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TravelCenters of America LLC (NYSE:TA)

Q2 2008 Earnings Call Transcript

August 12, 2008 8:30 am ET

Executives

Tim Bonang – Director of IR

Tom O'Brien – Managing Director, President and CEO

Andy Rebholz – EVP and CFO

Analysts

Ben Brownlow – Morgan Keegan

Brian Nagel – UBS

Jean Fatore [ph] – EagleRock Capital

Jaime Lester – Soundpost Partners

Eric Gold – StoneCastle

Steve Sakwa – Merrill Lynch

Steve Rhodes [ph] – KBW

Dennis Worts [ph] – vFinance Investments

Ari Zweiman – 683 Capital Management

Operator

Good day and welcome to the TravelCenters of America quarterly results conference call. Today's call is being recorded. At this time, for opening remarks and introductions, I'd like to turn the call over to the Director of Investor Relations, Mr. Tim Bonang. Please go ahead, sir.

Tim Bonang

Thank you. Good morning, everyone, and welcome. 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, August 12, 2008. 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 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 those differences is contained in our filings with the SEC. Investors are cautioned not to place undue reliance upon any forward-looking statements.

And with that, I would like to turn the call over to Tom O'Brien.

Tom O'Brien

Good morning and thank you for joining our call today. I have two important items to cover in today's call. The first – I'm pleased to report our second-quarter results and the positive trends I see in them. Second, I am also pleased to be able to report on an agreement we signed yesterday with Hospitality Properties Trust, or HPT, which I believe will help provide TA with financial flexibility to weather the current industry conditions and economic slowdown affecting TA, its customers, and the U.S. economy generally.

TA's second-quarter 2008 results appear to be trending in a positive direction. While we incurred a net loss for the quarter of $9.8 million, we've made improvement over 2007 second-quarter results, despite a continuing difficult industry environment. In the second quarter of 2008, TA generated EBITDAR and adjusted EBITDAR in excess of our rents.

On a same-site basis for the 2008 second quarter versus the 2007 second quarter, our gross fuel margin increased $7.7 million, despite a volume decline of about 16%. While we generated a modest 2.6% decline in non-fuel gross margin, our non-fuel gross margin percentage increased 70 basis points, and our site-level operating expenses declined nearly 1%. Our same-site results of operations show positive trends, especially when compared to the results realized in the immediately previous quarters. Three quarters ago, TA's same-site net operating results had declined by about $20 million in the fourth quarter of '07 compared to the fourth quarter of '06. Two quarters ago, our same-site net operating results declined by about $9.8 million compared to the prior-year quarter. Last quarter, however; our same-site operating results increased by about $4.4 million compared to the second quarter of 2007.

We also made improvement in our SG&A costs, which declined by about $2 million, even though our 2008 second quarter contained the full impact of our operation of the Petro business, which was acquired late in the second quarter of 2007, and increased the number of our operated sites by over 40%.

While these data points may represent a positive trend in our efforts to address the current difficult environment, we still have plenty of work to do and initiatives to execute. For example, as you may have noticed from our release, TA's fuel sales volumes declined by 16% as our customers have focused on fuel conservation. Further, our investment of working capital has increased, including an investment during the quarter of nearly $30 million related to cash we deposited principally with vendors to partially secure our purchases at increased prices. Our rent deferral agreement with HPT announced yesterday is a major positive for TA. The most significant part of that agreement for us is our ability to defer up to $5 million of rent per month for the period from July 2008 to December 2010. This deferral, if used, will not bear interest through December, 2009. Amounts deferred may remain outstanding through June, 2011. TA approached HPT regarding this arrangement because, while it's my belief that our operating initiatives are beginning to be successful, it's also my belief that time is required to reflect their full benefit and move TA to a position where it may generate profits.

The working capital required to run TA's business is significant. We sell over 2 billion gallons of fuel, plus about $1.2 billion worth of nonfuel goods and services per year. Even small changes in TA's cost of fuel and other goods can significantly impact TA's working capital needs. The rent deferral arrangement with HPT may allow us to build a working capital cushion during the difficult current market conditions.

I'm also aware that TA faces many risks. For example, fuel costs have focused customers on conservation, a circumstance which is likely to continue regardless of where, when, or if fuel costs begin to settle. Other risks, to name a few, include inflation, which has and may continue to increase TA's costs of doing business, risks from TA's competitors, some of which are formidable, and rising failure rates for our customers in the trucking industry. Our positive operating results trends and our rent deferral agreement with HPT are very important pieces of TA's current business plan. In a terrible market like the one we face today, these two items may provide us with an ability to adapt wisely; these two items may provide us with the flexibility to adapt further if the market changes for the worse; and if the market recovers during the deferral period, they may provide us with the financial flexibility to realize the benefit of that recovery.

