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

Executives

Thomas O'Brien, Chief Executive Officer

Andrew J. Rebholz, Chief Financial Officer

Timothy Bonang, Manager, Investor Relations

Analysts

Brian Nagel – UBS

Charles Place – Ferris, Baker Watts, Inc.

John Lawrence – Morgan, Keegan & Company, Inc.

Hamed Khorsand – BWS Financial

William Truelove – UBS

Jeff Donnelly – Wachovia

Manish Puri – Saras Capital

Nader Tavakoli – EagleRock Capital

David Rusky – Soundpost Capital

Doug Ross – Unknown Firm

Scott Miller – Unknown Firm

Jonathan M. Lubert – IL Hedge Investments

Kenneth Shubin Stein – Spencer Capital

TravelCenters of America LLC (TA) Q4 2007 Earnings Call April 1, 2008 8:00 AM ET

Operator

Good day and welcome to the TravelCenters of America Fourth Quarter and Year End Conference Call. This call is being recorded. At this time, for opening remarks and introductions, I’d like to turn the call over to the manager of investor relations, Mr. Timothy Bonang. Please go ahead sir.

Timothy A. Bonang

Thank you Kevin. Good morning everyone and welcome. The agenda for today’s call includes the presentation by Thomas O'Brien, our Chief Executive Officer and Andrew J. Rebholz, our Chief Financial Officer. After their presentations, there will be a short question and answer session. Before we begin, I would like to state that 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, April 1, 2008. The company undertakes no obligation to revise or publically release the results of any revision to the forward-looking statements made in today’s conference call other than as required through filings with the Securities and Exchange Commission or SEC. Actual results may differ materially from those implied or included in these forward-looking statements. Additional information concerning factors that could cause this difference is contained in our filings with the SEC. Investors are cautioned not to place undue reliance on any forward-looking statements. Now, I would like to turn the call over to Thomas O'Brien.

Thomas M. O'Brien

Thanks Tim. Good morning and thank you for joining our call today. As you’ve seen from our earnings release, TA’s results for the fourth quarter were disappointing. Our adjusted EBITDAR was down about $15 million in the fourth quarter 2007 versus the fourth quarter 2006. This decline is primarily the result of increased operating expenses primarily at TA branded sites and primarily labor. As you know, we announced the labor reduction about two weeks ago to address these issues. Today, I would like to address the issues and underlie those disappointing results. More importantly, I would also like to address TA’s challenges and its plans to meet them in the current market conditions. I plan to provide you today with our view of the current markets first followed by our analysis of TA’s fourth quarter results presented by Andrew Rebholz, our Chief Financial Officer. After Andy’s comments, I’ll come back to provide our outlook, to pose and to answer to the extent I can common questions I expect many of you may have, and finally I’ll take additional questions from you if there are any.

To begin, the market that TA relies upon is the trucking industry. We believe there were several market and industry conditions in the 2007 fourth quarter most of which have continued so far in 2008, which negatively affected the trucking industry and as a consequence have negatively affected us. First, as many of you know, one statistic we look at to help us measure our business prospects is the American Trucking Association or ATA total truck miles index. During the fourth quarter of 2007 versus the comparable period in 2006, this index was down by 2.4% for October, down by 3.7% for November, and down by 5% for December each on a year-over-year basis. The index continued to decline in 2008 year over year; January 2008 was down 2.6%. The trucking industry is dependent upon many other industries and macro-economic factors affecting the US economy generally. With indicators of extreme weakness in the housing sector, one industry which has problems abound is the trucking industry. New home sales in 2007 were down 26%, the largest such decrease in over 30 years. New housing starts in December hit a 16-year low and moreover were down almost 40% from a year earlier. The manufacturing production index was also weak in 2007 and the ATA’s re-weighting of that index to account its importance to trucking shows even weaker results. In part because of the weak trading value of the US dollar, US imports have slowed. Lower levels of imported goods shipped by truck within the US have outpaced higher levels of export shipped by truck within the US.

In short, trucking industry conditions have rapidly changed in response to lowered economic activity and demand for trucking services, and this has led to declines in our business. Another important macro-economic factor affecting our business is the average market price for diesel fuel. During the 2007 third quarter, diesel increased 10% per gallon. During the 2007 fourth quarter sequentially based on NYMEX results, diesel prices increased 18%. Again, sequentially, during the 2008 first quarter through last Friday, diesel prices increased 17%. These increases are substantial. We believe that speculation is a key component of the current high prices of oil and oil related products like diesel and that these conditions should not last forever. However, with retail pricing in many states now averaging over $4 per gallon, users of diesel fuel are aggressively seeking ways to use less fuel. Where the carriers are dialing back the speed governors to 62 miles an hour from 65, seeking greater fuel economy by using double-light tires or by installing auxiliary power units or APUs to reduce idle time, the fact is that users of diesel are seeking ways to use less fuel. Fewer potential customers using less fuel overall has led to volume declines in our business during the fourth quarter 2007 and continuing into the first quarter 2008.

Yet another major factor impacting our fourth quarter 2007 was the increase versus the 2006 fourth quarter in our operating expenses. Our operating expenses during the 2007 fourth quarter on a same-site basis were in excess of those incurred during the 2006 fourth quarter by about $15 million. An important factor making up this increase was our cost incurred in training and re-training staff at the site level resulting from our enhanced re-organizations and our integration of the Petro sites acquired in 2007. Labor costs make up the majority of our expenses classified as operating expense. Our volume declines coupled with expense increases during the fourth quarter 2007 led to our previously announced reduction in work force which is implemented in the second half of March 2008. Our goal for the second through fourth quarters in 2008 is to achieve significant labor cost savings per quarter versus that incurred in the fourth quarter of 2007 and right size our business. In our third quarter results press release, we also indicated that we had identified at least $328 million of capital projects intended to grow the company and to further our Operation Refresh program. During the fourth quarter of 2007, we invested about $80 million in these various projects. Recent declines in our industry and the current near crisis conditions and liquidity in the US economy generally have caused us to review our capital spending programs. Our current outlook for 2008 capital spending is to be approximately $100 million, which includes about $80 million invested or to be invested to complete projects begun in late 2007 and currently in progress approximately $65 million of which has been paid or incurred as of the date of this release. The balance of approximately $20 million will be focussed on what we believe are sustaining capital projects. In other words, capital expenditures we believe are necessary to keep our sites functional and attractive to our customers. With that background, I’ll now turn the call over to Andrew Rebholz, our Chief Financial Officer.

Andrew J. Rebholz

Thanks Tom. I would like to provide a little more detail on some of the key same site operating results and certain specific accounts. Our diesel fuel volume on a same-site basis declined about 11.5% during the fourth quarter 2007 versus the 2006 fourth quarter in part due to the decline in trucking miles and in part due to fuel savings measures we believe are being implemented by truckers to combat the historically high cost of fuel. Our revised pricing strategies appear to have been successful during the fourth quarter of 2007 in that our year-over-year margin on a cents per gallon same-site basis increased by 5.2% as compared with the 19.8% drop for the third quarter of 2007. We believe this performance was also aided by changes in the pattern of volatility in the NYMEX diesel prices in the fourth quarter of 2007 versus the third quarter, and we believe that our revised pricing strategies also may have contributed somewhat to the decline in our same-site volumes. Overall, our 2007 fourth quarter fuel margins in dollars were approximately $3 million or 6% less than in the comparable 2006 quarter. While this is still disappointing, it does represent an improvement over our third quarter 2007 results which were down $15.5 million or 22.6% versus the third quarter of 2006. Our non-fuel revenue during the 2007 fourth quarter declined modestly by about $3 million or less than 1.1% on a same-site basis versus the 2006 fourth quarter. Our non-fuel margin during the 2007 fourth quarter also declined modestly by about $2.5 million or about 1.6% on a same-site basis versus the 2006 fourth quarter. These decreases were due to a decline in the number of customers at our sites offset by an increase in the revenue generated by our shop business or the heavy truck repair business. Our site level operating expenses increased by $15 million or about 10.7% on a same-site basis versus the 2006 fourth quarter. The most significant changes in this account were related to labor costs which represent about 55% to 60% of our site level operating expenses. We believe the majority of these cost increases were associated with ongoing training and realignment of field, regional, and corporate staff who required training, development, and adjustment time to become effective at their new positions following our restructuring implemented beginning in late 2007 and our integration of the Petro operations. Our selling, general and administrative costs increased by approximately $16 million in the fourth quarter 2007 as compared to 2006. This increase was principally due to about $4 million of expense related to ongoing and settled litigation matters disclosed in our 10-K, about $1 million related to amortization of executive retention payments previously disclosed, about $7.5 million of SG&A as a result of our expanded operations and being a public company, and about $1 million related to non-cash share-based compensation. In connection with our work force reduction announced in mid March 2008 which Tom mentioned earlier, fourth quarter 2007 SG&A costs incurred which were associated with now separated employees totalled roughly $2 million. Our adjusted EBITDAR for the fourth quarter 2007 declined by approximately $15 million principally due to the increase in expenses I referred to a moment ago. With that, I would like to turn the call back over to Tom.

