT will waive payment of the first $2.5 million of percentage rent that may become payable under our Petro lease with HPT beginning in the year 2013.

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

Thomas O'Brien

Thanks, Andy. Just a few more comments before we turn to questions. For the better part of the last two years, our financial results have been affected by negative changes not only in our industry, but in the industry of our customers and the U.S. economy generally.

During that time, we took the time and the effort to tighten nearly every aspect of our business. After we reduced costs with the restructuring in the 2007, 2008 period, we developed the industry's best customer loyalty program. We've extended our competitive advantage in the Truck Service business by investing in advanced systems and expanding our service offerings. We've taken customer service, facilities maintenance, restroom and shower cleanliness and food menu offerings to a level that is unmatched by our competition and, frankly, unmatched in any prior period in TA's history.

Our full-service brands of travel centers offer both fleets and drivers with an unrivaled ability to optimize their business, with the combination of competitive fuel pricing and the added value of the benefits of a full-service travel center.

These efforts have been showing up in our results with regularity now. And combined with our lease restructuring, TA is today poised to take advantage of improvements in the economy that many have predicted for 2011 and thereafter. For those of you who've been with me on prior earnings calls, you know I'm not prone to overexcitement, but I can truly say that I am looking forward to the balance of 2011 and thereafter.

Andy and I will now take your questions. Operator, do we have any?

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Ben Brownlow from Morgan Keegan.

Benjamin Brownlow - Morgan, Keegan & Company, LLC

What percentage of transactions are debit-based? And can you give us some comments around the Durban amendment and potential impact to margins there?

Andrew Rebholz

I don't know that percentage off the top of my head, Ben, but it's pretty small. And I don't see that amendment having much effect.

Benjamin Brownlow - Morgan, Keegan & Company, LLC

So the majority are credit based then?

Andrew Rebholz

Yes, I mean and on the truck side of things, it's not even credit cards that you were thinking of, Visa, Mastercard, it's the truck billing companies. But on the motorist side, it's still primarily credit.

Benjamin Brownlow - Morgan, Keegan & Company, LLC

On the staffing levels that you have at the locations, how comfortable are you as the comps are picking up, especially on a tier-stack basis? As you look at that improvement in sales, how long do you think you can keep those staffing levels where they are?

Thomas O'Brien

We're pretty comfortable with -- our staffing models are pretty flexible. That is to say we're reasonably comfortable that, even in the shorter term, we can flex staffing levels to meet the revenue that we generated. And we've done that pretty consistently I think over the years. I mean there's been a few hiccups here and there and sometimes we're better than at other times. But I guess I would say I'm very comfortable that we can manage to grow labor less quickly than we grow revenue and vice versa.

Benjamin Brownlow - Morgan, Keegan & Company, LLC

Just one last question for me. The minimum rental that's due to HPT, what are the other minimum rental requirements that are outside of HPT to other parties?

Andrew Rebholz

Let's say an amount of somewhere in that $10 million to $12 million range, I think, annually.

Benjamin Brownlow - Morgan, Keegan & Company, LLC

And that hasn't changed from previous?

Andrew Rebholz

No. I mean, some of those leases have rent steps and those where they go up every so many years or they go up every year by a certain percentage or something like that, but nothing significant. Not a big huge jumps.

Thomas O'Brien

We have a few properties that are on land leased from third parties.

Operator

Our next question comes from the line of Dennis Wurst from Fieldstone Capital.

Dennis Wurst - vFinance Investments

I wanted to ask you about the parking lots. I understand that some of the IdleAir equipment had been removed, and I was curious, what revenue stream -- how much revenue you'd be losing now that, that's gone. And what part of CapEx did it cost to tear that stuff out?

Andrew Rebholz

Dennis, compared to our results for 2010, we won't lose any revenue going forward because there was really no revenue in 2010 from any of that equipment. And for the CapEx numbers that we reported, none of that would have been related to any of the dismantling of IdleAir equipment. We had had a security deposit from them that thus far has covered those costs.

Dennis Wurst - vFinance Investments

Is that the -- there was like a $2.5 million escrow somewhere, was that it? Was that consumed, exceeded, did that go way?

Andrew Rebholz

I'm not sure if we're talking about the same escrow or not. I think the only escrow that we've mentioned in our filings before is related to environmental. So that wouldn't -- I don't think that's the same thing.

