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TravelCenters of America LLC (NYSE:TA)

Q3 2011 Earnings Call

November 07, 2011 10:00 am ET

Executives

Carlynn Finn - Manager Investor Relations

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

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

Analysts

Michael Lasser - UBS Investment Bank, Research Division

Benjamin Brownlow - Morgan Keegan & Company, Inc., Research Division

Operator

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

Carlynn Finn

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

Today's conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and Federal Securities laws. These forward-looking statements are based on TA's present beliefs and expectations as of today, November 7, 2011. TA undertakes no obligation to revise or publicly release the results of any revisions 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 M. O'Brien

Good morning, and thank you for joining our call today. I'm here to report our results for the 2011 third quarter.

We achieved net income of $21 million or $0.74 a share, pushing our year-to-date net income to $26 million or $1.13 a share. Overall fuel volume for the 2011 third quarter increased 4.8% versus the 2010 third quarter and 1.8% on a same-store basis.

Third quarter 2011 freight volumes were somewhat larger than in the same period in 2010, and we believe our marketing and sales efforts have also had positive impacts on our business as have our gasoline pricing and branding strategies.

Fuel margin per gallon during the 2011 third quarter was $0.15 versus $0.14.4 for the 2010 period. Falling somewhat volatile fuel prices during the 2011 quarter generally helped fuel margins throughout that quarter.

Our nonfuel sales increased 10.2% for the 2011 third quarter as compared to the 2010 quarter, and our nonfuel sales during the last 12 months at $1.24 billion are higher than they have ever been at any point in company history.

Third quarter 2011 EBITDAR increased 4% compared to the 2010 third quarter. We've now posted improvement in EBITDAR in each of the last 6 conservative quarters. Increased EBITDAR and the reduction in rent and interest payments that was effective January 2011 were the 2 factors principally responsible for the $16 million improvement in net income in the third quarter of 2011 versus the prior year.

Net income year-to-date, September 30, 2011, was $26 million, a marked improvement over the 2010 year-to-date period.

In a moment, Andy will take you through our same-store results, which we're again positive in the third quarter and a significant factor in our EBITDAR growth.

Another factor in our improving financial results were the results from the sites we have added to our business this year. As we've discussed previously, during the second quarter this year, we acquired 8 properties that we now operate as travel centers or as ancillary operations to preexisting travel centers.

Late in the third quarter, we completed several of our planned capital projects at these new sites. The remaining projects we expect to undertake include the construction and opening of 3 truck service and repair facilities and a near total redevelopment of a large property in Indiana. We estimate that we will invest an additional $20 million in these projects, and that these investments will commence during the 2011 fourth quarter or early in 2012.

During the third quarter, these new sites contributed to combine $4.5 million to our total gross margins. And today, we're not yet realizing the full benefit of the planned and completed improvements.

In addition to the company operated sites we've added, we're also pleased to have signed new franchise agreements for 4 additional locations so far in 2011. One began to operate under the Petro flag in January. Another opened in July. And the remaining 2, one to be a Petro and one to be a TA, are expected to come online before the current year end.

We're also continuing other capital investments. Before the end of 2011, I expect that 75 of our locations will have installed on-island diesel exhaust fluid or DEF dispensers, and that substantially all of our company and franchisee-operated locations will deliver this product on-Island before the end of the 2012. Although sales of DEF have been modest to date, the percentage of vehicles that require DEF has begun to increase to a material percentage of many trucking company fleets.

During 2011 to date, we've also rebranded 37 gasoline offers from unbranded or underperforming brands to market-leading national brands. Sales increases of gasoline at those sites have generally outperformed our other sites.

We also opened 6 new quick-service restaurants so far in 2011, including our first 2 company-operated Dunkin' Donuts locations.

In addition to the external and internal capital investments I've just mentioned, we continue to keep our focus on routine maintenance and on customer service. A survey completed in September 2011 by Overdrive magazine showed the strong preference by drivers for TA and Petro versus all other travel center brands for every element of our business. I'm particularly proud of the continued dedication to customer service displayed by our employees and our franchisees, which is reflected in that survey's results. Drivers indicated that TA and Petro employees were the most trusted, the friendliest and the most competent in our industry. That driver shortages are increasingly felt by our customers, many trucking companies have begun to see the driver satisfaction value of directing their drivers to TA and Petro locations.

I've been telling you since the beginning of this year that I'm optimistic that TA will achieve positive net income for the full year 2011. Now that we've reported on 75% of the year, I'm even more bullish on that prediction. In addition, absent an overwhelming general economic pullback or a significant increase in fuel prices, I'm also optimistic about 2012.

And now Andy Rebholz, our Chief Financial Officer, will review our third 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 J. Rebholz

Thanks, Tom, and good morning, everybody. I'll discuss some of our key financial results for the 2011 third quarter. In this discussion, I will refer to same-site results, which are the results that only those sites that we have continuously operated since July 1, 2010.