Thomas M. O'Brien

Thanks Andy. In some ways I think our operating results for the fourth quarter 2007 were mixed even if our bottom line was very disappointing. I’m pleased that our fuel margins responded to our revised pricing strategies implemented midway through the fourth quarter. Obviously, I’m not happy that the tough times in the economy and in the industry occurred right about the same time we are in the throes of integrating Petro. Unfortunately, I believe our work is not done on that score as our integration is still in process. I am pleased with TA’s strategic success in 2007, having expanded our network by a total of 73 sites including our Petro acquisition. We believe the Petro represented our principal competitor in the fuel service travel center business, and many of the Petro locations are newer than the TA branded locations as well as being larger and with more parking capacity. I believe we’ve done the right thing by scaling back or deferring our capital plans until we know that the economy is starting to turn in our favor. Our reduction in work force was of course difficult; however, the reduction creates opportunity to instill new energy and dedication in our continuing employees. We believe our field staff now includes the best of the best, and our corporate staff although thinned out, has nearly every level from Executive Vice President to administrative assistant just focussed to provide our customers high quality services at all of our locations, 24 hours a day, every day of the year with experienced personnel like our new Senior Vice President of Food Service who has 35 years of field and leadership experience and came from the ranks of our field staff. Our top four food service executives have an average of 23 years of experience in this industry in our team combined from TA and Petro brands. We believe TA has the most full service restaurants in the travel center industry, and our Petro locations have the number one travel center table service restaurant brand, The Iron Skillet. We also have over 280 quick service restaurants more than any other travel center brand.

Our Executive Vice President of Operations also has over 35 years of experience, all of those years spent at TravelCenters of America and its predecessors. Much of the success in our fourth quarter fuel pricing strategies can be attributed to his added responsibilities over fuel pricing during that quarter. Our store operations are led by another of our Senior Vice Presidents from the ranks of the Petro organization. He’s brought a renewed dedication to our customers and to our employees and has 30 years or experience in our industry. Our Shop or Heavy Truck Repair business has been a stellar performer not just historically but even in the current difficult market. The TA repair shops and the Petro Lube shops lead the industry in their size with nearly 1000 truck repair base and in their scope of services offered. Our Senior Vice President responsible for our Shop operations has 30 years of experience and is heading up some important opportunities for TA and Petro including the expansion of Road Squad, our roadside assistance service which typically serves over 100 truckers a day and are continuing efforts to expand our close working relationships with our strategic partners. In January we announced our new tire supply agreement with Bridgestone Firestone. Also, we continued to work closely with Freightliner to assist their efforts to provide urea supplies at our sites in time for the roll out of their new lines of EPA complaint tractors in 2009. We expect that TA and Petro brands will be the first truck staff chains to carry urea. We’re also working closely with Freightliner in their dealer network to expand our Freightliner certified service point locations.

Longer term, we continue to believe that TA’s growth prospects for the trucking industry bodes well for TA’s business. The ATA projects that truck tonnage will increase by 30% over the next 10 years. With longer term prospects of the underlying industry still positive, TA continues to believe in its own longer-term prospects. However, capitalizing on those opportunities means that we have to successfully manage the risks that we face in the current difficult business environment.

Now I’ll attempt to answer a few questions I can anticipate. The first question I want to address is TA’s cash and liquidity position. During the fourth quarter of 2007, TA’s cash balance changed as follows: We began the fourth quarter with $279 million of cash on the balance sheet. We expended $80 million to acquire properties and to fund capital projects. We collected cash of $32 million associated with previously posted collateral with certain obligations and replaced that collateral with letters of credit from our new credit facility. We in effect funded operations during the fourth quarter, typically the second weakest quarter of the year, of approximately $33 million and we funded working capital increases of $49 million. Some of this working capital increase was due to the record high prices we’ve had to pay for fuel. I will point out that a significant portion of the working capital funding is largely due to the timing difference between September 30th which was a Sunday and December 31st which was a Monday. This cash change occurs over every weekend and is not unusual, and not all of our receipts over the weekends clear our bank when deposited on Monday, but our purchases for the weekend, principally fuel purchases at record high levels are settled electronically on Monday causing this difference. I know this may be a detail, but a business is complex and we have significant working capital requirements particularly while fuel prices are so high. As to liquidity, taking our major resources in order from most to least liquid, obviously our cash balance is the first one to consider. At the beginning of this year, our cash balance remained substantial at $149 million. Another important element of liquidity is our $100 million line of credit which we arranged in November 2007. Yet another element of our liquidity is our ability to draw funding from improvements to properties released from our former parent Hospitality Properties Trust or HPT. The lease for our TA sites allows us to draw $25million per year from HPT for 5 years. We were reimbursed $25 million for capital expenditures in 2007 and we expect to draw another $25 million before the end of the second quarter of 2008. We also have the ability to request additional capital expenditure funding from HPT for improvement to our leased sites in return for rent increases, but frankly it was not decided whether it makes sense to do so at this time. Perhaps as important as what TA does have in terms of liquidity is what TA does not have. TA has no funded debt. As of year end, we show about $263 million on our balance sheet as short-term debt. This debt was paid in full in February 2008 with a trust set up for that purpose when TA purchased Petro in May 2007. As of year end, we show $106 million on our balance sheet as capital lease obligations. As we’ve gone through before, although this is an unfortunate accounting confusion, this amount is merely a capitalization of some portion of the rental obligations that we have to HPT, and here is talk about rent, we generally are referring to the full amount of cash payments that is including the amounts that the accountants have allocated to these capital lease obligations. Also, the deferred rental allowance of $95 million shown on our year end balance sheet is merely the accounting offset to our right to receive capital improvement funding from HPT which is shown as an asset.

The second question I want to address is TA’s previously announced expansion plans. During our third quarter conference call, we discussed $328 million of 2008 capital projects which had been identified but not committed. Today, our plans have changed, and we’ve adapted to current market conditions. Our expansion plans have been reduced materially. During 2007 we undertook capital projects totalling $240 million including $160 million spent in 2007 and $80 million expected to be spent in the first half of 2008. We expect that additional capital expenditures during the remainder of 2007 will be limited to about $20 million. As you can see, these capital investment plans are materially reduced from our prior guidance to what I believe are the most critical projects that TA must undertake during the remainder of 2008.

A third question I expect some of you will ask is try to get me to make some prediction about future financial results. As you know, we don’t provide earnings guidance. As Tim pointed out at the beginning of this presentation, forward-looking statements and predictions are subject to many uncertainties. However, what I can tell you about what is going on in our business today is as follows: The tough industry conditions that we encountered in the 2007 fourth quarter is continuing. We do not know whether the economy will start to improve in the second half of this year or if the current recession will take longer, perhaps much longer to pass over the trucking industry which provides our customers to start to improve. There are some things that we think we may know. First, we’re trying to right size our operations to allow us to improve our financial results even if the economy is stalled for an extended period. The payroll cuts we announced in March are unlikely to have any positive impact upon our first quarter results; however, we expect to see some improvements resulting from these expense reductions starting in the second quarter 2008. Second, the changes we’re making in our operations and in our capital plans are intended to preserve capital, but they are also designed to do so in a fashion which will preserve our core operations and our competitive advantages. We plan to continue to offer our customers the greatest variety of goods and service among all national truck stop networks. We plan to continue to invent in those parts of our business which attract customers to our travel centers including our best of class foods service offerings and our truck repair and maintenance services. We believe that by carefully watching our expenses and carefully investing limited amounts of capital in our competitive advantage, we can position our company to continue to provide high quality services to our customers for the foreseeable future. We also believe that this business plan may allow our shareholders to profit handsomely when the current market conditions improve although that is later in 2008 or some time in 2009.

Now before I open up the phone lines to answer questions, our lawyers have cautioned me to make the following statement. As many of you know, TA is currently in litigation with certain dissident shareholders who are attempting to launch a proxy contest and with another shareholder has hired three law firms to being a derivative claim alleging conflicts of interest in other charges we believe are unfounded. Some of these litigants may be listening to this call today and may be planning to ask questions. We will be unable to answer any questions about these law suits or the subject matter of them. I’m here today to talk about TA’s business and not about the litigations. If anyone asks about the litigation or their subject matter, we’ll simply move on to the next question. We ask you to try to confine your questions to TA’s business as we’ve reported it today, in our press release yesterday, and in our prepared remarks here. With that I’m ready to take questions. Operator, do we have any?

Question-and-Answer Session

Operator

We do sir. We’ll take our first question from the site of Brian Nagel of UBS. Your line is open.

Brian Nagel – UBS

Hi good morning.

Thomas M. O'Brien

Hi Brian.

Brian Nagel – UBS

The question I want to ask is – if you look at the fuel volumes here in Q4, dropped off significantly from what we’ve seen in prior quarters and I understand that the environment is helping, but it seems to me that you guys are also losing market shares – the question I have is as you look at the industry – and I’m sure you look at a lot of industry data – is TA or Petro losing market share to some of the other competitors out there and if that is the case, why, and why would it happen so dramatically at the end of 2007?