Dennis Wurst - vFinance Investments

Has there been any reaction from, say, local environmental, local or more national environmental places about the green efforts in trying to keep the idling down? Has anybody reacted to tearing these equipment out or did you have to get approval for that or -- I don't know. I'm an analyst, I'm not an enviro guy, but I...

Thomas O'Brien

I'll tell you flat out. It appears to me that the successor to IdleAir's interest is also interested in furthering its cause. And I don't know if they have talked to you, but it certainly sounds like they have.

Dennis Wurst - vFinance Investments

I have channel guys. I talk to a lot of truckers. We've got Knight, we got Swift and I got biker friends who were all used to be truckers, so...

Thomas O'Brien

Generally speaking, the IdleAir equipment was not particularly popular. It's a solution to something that is a very poor solution. I think most of the anti-idling efforts that you've seen by large fleets have historically and continue to exclude consideration of poor solutions like IdleAir, and I don't think anybody's really missing it.

Operator

Our next question comes from the line of Brian Tran from Port Royal Partners.

Brian Tran

I was wondering if you guys could give a little color on what impact the weather had on the fourth quarter results?

Andrew Rebholz

A little bit on the fourth quarter, most of the real severe weather impacts were in late January, early February. And I've talked to an awful lot of carrier executives. On average, I would say -- and these are all anecdotes. But on average, of the people I've talked to, maybe as much as two days a load were missed in that period. And two days in a month is quite a bit. So it was pretty severe. I think probably the worst winter for -- I don't know, definitely within the last 10 years maybe, maybe longer.

Brian Tran

And can you help me also with a question would be, in terms of the $125 million that you guys have been eating through in that tenant allowance from HPT, what's your view on run rate CapEx for the centers going forward? In terms of a dollar amount?

Thomas O'Brien

For the operating units run rate CapEx, and I just want to be clear that we have spent $60 million into the last year. Run rate sort of stay-in-place, stay-in-business CapEx is $25 million to $35 million. Maybe today on the higher end of that range. We do expect to spend more than that in 2011. Quite frankly, how much more is something we're still working on. But we're doing that because what we're trying to do is continue to run a little bit faster than our competition, and also to adapt the business as the industry adapts to things, for example, like the diesel exhaust fluid dispensers.

Brian Tran

I guess just one more follow-up question and I'll get off. What was -- the $125 million that you've spent since roughly '07, '08 from the tenant improvement allowance, what was that mainly going towards? Was that massive deferred maintenance on the assets, or was that repositioning them? I'm just trying to get a feel for what that capital was really used for.

Thomas O'Brien

A little bit of both. There was, certainly, some deferred maintenance, and we're not yet perfect in that score. We have a little bit of that left. But I would say a balance of both.

Operator

Our next question comes from the line of Vadim Perelman from Baker Street Capital Management.

Vadim Perelman

Couple questions. One, there's sort of a heated debate in the analyst community about your capital structure. Can you sort of walk through how you think about your enterprise value? Because some sell side guys can't decide if the stock is 1X EBITDA, 5x EBITDA. It's not very common, so people are fairly confused about how to think about what the capital structure really looks like.

Thomas O'Brien

I think that you have to -- well, the big pieces that pop out obviously on the capital side are, first, you got to get to the EBITDAR, you got to consider what that value is and you've got to consider what it is we have to pay. And that payment includes -- those payments include $150 million at no interest, 11-plus years from now. It includes the lease obligation to HPT at about $185 million a year. And there's an excess between what we can generate in EBITDAR, which in 2010 was $237 million, and the sum total of those obligations, and over the capitalized and or discounted depending on which one you're talking about. And certainly there's CapEx. And CapEx, as I said, on a stay-in-business basis is $25 million to $30 million. In 2010, the excess over of EBITDAR over the new rents was about $52 million. And I think if you parse through some of the things that I've talked about in terms of how our performance was quarter-to-quarter, really the last three quarters, our performance over the prior year was really very positive versus the first quarter of 2010. And so, from all of those things, you might be able to make a prediction about what 2011 EBITDAR might look like in the face of what may be a growing economy and decide for yourself whether or not there's a delta between EBITDAR and the sum of CapEx and our rental obligations. That's kind of how you do it. I mean there are some other things out there, like our -- the risk or the upside from changes in -- have an impact on our working capital. Obviously, we have an amount of cash on the balance sheet. That impacts economic value. We have potential cushions from changes in working capital. And what I mean by that is we do own some assets outright, operating assets that aren't owned by HPT. And that's a potential source of capital to cushion some of those potential risks from working capital shock. I'm just sort of doing this off the top of my head. I don't know if I've missed anything that you put in your calculation but...

