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TravelCenters of America LLC (NYSE:TA)

Q2 2011 Earnings Call

August 09, 2011 10:00 am ET

Executives

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

Timothy Bonang - Manager of Investor Relations

Analysts

Jeff Geygan - Milwaukee Private Wealth Management

Michael Lasser - UBS Investment Bank

Kevin Roth

Matthew Sherwood

Susan Anderson - Citigroup Inc

Benjamin Brownlow - Morgan Keegan & Company, Inc.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the TravelCenters of America's Second Quarter 2011 Financial Results Conference Call. [Operator Instructions] And as a reminder, today's call is being recorded. Now, with that being said, I'll turn the conference now to Mr. Tim Bonang, Vice President, Investor Relations.

Timothy Bonang

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 other securities laws. These forward-looking statements are based on TA's present beliefs and expectations as of today, August 9, 2011. TA undertakes no obligation to revise or publicly release the results of any revisions of the forward-looking statements made today other than as required by law. Actual results may differ materially from those implied or included in any 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. I would also note that the recording and retransmission of today's conference call is strictly prohibited without prior written consent of TA. And now I will turn the call over to Tom O'Brien.

Thomas O'Brien

Good morning, and thank you for joining our call today. I'm here to report our results for the 2011 second quarter, during which TA again posted improvement over the comparable prior-year period.

For the 2011 second quarter, we achieved net income of nearly $22 million or $0.99 per share. Overall fuel volume for the 2011 second quarter increased 4.3% versus the 2010 second quarter. In addition, to second quarter 2011 freight volumes, which were somewhat larger than in the same period in 2010, and we believe our marketing and sales efforts have had positive impact on our business as have our gasoline pricing and branding strategies.

Fuel margin per gallon during the 2011 second quarter was $0.162 versus $0.147 for the 2010 period. Falling fuel prices during May and June helped these margins. Our nonfuel sales increased 9.7% for the 2011 second quarter, while 2011 second quarter total EBITDAR increased 9.4%, each as compared to the 2010 period.

Our increase in EBITDAR, coupled with the reduction in the rent and interest payments that was effective in January 2011 were the 2 factors principally responsible for the $20-plus million improvement in our net income in the second quarter of 2011 versus the second quarter of 2010.

Net income year to date, June 30, 2011, was $5 million.

We've also added a number of new sites during the second quarter of 2011. In a moment, Andy will take you through our same-store results, but I want to provide you with an update on where we stand on these new sites.

The travel center in Carl's Corner, Texas that we purchased at a foreclosure auction in March was opened for business as a Petro Stopping Center on May 1, 2011. We are already seeing very positive results for this facility and making plans to expand it further. The travel center in Salina, Kansas that we purchased from a former franchisee, pursuant to our exercise of our rights to do so, again began to operate as a Petro in late June 2011.

At the sites in Indiana and Illinois that we purchased in May, all except one are expected to be reflagged as Petro or TA before the end of September 2011. In fact, 2 were reflagged as TAs in the past 2 weeks. The single location that will not be rebranded by September 30, 2011, is expected to be substantially renovated and rebranded as a Petro within the next 12 months.

Our total purchase price for all of these properties was $37.8 million and, through June 30, 2011, we've spent $2.8 million renovating and improving them. We expect to invest an additional approximately $17 million completing all of them.

Despite the addition of these operations for less than the full second quarter, these new sites, together with the results from our national location, which reopened in February, 2011, contributed a combined $3.5 million to our total gross margins, despite not yet enjoying the full benefit of the planned and completed improvement. Essentially, these are all of the sites that are not included as same site, which Andy will talk about in a second.

Key areas for us for the balance of the year include a continued focus on our industry-leading customer service delivery to drive overall business and market share, the completion of the rebranding of our new sites, and a focus on improving what is virtually the only negative I see in our 2011 results year-to-date, which is a slightly lower nonfuel gross margin percentage on a same-site basis.

Based upon the positive signs we've seen during the first half of 2011, and absent the lasting impact of recent days' economic turmoil and overwhelming general economic pullback or a significant increase in fuel prices, I remain 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 second quarter results in more detail. 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 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 1, 2010.

In the second quarter of 2011, TA generated net income of $21.7 million, which is an increase of $20.5 million over the net income of $1.2 million for the second quarter of 2010.