Thomas M. O'Brien

Sure. As you know, the 2007 third quarter was a difficult environment for us. In 2007 fourth quarter, we, as we said a couple of times, revised our pricing strategy and basically that’s a soft way of saying we made sure we stayed ahead of the market, and so I think there are really three elements to the decline in volume; one is less customers overall and I think all of our competitors are likely feeling that; two is those customers using less fuel and all of our competitors are feeling that; three is those revised pricing strategies which for a time are in a restorative mode will effect volume. So while I suspect that the not all of our competitors felt that last element – that third element – I also suspect that that’s temporary. We don’t have great data; as you know, we’re the only public company in this base, and so I can only report anecdotes of things heard in the market place. While I think the fourth quarter, some of what you have suggested may be true, I think that’s the small piece of it and I think that’s something that gets restored over time. TA properties and Petro properties are materially different from our principally pumper only competitors. The fact is that we think drivers prefer TA sites – the full service restaurant, the food choices, the large stores over pumper onlys that are out there, and so I think that is one of our competitive advantages that certainly hasn’t gone away, and as we work through this little bubble if you will of the revised pricing strategies that we had implemented in the fourth quarter, some of which were pretty dramatic, I think we’re going to do fine.

Brian Nagel – UBS

But Tom can you explain a little further what revised price strategy means. You said it a few times, but I don’t think we got any details on that….

Thomas M. O'Brien

We talked about it in the third quarter, historically the pattern of volatility would allow a company to price in reaction of changes in market prices of fuel, sort of this follows, and given the examples of if fuel is up 3 cents in one day and down 3 cents the next day, you could go up 2 cents the first day and then down a penny the next day, and obviously that has an impact on the total dollars that fall to the bottom line. If that doesn’t happen, if you don’t have the down days following the up days with regularity, and you’re not taking the full amount of the increase in cost on the up days, then you fall behind and basically that’s what happened in the third quarter. So when I say revised pricing strategy talking about a time where we are in a restorative mode whereas our pricing broke with changes in underlying costs in an effort to catch up from where we were in the third quarter. You’re following me?

Brian Nagel – UBS

Yeah. I get you.

Thomas M. O'Brien

And that’s what I mean.

Brian Nagel – UBS

Should we consider this now a more normalized pricing type strategy?

Thomas M. O'Brien

I think so – yeah. I mean the volatility is still there, and I think our strategies to deal with it are working. Actually volatility is an awful lot. I mean you can see the NYMEX numbers just as we do, obviously we have other data as well, but it used to be that when fuel prices went up a penny in a day they would call people in from vacation to discuss what to do. We had a few days of the last month where we were up double digits in cents per gallon, and it’s a different world, and I think our strategies are the right ones for the current market.

Brian Nagel – UBS

Thanks a lot. I will let someone else ask the next question. Thanks.

Thomas M. O'Brien

Alright.

Operator

And we can take our next question from the site of Charles Place from Ferris, Baker Watts, Inc. Your line is open.

Charles Place – Ferris, Baker Watts, Inc.

Good morning.

Thomas M. O'Brien

Hi Charlie.

Charles Place – Ferris, Baker Watts, Inc.

A couple of things I wanted to touch upon here – first off, on the non-fuel revenue on a same-site basis, you reported that it was down 1.1% year over year; can you break that down from a food service standpoint, shop repair bay, and the stores, are any of those three different line items showing improvement year over year.

Thomas M. O'Brien

Yes, the shop business is up year over year. The store and food service is down year over year. The shop business – to a certain extent while folks are out saving money, one of the things they’re not doing is buying new trucks and I think obviously we have a competitive advantage in the shop business to begin with, but we pressed that advantage pretty well in the fourth quarter. We’re not talking about double digit increases or decreases, but basically, those two things largely offset, those two being increase in shop business and the decrease in the food and store business.

Charles Place – Ferris, Baker Watts, Inc.

Can we try to put numbers behind the understanding of single digit – is it 5% up on the shop and…

Thomas M. O'Brien

Yeah, I think I can do that. The shop business was up about 9% in the fourth quarter and the other two combined were down in the 5% to 6% range.

Charles Place – Ferris, Baker Watts, Inc.

Combined?

Thomas M. O'Brien

Yeah.

Charles Place – Ferris, Baker Watts, Inc.

Okay. Secondly, for the $100 million in ’08 expenditures that are planned here – I think it was in your release there, but how much of that is reimbursable under the Operation Refresh; and then the second part of that question is, looking at your balance sheet at your fixed asset as potential things that you can sell off to HPT for additional rent expense, what’s that total dollar amount?

Thomas M. O'Brien

Yeah, the reimbursement for the debt committed is $25 million.

Charles Place – Ferris, Baker Watts, Inc.

Right, and….

Thomas M. O'Brien

I believe we’ll be able to get all of that – we will get it all in the second quarter.

Charles Place – Ferris, Baker Watts, Inc.

Right.

Thomas M. O'Brien

The remainder would largely be associated with HPT properties. However, as you know we have the right to request that and we haven’t made the decision whether or when to request that funding of the remaining $75ish million, it’s in the $60 million range that would be expended upon HPT owned properties, and so, I think that answers the first part of your question.

Charles Place – Ferris, Baker Watts, Inc.

I’m sorry, let me just interrupt real quickly on that. So, lets say even looking out further because we’ve got four more years of $25 million coming into the business, is it something where if that $60 million in addition that you’re putting into HPT properties and you don’t have any additional expenditures in ’09, can you have $25 million credit against that $60 million – those type of investment, is that reimbursable under this 125 program or is it something that is in the second bucket that can be sold to HPT?

Thomas M. O'Brien

I think I follow you. I think what you’re saying is if we invested the $60 million and we got $25 million back this year and then didn’t invest another dime, could we get the $25 million against the $60 million?

Charles Place – Ferris, Baker Watts, Inc.

Yes.

Thomas M. O'Brien

The answer to that is yes.

Charles Place – Ferris, Baker Watts, Inc.

Okay. So it’s just the timing issue for you and in case it leads to that liquidity question that you have if you can hold off and not increase your rent expense, then that’s an option that you have.

Thomas M. O'Brien

That’s right and that’s one of the factors going into the decision that we’ve made so far which is the further decision on requesting additional capital reimbursement from HPT because we may do better by waiting till 2009 and getting $25 million of that for free if you will.

Charles Place – Ferris, Baker Watts, Inc.

Okay; and then the second part of the question is the $397 million of property and equipment net – how much of that is the type of asset that you could sell to HPT?

Thomas M. O'Brien

Okay, a couple of parts of that question; firstly, if you’re looking at the balance sheet….

Charles Place – Ferris, Baker Watts, Inc.

Yeah.

Thomas M. O'Brien

Some of the property and equipment there represents our capitalized lease assets, probably 13 assets in there; I think what you’re really getting at is what does TA own freeing clear of debt or other leases, and there is really two parts to that; we’ve invested in total about $100 million, there are seven greenfield development sites and five operating properties in that $100 million investment. And so, yeah, as a source of longer-term liquidity, we could look at those assets as salable financeable in one form or another for sure.

Charles Place – Ferris, Baker Watts, Inc.

Okay.

Thomas M. O'Brien

I mean right now what we are intent upon doing is mothballing, if you will, the greenfield properties for a better day, and of the five operating properties, two were recently purchased; we’re going to convert those to the full TA standards and operate them.

Charles Place – Ferris, Baker Watts, Inc.

The last question I have is you look out into 2008 and beyond, have you – you have pretty much put future acquisitions on the back burner for now?

Thomas M. O'Brien

Yeah, I think the answer to that is yes. One thing to remember is that the fourth quarter is typically a difficult quarter in terms of seasonality. Typically, the fourth quarter is the worst quarter in a year, and we’re sort of in that period now; and in that period, we’ve undertaken the integration of Petro. We have seen declines in the business whether from reduced miles or reduced fuel consumption. We’ve had our staffing reductions just a couple of weeks ago – so a lot of things moving around; and right now, I believe that the middle part of this year will be better than the fourth and the first quarters, if nothing else, due to seasonality, but also due to the chance we have here of seeing results from the implementation and execution of the various things that we’ve done. If in the meantime as some folks said and predicted, and you know what weight to place on those predictions, Charlie, like I do – if the trucking industries start to bounce back, we’ll be in a much different environment 6 months hence. Now, I can’t control particularly that last part, and so we’re planning a business plan that doesn’t include hope which is a terrible part of any business plan – we’re planning to preserve capital to make the moves that we think we should make in the current environment, to right size the company, and so we’ll have this conversation again I’m sure next quarter and the quarter after that and we’re continuously evaluating everything, but today we’re not looking at new acquisition let alone thinking about executing any. In fact, we’ve canceled a number that wasn’t even in the previously talked about $300 plus million.

Charles Place – Ferris, Baker Watts, Inc.

Okay, well thank you very much.

Thomas M. O'Brien

Thank you.