Vadim Perelman

No, I mean that's how I think about it. But there's a wide divergence on how people think about, also, the capitalized lease obligation, which to me appears to be non-cash but people get that -- and if you could just explain that in a very 30,000 foot-view level.

Thomas O'Brien

When we talk about -- when you hear Andy or I talk about cash rents, we're talking about all other rents that we pay. And we're not making a distinction between what accounting may require us to make a distinction. There are certain properties that we lease from HPT, which are also subleased to our franchisees, okay? And there is an arcane accounting rule that says if more than a certain percentage of a particular property is subleased to someone else, in effect -- and I'm probably using the wrong term here, but in effect that's a capital lease. And so what's required is we have to put things on our balance sheet for it. We have to, in our statement under GAAP, we have to classify a certain amount of what would have been rent expense if not for this treatment as interest. And so, really what we're trying to do when we're presenting EBITDAR is EBITDAR and cash rents and those are two key supplemental tables that are always in our releases. What we're trying to do is clean that up for folks. So that -- I mean, it is unfortunate and it is very confusing. If you look at the balance sheet, you see lots of assets and lots of capitalized lease obligations. And what we're trying to do is shortcut that by focusing on cash flow. We're stripping out the accounting, the technical accounting complexities.

Vadim Perelman

Another question. You have quite a bit of unencumbered real estate that you talked about that you own outright. Can you describe sort of what that is, both land and owned units, and what the opportunities are for you to put those assets to work or monetize them?

Andrew Rebholz

We have seven or eight of our operating sites out there that we own outright. We acquired them after the deals with HPT and Petro. A couple of them were under construction at the time of the original HPT transaction in January 2007. So you've got those seven or eight sites where we own the land, the buildings, all the improvements, the equipment. In addition to that, there are eight parcels of land that are just undeveloped land, land that had been acquired by us or by Petro before we acquired them for future development of a Travel Center site. And then those plans were essentially put on hold when the economy went south on us. So that's really -- in addition to that, we own equipment and certain other assets at sites that we lease from HPT. But the sites where we kind of own it outright, that's the population of those assets. The ability to somehow finance or monetize those assets, as you say, it's been a difficult environment maybe to make it worth going out and looking too much into that over the past few years, but there would be the opportunity to go out potentially and find -- enter into some sort of a secured borrowing arrangement where the land and improvements could be used as collateral. There could be sales, potentially, of -- sales and leasebacks of those properties with HPT or with others. I don't know if there's any other thoughts really.

Thomas O'Brien

I think that the way that I think about those is, it's a potential. It's a potential source of capital. And as Andy said, over the past couple of years, some of the potential sources that would utilize that capital, so like a credit agreement, bank or something like that, have been pretty quiet on all fronts. But it's there, it's out there. Now the EBITDAR from those, of course, are included in the EBITDAR that we talk about. And so, if you're talking about enterprise value, you want to make sure that you don't double count. But that's why I talk about them as a potential source of cushion if we ever need it. But we haven't yet.

Vadim Perelman

And, Tom, I guess a more personal question. You own a lot of stock.

Thomas O'Brien

Yes.

Vadim Perelman

There's a criticism out there that there's this nefarious plan by HPT and management to suck out the value, that I personally disagree with. But you're a material owner of the company. How do you think about it? Does it make sense to you that the whole thing is valued at $170 million and then you get these assets upside, et cetera?

Thomas O'Brien

Without -- I don't really want to -- the market price is what the market price is. The way I think about my job and my position and my investment is just as anybody else would. That is to say, those who -- and I don't know who you're accusing. But those who have told you that they think that there's some nefarious plan are just dead wrong. It's a ridiculous statement. I'm a pretty forceful fellow, and I exercise that in my interests, and those interests are the same as all the other TA shareholders.

Operator

Our next question comes from the line of Brandon Osten from Venator.

Brandon Osten

I wanted to follow up on the last guy's questions. Not really so much capital structure, but I'm trying to get a sense of the cash flow that you guys would like to throw off at some point on this business. So last year, if I look at your EBITDAR, you're saying if I pro forma the new rental agreement, you've got maybe on last year's numbers, with the new rent, $50 million in EBITDAR and sustainable CapEx of maybe $30 million. What's your interest expense going forward given the deferred interest free nature of the new arrangement with your landlord?