In the third quarter of 2011, TA generated net income of $20.7 million, which is an increase of $16.2 million over our net income in the third quarter of 2010. On a same-site basis, our fuel sales volume increased by 1.8% in the 2011 third quarter versus the 2010 third 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 has done so slowly.

On a same-site basis, our 2011 third quarter fuel gross margin was approximately $3.9 million or 5.2% 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 $0.005 increase in margin per gallon. This reflects the generally declining fuel market pricing during the 2011 third quarter, as well as the fact that we declined to chase less profitable fuel sales in 2011.

On a same-site basis, our nonfuel revenue increased by 8.1% versus the 2010 third quarter. We believe that the increase in nonfuel sales reflects the effects of the improved economic conditions on trucking companies and their drivers as compared to the prior year. With more cash in their coffers or pockets and greater urgency to deliver their loads, our customers seem more attracted to our wide array of products and services, including our restaurant and truck service offerings.

On a same-site basis, our site level operating expenses increased by 6.3% versus the 2010 third 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, declining by 80 basis points from the 2010 quarter, to 49.7% in the 2011 third quarter, which I believe is a reflection of our continued management of operating costs, which management 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 19% of the same-site year-over-year increase in total site level operating expenses for the quarter.

Our selling, general and administrative cost of $22.1 million for the third quarter of 2011 were $1.9 million or 9.3% higher than in the 2010 third quarter. This increase is primarily due to increased legal expenses but also resulted from increased personnel costs and modest increases we've made in our marketing and advertising.

Now I will summarize some data regarding our liquidity position.

During the third quarter of 2011, TA's cash balance decreased by $6 million. We began the quarter with $137 million of cash on the balance sheet. We generated EBITDAR in excess of cash, rent and interest of $29 million during the quarter. We spent $35 million to fund capital projects. We received proceeds of $10 million from the sale to HPT of improvements to sites we lease from HPT, and we invested approximately $10 million in our working capital during the quarter. This brings us to the $131 million in cash on the balance sheet at the end of the quarter.

At September 30, 2011, the portion of our credit line used to support letters of credit was approximately $66 million. Our credit facility was otherwise undrawn. On October 25, 2011, we amended our credit facility to double its size from $100 million to $200 million and to extend its maturity to October 2016 from November 2012. This credit facility continues to be collateralized by accounts receivable and inventory. Also, the maximum amount of the facility can be increased to $300 million under certain circumstances.

And now I turn the call back to Tom.

Thomas M. O'Brien

Thanks, Andy. Before we turn to questions, I'd like to outline for you what I believe may be the 5 biggest points of value for TA.

First, our earnings power. During the 12 months ended September 2011, our company generated EBITDAR of $259 million, which is $61 million in excess of our current annual cash rental obligations. I believe TA's balanced approach to growth, including internal and external capital projects, supplemented with our marketing and sales efforts, has been and will continue to be the right way to pursue future earnings growth.

Second, liquidity. TA has a solid liquidity position, including $131 million of cash at September 30 and utilization of only $66 million for our letters of credit under our new $200 million credit facility. This liquidity position allows us to consider our broad range of opportunities to invest in our business while providing a cushion against rising commodity prices.

Third, financial stability. TA's financial position includes significant lease financing, a capital element which reduces risks associated with debt because it contains no refinancing risk. There is no debt maturity date, no date when our leases have to be repaid, as there would be with debt financing. In addition, TA's principal landlord has remained historically willing and able to invest capital in its own properties.

Fourth, our owned asset portfolio. TA owns today 17 operating properties outright, free and clear of mortgage debts. Although 8 of these 17 sites have only been owned for parts of 2011 and have been subject to remodeling and partial closings, these 17 sites have generated approximately $33 million of gross margins so far in 2011. TA also owns 8 development sites in which we have invested $17 million.

Fifth and finally, brand strength. Our brand equity in both the TA and Petro brands appears to be growing. The hard work and dedication by our employees in serving the professional truck drivers have allowed TA and Petro to dominate all other travel center and truck service brands in the independent survey for customer satisfaction that I mentioned earlier. These brands strengths have also led to 4 new franchise agreements so far in 2011. While there are certainly many risks that TA faces in its business, I'm looking forward to continuing our work to grow these brand values.

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

Question-and-Answer Session

Operator

[Operator Instructions] And we do have a question from the line of Ben Brownlow.

Benjamin Brownlow - Morgan Keegan & Company, Inc., Research Division

Can you go back over just the CapEx that's left for the acquired sites?

Thomas M. O'Brien

The primary projects that remain for those sites are at 3 of those sites to put in a truck repair facility, those sites that didn't have one, and at the one site, sort of a near total redevelopment. It was a -- it's an excellent geographic location, but the buildings there were a little tired and not quite what we would like to have out there in the world for our brands.

Benjamin Brownlow - Morgan Keegan & Company, Inc., Research Division

Okay. And what's the planned spend for those?

Thomas M. O'Brien

Including those projects and there's some other things to be done as well, but we would probably put about $20 million in. And that's consistent with what our plan has been all along.

