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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

Jeff Geygan - Milwaukee Private Wealth Management

Benjamin Brownlow - Morgan Keegan & Company, Inc.

TravelCenters of America LLC (TA) Q1 2011 Earnings Call May 9, 2011 10:00 AM ET

Operator

Good day, and welcome to the TravelCenters of America First Quarter 2011 Financial Results Conference Call. This call is being recorded. At this time, for opening remarks and introductions, I would like to turn the conference over to TA's Manager of Investor Relation, Ms. Carlynn Finn. Please go ahead, ma'am.

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, May 9, 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 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.

Thomas O'Brien

Good morning, everybody, and thank you for joining our call today. I'm here to report results for the 2011 first quarter, which reflected significant improvement over the 2010 first quarter.

Our 2011, first quarter EBITDAR was $45 million, an increase of $11 million or 34% over the 2010 quarter. We believe the combination of the generally improving economic conditions in the country and our marketing and management efforts is paying off with the increased customer spending and a higher percentage of each incremental sales dollar reaching the bottom line. Our increase in EBITDAR coupled with the reduction in rent and interest payments that we announced earlier this year were the two factors principally responsible for the $24 million improvement in our net loss.

As you may be aware, typically, our results during a year our strongest during the second and third quarters. Pro forma for the January 2011 lease amendments, our net income for the 12 months ended March 31, 2011, was $5 million. This pro forma profit takes account of our improved operating results in the first quarter of 2011, and we expect to continue operational improvements for the balance of the year.

During the 2011 first quarter, we opportunistically took advantage of the distressed market conditions affecting specialized real estate financing by buying or agreeing to buy 8 travel centers for about $37 million. In March, we purchased a travel center in Carl's Corner, Texas at a foreclosure auction. We renovated this property into a Petro Stopping Center and opened for business on May 1, 2011. Our total investment was about $7 million. We believe the replacement cost of this facility is significantly more than this amount. In the first few weeks of operations, we're already seeing very positive sales results from this facility.

Also in March, we exercised our right to purchase a former Petro franchisee's travel center in Kansas for $5.5 million. We expect to close on this purchase and begin to operate this site for our own account during the second quarter of 2011.

In April, we agreed to acquire six travel centers, 5 in Indiana and one in Illinois, at a bankruptcy auction. Staggered closing for these sites begin May 2 and are expected to be complete prior to the end of the second quarter of 2011. One of these sites has been operated as a Petro franchise, and we intend to continue its operation as a Petro. Three are expected to be rebranded prior to the end of 2011, 2 as Petro Stopping Centers and one as a TA.

The remaining 2 sites are adjacent or near to and are expected to function as ancillary facilities to existing TA locations. We agreed to purchase these 6 properties for a total of approximately $24.5 million, which we estimate equates to slightly over 4x the historically generated annual cash flow at these locations. We expect to spend between $15 million and $20 million to renovate these properties into first-class travel centers, and we expect the cash flow from these sites will improve when they're renovated and when we are operating them.

In sum, we believe these acquisitions were at bargain prices and that our future sales of these new company-operated sites will positively impact our future financial results.

Also during the first quarter of 2011, we reopened our existing travel center in Nashville, Tennessee. This facility had been closed since the flood that struck Nashville in May of 2010.

Of course, during this past quarter and continuing through today, we continue to strengthen what we believe is our industry-leading focus on customer service. We believe that dedication to superior customer service, our larger facilities and our extensive truck repair service capabilities set TA apart from our major competitors. The fact that TA is dedicated to offering a full range of amenities and services to truckers and that TA, unlike the competition, maintains direct operating control of all aspects of its business have lead many customers to agree that the full-service experience of TA and Petro brands offer can help them optimize their business.

Based upon the positive signs seen during the first quarter of 2011 and absent an overwhelming general economic pullback, I'm optimistic that TA will be able to achieve positive net income for the full year of 2011.

And now, Andy Rebholz, our Chief Financial Officer, will review our first quarter results in more detail. And after Andy's 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 2011 first 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 January 1, 2010.

