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Executives

Carlynn Finn -

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

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

Analysts

Michael Lasser - UBS Investment Bank, Research Division

Benjamin Brownlow - Raymond James & Associates, Inc., Research Division

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

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

TravelCenters of America LLC (TA) Q1 2012 Earnings Call May 7, 2012 10:00 AM ET

Operator

Good day, and welcome to the TravelCenters of America LLC First Quarter 2012 Financial Results Call. This call 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, May 7, 2012. 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 written consent of TravelCenters.

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. Our results for the 2012 first quarter continued our trend of year-over-year improvements. As expected, we generated a seasonal net loss for the first quarter of 2012 that was $14 million or about $0.49 per share.

An important thing to note is that this loss represents a $2.4 million or $0.43 per share improvement from the net loss we realized for the first quarter of 2011. Importantly, our 2012 first quarter EBITDAR was $49.7 million, an increase of $5 million or 12% over the 2011 quarter. EBITDAR exceeded our rent expense in the 2012 first quarter versus a shortfall in that measure of nearly $3 million in the 2011 period.

During the last 12 months ended March 31, 2012, our net income was $26 million, a $68 million increase over the 12 months ended March 31, 2011. We believe the improved results we achieved for the first quarter of 2012 result from the travel centers we added to our business during 2011, the capital investments we've made in our properties and our industry-leading customer service.

Our nonfuel sales, in particular, were strong versus the prior year and I believe that this is because our full service model and focus on customer service strikes a chord with our customers.

Our trucking company customers businesses appear to be growing, albeit, slowly in some cases and I believe they're focused more than ever on driver satisfaction and on maximizing miles per truck. I believe our full-service travel center provides customers with the best opportunity among all travel centers to positively impact these and other aspects of their business.

For the 2012 first quarter, we realized same-site growth in nonfuel revenues of 5.9% and in nonfuel gross margin of 2%. These improvements were achieved despite the modestly negative impact on our truck repair and service business of mild weather this winter.

We also managed site level operating expenses down by 30 basis points on a same-site basis. Our fuel sales volume on a same-site basis was slightly down versus the prior year quarter, and we believe this is at least partially a result of the dispensers that were out of service at times during the quarter, as we continued to install new diesel and diesel exhaust fluid equipment throughout our network. We expect that these dispenser projects will persist at certain sites throughout the remainder of the year and that by year end, we will have on island both diesel exhaust fluid available at all of our travel centers. Despite the slightly lower volume on a same-site basis, fuel gross margin increased by 9% over the 2011 first quarter.

As you may be aware, our results are typically weakest in the first quarter of the year and are strongest during the second and third quarters. For this reason, we're not at all surprised of the net loss for the first quarter and we don't think anyone who studies our business should be either.

We continue to expect to post net income for the full year of 2012 that will exceed the net income generated for 2011. During the 2012 first quarter, TA again opportunistically took advantage of the distressed market conditions affecting specialized real estate by buying or agreeing to buy 6 travel centers for about $26 million. On March 7, we invested $5 million to purchase 1 travel center in Carnesville, Georgia and branded this travel center as a Petro Stopping Center. On April 30, we invested $7.1 million to purchase a travel center in Scranton, Pennsylvania that had been previously operated as a Petro Stopping Center by a former franchisee. During the first quarter of 2012, we agreed to acquire 4 travel centers in Indiana for $14 million. 3 of these travel centers are currently operated as Petro Stopping Centers by our franchisee. We expect to keep them branded as Petros and to brand the 4th travel center as a TA. We expect to close on this acquisition during the third quarter of 2012.

The large price variances between each of these purchases represents the different qualities of each center, its historical operating performance, the expected capital investment required to bring the property to our brand standards and, of course, the different locations along the interstate highway system, which result in different expected sales volumes.

We have a few other travel center properties that we're pursuing for possible future acquisitions, but we do not yet know what may come of those discussions and negotiations.

And now, Andy Rebholz, our Chief Financial Officer, will review our first quarter results in more detail. After Andy's comments, I'll make some closing remarks and then we'll try to answer questions.

Andrew J. Rebholz

Thanks, Tom. Good morning, everybody. I'll discuss some of our key financial results for the 2012 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, 2011.

In the first quarter of 2012, TA generated a net loss of $14.2 million. This compares favorably to a net loss of $16.6 million in the first quarter of 2011.

For the first quarter of 2012, TA also reported EBITDAR of $49.7 million, an increase of $5.2 million versus the first quarter of 2011. Our real estate rent expense for the 2012 quarter increased by about $2 million over the 2011 quarter primarily due to the rent payable with respect to the $69 million of proceeds paid to us by HPT for improvements we sold to HPT during 2011, as well as the commencement of percentage rent under one of our leases.