Operator

We’ll take our next question from the site of John Lawrence from Morgan, Keegan & Company, Inc. Your line is open.

John Lawrence – Morgan, Keegan & Company, Inc.

Good morning Tom.

Thomas M. O'Brien

Good morning John.

John Lawrence – Morgan, Keegan & Company, Inc.

A couple of questions; first of all, would you discuss a little bit the first quarter environment versus the fourth – obviously, the environment is the same, not getting any better; can you talk about anything in the cost structure or the timing of when you started this pricing strategy, does it change anything and certainly help the first quarter or is there anything in that quarter that makes it just as difficult?

Thomas M. O'Brien

The pricing strategy – may be we spent a little bit too much time talking about it – maybe I’ve made it sound more complex than it really is – pricing strategy is basically to make sure that margins are preserved while costs are going up and that’s basically it. The first quarter I can tell you is as I said before typically slower than the fourth quarter. In the fourth quarter holiday are slow, October is typically pretty strong; this first quarter we got benefit from having an extra day in February for example, but Easter was in March, so we have again a typically slow quarter. I don’t see that the pricing strategies as they are having a continued impact like we referred to in the fourth quarter for an extended period of time and that – may be what I’m saying is that while I’m sure that it did have an impact certainly in the beginning of 2008, I don’t expect it will continue as diesel prices are adjusting, the fact that we have the couple of days in the fourth quarter where we raise prices 10 cents nationwide, that’s something that will kind of get absorbed in the subsequent movements if you follow me.

John Lawrence – Morgan, Keegan & Company, Inc.

Thanks. Second question – obviously, since you’ve been public and you made these investments in ’07, albeit that the industry is down and we know that overall box is under pressure, but the money you spent – can you sort of walk us through the type of projects that you’ve invested in that you can see the needle move on a return; and now as you move out, obviously things like with shop services and all that improving, your decision to move toward the Road Squad, etc., – talk about that sort of, if you will, the dynamic of returns and what you’re seeing how you spend your money now.

Thomas M. O'Brien

Sure. I’ll give you two examples; perhaps the biggest projects that we undertook in 2007, one being the opening of Laredo Site in Texas, that’s turned out to be a very good return in the context of the market that we’re in. We do expect to hit our originally forecast return targets – it’s only been open less than a year, but I think we’re on track to hit that 20ish percent. On the other hand, property like Livingston in California has not fared well in the current market and we’re probably behind in terms of that return sort of going out to the second or third year which is a stabilized year; and so, been a kind of a mixed bag in the current market, but certainly given those two examples and issues that I talked about in the market place and in the economy generally, it makes more sense for us to stop future development. That’s why we have those seven greenfield sites in mothballs.

I could tell u a little bit about operation re-pressure. We talked about – that we scaled that back as well, but we do have a lot of properties actually that have been touched with a lot of projects and it is still pretty early in the game to sort of look back and kind of post audit some of those. One thing we’re seeing though early on – when I talk about early, I’m talking about a 2- to 3-month period depending on the property at most – where those particular properties have seen the full range of improvements, whether be it painting roofs, upgrades of one kind or another, rest rooms, etc., etc. The early positive that we’ve seen and can measure is those sites have done better than the rest of the network and gasoline. And I think that has a lot to do with the way that the sites present themselves particularly to the four-wheeler as inviting and in places that you want to go in and use the bathroom, and so that’s not why we did all this, but that’s the information that we can measure as of right now. More anecdotally, I’m hearing from industry executives, trucking companies, and we’re certainly hearing in our customer feedback line that the improvements that have been made have been very well received. They think it helps us press our competitive advantage and I think it’s going to be a positive for us in the future.

John Lawrence – Morgan, Keegan & Company, Inc.

And then Tom, just to go one step further; in that group of stores that have been fully refurbished, how many would those be?

Thomas M. O'Brien

We’re talking about probably – of the ones that have seen everything – we’re talking of probably a little bit more than half the sites on the TA brand.

John Lawrence – Morgan, Keegan & Company, Inc.

Alright. Thanks.

Operator

We’ll take our next question from the site of Hamed Khorsand of BWS Financial. Your line is open.

Hamed Khorsand – BWS Financial

Good morning. My question is regarding the $25 million of leaseholds receivables. Is that from ’07 or is that ’08?

Thomas M. O'Brien

It’s on the balance sheet, but that’s in the current receivables – that’s just the way the accounting works. Most of the receivable is sitting down in that non-current category. The $25 million up in the current represents the fact that during the coming 12 months – and really it’ll probably happen in the second quarter – is there will be $25 million received.

Hamed Khorsand – BWS Financial

Okay. So for your ’07 capital expenditures, that $149 million all is in cash already reflects receiving $25 million from HPT?

Thomas M. O'Brien

Can you say that again?

Hamed Khorsand – BWS Financial

Yeah. You guys requested $25 million in 2007 from HPT for the Operation Refresh program. So is that reflected in the $149 million or is that reflected in the $25 million, your leasehold receivables?

Andrew J. Rebholz

They are two different items. The $25 million we got is out of the receivables – that’s the $25 million we got in ’07. And the $25 million that will get in ’08 is in the current portion of the receivables. Does that make it clear?

Hamed Khorsand – BWS Financial

Okay. Yes. My other question is, with these announced reductions in headcount, what kind of operating level are you shooting for on the field level expenses?

Andrew J. Rebholz

Well, I think that we’re cognizant of the volume declines in the fourth quarter 2007 which were for the TA sites about 10% or 11% and for the Petro sites about 14%. Basically you can think about it along those terms, in terms of the cost that we’re trying to save versus the 2007 fourth quarter.

Hamed Khorsand – BWS Financial

Okay. So will this be a gradual decline? So we see it by the end of Q4 ’08 or will this all of a sudden show up in the Q3 numbers.

Andrew J. Rebholz

There are two parts to it. All of the managerial and salaried separations that are going to take place as part of this have taken place. The hourly labor associated with this sort of reduction will be more gradual, but it’s not something that we’re phasing in over time, and the only reason it’s gradual is because it requires 190 site managers with three FBUs each to adjust their staffing to our new labor models. I think we so far have had great success, but this isn’t something that you’re going to have to wait till the fourth quarter to see or I’m going to have to wait to see if it’s working. We have got to see those results kick in in the second quarter and be largely realized in that second quarter and fully in the third quarter.

Hamed Khorsand – BWS Financial

Okay. And two other quick questions; one is why was your depreciation expenses so much higher in Q4?

Andrew J. Rebholz

Some of that could be effect of the goodwill impairment that we had to take in the fourth quarter. There was a discussion of that in the release. I think some of that is just the way the timing of the capital expenditures throughout the year that sort of stay on our balance sheet. As you’re spending throughout the year, you’re just having more and more effect, and the final piece really that’s worth mentioning would be – and we talked about this in the release – the costs that were written off are related to – as we’ve gone through this analysis of our capital program or call it the projects that were in place, and Tom mentioned some of the – say either greenfield site or operating travel center acquisitions that we’ve been working on or had under a letter of intent and what have you, where you’ve invested money in that project, be it legal fees or different due diligence type cost related to a real estate acquisition where because of the kind of environment we’ve decided to not go forward with that project. There was a roughly $2 million write-off in the fourth quarter of costs related to some of those projects that we’ve effectively canceled and won’t be moving forward with, and that falls into that line in the income statement.

Hamed Khorsand – BWS Financial

Okay. But your model I thought was a model to move away from depreciation expense being so high though?

Andrew J. Rebholz

That’s true and frankly when you compare to the prior year it is down considerably, but we also have – if you think about it – the reason that that has been said all along is that we’re now going to lease the majority of our properties instead of own them as the predecessor did. But due to the accounting rules we’ve got for example the $107 million that we call the capitalized lease obligation – those 13 or so sites – we had to, even though we don’t own them, we have to have that asset on our balance sheet and it creates depreciation expense for GAAF accounting purposes, but not on the tax return. Similarly, this accounting that we’re following related to the $125 million of allowance from HPT – the way the accounting on that works – is that we set up this receivable to represent or indicate the amounts that will be paid to us by HPT. The other side of that is as we spend that money and buy an asset, we get reimbursed by HPT, we still have to put that asset on our balance and depreciate it. So, while it’s true that our depreciation is much less than it was for our predecessor, it’s still maybe a bigger number than one might expect largely because of some of these lease accounting factors and what they do to the assets we can’t get off of our balance sheet.

Hamed Khorsand – BWS Financial

Yeah. That explains it. And my last question is regarding this capital expenditure plan for ’08, am I to assume that the total cash outlay in ’08 would be $20 million from the closing balance of ’07?

Thomas M. O'Brien

The capital expenditures are in two buckets – one is about $80 million to finish projects that were begun in 2007 and the remainder of $20 million is basically projects that have not yet been started. And so where we had bathrooms ripped apart or a property partially redone in the TA image whether it be a new property that we bought – we bought two in the fourth quarter – or a property that we’d begun to re-image, all of those things to complete everything – we’re sort of in the middle of it if you will – that’s $80 million, and everything we’re not in the middle of today is $20 million, and that $20 million is projects that we believe are sustaining capital; again they invest in our competitive advantages and keep our properties attractive so that the customers keep coming. Does that make sense?