Andrew Rebholz

Tom went through a little earlier how we have some of these accounting complexities, so if you push those to the side for a moment and you treat everything we pay under the lease as rent, then our interest expense really is minimal. It's a few hundred thousand dollars a year for things related to the credit facility. Most of what it's in our interest expense right now is either the interest that's going away from the deferral agreement or it's really rent that we just have to classify as interest under GAAP.

Thomas O'Brien

Does that make sense? Do you want me to go through that again?

Brandon Osten

Yes. I guess I'm just trying to figure out, like if I look at last year's number, and I just say, okay, $237 million minus the new rent's $50 million minus CapEx of $30 million is $20 million. Is there a chance that in the next couple of years that, that plays out and we see $20 million in free cash flow? Or -- I'm just trying to get to that number in the end.

Thomas O'Brien

Yes, look, if you're trying to add back interest expense, basically which way you want to think about it is add back all of it. Because it's either going away because there's no interest on the deferred rent balance, or it's an accounting convention. As Andy said, there's a couple of hundred thousand that really represent fees associated with how we use our credit facility, which is really kind of a letter of credit facility the way we use it. But it's not -- it isn't significant. As to what we think EBITDAR could be, I mean, I got a pretty active imagination, so -- what I can tell you is that I think if you look back on the historical results, you look at them long enough, you'll know -- you'll come to the conclusion that we have an awful lot of operating leverage in our business. And in an environment where we have, as I said, put in the programs that we have put in place to attract customers, to make our sites those that are in greater demand than they were before because -- in part because of the upgrades we've made, in part because of their large size, there's benefits to fleets from those sites of safety and of driver satisfaction. And if those things become more important -- and I will tell you that in the trucking community, safety's a big issue. Bigger today than it was before because of some of the things from the FMCA. And I believe driver satisfaction is big and growing bigger. It's a big issue, and it's growing bigger because of perceptions of driver shortages. Take all of those things, and I think TA set the table. And I think that if those who are predicting good things about the economy are right, in an environment where, if demand grows from where it is today, we're poised to take advantage of it. And you're looking at operating leverage. This a bit of a, I don't know, I don't want to call it -- if you look at revenue, revenue is $6 billion and EBITDAR is $237 million. And you probably need to make adjustments because a lot of that revenue is obviously fuel. But exclude fuel, we have a $1 billion, $1.2 billion in revenue. There's a tremendous operating leverage in the business. And in the right set of circumstances, we can take advantage of it. Some of those circumstances are internal. I think we've done an awful lot of things to set ourselves up to take advantage of those. And if you add to that the potential on the growth of the economy, I think we're in a pretty good position today.

Brandon Osten

I guess there are two more questions that I wanted to ask you. One of them is, do you guys have any initial thoughts over the impact, and I'm guessing it would be positive, over the potential coming regulatory changes with regard to -- I'm not sure what the technical word is, but how many hours a trucker can put in and downtime and all that? I'm guessing, it's positive because it has to put more guys out there on the road. But just wondering if you guys have a view of the potential impact of that?

Thomas O'Brien

I think the -- they're called hours of service rules. The potential for decline increases the potential for, frankly, our customers inefficiency. It's one less hour they've got to work with. It's different rules about stops and starts and rest periods. I really don't position TA to take advantage of that one way or the other, nor do I think we'd be disadvantaged. What we always try to do is recognize the challenges that our customers face and adapt in the face of those challenges in a way that is a positive for our customers' businesses. And so, for example, when hours of service first went in -- today versus 10 -- I don't know, versus a long time ago, drivers really don't -- they don't sit down for breakfast, lunch and dinner. They don't have time. And so introduction of the quick service restaurant was important and we did that. Today, a lot of companies are -- a lot of our customers are thinking about things like wellness programs. And I know that doesn't specifically have anything to do with hours of service, but it is a change that we've seen our customers experience. They're demanding and drivers are demanding healthier choices and are concerned about wellness, and so we adapted again. We have healthier choices in our full-service restaurants. We put in fitness facilities up and down 95 and back-and-forth I-40. That's something we're trying out. When you check into a hotel and you can get a little map about where's a good place to walk or jog, we have those at all of our sites. And so, yes, the changes in hours of service are not generally looked at as a good thing by our customers. It makes their job more difficult. And what we can do there is adapt our services and our offerings to what they're going through to help them continue to optimize their business.