On a same-site basis, our fuel sales volume decreased slightly by 0.5% in the 2012 first quarter versus the 2011 first quarter. We believe this decline is partially due to the effects of diesel fuel and diesel exhaust fluid dispenser construction projects that caused us to take certain fuelings out of service for periods during the quarter.

Our 2012 first quarter fuel gross margin on a same-site basis was approximately $5.4 million or 9% more than in the comparable 2011 quarter. It's interesting to note that we made more money in fuel gross margin on less fuel sales volume in 2012 versus 2011.

We believe this reflects, in part, less of an increase in fuel prices during the 2012 first quarter relative to the increases in the 2011 first quarter. And in part, a recognition by our customers of the value proposition of our full-service travel center brands TA and Petro Stopping Centers.

Our nonfuel revenue increased by 9.6% versus the 2011 first quarter on a same-site basis. We believe that the increase in nonfuel sales reflects increased customer visits and customer spending at our locations, as our businesses have slowly improved in the current trucking industry conditions.

On a same site-basis, our site level operating expenses decreased by 0.3% versus the 2011 first quarter. This decrease reflects the operating leverage in our business and the benefit of a higher fuel and nonfuel gross margins in the 2012 quarter.

A larger part of each incremental revenue dollar is finding its way to our bottom line. The ratio of operating expenses to nonfuel revenues on a same-site basis improved, declining by 330 basis points from the 2011 quarter to 53.9% in the 2012 first quarter, which I believe is a reflection of our continued management of operating expenses.

We also benefited from lower utility costs during the relatively mild winter of 2012. Our selling, general and administrative cost of $23 million for the first quarter of 2012 were $2 million or 9%, higher than in the 2011 first quarter. This increase is primarily due to increased personnel costs and increases in legal fee expenses. Unfortunately, our industry continues to be plagued by class actions and environmental paperwork litigation in California.

With respect to our liquidity position, I note that during the first quarter of 2012, TA's cash balance declined by $23 million largely as a result of our acquisition and capital expenditures investments of $27 million net of assets sold. Along with the seasonality in our business results, with our first quarter typically our weakest, this change in our cash balance is not unexpected. Further, we view the investments we made as appropriate to help create future growth and profits for TA.

And now I turn the call back over to Tom.

Thomas M. O'Brien

Thanks, Andy. With 1 quarter of 2012 on the books, I continue to feel optimistic about the balance of the year. We see positives in the continuation of our strategies including acquisition activities, our investments in our existing locations. We continue the emphasis on innovation and customer base expansion, customer service, and a solid financial position.

And Andy and I will now take your questions. Operator?

Question-and-Answer Session

Operator

.

[Operator Instructions] We'll go to the line of Michael Lasser, UBS.

Michael Lasser - UBS Investment Bank, Research Division

Do you think that the nonfuel revenues were impacted by some of the changes that you made to the diesel during the quarter?

Thomas M. O'Brien

You mean for the sites that were partly affected by these capital activities?

Michael Lasser - UBS Investment Bank, Research Division

That's right.

Thomas M. O'Brien

Yes, I do. If you take the both sites out of the same site analysis, our fuel volume was actually up 1% and similar measures for nonfuel. So in other words, when we get through this process, there's a lower base to jump up off of and obviously that's why we're doing it.

Michael Lasser - UBS Investment Bank, Research Division

And does that have an impact on the profitability as well? So would...

Thomas M. O'Brien

On a percentage basis, not really. We haven't seen any discernible change with that. In part, that's because we're pretty well -- pretty capable of adjusting operating expenses to a large extent for changes in volume. And so I think we've -- our crew has done a pretty good job of that as you can see in the results.

Michael Lasser - UBS Investment Bank, Research Division

What about the gross profit per gallon?

Thomas M. O'Brien

No discernible difference.

Michael Lasser - UBS Investment Bank, Research Division

Okay. And then lastly, on the shelf offering from last Friday, is there anything that you can -- any commentary that you can provide just to further expand on that?

Thomas M. O'Brien

Yes, sure. I mean we've had a call or 2 about that shelf renewal. The universal shelf filing is effective for 3 years. We filed ours about what was 3 years to the day, tomorrow and the renewal itself changed absolutely nothing. It's a nonevent. It doesn't change our outlook. It's not a signal about our prospects or options or anything else. It's really a very, very routine thing.

Operator

Our next question comes from the line of Ben Brownlow at Raymond James.