Hamed Khorsand – BWS Financial

Yeah. Okay. Thank you.

Thomas M. O'Brien

Sure. Thanks.

Operator

We can take our next question from the site of William Truelove from UBS.

William Truelove – UBS

I apologize for asking this question – I just want some clarification. On the rental, if you avoid taking the receivable, you’re able to avoid the rent increases in the future… is that correct what I’m hearing? I was just a little confused by that.

Andrew J. Rebholz

Yeah. Let me back up a little. The HPT TA lease for the TA branded sites from day one always included a $125 million commitment from HPT to TA for improvements at HPT leased sites. That commitment was to be funded by HPT not more than $25 million per year in the first five lease years, and when it was paid from HPT to TA, the rent did not adjust. And so, we received $25 million in the first lease year. We expect to receive $25 million in this lease year in the second quarter, and after that HPT’s obligations with regard to the total $75 million or $25 million a year for the next 3 lease years.

William Truelove – UBS

Yeah. That’s clear.

Andrew J. Rebholz

Okay. Does that answer your question?

William Truelove – UBS

But your cash rent payments back to HPT will no longer going forward or is there any desire on your part to re-negotiate those leases?

Thomas M. O'Brien

The cash rent payments don’t change as a result of the funding, but to be clear the HPT rent for the TA lease does ramp up; I believe, the first year it was $153.5 million, this year it is $157 million, and in year six, I believe, it ramps up to $175 million; and we’re recognizing that on a straight line basis.

William Truelove – UBS

Right. And so there are no discussions at this point to try to adjust that going forward?

Thomas M. O'Brien

That’s correct. We have I think a lot of levers to pull in the operations and I think that the upside that we may have from those levers, and boy if it could be combined with coming out of the current recession, I think, ultimately our shareholders as I said before are going to be rewarded handsomely by making sure that TA is committed to its obligations to HPT.

William Truelove – UBS

Alright. Thank you so much.

Thomas M. O'Brien

Thanks a lot.

Operator

We’ll take the next question from the site of Jeff Donnelly from Wachovia. Your line is open.

Jeff Donnelly – Wachovia

Good morning guys.

Thomas M. O'Brien

Hi Jeff.

Jeff Donnelly – Wachovia

Hey Tom. I’m sorry if you talked on this, but could you tell us what the trailing 12 months fixed charge coverage ratio is on your $100 million line and I guess are you in compliance with covenants there and does it remain undrawn even today?

Thomas M. O'Brien

Yeah. We’re in compliance. I can’t quote the ratio for you and I think it only applies in certain circumstances which we’re not in today. But we’re in compliance with the line. It is $100 million today. We have sufficient collateral for the entire amount. We have not drawn on that facility. We have used it to date – I think there’s about $32 million of it allocated to back letters of credit most of which were had to do with fuel taxes and other things, some of which came from Petro which had previously been backed by cash collateral and we really sort of have been working to cleaning all of that up and backing them by the credit line, but that’s the only use right now and has been the only use to date since we put it in place in December of ’07.

Jeff Donnelly – Wachovia

Have you guys raised the question with HPT of maybe accelerating the $25 million of your payments so they have to give you guys a larger cash cushion?

Thomas M. O'Brien

No. We haven’t, and I think that it’s always nice to have a bigger cash cushion, but we’re not in panic here. I mean I think we have got $150 million in cash; we got $100 million credit line that is largely unused. We’ve $25 million coming in for nothing if you will in the second quarter, and I think it would be a mistake to sort of look at the fourth quarter of ’07 as the first quarter of ’08 which are again typically seasonally difficult quarters in a tough market admittedly. The seasonally difficult quarters where at the end of which we’ve implemented some pretty big tugs labor lever, if you will, and haven’t completed our integration projects for Petro, I think it would be a little bit premature and certainly pretty far down the list in terms of the things that we have in our control to try to execute in the current environment.

Jeff Donnelly – Wachovia

I guess two last questions, maybe a little more nitpicky, but I am revisiting one, I think you might have answered, but just to be clear; did your year end 2007 cash balance not include any reimbursement of ’07 CapEx from HPT that you’re maybe waiting on?

Thomas M. O'Brien

Yeah. Let’s be clear about that. We received $25 million which was HPT’s obligation in the first lease year.

Jeff Donnelly – Wachovia

Right.

Thomas M. O'Brien

We received all of that in 2007 and we have received none of the $25 million that is for the HPT’s second lease year yet at all. So that’ll be – we’re going to draw that in the second quarter of 2008. The receivables and things that you see really – just yet another sort of technical accounting confusion that we wish we didn’t have to deal with, but when I look at the HPT obligation, I look at what’s due in cash and what do we have to do to get it, and I believe today we’ll receive all of it because our expenditures whether they are to date or in the future would be sufficient to draw all of it. Does that make it clear?

Jeff Donnelly – Wachovia

It does. I guess I was asking about monies or CapEx over and above the $25 million to the extent you submitted additional CapEx for reimbursement for 2007. Has that all been reimbursed such that your year end cash balances kind of reflects that it has all been included up if you will?

Andrew J. Rebholz

No, the only amount over the $25 million was a very small piece, about a little less than $2 million….

Thomas M. O'Brien

A million to a million and a half…

Andrew J. Rebholz

…that we drew – we requested and drew – from HPT in the middle of 2007 – that was mid second quarter.

Jeff Donnelly – Wachovia

Just a last one – you might have the answer to it off the cuff, but it’s just – looking at your 10-K, it lists obviously the future minimum lease payments, and under the TA lease I think you’re saying it’s – you guys think you owe HPT roughly $157 million – I think – in 2008, but HPT’s 10-K says they are expecting about $159 million under the same lease. I know it’s not a large discrepancy, but I wouldn’t have expected to see a $2 or $3 million differential there. Any idea – off the cuff – as to why you guys would be expecting different payments under the same lease.

Andrew J. Rebholz

We certainly shouldn’t be, but it may be the difference between – and again I am speculating, but what our disclosure is is the amounts we expect to pay for a calendar year. There may be some timing difference – may be they did by lease year – I just don’t know.

Jeff Donnelly – Wachovia

Okay. Thank you.

Operator

We’ll take our next question from the site of Manish Puri from Saras Capital. Your line is open.

Manish Puri – Saras Capital

Hi.

Thomas M. O'Brien

Good morning Manish.

Manish Puri – Saras Capital

First question is that the $49 million of working capital – how much of that is timing issues?

Thomas M. O'Brien

A little more than half.

Andrew J. Rebholz

If you think about that they just do the 2.5 billion gallons or so of fuel at about $3 which is sort of net of fuel taxes and count up three days.

Manish Puri – Saras Capital

Three days – so that’s about $25 to $30 million.

Andrew J. Rebholz

Right.

Manish Puri – Saras Capital

Okay. And the second question I have is – you’ve got expenses that you talked about in 4Q – this is just SG&A - $4 million of litigation, $2 million of executive retention and sort of non-cash comp in your SG&A. The $4 million litigation – what is that number for full year ’07 because I think you’ve had litigation costs throughout the year that you haven’t pulled out before. Is that number higher on a runrate basis in the fourth quarter? By how much?

Thomas M. O'Brien

It is higher in the fourth quarter. Andy is flipping through the 10-K. We didn’t put it all in one place. If you look at the legal proceedings – that is at the end of each case it talks about what was incurred. Why don’t we come back to that…

Andrew J. Rebholz

For the year it’s about $8 million for the legal fees and settlement costs. So full year $8 million and fourth quarter $4 million. That answers your question…

Manish Puri – Saras Capital

Yeah. My next question is – I look at the business and it seems like on a total gross profit basis it’s doing what it’s doing on a site level basis before the expenses and it’s more the expense issue than a revenue issue…

Thomas M. O'Brien

You are right on.

Manish Puri – Saras Capital

So, my question to you is – our expenses in TA site level were up $5 million year over year in the third quarter, now they are up $15 million, and we’re in a shoulder quarter where normally the expenses go down sequentially. What is the right level of expense increase or should have been in the fourth quarter in TA sites operating

Andrew J. Rebholz

Perhaps the simplest way to look at that is that what we ought to be managing to is to make sure that our expenses and our revenue are sort of moving at least in the same direction and preferably in the same magnitude. So, if you look at revenue decline in the fourth quarter, I think it was about 1.1% or 1.6% – that’s what I wanted to see in the operating expenses and this expense we could push it down further. I wanted to see that too. I think you are right on. It’s a very basic business premise – your expenses can’t go up while your revenues are going down forever; and hopefully not ever. In terms of the goals that we set, that’s the idea. That part of the restructuring and the layoffs that were announced in March trying to right size the business for the level of volume and for the level of change in revenue.