For the second quarter of 2011, TA also reported EBITDAR of $82.9 million, an increase of $7.1 million versus the second quarter of 2010. This $7.1 million EBITDAR improvement contributed to our $20.5 million earnings improvement, which also reflected the reduction in rent and interest expense we realized as a result of the lease amendment in January 2011.

On a same-site basis, our fuel sales volume increased by 2.1% in the 2011 second quarter versus the 2010 second quarter. We believe the trend of modest year-over-year sales growth reflects the condition of the U.S. economy and the trucking industry, which has improved over the prior year, but done so slowly and with considerable inconsistency.

On a same-site basis, our 2011 second quarter fuel gross margin was approximately $9.7 million or 13.1% more than in the comparable 2010 quarter. The increased level of fuel gross margin resulted from both the increased level of sales volume as well as a $0.016 increase in margin per gallon. This reflects the fact that we've declined to chase less profitable fuel sales during 2011.

On a same-site basis, our nonfuel revenue increased by 8.7% versus the 2010 second quarter. We believe that the increase in nonfuel sales reflects the effects of the improved economic conditions on trucking companies and drivers as compared to the prior year. In short, our nonfuel customers seem to have more money to spend.

Our nonfuel gross margin as a percentage of nonfuel sales on a same-site basis for the second quarter of 2011 declined by 1.4 percentage points as compared to the 2010 second quarter. We believe this decline resulted from decisions we made since the 2010 quarter to alter our pricing for certain products in order to encourage greater sales volume in our stores, as well as some almost inevitable time lags in passing on the full impact of certain product cost increases to customers.

On a same-site basis, our site level operating expenses increased by 7.5% versus the 2010 second quarter. This increase largely reflects the effect of the higher volume of nonfuel sales at the continuing sites in the 2011 quarter than in the 2010 quarter. Although the dollar amount of operating expenses increased, the ratio of operating expenses to nonfuel revenues on a same-site basis improved to 51.7% in this 2011 second quarter versus 52.2% for the prior-year quarter, which improvement I believe is a reflection of our continued management of operating costs, which overcame increased credit and billing card transaction fees resulting from higher fuel prices. Indeed, as compared to the prior year, the increase in transaction fees was 20% of the same site year-over-year increase in total site level operating expenses.

Our selling, general and administrative costs of $22.2 million for the second quarter of 2011 were $2.2 million or 10.7% higher than in the 2010 second quarter. This increase is primarily due to increased personnel costs, including an increase in our share-based compensation expense as a result of the increase on our share price versus the comparable 2010 period. The increase also resulted from an increase in legal fees and modest increases we have made in marketing and advertising.

Now I will summarize some data regarding our liquidity position.

During the second quarter of 2011, TA's cash balance increased by $11 million. We began the quarter with $53 million of cash on the balance sheet. We generated EBITDAR in excess of cash rent and interest of $31 million during the quarter. We received net proceeds of $53 million from our May offering of 10 million common shares. We spent $47 million to fund capital projects, including $31 million related to the acquisitions of 7 travel center facilities and $16 million for renovations to existing sites and the newly acquired sites. We received proceeds of $36 million from the sale to HPT of improvements to sites we lease from HPT. We generated approximately $11 million from our working capital during the quarter, primarily as a result of decreases in petroleum prices and despite a marked increase in our receivable from Comdata, our largest truck fuel card services provider. This brings us to the $137 million in cash on the balance sheet at the end of the quarter.

At June 30, 2011, the portion of our credit line used to support letters of credit was approximately $63 million. This $100 million credit facility was otherwise undrawn. We are currently working towards a new credit facility sometime during the fourth quarter of this year. And now, I turn the call back over to Tom.

Thomas O'Brien

Thanks, Andy. Just a couple of more comments before we turn to questions. As I mentioned in our last call, I'm really looking forward to the balance of 2011. As everybody in the company could tell you, I'm not assuming that our string of recent successes means that everything will come up roses from here. The accomplishments we've seen have taken the dedication of every TA and Petro employee, and there's more hard work that can be done. That means focus, and we're going to focus on customers, on new site operations and focus on driving revenue and expense control. That said, Andy and I will now take your questions. And operator, do we have any?

Question-and-Answer Session

Operator

[Operator Instructions] The first one is Ben Brownlow with Morgan Keegan.

Benjamin Brownlow - Morgan Keegan & Company, Inc.

Glad to see the merchandise comp doing so well and continuing. Of that 8.7% comp, how much of that was price versus transaction count?