Benjamin Brownlow - Morgan Keegan & Company, Inc., Research Division

Okay. And the -- and just if you could touch on the gross margin outlook for nonfuel and sort of what you're seeing in the cost of tires and the repair service there.

Thomas M. O'Brien

I think that you're seeing in the third quarter the impact of some of the things I was talking about in the second quarter call, that is to say, some of the positive impacts of both cost control and revenue management have come to bear fruit, perhaps a little bit more quickly than I had hoped for when we were talking about them in the second quarter. And that's resulted in positive impact on the margin line that Andy was talking about. I expect that there are some additional improvement to be had there. Of course, it may be muted somewhat by the typical slowdown in volume in the fourth quarter. And I'm sorry, what's the second part of your question?

Benjamin Brownlow - Morgan Keegan & Company, Inc., Research Division

The cost of tires?

Thomas M. O'Brien

Oh, yes, the cost of everything has gone up. I think that we have seen somewhat better supply availability in tires in the third quarter than we did in the second quarter, and working through those issues as it continues to happen. It's not as loose as I really would want, and we've got to do a lot of things to make sure we're -- we've got adequate supply of tires. As far as cost increases, that's been pretty significant over the past year or so. And the impact of that -- while we've passed on cost increases to customers, some of our tires or a large portion of our tires are sold on a national account basis, which gives us, in effect, a fixed dollar margin. And so that has sort of muted some of the changes you see in the gross margin percentage.

Benjamin Brownlow - Morgan Keegan & Company, Inc., Research Division

Okay. Just one last one for me. What is driving the increase in the franchise sites? Is that more applicants or is it the quality of applicants? If you could just give a little color around that.

Thomas M. O'Brien

The franchisees that we've added this year, one is a -- was an existing franchisee. The second is a very seasoned travel center operator. And I think, generally speaking, not just those 2 folks, but others that we're talking to are seeing the value of the brand, not just to deliver volume because of our various relationships, but also because I think they're seeing value in a full-service offering. And we've been talking and touting the benefits of a full-service truck stop to drivers and fleets alike for a while. And I believe that, that is making sense not just the customers but to potential franchisees/partners.

Operator

[Operator Instructions] And next, we'll go to the line of Michael Lasser with UBS.

Michael Lasser - UBS Investment Bank, Research Division

Number one, how much did the -- was the fuel margin impacted by the price fluctuations and then how much was on conscious decisions to not chase unprofitable business? I'm just curious, what's sustainable and what may be more temporary in nature?

Thomas M. O'Brien

That's a loaded question. I would say that the volatility that -- just to repeat, generally speaking, volatility is helpful to us particularly on the retail side because it's -- the impact of a delay in reflecting in the retail price changes in cost, in effect, that formula, if you will, favors a volatile environment. And I would say that, generally speaking, the volatility in the third quarter was about the same as it was in the second quarter. And the impact of changing or I should say not chasing lower margin business, most of that impact -- although it has continued, but most of that impact was prior to the both of those quarters. And so to a certain extent, you're -- if you're trying to look at it in 2 pieces, what's volatility and what is sort of walking away from lower margin business, I think the lower margin business impact has predated the third quarter. I think that answers your question.

Michael Lasser - UBS Investment Bank, Research Division

Yes, it's helpful. The second question I had was on the nonfuel side. How much do you think the business is being grown by like-for-like customers spending a little bit more, and then how much do you think is driven by further penetration of --

Thomas M. O'Brien

Sorry, did you get cut off? Further penetration of?

Michael Lasser - UBS Investment Bank, Research Division

Of your offerings into your customer base. Did you think more folks are picking up a candy bar, spending in the restaurant or -- and using the repair services? Or is it that those two had already been using these services, the nonfuel sales are spending a little bit more? It may be difficult to parse.

Thomas M. O'Brien

Yes, I think, Michael, it is. It is difficult to say for certain but we believe that there is some of both of those factors. I mean, for example, we had talked, I think last quarter, about one of the items that's affecting our nonfuel gross margin percentage was the changes we made in cigarette pricing, reducing our cigarette prices to state minimums from higher prices that we had previously. And in doing that, we are selling more cigarettes but we're also selling more of other things to those same people who are buying the cigarettes, some of whom may have been customer last year and some of whom may be a new customer. Another factor that plays into that is, in times like this, in the trucking industry right now, where they're dealing with sort of higher utilization rates for their equipment, those companies had enjoyed really high, on-time delivery percentages, when they're utilization rates were maybe lower and wanting to hang on to the online delivery results, when you're at a higher utilization rate requires you to maybe make use of our facilities more often for things that you might have in the past used your own operating centers, like some tire repair or truck maintenance and things like that. So there's evidence to suggest that it's both the same customers who were stopping at your sites all along, just buying more from you during that stop, and probably some new customers as either our marketing efforts are taking hold and/or just as there's been an increase in the numbers of trucks on the road as trucking has continued to slowly grow.

Operator

And I'd like now to turn it back to Tom O'Brien for closing remarks.

Thomas M. O'Brien

Well, that's all we have today. I appreciate everybody's participation, and I look forward to our next call. Thanks a lot.

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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