Manish Puri – Saras Capital

I understand. I guess my question is slightly different. There was a $15 million increase in TA sites on operating expenses site level. Should that number have been 0 or up 5 given you’re integrating or should that number be – and you kind of answered this as in you’d like it to be down, but I am – you look at TA historically – every year fourth quarter expenses site level OpEx steps down just like revenue steps down. So my question is – is all of that $15 million order of magnitude excess because that’s dollar share of cash burn?

Andrew J. Rebholz

I think the answer is that substantially all of it is excess.

Manish Puri – Saras Capital

Okay.

Andrew J. Rebholz

And there are probably certain things in there that you can’t control as much – things like utility costs – the high oil prices are affecting you there – and things like property taxes which are going to do their own thing independent of anything else in the business. The labor was an issue and that one is one that we’re working on addressing.

Manish Puri – Saras Capital

My next question is just on the working capital. I think on a full year, it seems like it was a use in the fourth quarter, but on a full year basis, I think it was a source of something like $15 million or something. I mean, again, we shouldn’t be consuming cash specially when business is not exactly expanding – on working capital on a full year basis – I mean these are I am assuming like timing differences as you partly pointed out as in partly the timing businesses in business on weekends and all that type of stuff – the noise.

Andrew J. Rebholz

Partly the timing, partly I think – I don’t know where you pulled your numbers from – but if you’re looking at the cash flow statement I think the receipt of the $25 million is actually in the operating cash flow and the GAAF. So that’s another piece of it. I will tell you with diesel prices high as they are, that does happen to impact our working capital, and so that’s in there as well.

Manish Puri – Saras Capital

Another question is – the cost savings that you announced – 8% workforce – 190 people – like what are they making roughly in dollars – is it like 50,000 or 60,000 per person – so that like totals to – what is that number roughly – the $9 and $10 million in savings and 190 plus another $9 to $10 million in the managerial work force.

Andrew J. Rebholz

Those are pretty good numbers. Yeah.

Manish Puri – Saras Capital

So $9 to $10 million on each one. So that’s totally another $18 to $20 million of savings.

Andrew J. Rebholz

That’s about right.

Manish Puri – Saras Capital

Okay. How many sites do we actually own at the end of the year that are not owned by HPT, that are owned by TA, whether greenfield or not?

Thomas M. O'Brien

Five of operating and 7 greenfield.

Manish Puri – Saras Capital

So 7 greenfield – when you talk about greenfield, these are built sites?

Thomas M. O'Brien

No, these are just land at this point – they are development sites if you will.

Manish Puri – Saras Capital

Got it. So this is actually land and 5 operating sites.

Thomas M. O'Brien

Yeah.

Manish Puri – Saras Capital

Okay. The $100 million in ’08 of CapEx, how would you break that out into Refresh and all the other categories you used to give us?

Andrew J. Rebholz

The Refresh is about a quarter of that, $25 million. The things that were in process – we had a few re-images of properties, that is about $20 million; the rest are minor ROI projects sustaining capital and fairly big piece of regulatory capital systems, safety, and environment.

Manish Puri – Saras Capital

Got it. And where are we in the synergies from Petro?

Thomas M. O'Brien

I think that those synergies are still there. I think that a lot of that has been masked by the things that have gone on in the market place; for example, lower customers, lower customer accounts mean you order less; higher oil prices means that we’re paying X dollars less than we would have paid had we not, and so there has been some I think deterioration in the numbers because of the things that have been happening in the market place. I think we are also looking forward to getting a large chunk of that which has not been realized yet, and I think that when we talked about those costs, we thought that they would largely show up in 2008, and the execution of that is ongoing; for example, part of that savings will come when we have all of the one type or another contract items running through our distribution center in the package products service center. Not all of the sites today are ordering as much as they can from what we can the PPSC, and that’s an execution issue that’s being worked on, and I think when we are at 100%, we’ll see more savings.

Manish Puri – Saras Capital

And the $60 million – sorry, one or two more – the $60 million that you are potentially going to sell to HPT and get that you outlined in the press release, that is related to what – that is some of the sites you’re going to sell or?

Thomas M. O'Brien

No, that’s not including any of the sites we own outright; all of that money is invested or to be invested in sites that HPT own today, and to be clear, it’s our right to request that money and we haven’t decided whether or not we want to or if we do how much or when.

Manish Puri – Saras Capital

Got it. Okay, so the $60 million is basically the part of the CapEx we’ve spent in ’07?

Thomas M. O'Brien

That’s right – it’s spent in ’07 or it’s really better to say that the project started in ’07 and it takes a while to sort of choke that off, which is what we’ve done here.

Manish Puri – Saras Capital

I think what most people are trying to figure out is we spent, I think you said $240 million of CapEx in ’07. You’re going to spend another $100 million in ’08; that’s $340 million, right? Out of that $340 million, we get $50 million back because of the funding from HPT, sorry to go through on a public call, but kind of important, so you get $290 million left. Out of that $290 million, how much can we refund in the $60 million you disclosed, and this $290 million number or the $340 million number includes new sites that you are opening that are not obviously included in the $60 million, so you're left with $230 million if you get the $60 back. What we're trying to figure out is how much of that cash can you get back, granted it's increased rent, but $60 million is $4 per share and $5 million or $6 million of increased rent.

Thomas M. O'Brien

Sure. I think I follow your question now. What you are asking is other than...and let me restate it to make sure I got it. Other than the $60 million that we expect to spend in 2008, are there dollars that were spent on HPT-owned properties in 2007 which are in excess of the 25 plus 25 reimbursement in 2007 and 2008 which could potentially be sold to HPT. Is that the question?

Manish Puri – Saras Capital

Yeah.

Thomas M. O'Brien

I don't have the answer at the top of my head. Do you?

Andrew J. Rebholz

I don't have it off the top of my head. We can get a number there, but it's a substantial number. You've got to remember most of our sites are owned by HPT and to the extent obviously that we've invested in, Livington or Loredo or some site or piece of land that we own today, obviously those are not subject to our request for reimburment from HPT, but there is very likely a substantial amount that could be requested or improvements that could be sold to HPT out of that investment.

Manish Puri – Saras Capital

One last question and then I'll stop. I just want to clarity this whole site level operating expense question. What I am trying to understand again is what is normal site OpEx on a run rate basis for a fourth quarter versus are you trying to do the 190 and other hourly attrition and all that? Is that basically to get that number down or that number should be lower to begin with and then we on top of that get the savings from the changes you've announced? You understand my question?

Andrew J. Rebholz

Maybe the simplest way to answer that is what the goal on a same-site basis were the fourth quarter 2007 for operating expenses would have been $99 million we incurred in 2006, and so that is savings and the synergies that would have effected the site-operating level expenses to get from Petro which would have overtaken the cost increases like minimum wage cost, utilities cost, real estate cost... That would have been goal. Around that $99 million area.

Manish Puri – Saras Capital

I think we are confusing a little bit the two things. What I was saying is the 190 and the hourly work force changes that you announced; those should be on top of a savings on top of a $99-million run rate number.

Andrew J. Rebholz

No.

Manish Puri – Saras Capital

So those savings are part of the plan to offset the cost increases?

Andrew J. Rebholz

Correct.

Manish Puri – Saras Capital

Okay, thank you.

Andrew J. Rebholz

Thanks, Manish.

Operator

We'll take our next question from the site of Nader Tavakoli from EagleRock Capital. Your line is open.

Nader Tavakoli – EagleRock Capital

Hi.

Thomas M. O'Brien

Hi.

Nader Tavakoli – EagleRock Capital

Just trying to get a sense, and I apologize if some of these questions were answered. Just tell me, and I'll come back to you. The cash that you can get back from HPT in exchange for rent increases, can you just quantify what those rent increases might be and transpose against the $75-million that you can get back from them?

Thomas M. O'Brien

There is a lot of part to that question. To back up, there are two kinds of possible reimbursements from HPT for sites that they own. One is the $25 million a year that we've been talking about which comes to us after we've spent the money to improve the HPT sites. We submit a bill to HPT, and they send us $25 million in that year, and the rent doesn't change. The other way it could happen is we send the request to HPT that says we want to spend money at your site and we may ask you later to reimburse us for that in exchange for rent increase which, I think, varies by lease, but it's in the 8 to 9 percent of the amount spent, and with an approved project, we can go and invest that capital, and then we have the decision to make which is whether we will request reimbursement, and that reimbursement, the day that we get it, our annual rent would increase by roughly 8 to 9 percent of the amount reimbursement per annum. Does that make sense?

Nader Tavakoli – EagleRock Capital

So basically just put a cap rate of 8 or 9 percent on that if you look at it as your financing opportunity.

Thomas M. O'Brien

And you're deciding whether that's worthwhile right now. I don't understand how that's a tradeoff against the 25. If you exercise that right, it alleviates their need to pay you the 25 annually?

Andrew J. Rebholz

No, these are two separate things. It's not a tradeoff. We can do either or both.

Nader Tavakoli – EagleRock Capital

Okay. I thought earlier in the answer to a question you implied that if you exercise this, you may not be able to get the 25, so this in incremental to the 25.

Thomas M. O'Brien

Correct.