Brandon Osten

And the last thing I wanted to ask you is just around the negotiations that you had with your landlord there. I guess you guys are kind of tied at the hip, nature of a spin-out. Historically, since the spin-out, I guess you guys haven't really thrown off a lot of free cash flow. When you guys sat down for negotiations, was there sort of a mutually beneficial understanding that there is a target operating margin that you guys should be able to get to under a reasonable rent scenario? Or -- I'm just trying to figure out what the give-and-take was here for the rent cut and the negotiations. And I don't necessarily understand the leverage that you guys would've had over your landlord to negotiate this, other than the fact that they're aware they spun you out and there's still probably a lot of common shareholders, and they own 10% of your company and...

Thomas O'Brien

Yes, I'll answer that question, but first I want to say that I need to be very careful about how I respond because, as we said, there's a piece of this, a little piece of the amendment that is still subject to court approval. And so I do need to be careful. But I can tell you this: HPT, as any TA shareholder knows, is important to TA because it is our principal landlord. And as important as HPT is to TA, from HPT's perspective, TA is a very large percentage of their assets and their rents going forward. And so you asked about an understanding and all of that. I think that the agreement that was reached -- I know it was mutually acceptable, and there was a commonality of interests based upon the relative importance of the two companies to one another. And I hope that's an adequate answer to your question. That's the general thing that I think guided those negotiations.

Operator

Our next question comes from the line of Phil Benedict from Milwaukee Private Wealth.

Philip Benedict

I have a comment and then just a couple questions as it relates to the renegotiated lease. I thought it was an extraordinarily favorable settlement. I think all TA shareholders are pleased with this, and we would want to thank Alan Kahn, the plaintiff, for driving this situation forward and resolving it in such a favorable way. The questions I have for you today would relate to the unencumbered real estate which you referenced earlier. Can you give us any sense of the net asset value of those three items you mentioned?

Andrew Rebholz

The undeveloped land is on the books at roughly $16 million. And the net book value of the operating sites that we own, I'm not going to remember that amount specifically, but it's in that $50 million to $60 million range on the net book value side of that.

Philip Benedict

And you mentioned the equipment and assets that are at the leased sites, is that de minimis or is it a material number?

Andrew Rebholz

I don't think that it's a significant number. That's typically stuff that's got a 5 to 7-year life. So that's going to depreciate fairly quickly from historical costs. I don't think that it's a big number. It's not one we pay a lot of attention to in this discussion.

Philip Benedict

Second question. Related to fuel profit per gallon, this quarter round number is $0.123, which is historically a pretty favorable number. I know since Flying J's Chapter 11, that margin has remained relatively high. What is your expectation in terms of that margin on a forward basis?

Thomas O'Brien

I think if you look back at the last three years, we've been over $0.12 in '08, '09 and 2010. 2010 is a little bit higher than 2009. And although there certainly has been some variability within the year, quarter-to-quarter, I think that has a lot to do with the variability in underlying commodity prices. And while I won't predict the future, I do take some comfort in the fact that it's been pretty consistent year-over-year for the last three years.

Philip Benedict

So it's fair for us to assume it stays somewhere in that range as opposed to that this has been an anomaly for the last couple of years and we're headed back to $0.08?

Thomas O'Brien

Let's put it this way, as you know, we don't talk about the future because I can't predict it. You can take comfort from the last three years such as you can take from it. I have no particular reason to believe it's going back to $0.08, nor do I have any particular reason to believe it's going to $0.15.

Philip Benedict

And a final question. Given GDP levels today are at or above GDP level prior to this recent downturn, and your comments in the release suggest that we need to get back to peak economic conditions, what do the economic conditions that you reference look like so that we can kind of gauge what potential future improvement to expect as the business moves forward?

Thomas O'Brien

Well, in terms of getting back to peak, I didn't say that. I don't think we'll ever get back to peak in terms of volume. Anybody that knows anything about trucks knows -- and this business, knows that there's certain amount of volume that's gone forever. And that's because of fuel efficiency. And so -- that's one thing to keep in mind. And, no, I am not expecting TA's volumes to return to 2006 levels, even if the economic conditions were to return to 2006 levels, if you follow me. I do think that over the longer term, when you're looking at growth in GDP, the -- ultimately, I think GDP growth will follow trucking activity growth. And trucking activity is a leading indicator. And so it's a matter of how much sooner and to what extent GDP. But over the longer term, I think we're looking at volume growth -- absent other changes in the industry, fuel usage, other kinds of sales like DEF, you're looking at that to be about what you're seeing in GDP. Trucking is a reflection of the U.S. economy in generally.