With that, I will now turn the call over to Andy Rebholz, our Chief Financial Officer, who will review our second quarter 2008 results in detail. After Andy's comments, I will come back to answer questions I expect many of you may have, and I will take additional questions from you if there are any.

Andy Rebholz

Thanks, Tom. I will provide some detail on some of our key same-site operating and other financial results for the second quarter. Our fuel volume on a same-site basis declined about 16% during the second quarter of 2008 versus the 2007 second quarter, in part due to fuel conservation practices we believe are being implemented by truckers to combat the historically high cost of fuel. Our year-over-year fuel margin on a cents-per-gallon same-site basis increased by 33% for the second quarter of 2008 versus the 2007 second quarter. Historically, our industry seems to have been focused on increasing volume and racing to the bottom on price using so-called cost-plus pricing mechanisms developed in a different time when diesel fuel prices were relatively stable and much lower. However, volume cannot be put into the bank, and our industry's historical pricing methods tend to lock in a cents-per-gallon margin, which reduces margin as a percentage of revenue when fuel costs are rising. We've been able to remain competitive on retail pricing in our markets, but during the second quarter, we've also been able to earn a gross profit on the average gallons sold, which takes into account at least some of the enormous working capital investment associated with supplying fuel to our customers at today's historically high prices.

Overall, our 2008 second quarter fuel margin, in total, was approximately $7.7 million or 14.5% more than in the comparable 2007 quarter. Our nonfuel revenue during the 2008 second quarter declined by $12.3 million or about 3.8% on a same-site basis versus the 2007 second quarter. Our nonfuel margin during the 2008 second quarter also declined modestly by $4.7 million or about 2.6% on a same-site basis versus the 2007 second quarter. We believe these decreases were due to the decline in the number of customers traveling the interstates in this period of a slowed U.S. economy and historically high fuel costs. We believe that a decline of 3.8% for nonfuel sales, in light of a 16% decline in fuel sales volume, both on a same-site basis, is evidence that the attractive features of our nonfuel offering, including our truck-repair business, table and quick-service restaurants, large retail stores and the most parking in the industry, draw customers to our sites.

Our nonfuel gross margin as a percentage of nonfuel sales increased by about 70 basis points on a same-site basis to 57.7% in the 2008 second quarter, versus 57% in the 2007 second quarter. We believe this improvement is largely the positive effect of various increased volume purchasing contracts and other synergies we've been able to implement as a result of the Petro acquisition.

Our site-level operating expenses decreased by $1.4 million or about 0.9% on a same-site basis versus the 2007 second quarter. This decrease was principally due to a $5.5 million decrease in labor costs during the 2008 second quarter as compared to the 2007 second quarter, offset by increases in utilities, credit card fees, and other costs. Our selling, general and administrative costs of $23.3 million for the second quarter of 2008 represented a decrease of about $2 million, versus the comparable 2007 period, and a decrease of about $9.4 million versus the 2008 first quarter. These decreases are largely attributable to a net decline in labor costs, representing the impact of our March 2008 reduction in work force. I believe this cost reduction is particularly impressive because of the 40% increase in our site count resulting from the Petro acquisition, the effects of which were only experienced for one month in the 2007 second quarter. By adopting the best practices of each of TA and Petro, we are trying to do more with less overhead.

Our adjusted EBITDAR for the second quarter of 2008 increased by approximately $11.5 million versus the 2007 second quarter, principally due to the changes I've just described. This increase compares favorably to the $1 million decline we experienced in the 2008 first quarter, versus the 2007 first quarter, and the decline of nearly $15 million we experienced in the 2007 fourth quarter versus the 2006 fourth quarter. While the difficulties we've experienced and continue to experience as a result of the conditions of the U.S. economy and the trucking industry over recent quarters have continued to require rapid adaptation and hard work, it appears that we may be beginning to see positive results from our efforts to date.

With that, I would like to turn the call back over to Tom.

Tom O'Brien

Thank you, Andy. As I've done in previous quarterly conference calls, I want to provide an update of our cash and liquidity position.