Nader Tavakoli – EagleRock Capital

With respect to the balance sheet, obviously the restricted investments line is going to be gone. That's been paid off. Where do you have your cash? What kind of securities is the cash in?

Thomas M. O'Brien

We do not invest in auction rate preferred securities, to answer your question.

Nader Tavakoli – EagleRock Capital

Okay, that's the A answer.

Thomas M. O'Brien

It's in money markets.

Nader Tavakoli – EagleRock Capital

Okay money markets that don't hold auction rates as part of its account.

Thomas M. O'Brien

Right.

Nader Tavakoli – EagleRock Capital

Okay. And the accounts receivable is a fair amount of money. Just generally, what does that represent?

Thomas M. O'Brien

Some of our fleet customers, we direct sell, and there are some other receivables in there, like credit cards and things like that which are much shorter term. We are doing pretty good on accounts receivable. We haven't had any material writeoffs and people are paying on time. There's been some stress in the trucking industry, and we watch that pretty carefully and haven't gotten burned.

Nader Tavakoli – EagleRock Capital

And you are carrying $150 of inventory. Is there an opportunity here on working capital of the year?

Thomas M. O'Brien

Possibly. I'd like to be able to reduce our working capital, but it's pretty clean. Most of the change in inventory is fuel, and as those costs go up obviously the dollars invested will go up. We have on site storage and we don't have rolling stock or other ways of storing excess. Again, it's fuel, it's tires, it's part of being in the truck repair business. It requires a certain level of inventories.

Nader Tavakoli – EagleRock Capital

Alright, I'm not going to take more time on this call. I'll pass it on. We have a fairly significant shareholding position at this point. Is it possible to get you guys off line?

Thomas M. O'Brien

Sure, call the number on the release, and we'll set something up.

Nader Tavakoli – EagleRock Capital

Okay, great. Thank you.

Thomas M. O'Brien

Thanks.

Operator

We go next to the site of David Rusky from Soundpost Capital. Your line is open.

David Rusky – Soundpost Capital

Hi guys.

Thomas M. O'Brien

Hi David.

David Rusky – Soundpost Capital

Just a couple of quick questions. I am wondering when you think the integration with Petro and the extra costs involved in that will be complete?

Thomas M. O'Brien

I think the completion and most of the things that are taking a little longer are systems related. That is probably not going to be done much before year end this year. We have made pretty good progress on some fronts. As you know, Petro was based in El Paso. It was a 4-story building, and we're down to 1 floor. That office is likely to be shut before that end of the second quarter. The big part of the integration really occurred in the fourth quarter, and that big part of realigning functions, and actually we took on a lot of the for lack of a better term, the Petro Way, and made a lot of changes in the TA sites, be it the general manager level or the way that we control the individual business units, and that is starting to really start to firm up. It certainly wasn't firm at all in the fourth quarter. I hope that the changes we've made to staffing in March of course are also things that need to be worked through and probably get to the next stage of the integration, but I think in the field level, most of that will be done, I would expect, by the middle of the third quarter. And so if that answers your question—done by the end of this year, but making strides in chunks to date and in the interim period.

David Rusky – Soundpost Capital

Yeah, you mentioned that the increase in OpEx for Q4 of $15 million was mostly incurred from retraining and the acquisition, so I was just wondering how that kind of chunk dissipates over Q1, Q2, and Q3 this year.

Thomas M. O'Brien

I think that you will see some of that remain in Q1, and perhaps into Q2, but after Q2, I don't expect that it's going to be a part of what we'd be talking about on our result calls.

David Rusky – Soundpost Capital

So, can you quantify what you'd expect that cost to go to over these quarters in this year?

Thomas M. O'Brien

No, but what I can tell you is again if you are looking at fourth quarter, what we're trying to do is make our expenses and our revenues go in the same direction. Obviously we want our revenues to go up and we're pulling levers to try to make sure we're everything we can in the current environment, but simply wanting your revenues to go up and building in cost increases is not what I consider to be execution. We are carefully watching those costs. I hope that I've been clear using the fourth quarter as an example of targeting levels of costs that are in line with or materially different from those occurred in the prior year.

David Rusky – Soundpost Capital

You are saying this Q4 of 08?

Thomas M. O'Brien

Yeah, so you've got to go back to '06.

David Rusky – Soundpost Capital

Just to clarify. You said about $18 to $20 million of savings from labor cuts. That's over the year's time, over a 12-month period?

Thomas M. O'Brien

Yeah, I think that was Manish's calculation, and I said that it wasn't far off. Yes.

David Rusky – Soundpost Capital

Okay, and that should start to kick in then just in Q2 obviously.

Thomas M. O'Brien

Should start, yeah.

David Rusky – Soundpost Capital

Alright, one last question. You may not want to answer this, but has there been any talk of trying to re-negotiate on your lease payment?

Thomas M. O'Brien

I think that we did talk about that earlier in Jeff Balle's questions from Wachovia. I am not at the point where I feel like that we have $150 million of cash, we have a $100 million credit line, we don't have maturity payments of debt. We have opportunities to whether it be adjust labor, rightsize the business, to increase the strength of our relationship with our strategic partners like Freightliner to increase our shop business where it be through Road Squad which is not a new program but it's still a very radpidly growing program or by offering other services in the shop focusing on our customers and playing to our competitive advantages. Those are the big business opportuniteis, and to the extent that we capitalize on those opportunities and meet our obligations financial and othewise, that's where the big win is for shareholders including me. It's not a question of going to back to HPT and trying to figure out whether we could lower our rent by a couple of million dollars a quarter or what have you. That's not even close to having the big impact that we may be able to have with some of the other programs that I just talked about, and 90 somewhat percent of our properties are owned by HPT, and to do that would mean that I have to risk a default and basically loss of the entire business putting my capital and yours at total risk​ because the lease is senior to us, it just doesn't make sense. I am not in a mode where I think that that makes sense at this time.

David Rusky – Soundpost Capital

Understood. Great! Thanks guys.

Thomas M. O'Brien

Okay.

Thomas M. O'Brien

Keep going. We've got a few more.

Operator

We'll go next to the site of Doug Ross from [__________]. Your line is open.

Doug Ross – Unknown Firm

Hi guys.

Thomas M. O'Brien

Hi Doug.

Doug Ross – Unknown Firm

Quick question. On the $100 million of CapEx for 2008, does that include maintenance CapEx?

Thomas M. O'Brien

Yes.

Doug Ross – Unknown Firm

Okay, that's the $20 million portion?

Thomas M. O'Brien

Basically, yeah.

Doug Ross – Unknown Firm

And historically you guys have said that maintenance is a lot higher than that. Are you guys underinvesting this year just to save some cash or you've been overinvesting in '07?

Thomas M. O'Brien

A little bit of both. Remember the $20 million is basically from today forward, so it's really not a full year. The things that we've done in Operation Refresh you can look at that as a bit of pre-spend, and we're deferring some things that we'd like to get done, but we are stretching out the schedules if you will, so a little bit of all three of those things.

Doug Ross – Unknown Firm

Okay, thanks very much.

Thomas M. O'Brien

Okay.

Operator

And we'll take our next question from the site of Scott Miller from [__________]. Your line is open.

Scott Miller – Unknown Firm

You have answered most of my questions at this point, but I just want to hit a little bit deeper on the site level operating expenses. Can you give a little more detail what might be structural in terms of average wages? What you are seeing year over year, and credit card fees, and those kinds of things?

Thomas M. O'Brien

Operating expenses are depending on the quarter about 55% to 60% labor.

Scott Miller – Unknown Firm

So you say your average attendant for lack of a better word last year made $9 an hour and this year makes $9.50, or is it flat, or what's the...?

Thomas M. O'Brien

A good portion of our hourly labor is actually affected by minimum wage and so we're subject to that. I think the average increase by position last year to mid year '07 was in the 2.5% range. I am not sure that answers your question, but basically the labor costs and operating expenses are subject to inflation if you will and of course the number of hours employed and that’s really the control mechanism that we have at our disposal.

Scott Miller – Unknown Firm

Got it. So, even the sales levels were down, the number of hours were up dramatically and that’s more what drove it.

Thomas M. O'Brien

That’s right and that’s because of the integration. You know, for example, just to give a quick example of what we did in the fourth quarter was announced, I guess in August of ’07 that we took out of the TA branded sites, the site general manager. There was one person that was in charge of a particular site’s operation and that was different than the way those operations were conducted at Petro which had a manager at each business unit. So, a manager of the store and fuel islands, the manager of the restaurants, and the manager of the shop. We adopted that strategy for TA, which just basically means that we’ve cut out a layer of management at the TA sites. And so, that’s part of what we’re talking about when we are talking about integration. It is a part of – it’s the separation of a layer of management, redistributing the duties that were previously performed by that layer into a combination of whether it be somethings now being done centrally, somethings being done at site by different people, and somethings that we’ve decided not to do; all of that sort of adds up into confusion. Somebody has to learn a new system to make reports back to us for example, and that’s little less time they have to spend on making sure they are following the labor models and looking at their volumes to make sure that they’ve right-sized everything. And hopefully that gives you a little bit insight. That’s a detail, that’s an example, you know, part of what I’m trying to do here today is simplify things, but when I’m taking about hours employed, it’s not that we said, “no, we want people to have more staff.” It wasn’t that at all. It’s re-training and the training and getting used to new positions and new field leadership.