Thomas O'Brien

It's a little bit more than -- call it 2/3 price.

Benjamin Brownlow - Morgan Keegan & Company, Inc.

Okay. And where are you taking price increases? And can you just relate that back to the decline in nonfuel gross margins?

Thomas O'Brien

Yes, the price increases that we're seeing are really in response to cost increases, and that's happening in nearly every category. So we've been pretty diligent about being aware of that and making adjustments, not only in reaction, but in the context of what the market will bear. What Andy was referring to, and what I think you may be referring to here is that there were also some decisions that we made with regard to certain types of products, which are designed to lead to a greater sales and margin over all, but which had the impact of, while expanding the dollars in the margin, had the impact of contracting the percentage, if you know what I mean. So for example, if a consumer typically purchases a tobacco product and something else, you may -- one of our strategies has been to lower the cost of one to drive sales of both, if you follow me. The other impact in there is a significant amount of our tires are sold on national account. In effect, for the short term, the national account higher margin is fixed. So despite the fact that we are able to pass on, in effect, cost increases, the margin as a percentage of revenue is smaller. Those are the 2 big impacts in there.

Benjamin Brownlow - Morgan Keegan & Company, Inc.

Okay. And the third quarter is typically a slightly weaker nonfuel gross margin just seasonally. But are there additional price increases that will change that, that you expect? Or do you think that, that historic trend will remain?

Thomas O'Brien

I don't think it will change the historic trend, but I will tell you that, as I said, in the second quarter, well, I guess this may apply for any period, but certainly looking back at the second quarter, there were, in some categories, price increases that were not yet in effect. I think that answers your question.

Operator

[Operator Instructions] And we'll go to Susan Anderson with Citi.

Susan Anderson - Citigroup Inc

So maybe we can talk about a little bit the driver of the higher fuel margins. Is this, do you think, a new benchmark that we're seeing? Or what was the major driver between the higher rates versus last quarter and maybe your expectations going forward? And if you can give a little color heading into the third quarter?

Thomas O'Brien

I'm not ready to call a new benchmark yet. I think declining fuel prices did have an impact during the quarter, particularly in May and the first part of June. Since then, the fuel prices have gone up, up until a few days ago. Now they're coming down. And so I think that where we had seen over the last 3 years, the $0.12 to $0.13 range, reasonably comfortable that applies going forward. I'm happy to have an outperformance in a particular quarter, but I'm not yet ready to say that, that outperformance is a new trend. I do think also that we have done some things in 2011 to sort of hold back in terms of chasing lower-margin business. That has had a modest impact. And I do also think that our customer service programs and other marketing programs have slightly increased our percentage of sort of owner-operator business in the entirety, and so that is typically a higher-margin retail sale. So all of those things are going on in there.

Susan Anderson - Citigroup Inc

Okay. And then just a little bit on the volumes. It looks like growth was pretty strong. Could you maybe break out how much was the additional site? How much was maybe share gain and any other drivers in there?

Thomas O'Brien

Well, the total volume in the quarter on a same-site -- up 2.1%, a little over 2%. So the new sites that you see, I think our total was 4.3%. So the new sites are most of the remainder, if you follow me. Did that answer your question?

Susan Anderson - Citigroup Inc

Yes. And I guess maybe just the trend on with the same-site volume gains, what's driving those gains? Last quarter, they were down. Are you guys seeing more of a rebound in the industry? And I guess with that if maybe you could just touch on, the macro trends given what's going on over the past couple of days in the marketplace. Are you seeing any pullback in truckloads and stuff like that?

Thomas O'Brien

I haven't detected any overarching pullback in the last couple of days, but not to say that I have real-time information. It may be happening, and I'm simply not aware of it as of yet. I will say that second quarter volumes seemed to have improved slightly, but if you -- when I talk to customers they are kind of all over the board. And some have had good success and some have detected the softness. I think right now, the best way to summarize it is modest growth, but inconsistent and spotty. I think that, that's about what we saw in the first quarter, if you sort of strip out the first quarter impact of all of the weather-related issues. Again, modest growth, but inconsistent, I think is the best way to phrase it based on the things that I know and see.

Operator

Our next question is from Michael Lasser with UBS.

Michael Lasser - UBS Investment Bank

Can you comment on the competitive landscape with respect to the fuel market? And did that have an impact on the margin during the quarter?