During the second quarter of 2008, our cash balance changed as follows. We began the second quarter with $121 million of cash on the balance sheet. We expended $23 million to fund capital projects that we've previously talked about. We sold to HPT $68 million of improvements to HPT-owned properties that we lease. We generated adjusted EBITDAR and interest income in excess of cash rents of $6 million. We increased our working capital by about $62 million. All other items, net, totaled about $4 million and we ended June 2008 with $106 million of cash on the balance sheet.

The increase in working capital is in part due to the increased level of business activity associated with the seasonality in our business and in part associated with the high cost of fuel, which has increased our unit inventory costs and accounts receivable. The portion of our credit line now used to support letters of credit remains unchanged from the May 2008 level I reported to you during the first-quarter conference call. It remains at approximately $70 million. This $100 million credit facility is otherwise undrawn. We have also receivables of approximately $23.6 million on our balance sheet, which represents the amounts remaining on our original $125 million allowance from HPT for certain TA-branded property improvements that can be sold to HPT without a rent increase.

Now, as in the past, our lawyers have cautioned me to make the following statement. TA is currently in litigation with certain dissident shareholders for recovery of costs that we incurred associated with their failed attempt to launch a proxy contest earlier this year and with the shareholders brought a derivative claim which we believe is unfounded. We will be unable to answer any questions about these lawsuits or their subject matter. We ask that questions, when we get to that portion of this call, be confined to TA's business as we've reported it in our press release yesterday and in our prepared remarks today.

Before we take the first question, I really want to try to summarize our report today. As we've said, TA's business is under significant pressures, largely caused by very high fuel prices and the general slowing of the U.S. economic activity. While I am pleased to report positive trends in the second quarter 2008 versus prior quarters, we cannot discount the possibility that at least some of what we are seeing may be temporary and partially a reflection of seasonality in our business and/or other factors. We have much work to do and many risks to overcome in the coming periods.

As I've told you in prior quarters, the ongoing decline in fuel volume continues to put pressure on us. Inflation appears to us to be an increasing problem and the effects of increases on our cost of goods sold may take time to be accepted by customers. The industry conditions have put pressure on some of our business partners as well, including a couple of our franchisees, some of the sub-tenants who conduct business at our sites like Idle Air, which earlier this year filed for Chapter 11 reorganization.

Despite these challenges, I remain positive about the work that has been accomplished and that is ongoing. For example, I believe we've seen positive impacts from our March workforce reduction and labor controls. I also think we may continue to see positive impact from our cancellation of the Simons Petroleum fuel marketing arrangement under which we began to compete with Simons directly in May of 2008. I also believe that TA's settlement with Flying J in first quarter of 2008 not only reduced our legal fee expense but may also turn out to have created new business opportunities for us. A myriad of other revenue enhancing and cost-control initiatives are underway.

The changes we're making to our operations today are focused to create more positive customer experiences as it takes full benefits of our core competitive advantages, like our industry-leading full-service and quick-service restaurant offerings, and our on-interstate truck repair and maintenance services, which is second to none in the industry. Our rent deferral agreement which I discussed earlier is a significant event for TA. It provides us with much additional financial flexibility, which may allow us to better deal with the uncertain market we are facing. While not all of our initiatives will be successful, we believe we have a reasonable opportunity to produce positive cash flows during the current phase of the economic cycle, and then to produce operating profits when the cycle turns.

At this point, Andy and I would be happy to take questions. Operator, do we have any?

Question-and-Answer Session

Operator

Yes. The question-and-answer session will be conducted electronically. (Operator instructions) We will go to Ben Brownlow of Morgan Keegan.

Ben Brownlow – Morgan Keegan

Good morning. Can you guys talk about – and I'm sorry if you've gone already over this. I kind of missed the beginning of the call. But can you talk about fuel demand versus fuel margins, and kind of the trade-off there?

Tom O'Brien

Sure. I think the major thing that we are seeing in fuel demand is conservation. I think that if you look at industry reports month-over-month, it appears that things that have historically been relevant metrics, like tonnage or miles, are actually trending slightly positive, but folks focused on conservation have, I think, really put an awful lot of a dent in the way that fuel has been – I should say the amount of fuel that's demanded and that goes certainly on the diesel side. On the gasoline side, being on interstate, I think that the high prices of gas really have curbed demand for gas. People are – because they don't do it the same way as trucking companies do – but they are taking shorter trips, forgoing vacations, that sort of thing because of the high price of fuel. At this point, it's very expensive to get lost; you don't want to make a wrong turn. Those are the kinds of things that people think about. And I think that's the major impact of what we are seeing in terms of demand.