Benjamin Brownlow - Raymond James & Associates, Inc., Research Division

I missed the very first part of the call, did you talk about some of the acquisitions that you have planned for this year?

Thomas M. O'Brien

We talked about the acquisitions that had been made, 1, or excuse me, 2 are finished this year, one for $5 million and one point -- excuse me, one for $7 million. And the fact that we've agreed to buy 4 others for a total of $14 million. We are in discussions and poking around on I'd say at least half a dozen others. In my comment there's until -- unless and until we come to agreement, I don't know which of those if any, will come to fruition. But on balance, the acquisition activity in 2012 today kind of feels like about the same amount as in 2011.

Benjamin Brownlow - Raymond James & Associates, Inc., Research Division

And if you went through with those acquisitions, are you planning on funding those through cash on hand or is that going to be -- how do you look at funding those?

Thomas M. O'Brien

Yes, that's what we've done and I think we have both cash on hand and availability under the credit line to deal with what we've got on the contract.

Benjamin Brownlow - Raymond James & Associates, Inc., Research Division

Great. And how do the margins on those sites compare to kind of fuel and nonfuel merchandise margins and volumes?

Thomas M. O'Brien

I'm sorry, the margins on the new sites?

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

Yes, the acquired sites. How did those sort of volumes and margins compared to the chain wide average?

Thomas M. O'Brien

Well, I think you can see, obviously, all of those are the ones that are excluded from the difference between the same site and the consolidated. But it's a bit of a mixed bag. Some of these properties that we purchased are ready to go day 1. We roll in with new signs and hook up a few things and we're just ready like I said, right out-of-the-box. Others are more challenging, in particular, there's one large property that we bought last year working through issues associated with that property and its improvement is going to be significant and working through the issues with the local authorities has taken longer than had anticipated. By and large, for those that are ready to go, we really see very little dip in their results. In fact, in most cases, right out-of-the-box, we're ahead of their historical operations.

Operator

[Operator Instructions] Our next question will come from the line of Smedes Rose at Keefe, Bruyette, & Woods.

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

It's Smedes. I had just 2 quick questions. Last year, the margin per gallon improved a little bit sequentially from the first quarter into the second quarter. And I know you mentioned second quarter should be seasonally stronger. But was there something in the way that fuel prices moved last year that may be helped that be -- become sort of a tough comp year-over-year? Or would you expect a similar kind of improvement in the second quarter as what you saw last year?

Thomas M. O'Brien

Yes, I don't see much of a pattern in sequential cents per gallon margin sort of quarter-to-quarter. But you're right to point out, our second quarter 2011, I think our fuel margin was about $0.16 a gallon. That might be difficult to beat in 2012 but they're the effect of our recent acquisitions, positive growth and nonfuel sales. Those things and with a little luck, over the past week, there's been a general decline in fuel prices. If that continues, I think we've got pretty good prospects to match or improve upon the results overall in 2012 second quarter.

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

Okay. And then in the quarter on the same store level, your site operating expenses actually declined year-over-year. I'm sorry if you mentioned this on the call but is that something that you would see as sustainable going forward? Or I mean usually they go up 4% or 5%. I'm just wondering what caused it to go down this year and what do you see on that level going forward?

Andrew J. Rebholz

I think, Smedes, that part of the decline year-over-year, at least part of it is attributable to the utilities cost, which were lower, for the first quarter of this year than last year and that's sort of a -- yes, the difference last -- 2011, you may all recall, we have fairly severe, winter weather and this year was a much, much milder. So that's part of it. And the other part of it is or another part of it would be -- there is a sort of a base of fixed cost that's a big part of that site level of operating expense, which doesn't need to grow as say the nonfuel or fuel sales volumes continue to grow. Things like property taxes and a lot of the utilities, manager salaries at the sites, things like that, they're going to stay relatively fixed in the short term no matter what happens with the level of sales at those sites. So I think that, that -- it's fair to assume that the site level operating expenses won't just necessarily grow at some similar rate as nonfuel sales would, even though there is a significant correlation between those 2 I mean, as nonfuel sales grow, you are going to need more hourly staff at the travel centers and things like that but those are the biggest probably factors.

Thomas M. O'Brien

I would add, Smedes, that I look at it like this the improvement that we had is probably a bit of an outperformance because to the extent of the weather issues but most of what you're seeing is increases in sales that are outstripping increases in generally going to be fixed costs as Andy mentioned.

Operator

I was to turn it back to Mr. O'Brien for closing comments.

Thomas M. O'Brien

Well, I want to thank everybody for joining the call and it's been just a couple of weeks since we talked about the fourth quarter. And we'll join you again after the second quarter. Thanks a lot.

Operator

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

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