Andrew J. Rebholz

Another thing that plays into that would be, we talked earlier Tom and answered a question about, the shop business was up in the quarter and the shop business is an area where you have your laborers more directly correlated to the revenue because the way mechanics get paid. So to some extent, there is a little bit of noise there, a little bit of disconnect when you are looking at things in total, I don’t have the details behind that and it’s not going to be the biggest piece of the $15 million, it’s a little bit of that story. Whereas in say, the store, you might have two people working and if a thousand customers come in or zero customers come in, it’s still two people working. We’ll need somebody to watch the cash register.

Scott Miller – Unknown Firm

Okay, thank you.

Thomas M. O'Brien

Thanks a lot.

Thomas M. O'Brien

I think we have more one more question.

Operator

And we will take our final question from the site of Jon Lubert from IL Hedge Investments, your line is open.

Jonathan M. Lubert – IL Hedge Investments

Hi guys, how are you doing?

Thomas M. O'Brien

Hi Jon.

Jonathan M. Lubert – IL Hedge Investments

I want to try to understand if there was a significant difference in profitability for the Petro versus TA branded locations.

Thomas M. O'Brien

Well, I’m not sure if – the way I would characterize the difference between TA sites and Petro sites, obviously TA was the larger of the two brands. Petro has today a reputation for having the largest facilities for – I don’t know – to a certain extent being the owner-operator facility of choice but there are only 69 of them. So, while they are perceived to be very, very high quality, very trucker friendly, not impossible to find but relatively speaking, they are hard to find. And so, I see the Petro brand from a financial perspective that translates into – those properties will tend to do well in growing markets or tend to perform relatively better than the TA brand. And, the opposite side of that coin is, in the declining market they’ll tend to do less well and I think you can see that pretty clearly if you look at the volume change even fourth quarter over fourth quarter at TA there was about on the diesel side a little over 10% and little over 14% for Petro. And you look at the full year stuff, full year volume change is a little over 7% for ’07 versus ’06 at Petro and the volume change at TA sites as well. And so, in periods of stress, the TA sites which have relatively more fleet business where we can track, where we range directly with fleets for purchases of fuel, a larger percentage of the TA business than we do at the Petro business. And typically, historically, that’s also meant that the Petro gross margins on a cents per gallon basis been higher than TA and that’s the case in both the full year and the quarter 2007 versus 2006.

On a non-fuel and like a margin basis, the Petro’s tend to be – I mean they are both roughly in the same are, but they tend to be less as a percentage of non-fuel sales for a couple of reasons. Now one is the Petro Lubes today don’t have the service point recognition from freight liner that the TA sites do and we’re working to try to make that happen. And so, there is just simply less revenue from the Petro Lubes versus the TA shops. We’ve just rolled Road Squad and sort of rebranded as the Road Squad where it used to be called TA Road Squad to help service and drive more business to the Petro Lube shops to try to help that as well. The other reason that there is a lesser non-fuel gross margin percentage in Petro verus TA is because the Petro properties are larger, they tend to – more than tend to be configured with separate buildings and that does cause some inefficiency from a cost standpoint in a margin whether it be gross margin after site-level operating expenses. It’s probably more information than you wanted but that’s the way I look at it sort of line item by line item.

Jonathan M. Lubert – IL Hedge Investments

When you guys look at -- you guys mentioned that your expenses were higher in the fourth quarter than you had talked about historically and you mentioned property taxes as one of the reasons, are you paying property taxes for the properties that are owned by HPT?

Thomas M. O'Brien

Yeah, the HPT lease is a triple net lease.

Jonathan M. Lubert – IL Hedge Investments

Most triple net leases I know don’t include property tax, but you guys property taxes as well?

Thomas M. O'Brien

Yeah, in my experience triple net lease means, the tenant pays everything.

Jonathan M. Lubert – IL Hedge Investments

Okay.

Thomas M. O'Brien

In Philadelphia, it’s a little different. I think you are in Philadelphia?

Jonathan M. Lubert – IL Hedge Investments

Yep.

Thomas M. O'Brien

It’s usually they have things called, lease on the office site, triple net plus electric. So it differs by region on the office space, anyway if that’s what you are drawing upon.

Jonathan M. Lubert – IL Hedge Investments

Yeah, I think it differs about who negotiates with. I also have a question, you mentioned that their lease is senior to obviously the common equity and that, you know, trying to re-negotiate you could, I believe, wipe out the common equity because they are senior and you might have issues with the business. Now that the stock is down around $3.50 to $4, is there a point where the stock price is so low that that common equity may, being went down makes it prudent to try to re-negotiate?

Thomas M. O'Brien

I think I’ve been pretty clear about that. I think that a call for re-negotiation if you will has to be done in the context of realistic valuation of success impact and all of that in comparison to the evaluation of your ability to successful and impact the numbers in other ways without taking on those risks. Since it’s no different than any other business call with a third party.

Jonathan M. Lubert – IL Hedge Investments

When you guys do CapEx on their properties and then they give you that cash, pretty much the 9% financing rate, is that normal in the industry you find that basically you guys favor CapEx on their properties and they -- they get basically to hold that value?

Thomas M. O'Brien

Well, I mean I think the tenant often times improved the property that they are operating. I think what most leases, I don’t think you can characterize them one way or the other but I find it to be beneficial to have the option to make a request for reimbursement from HPTs.

Jonathan M. Lubert – IL Hedge Investments

Not real reimbursement, it’s you are increasing your -- you are increasing your annual rent by 9% of that cost over, how many years? I mean it’s factual to about 10 years? I don’t know the exact lease term?

Thomas M. O'Brien

It’s no different than any other financing option that I have which is why the, frankly as I said, we haven’t made the decision one way or the other to make that request and I could not make, we could fund with cash, we could fund it with drawing from the credit line or we could not spend it.

Jonathan M. Lubert – IL Hedge Investments

Okay, so when you think about it, so you have to make more than 9% on that CapEx spent when you are thinking about it theoretically in order for it to make sense. You guys are thinking whether to do it or not?

Thomas M. O'Brien

I think that’s the fair way to characterize it.

Jonathan M. Lubert – IL Hedge Investments

Okay, alright. Thank you.

Thomas M. O'Brien

Thanks a lot.

Thomas M. O'Brien

If we have more question and – I don’t see anyone else in the queue other than the next question, go ahead Chris.

Operator

Chris Ford, your line is open.

Kenneth Shubin Stein – Spencer Capital

Hi. This is actually Kenneth Shubin Stein from Spencer Capital.

Thomas M. O'Brien

Oh Hi.

Kenneth Shubin Stein – Spencer Capital

Hi, I wanted to talk a little about the cost cutting initiatives that you’ve outlined on the call which has been helpful so thank you. The relationship – I understand you are cutting cost and that makes sense because you staffed last year and now pulling back because of the recession. The 8 or $9 million that you spent year over year for basically outsourcing some of your SG&A, is that also up for either renegotiating or for scaling back, do you have any flexibility to decrease that as the size of your business changes and as the operational leverage changes in the business?

Thomas M. O'Brien

Yeah, there are two elements of that, one is that it under the current contract scales with non-fuel revenue and fuel gross margin. So if we make less margin on fuel, then we pay less under the contract. If our revenue declines on non-fuel we pay less under that contract. Another important element is that, it is a contract that is basically a one year contract and negotiated or looked at every year by our independent trustees.

Kenneth Shubin Stein – Spencer Capital

Great. When does it come up for renegotiating again?

Thomas M. O'Brien

That’s a good question. I think it’s the end of 2008, the first – the initial term of it was a 2 year and then it’s 1 year after that.

Kenneth Shubin Stein – Spencer Capital

So, in December of ’08, it’s up for renegotiating?

Thomas M. O'Brien

I think that’s the date. It maybe December, it may be January of ’09.

Kenneth Shubin Stein – Spencer Capital

January of ’09. And is that something, I know we’ve had some offline conversations about this and sort of the plus, minuses of that contract. Is that something that in your mind you are targeting as another potential source of saving, because with the stock down here, any savings of even a couple of million dollars has a dramatic impact on the enterprise value of the company?

Thomas M. O'Brien

As you know I am employee of the TA and a partial employee of RMR, I don’t – I am not involved in the negotiation of that and that’s done by our independent trustees.

Kenneth Shubin Stein – Spencer Capital

Okay. Thanks.

Thomas M. O'Brien

Okay, thank you very much. I am just checking – we have nobody else in line. I appreciate all of your questions and we’re going to go get to it.

Operator

That concludes today’s teleconference. Thank you very much for your participation. Have a great day. You may disconnect at any time.

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 Q4 2007 Earnings Call Transcript
This Transcript
All Transcripts