Now, there is obviously competition on the diesel side for sure, and I'm not just talking about the headline price, or the posted price. We've been very, very close to our historical protocols in terms of retail pricing, relative to our competitors in the local markets. In fact, I've been very pleased with the way that we've been able to remain right in the mix in lots and lots of markets. There are certainly other forms of competition for fleet business, and that's on a national level. We've been competitive, I think as competitive as we have been in the past. Certainly, there have been instances where I think – let's put it this way, we have been selective in bidding new business with fleets and taking a more wholesome – fulsome, I should say, look at the relationships that we have, whether they be fuel only, fuel and shop, and really trying to bring up suites of services to our fleets and some appreciate that; some understand the benefits or see the benefits of that, and for some, that's not a benefit. And so, if there is some low, low-margin business in this environment, to me, it doesn't make sense. Let's say I was earning $0.06 a gallon when diesel was a dollar. It doesn't make any sense to me to earn $0.06 a gallon when I have to pay $4 to put it in the ground. And so, those have been conscious decisions to try to take into account all of our different business relationships, our cost of capital, working capital, and all of those things. I hope that answers your question.

Ben Brownlow – Morgan Keegan

It does; it's very helpful. When you kind of look at this quarter, I guess you wouldn't expect a change in that kind of comp trend?

Tom O'Brien

No, I think what I've just explained is our philosophy. You know, we have to change and adapt every day as our competitors do and as we see what the oil and diesel markets are doing. But generally speaking, I think, as a way of doing business, the philosophy that I've just put forth is the one I'd like to follow. It has to be adaptable, though, because I don't get to – to simply pick. And that is it's adaptable to what our competition is doing and what the market is doing.

Ben Brownlow – Morgan Keegan

Okay. In terms of the rent deferral, do you expect to take full advantage of that rent deferral over the next 12 months or so?

Tom O'Brien

I think that, sitting here, the way I look at the rent deferral is that it is a significant series of options for TA, for us to build a working capital cushion for times that are not in the high season in the summer, so the fourth quarter and the first quarter. And unless and until we have much more clarity and see where markets are shaking out – I'm really happy about the positive trends of the last three quarters. I think they are trends, but this market can get violent very quickly, as we've seen in the last year or so. And so – sitting here today, I do expect to take full advantage of it, but it's nice to have the option to be able to capture some of that adaptability that I was talking about.

Ben Brownlow – Morgan Keegan

Great. And the last question on the Petro integration expense – is that fully all the way or can you detail that out a little bit?

Tom O'Brien

Yes, the amount that you see really relates to costs associated with canceling out old contracts and putting in place new contracts. In a couple of cases, we paid amounts to cancel contracts. In both if those cases, our new supplier paid similar amounts to us. The accounting rules unfortunately make us expense one and amortize the other. I think that, by and large, we are through all of the big contracts and what were looking at going forward is the – hopefully the benefits of those contracts. I don't expect – there may be a few dollars going forward that you'll find on that line, but nothing that I know of that's significant today.

Ben Brownlow – Morgan Keegan

Thank you.

Operator

We will go to Brian Nagel of UBS.

Brian Nagel – UBS

Good morning. Just a quick question to follow on the rent deferral – just if you could help us better explain the accounting treatment of that, how it would work for your financial statements?

Tom O'Brien

Yes. I will start and maybe Andy can correct me because he is the better accountant, but our obligation to pay rent in total dollars hasn't changed, and so our rent expense will continue to be recognized on a straight line basis, and the amount of rent expense – and ours has lots of different pieces of it, as you know, but generally speaking, the amount of rent expense won't change because of the deferral arrangement.

Brian Nagel – UBS

So it's just simply – it is cash then, the timing of the cash outlays?

Tom O'Brien

That's right.

Andy Rebholz

So there will be an accrual building on the balance sheet every time we take advantage of the deferral.

Brian Nagel – UBS

Just so I understand, after the rent deferral period, assuming you exercise this option, let's say, after the deferral period, then at what pace do you make those payments back?

Tom O'Brien

Well, the amounts that are deferred are due in June of 2011, and they are due in lump. You know, we can pay them off any time prior to that, so if, in the next three years, the world changes, the economy gets better, our operating initiatives kick in to full measure, I think – I don't know what the world's going to look like in June 2011, but I'm sure it will be different than today. And – so those are due in lump, to answer your question directly.

Brian Nagel – UBS

Okay. I guess the final question on this is your negotiations with HPT – and this would be a different question (inaudible) answer but I'll ask it anyway. Is this a beginning negotiation, or is this, do you think this is the solution you wanted on the rent side?