Operator

Our next question comes from the line of Adam Wyden from ADW Capital.

Adam Wyden

I just wanted to go back to your closing remarks, Tom, about how excited you were about some of the investments you made in your business and kind of what you're looking like going forward. Because of the variability in fuel margins and kind of fuel volumes, kind of because of the fuel efficiency, I presume you're talking about the non-fuel side in terms of what you're super excited about? I mean, do you think you're going to get gross margin improvement, or do you think revenues are going to grow substantially? I mean it's a good percentage of your gross profit. I mean, what specifically are you super excited about?

Thomas O'Brien

I think in large part, it's our competitive position. And I think that the circumstances that exist in the industry today. So, for example, a growing fear of driver shortage. Those circumstances lend themselves to TA and Petro's full-service model, where we can provide a competitive price on fuel and greater value from things that are actually becoming more valuable to customers. That's really what I'm talking about. And so I'm not -- I didn't make those comments in the context of me thinking that fuel margins are going to expand. Rather, I made them in the context of being able to hold our own and perhaps outpace somewhat, in this environment, the competition. So getting more than our share. And on the non-fuel side, I think from truck service where, frankly, we're pretty much alone in what we do with A Thousand Days and Road Squad offering. Our competition isn't anywhere close to what we do in truck service. From that, to things like our full-service restaurants. And if anybody has looked at other public company casual dining results, they're not showing same-store increases in revenue, and we have experienced same-store increases in revenue. And so the things that we're doing appear to me to be working, and that's what I'm excited about.

Adam Wyden

So it's fair to assume that we might see significant more operational leverage on the non-fuel side, maybe margin improvement, maybe future kind of same-store sales growth? Because that's a big percentage of your gross profit.

Thomas O'Brien

Absolutely.

Adam Wyden

What about in terms of returning capital to shareholders at any point? I mean, you guys do have a bunch of cash. And I mean, at any point do you expect to buy back stock or do a dividend or anything like that?

Thomas O'Brien

I have no current plans to do any of that.

Operator

Our next question comes from the line of Andrew Gadlin from Bantam.

Andrew Gadlin

I wanted to ask about the unencumbered real estate. When did that come on the books?

Andrew Rebholz

About half of it came on with the acquisition of Petro. And I think the remainder of it during 2007. It could be that a piece of it was involved in the original January 2007 transaction.

Thomas O'Brien

We had two properties under construction at the time that TA went public. And there were a couple of properties that were acquired by TA when we bought Petro. And in the period of time from the Petro acquisition until we pretty much shut down our acquisition efforts at the beginning of the economic downturn, there were two or three properties that we'd purchased. So that's what I can tell you.

Andrew Gadlin

In terms of acquiring properties, is that something you guys would be interested in doing going forward? I'm trying to get at the same question the earlier caller was asking about, what's the intentions of cash on the balance sheet? Obviously, it's pretty hefty at this point.

Thomas O'Brien

Well, I think that in terms of where potentials are for growth, I think that, today, I am most interested in investments in our existing properties. I think there's an awful lot of bang for the buck in there. From time to time, over the last few months, we have looked at principally distressed sales of properties, but nothing's come of that. And in terms of -- like Andy mentioned a couple of times, there's been a couple of questions about the real estate on the balance sheet, that there is raw land on the balance sheet, but we don't have, today, any activity associated with developing that. There's just better places for capital.

Andrew Rebholz

And the other thing too is -- I got to mention this and I think I've gone over it once before, but you really got to keep in mind that, for a company that had $6 billion of revenue, the amount of cash on the balance sheet is not a tremendous amount. And I don't mean to -- I guess it's just sort of, as you're thinking about the company, you've got to keep that in mind.

Thomas O'Brien

And today, I've got a comfortable handle on all of the things that we do and how we operate. But things like our real estate owned and the cash on the balance sheet and things like that, all have to be, those decisions all have to be made in the context of everything that's going on. And while oil prices are certainly more tame than they were a couple of years ago, there were times in the fourth quarter where we're paying -- the NYMEX was at $3.30 a gallon. And it's come back down, but it's still volatile. And there is no particular reason to believe that, that volatility could not increase the price of fuel. I don't want to be a downer, but you do have to keep these in consideration.