In the first quarter of 2011, TA generated a net loss of $16.7 million. This compares favorably to a net loss of $41.2 million in the first quarter of 2010. For the first quarter of 2011, TA also reported EBITDAR of $44.5 million, an increase of about $11 million versus the first quarter of 2010. This $11 million EBITDAR improvement contributed to our earnings improvement of over $24 million-dollar reduction in our net loss, which also reflects the reduction in rent and interest expense we realized as a result of the lease amendment in January 2011.

Our total fuel sales volume decreased by 0.5% during the first quarter of 2011 as compared to the prior year first quarter. On a same-site basis, our fuel sales volume decreased by 1.4% in the 2011 first quarter versus the 2010 first quarter. We believe that the severe storms experienced in much of the country this January had an effect on our sales volume in the first quarter of 2011 and that the trend of modest but positive year-over-year sales growth may have continued during the most recent quarter were it not for these storms.

In total, for the 2011 first quarter, our fuel gross margin was $10.6 million or 21.2% higher than in the 2010 quarter. On a same-site basis, our 2011 first quarter fuel gross margin was approximately $10.4 million or 20.8% more than in the comparable 2010 quarter. It is interesting to note that we have made more money in fuel gross margin on less fuel sales volume in 2011 than in 2010. This reflects the fact that we declined to chase less profitable fuel sales in 2011.

Our nonfuel revenue during the 2011 first quarter increased by $23.6 million or 9% over the same quarter of 2010. On a same-site basis, our nonfuel revenue increased by 9.2% versus the 2010 first quarter. We believe that the increase in nonfuel sales reflects the effects of the improving economic conditions on trucking companies and on drivers. In short, our nonfuel customers seem to have more money to spend.

Our nonfuel gross margin as a percentage of nonfuel sales in total and on a same-site basis remain consistent with the 2010 first quarter at 57.9% despite some significant price increases we have seen from many of the nonfuel inventory items we purchased, including food items, tires and lubricants. I believe TA has is being fairly disciplined about passing through these increased costs.

Our site level operating expenses increased by $11 million or 7.2% over the 2010 first quarter. On a same-site basis, our site level operating expenses increased by 7.3%. These increases reflect the higher volume of nonfuel sales in the 2011 quarter. Although the dollar amount of operating expenses increased, the ratio of operating expenses to nonfuel revenues on a same site basis improved, declining by 100 basis points from the 2010 quarter to 57.2% in the 2011 first quarter, which I believe is a reflection of our continued management of cost levels.

Our selling, general and administrative cost of $21.2 million for the first quarter of 2011 were $1.9 million or 9.7% higher than in the 2010 first quarter. This increase is primarily due to increased personnel cost, including an increase in our share-based compensation expense as a result of the increase in our share price. We believe we generally have been able to continue to control our overhead cost in response to changing business conditions.

Now I will summarize some data regarding our liquidity position. During the first quarter of 2011, TA's cash balance declined by $72 million. Because a large part of this decrease reflects our investments in our increased business, this is not necessarily bad news. We began the quarter with $125 million of cash on the balance sheet. We spent $22 million to fund capital projects, including $7 million related to the acquisition and opening of a new travel center facility and $15 million for renovations to existing sites.

We invested approximately $44 million in our working capital during the quarter, primarily as a result of increased petroleum prices and a change in payment terms for our receivables from Comdata, the largest truck fuel car provider. Our nonfuel inventories also increased as a result of our increased sales. We have $6 million of certain other net uses of cash to bring us to the $53 million in cash on the balance sheet at the end of the quarter.

As I've just mentioned, during the three months ended March 31, 2011, we spent $15 million on improvements to our existing sites. As our business enters what we believe may be a prolonged recovery, we expect to continue our refurbishment program. We intend to request that during the second quarter 2011, HPT purchase from us improvements we have previously made to the properties we leased from HPT. We expect that the proceeds may be approximately $35 million, which would result in an increase in annual rent of approximately $3 million.

At March 31, 2011, the portion of our credit line used to support letters of credit was approximately $56 million. This $100 million credit facility is otherwise undrawn.

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

Thomas O'Brien

Thanks, Andy. Just a few more comments before we turn to questions. As I mentioned in our last call, I'm looking forward to the balance of 2011. I think TA today has set its business for 2011 to take full advantage of the general economic and trucking industry recoveries that appear to be taking place.