Tom O'Brien

Well, I think the rent deferral agreement that we have is a win-win for HPT and for TA. It's intended to deal with uncertain market conditions, which is the only thing that's certain today. That is to say I didn't know a year ago where we would be today; I don't know a year from now where we would be. The agreement was a result of give and take in negotiation between our independent directors and independent trustees. I think it's where we should have come out. It provides us with flexibility; it provides TA with a strength that it didn't have before and a series of valuable options that it didn't have before. And yet, it commits us to repayment or payment of all of our obligations, which is how we want to treat all of our business partners.

Now, in June 2011, one of – a range of things could happen. One would be that, by that time, all of the positives that we can imagine have kicked in and have long paid off amounts that have been deferred. At that time, on the other end, the world, as I said, is going to be different three years from now, but if it's a lot worse, there's a rift there of course that we won't have a lot of options for repayment and then at that time, we will look around, see where we are – or actually before that time – and decide what we want to do. Three years is a long time. Again, it's not just something to say that the world will be different three years from now. I think that's one of the things that it is probably for sure. It's a long time for the economy; it's a long time for a company like us to be able to adapt if that's what we need to do. That was a little bit of an indirect answer to your question, but I think in there is perhaps what you're looking for.

Brian Nagel – UBS

That's helpful. I appreciate it. Thank you.

Operator

We will go next to Jean Fatore [ph], EagleRock Capital.

Jean Fatore – EagleRock Capital

Congratulations on the improved results. I have a couple of questions. The majority of your sales of fuel are obviously diesel-related, so presumably fleet drivers, professional drivers. And it looks as though – and it's difficult for me to get the actual comparisons because you don't break out, I believe, comps net of the Petro acquisition to do full comps but it looks like you're margins only declined slightly on the fuel aside. Can you clarify that? What were your gross margins? I had about 3.07% for this quarter. Do you know what they were for last quarter on an adjusted basis for the Petro acquisition? On the diesel side – on the fuel side, pardon me?

Andy Rebholz

I'm trying to –

Tom O'Brien

You're talking margin as a percent of revenue?

Jean Fatore – EagleRock Capital

Sure.

Andy Rebholz

We can get that number for you.

Jean Fatore – EagleRock Capital

Okay, perhaps we can take this off-line later. But the good news is you are relatively flat it looks like in terms of fuel margins. And the other question I have is, other than turning off the trucks at idle time for layovers and better maintenance, a lot of this has to do with miles driven for the fleet drivers. There's not much they can do to change the fuel mileage of a truck when it is properly maintained. So as the economy comes back, irrespective of where prices are, we will presumably see haulage increase?

Tom O'Brien

I'm sorry, I didn't catch that. You'll see what?

Jean Fatore – EagleRock Capital

Haulage increase. As the economy recovers, we're going to see more truck haulage, and they will buy more fuel from you. So the good news is your margins on nonfuel are very attractive.

Andy Rebholz

Yes.

Jean Fatore – EagleRock Capital

So the question I'm really trying to – what I'm drilling down on this – can you talk about CapEx? What is your real maintenance CapEx for the company? Can you discuss the terms under which you are compensated by HPT for that?

Tom O'Brien

Sure. CapEx on sort of a going-forward basis for the properties that we operate is in the $30 million range, we believe.

Jean Fatore – EagleRock Capital

Now, that's for a full year?

Tom O'Brien

Yes. To the extent that – let's take it in two pieces. We have a little over $20 million available under the allowance that is baked into the HPT lease of TA-branded properties, okay. For improvements to HPT TA-branded properties, we could spend up to that amount and sell improvements to the real estate, to HPT, without adjustment to rent. That's the first piece. Under both of the leases, the TA branded property lease with HPT and the Petro-branded property lease with HPT, to the extent that we make improvements to the real estate on those properties owned by HPT, we can request HPT fund or buy those improvements in exchange for an increase in rent. That rent is set by a formula in the lease. I don't remember exactly what the percentage is, a little under 10% I think. We actually had done this once, sold a small amount of improvements like that under the TA-branded lease last summer. So that's the way that works. I mean, obviously our goal is to be able to be, over time, cash flow positive so that we are generating enough capital to cover our business obligations I think is the way I said it. When I think about that, I think about routine maintenance CapEx as well, but it's nice to have those options to sell improvements in both of those buckets that I talked about. Does that answer your question?