Thomas O'Brien

Well, the competitive landscape hasn't changed that much. In this -- in our industry with 2 very, very large players, and everyone else sort of far behind in terms of scope and scale. Our competition is pretty fierce between the 2 largest players. And so there's always an awareness, certainly on my part, and I presume on theirs as well. And so it does have an impact. I do think that I'm feeling pretty comfortable about where TA is positioned in terms of our appeal to owner-operators and fleets. I feel confident in our value proposition. I think we attempt to deliver a competitive fuel price and more value because of the full-service nature of our operations. And that value comes from a lot of different ways, but in particular, helping fleets and owner-operators alike make one stop that services all their business needs, but also allows them to -- allows the drivers to obtain a level of satisfaction from a hot shower, a clean shower, full-service restaurant, friendly and attentive staff, those sorts of thing.

Michael Lasser - UBS Investment Bank

And a quick follow-up question, in the past when you've seen this sort of volatility in the underlying market for commodities, how has that impacted the fuel margin? Has it lead to greater volatility in that line item or has it actually been a benefit for you?

Thomas O'Brien

Well, it depends on whether it's going up or it's going down. And back to your prior question on what -- how the competition is reacting to that, I can't set my fuel prices in a vacuum. But generally speaking, as fuel prices -- a rising fuel-price environment will negatively impact our margin. A declining fuel-price environment will positively impact it. And that's held pretty consistent for a long period of time. Now it's also true, to give you another metric or rule of thumb, in a period of consistent fuel prices, so not really going up, and not really going down, which is not something we've seen in a while, but I can imagine that it might exist someday again. Generally speaking, the lower fuel price is preferred because it has intended positive impacts on level of working capital employed in particular.

Operator

[Operator Instructions] And we'll go to Matt Sherwood of Cooper Creek Partners.

Matthew Sherwood

So just had a quick -- firstly, I just want to start off and just try and understand the earnings power contribution of these acquisitions that you've made near term, and then what you think the earnings power could be as some of the benefits of being under the TA banner begin to play out?

Thomas O'Brien

Well, the non-same-site assets that are in the quarter were on average open for about 45 days. And if you just take a simple annualization, you know our businesses is cyclical. If you take a simple annualization. In just those 45 days, our investment is a little over 6x what they produced. And so my targets for those investments isn't different than what it was when we made the decision to make them. I do believe that, again, absent some of the horrors that I enumerated before, I do believe that it's quite possible that we're going to be able to see something closer to 4x.

Matthew Sherwood

So right now you're saying, if you looked at the -- you paid $37 million, you divide that by 6, that's about $6 million of incremental EBITDA now, just as you said, with all the caveats you explained. But then over time, the $60 million you expect to spend, do you think that could ultimately contribute say $15 million of EBITDA?

Thomas O'Brien

You've got it.

Matthew Sherwood

And just sort of I wanted to understand the working capital benefits, as you know oil prices are, WTI is at $82 bucks today. It was at $95, $96 on June 30. Can you sort of help -- it sounds like you're going to be pretty flushed with liquidity and I just want to understand how that could impact you if prices stay where they are.

Andrew Rebholz

Yes, I think that we figured out that a penny change in the fuel price, not necessarily oil, the oil barrel, but in the gallon of fuel, was roughly in the $3 million of working capital range. That was a number months ago. We were working through that calculus. But it's probably not very far off now. So I mean I think that's the numbers that we had. Tom?

Thomas O'Brien

The only caution there, of course, is that it's a 2-way street. And from the beginning of last month, [indiscernible] was around 280, it went up to about 320 and today it's back, well I haven't looked at it today. But yesterday, it was around 280. So you got to kind of keep that powder ready.

Matthew Sherwood

Yes, obviously. But in the near term, it's up $0.14, which should be, I mean it's down $0.14 from 6/30 prices, actually more, it's down $0.16, so $3 million, it's $48 million of working capital, you're already at $136 million and you're doing $30 million in EBITDA. It's pretty -- you're going to have a lot of liquidity if diesel prices don't spike back up.

Thomas O'Brien

And I think I said a penny, I think I meant a dime when I said the $3 million. I was off a decimal place, I think. I'm sorry.

Operator

Our next question is from Jeff Geygan with Milwaukee Private Wealth Management.

Jeff Geygan - Milwaukee Private Wealth Management

With respect to your service bay strategy, can you break out the percentage of nonfuel sales coming from service bays versus other nonfuel sales?

Thomas O'Brien

Rule of thumb, the truck service business is a little more than half the nonfuel sale.