TA's internal growth efforts will balance dedication to leading the industry in customer service with our continuing efforts towards improvement in business efficiency. However, what I find very exciting about our business today is that now that we've eliminated our short-term debt obligations and fixed our lease arrangements with the January agreement, we've begun to invest our available cash resources to improve our existing sites and to selectively acquire new sites that we believe are bargain prices. I believe these internal and external investments are being made at just the right time in the economic cycle.

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

Question-and-Answer Session

Operator

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

Benjamin Brownlow - Morgan Keegan & Company, Inc.

Congrats on the nonfuel comp increase. That was a pretty strong increase. How much of that was transaction count versus price increase?

Thomas O'Brien

Well, I think that the fuel volume's about flat. The transaction count increases in the low-single digit, the rest being price increases.

Benjamin Brownlow - Morgan Keegan & Company, Inc.

Okay. Do you anticipate taking additional price increases?

Thomas O'Brien

Our -- what we're trying to do is make sure that we stay ahead of our cost increases not just on a dollar basis but on a percentage basis. And obviously, you want to do that to the extent that doesn't have a change in your mix or in your customers' overall level. We watch that pretty carefully. I think that generally speaking, trucker pay, for example, is beginning to go up, and so I have the notion that we ought to be able to continue to do that, but it does require careful management.

Benjamin Brownlow - Morgan Keegan & Company, Inc.

Okay. Obviously, the cost increases have continued at least. Okay. On the acquisition side, what improvements are you planning for those sites? And if you could just talk about the real estate, if you own that real estate that was included.

Thomas O'Brien

Yes, we purchased those or agreed to purchase them for our own account. The improvements range from -- in some cases, where we had sites that are today or had recently been Petros, the lowest level of improvements really is new sign to facilities that have been, frankly, under-managed and under-invested in, where we're replacing, for example, an entire building. So it's kind of all over the map. The one in Texas was closed when we acquired it, and we renovated the inside and added an Iron Skillet and are adding a Dunkin' Donuts there. So that was, I would say, the medium level of intensity to a higher level of intensity at some of the sites that we acquired in the bankruptcy auction.

Benjamin Brownlow - Morgan Keegan & Company, Inc.

Okay. And I'm sorry, are those sites leased?

Thomas O'Brien

No.

Benjamin Brownlow - Morgan Keegan & Company, Inc.

Okay. What would you -- do you intend to do, let's say, a leaseback on those? Or do you think you'll keep them in the portfolio?

Thomas O'Brien

We always keep the option open, but today, we're intent upon keeping them as owned sites, sites owned by TA.

Benjamin Brownlow - Morgan Keegan & Company, Inc.

Okay, wonderful.

Operator

[Operator Instructions] The next question is from the line of Jeff Geygan. [Milwaukee Private Wealth Management]

Jeff Geygan - Milwaukee Private Wealth Management

Can you elaborate on your new contract with Comdata?

Thomas O'Brien

Sure. I think that our -- the contract has effect about 60%, 65% of our total sales, and that's the Comdata's market penetration.

Andrew Rebholz

Fuel sales.

Thomas O'Brien

Fuel sales, yes. And really what we have here is in our contract, we have the option to receive payments lower or pay a higher fee, and we have that option on an ongoing basis. And so the change in the Comdata contract was really not -- it wasn't unexpected. It wasn't fully cooked the last time we talked. I'm not sure what else I can say about it. They're a big player in the industry, and their need for improvement in their business was tempered with us on the other end for keeping things the same. I will point out too that as far as it impacts working capital, today, in our existing credit line, we have a cap on receivables from a single customer to the extent they make our credit line available. And so we're talking to our lender there to perhaps make that more efficient going forward.

Jeff Geygan - Milwaukee Private Wealth Management

Okay.

Operator

There are no further questions. Please continue.

Thomas O'Brien

Well, if we've got no further questions, I want to thank everybody for participating and for listening in. As I said, I am pretty bullish on the rest of 2007. It appears that we've got all our boats sailing in the right direction. I'm looking forward to talking to you after our next quarter's results.

Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

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