Andrew Gadlin

And then just one more question on the market dynamics, competition and CapEx. Trying to tie it all together. Could you comment a little bit on the competitive environment right now? You had some consolidation amongst your competitors. As well as tying it together and how we think of CapEx. If a run rate on CapEx to just maintain properties is about $35 million, what do you kind of think over let's say a five-year period would be an annual spend to improve properties and keep TA competitive?

Thomas O'Brien

Well, last year we spent $60 million. The year before that, I think was a lower number. We were really clamped down the year before that. I think that, as I said, $25 million to $35 million is a reasonable stay-in-business run rate. But there are things like, for example, the advent of diesel exhaust fluid. It's been slow to take off, but those that are buying new trucks, many of them are committing to that SCR technology. And with the dosing rate of -- even if it's 3%, and it's probably more, that could be 50 million, 60 million gallons if we get -- in proportion to the gallons that flow through the system today. That could be big, and I don't want to miss that. And so I don't consider that to be stay-in-business capital, but it's necessary. Things like last year, we added -- we had a big project to add high-rise pricing signs, big LED signs. And something like that is difficult to measure, but I can tell you that, for those sites that had signs added, those sites increase in volume outpaced the increase in volume of sites that didn't have that. By not a small amount, by a large amount. I mean talking about a 500-basis-point difference between the two. And if you were to attribute all the 500-basis-point difference to the price signs -- and I believe there are reasons to believe you shouldn't attribute all of it. But even if you sort of offset that by excluding non-fuel, you're talking about 2.5 million, 3 million gallons a month. And those are the kinds of projects that, did I have to do that to stay in business as is? No, but it was a damn good idea. So maybe that gives you little color for it.

Andrew Gadlin

And just one last question about the competitive dynamics of the market right now. Just if you could give some color there. Are you seeing competition more aggressive than before, than let's say last year? Or is it [indiscernible]?

Thomas O'Brien

I think that -- I assume that everybody in the call knows what we're talking about. I mean our largest competitor bought our second largest competitor. So now, we went from a really three-party industry to a two-party industry. Pilot bought Flying J. It's a horizontal integration. It has the potential to provide them with some business advantages. But in the face of that, what we've done is focus on TA's own advantages. As I said before, a competitive price and greater value from a full-service offering. And that's what we focus on. There's a lot of fleet company executives and a lot of individual drivers that agree that there is a lot of business value. Again, particularly driver satisfaction that stems from bigger parking areas or restaurants that we run ourselves, clean hot showers. Making the most of available driver hours, I believe that you can get efficiencies from using full-service facilities like ours. Our ability to do truck maintenance, whether it's routine or roadside, those are the kinds of values. Now I, of course, have a belief that those values are material. And as I said, some truck executives believe me or agree with me, and some don't. That's not that they're wrong, it's just that I have things -- TA has its own competitive advantages. Perhaps the merger of Pilot and Flying J gave them some competitive advantages. But to date, I think it's been about balance. I think over time, as and if the economy picks up and driver shortages become more acute, I think the full-service model's going to prove to be the superior beast.

Operator

Our next question comes from the line of Smedes Rose from KBW.

Smedes Rose - Keefe, Bruyette, & Woods, Inc.

I just want to ask you one thing. I think under your old agreements with HPT, you were restricted from repurchasing shares. I know you said you're not interested in repurchasing now, but is that restriction lifted going forward?

Thomas O'Brien

No. So long as the deferred rent balance is outstanding, we can't do that.

Smedes Rose - Keefe, Bruyette, & Woods, Inc.

So you cannot pay a dividend or repurchase shares until the deferred amounts are repaid?

Thomas O'Brien

Correct.

Operator

Our next question comes from the line of Mark Cohen from Stonehouse Management.

Marc Cohen

Just one thing I was wondering, could you talk about your Franchising business and how that works and if there are any opportunities you see there to grow it, or just your thoughts on that?

Thomas O'Brien

Sure. Franchisees, we have roughly 40 franchisee sites. A franchise agreement gives the operator the right to use the TA or the Petro name, the TA or the Petro systems, from the loyalty cards, to the shower system, to our truck service system and on and on. Provides assistance with business matters, and some want more assistance than others. But it's a pretty viable business. It has had some changes over the past year, in particular. Just sort of going through unit changes, in January of last year, we had one franchisee that actually operated four sites that elected not to renew. We had one other that elected not to renew at the end of this year, so as of 12/31. There were six that we renewed and extended, and one franchise that was new. That was an existing franchisee opened a second site. We do have discussions with people that are ongoing about new franchise relationships. And so, it's not the main focus, but it's not a small focus either. It's a good business, it's a good way to expand the footprint to the extent that, that's needed within our network.