Jeff Geygan - Milwaukee Private Wealth Management

And I note that your nonfuel sales at $329 million are a record for as long as I've been following your company, so congratulations on that. What is your expectation in terms of the efficacy of your strategy to build the bays to service the aging truck fleet and do you see that materializing?

Thomas O'Brien

We put bay additions in the hopper with other ROI internal growth opportunities. And we'll do some of those over the next year or so. We also look to -- some of the new sites that we purchased don't have shops today. And I did make a reference when I talked about Carl's Corner down in Texas. That doesn't have a shop. We're considering building one as part of the future expansion that I mentioned. So it's -- I would say it's a big piece of the ROI potential, but we don't evaluate it any differently than we do other ROI projects. We basically rank them and do the ones that we expect is going to make us the most hay.

Jeff Geygan - Milwaukee Private Wealth Management

And what is your ROI expectation when considering capital expenses?

Thomas O'Brien

I think that most of the ROI projects that we're looking at, it's safe to say, our expectation going in is well into the double digits. I don't think I've been more specific than that, but let's put it this way, when I say well into, I don't mean 10. It's a calculus that suggests to me today that internal projects are at least as -- I expect them to be at least as profitable as some of the external growth opportunities that we've taken advantage of.

Jeff Geygan - Milwaukee Private Wealth Management

And then lastly with respect to potential acquisitions. How is -- how are those opportunities looking today relative to where they were 3 or 6 months ago? And what is your expectation in terms of the number of additional acquisitions you could make, assuming say your $6 million rough price per unit going forward?

Thomas O'Brien

We've had some questions about that. And our expectation for external growth is, in terms of acquisition, today is based upon sort of opportunism. I'm not really scouring the country, looking for things to buy. We're waiting and seeing what comes to us. That's how -- I mean we're monitoring the market, so we're generally in a position to be aware. But I wouldn't consider our external growth appetite to be particularly aggressive at this time. The things that we are looking at, 2 or 3, but none of them have been, in my mind, moved to the more likely than not or probable stage at all. It's just things that happen to be for sale, and if we can make more money at that than at something else, then maybe we'll do those things if we can reach price agreement. But we're not being particularly aggressive because I don't think we need to be.

Jeff Geygan - Milwaukee Private Wealth Management

And finally, what is HPT's appetite for continuing to buy leasehold improvements?

Thomas O'Brien

I think it remains strong. I think in the second quarter, we sold about $35 million of investments in HPT properties to HPT. I think HPT sees, generally speaking, I'm not trying to speak for them. This is my assessment of what I see. They see the value in maintaining long-term competitiveness with the properties, which is consistent with our view of that same thing. I expect that we will -- TA will continue to seek capital improvement funding from HPT, and while HPT is not committed to fund that, I don't see so far any reluctance to speak of.

Operator

And we'll go to Kevin Roth with Stark Investments.

Kevin Roth

Quick question for you. With regards to the centers that you've acquired, I believe you acquired both the real estate and the operations. Is there any possibilities of selling that real estate to HPT?

Thomas O'Brien

That's always a possibility. I will tell you that we have, for several years now, owned several operating properties in fee [ph] and have not done anything with them in terms of financing them, either through say a leaseback with HPT or somebody else or through mortgage financing. With regard to their newer properties, we're pretty comfortable owning the real estate, in particular, during the period of time where I think and expect that we are in the period of ramp-up for those properties. In other words, as the properties' net operating income sort of seasons and grows over time, I expect our opportunities for financing them one way or the other, will become more favorable to us. That is to say the more net operating income we generate, the more financing we may have the opportunity to, if you will, pull out of them. For right now, we don't have any plans to sell operating properties.

Kevin Roth

What's your expectation in terms of time to get the NOI up on those acquisitions to the level where it's stabilized?

Thomas O'Brien

I think for the vast majority of them, we should be stabilized pretty early in the 2012 period. There is one where the redevelopment is going to take a little bit longer. But I would say within the 6 months to maybe 9 months, we'd be at the "stabilized" level.

Operator

No further questions, Mr. O'Brien. Go ahead with any closing comments.

Thomas O'Brien

I want to thank everybody for participating in the call today and certainly the support that we've gotten in the past 6 months. I am looking forward to the rest of 2011. We have a lot of things going on, and we're going to go and get to work on them right now. We'll speak to you in about 3 months. Take care.

Operator

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.

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