Marc Cohen

And just for Tom, I know just from reading a few of the last conference calls, I know you have a significant amount of your net wealth invested in TA at this point. Just if you look out a few years, where do you see the biggest opportunities to realize value? Given there are some arguments out there that this equity is never going to be worth anything significant because you're always going to be attached to HPT and have that stigma? How do you think about that? What gets you excited to go to work in the morning? That type of thing.

Thomas O'Brien

I think that the things that we're doing operationally are, today, all the right things. We're taking advantage of the -- really the complexity in this business. And setting them up and knocking them down one by one as part of an integrated operational improvement framework has been very, very good, and it continues. It will continue into the future, and it does excite me. And as for those who may think that there's a stigma associated with HPT, I -- personally, I don't think of it that way. I consider it to be a material advantage to have that relationship. I don't, like some of my competitors, have $2-plus billion of debt. I don't have any debt. That's significant. That is significant in a business that has the operating and financial leverage that TA has, and I consider it to be a material advantage. And so, I understand that there are those who may imagine differently, and they're entitled to their opinion, of course. But from my perspective, since you asked, that's how I look at it.

Operator

We have a follow-up question by Brian Tran from Port Royal Partners.

Brian Tran

Just on a quick follow-up question, only because you brought up the 10 leases that you guys on-lease to someone else. And I was just curious if you could help me understand. It looks like on the math that they're paying you about $500,000 per center and with the recut leases to HPT, you're paying about $1 million per center per annum. And I was just trying to understand where the value spread or what the market rate really is between those two? Those 10 leases roll, what, in like 2012?

Thomas O'Brien

Those are historical creatures. There was a time, before my time and maybe before Andy's --

Andrew Rebholz

It goes back to the '80s.

Thomas O'Brien

-- where those businesses were in the hands of someone who wasn't comfortable operating. I mean, I'm sort of filling in the blanks because I think this was 30 years ago.

Andrew Rebholz

It's the Unocal model.

Thomas O'Brien

And those businesses today, first and foremost, they're franchisees. They're all good operators. But it was a model set up, like I said, almost 30 years ago. And when you mentioned 2012, those subleases do roll in 2012. That is to say there's provisions -- I may not be getting this precisely right. There's provisions for renewals at then-current market rates. And so we're going to have to go through that process. But if there is a delta -- and I don't remember the total rent for these 10 sites. But if there is a delta part of it, at least, comes from the 25-plus year difference between when things were set up in the two camps you're comparing.

Brian Tran

So you wouldn't consider the $500,000 per year for those 10 even close to market? Is that kind of what you're thinking?

Thomas O'Brien

Well, I guess I don't want to come out and say that. I mean, they are individual properties, individual market circumstances. And I don't mean to -- I'm not trying to sidestep, but I am hedging a little bit. Because I've got a negotiation coming up with these folks and we really don't have a great deal of insight into that from where we sit right now.

Brian Tran

And then just one more quick question. Is -- and I don't mean to put you on the spot, Tom.

Thomas O'Brien

That's what this call's for.

Brian Tran

I know you're highly incentivized for TA shareholders. The one question I just had was, RMR, who effectively manages HPT as well as has a sort of short service agreement with TA, are you still simultaneously employed by RMR and TA?

Thomas O'Brien

I am employed at both companies. [indiscernible] I will tell you that TA's based in -- outside Cleveland, RMR is based in Boston, and I haven't been to Boston in quite some time. So I could tell you that, if some portion of my time is spent on RMR matters, it would take a regular person and see how much they work, multiply that by two, that's how much time I spend on TA, anything left over, yes, I can spend time on RMR.

Brian Tran

I mean do you think that's -- do you think you'll need to disclose at some point the comp you received from RMR as well as TA? Or is that not something your lawyers think you need to get near?

Thomas O'Brien

It is in the proxy. I mean not the numbers, but if you talked about the percentages, you can get it from there. Folks, anybody left on the line, we've went through all that, I really appreciate your interest and I'm looking forward, as we said, to 2011. Have a great morning.

Operator

That does conclude our conference for today. Thank you for your participation and using an AT&T executive teleconference. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: TravelCenters of America LLC's CEO Discusses Q4 2010 Results - Earnings Call Transcript
This Transcript
All Transcripts