Jean Fatore – EagleRock Capital

Yes, largely. Then the other question I had is, and you pointed this out earlier – your nonfuel sales were very, very strong relative to your volume drop.

Tom O'Brien

Yes.

Jean Fatore – EagleRock Capital

– which is terrific. What do you think you're doing in a positive sense that's accountable for that?

Tom O'Brien

Yes, I will give you a little bit of backdrop. Your average – I mean, an average day for a trucker involves three stops, and he only stops once for fuel. All three times he stops – generally speaking to eat, to get a shower, to do things that we offer. Our business is in the full-service end, so you can find a full service, sit-down restaurant if that's what you're looking for. You can find options within the quick-service or they used to call it fast food, in that arena, particularly in the TA sites which have – many of them have multiple quick-service restaurant offerings, whether it be Popeye's chicken or Burger King or Wendy's, or something like that, really sort of mini food courts. Then of course our shop services, which really can't be found at our other chain competitors – probably there's an awful lot of folks that are attracted to things like being able to find parking.

We have on average 200 parking spaces at our sites; which is sort of the best of the bunch, if you will. Whether you simply like to be able to find a parking space easily, or whether you appreciate not having the risk of running into somebody that is smaller, bumper-only crowded parking lot, I think that is something that folks find attractive. Maybe a little bit of a softer reason but I think focusing our marketing programs and the way that our employees interact with customers on things that go to positive customer experiences – at Petro for example, we were running a campaign called Petro Payload Paydays. I won't go into the details but it's something that we are getting great feedback from. The slogan is "Nobody cares more about the drivers than Petro." And we are getting great response both from customers but also from our marketing partners, and that's creating an awful lot of buzz. So I think all of those things are some proof to the business model that we've set up, and you're right to point out that, if what's happening is folks that are conserving cash – conserving fuel – the biggest thing there that you didn't mention is reduction in speed. All of the other things you mentioned are true, too, but reduction in speed saves an awful lot of fuel. If that's what's here to stay, I'm very, very pleased that we are in the full-service end of this business.

Operator

(Operator instructions) We will go to Jaime Lester of Soundpost Partners.

Jaime Lester – Soundpost Partners

Congrats. Can you just walk through – do you have to decide each month whether or not to defer the rent, or can you build up a reserve, not take that rent deferral and then take it all at once if you need it?

Tom O'Brien

It doesn't accumulate, so except in – well, let's back up – in the first month here, the rent deferrals for July, beginning July of '08. The first month, we can take up to $10 million because we've already paid July rent. But after that, it doesn't accumulate, so if I don't take $5 million in December, there won't be $10 million available in January, and so it is a month-to-month decision.

Jaime Lester – Soundpost Partners

Okay. And can you just walk me through how you're going to think about that each month? I mean, is it going to be – so the July deferral for instance – that's a bad example – the August deferral, you have to decide on August 1 or August 30, or somewhere in between?

Tom O'Brien

We have to decide the second before we hit the button to send the rent wire. We have that kind of flexibility. There's –

Jaime Lester – Soundpost Partners

Which is what day of the month?

Andy Rebholz

The first business day of the following month, so September 1 –.

Tom O'Brien

August rent will be due.

Jaime Lester – Soundpost Partners

I got it.

Tom O'Brien

Yes, I mean, obviously the things that we will look at are our own cash position, our evaluation of the marketplace, our operating results, you know, the price of oil and diesel and claims on our cash, what time of the year it is, and a million other things. Will we run sort of a rolling four quarters budget? Obviously, there will be short-term and longer-term aspects that are brought to bear on each of those decisions.

Jaime Lester – Soundpost Partners

Okay. Then you made some allusion to business opportunities from the Flying J settlement. Can you just give a sense for what those might be?

Tom O'Brien

I really was talking there simply about, today; we take every major fuel card. Before the Flying J settlement, before we took the TCH – Transportation Clearinghouse is their affiliate that issues those cards. Anyone who didn't carry another card or exclusively carry the TCH card couldn't be a customer of ours, or if they were, they could be a customer by using a bank card, a Visa or a MasterCard. So, the business opportunity is one, to have expanded the potential pool of our customers, and that's significant. And the second part is, to the extent we were already attracting those customers and they were using a different form of payment, the cost of a bank card transaction, in terms of fees, generally speaking, are much higher than the cost of a fuel card, which is more close to – more closely akin to a debit card. So those are the two benefits that I was talking about principally.

Jaime Lester – Soundpost Partners

Okay. And then the comments you made that things had started to maybe level off or get a little better, that's commentary regarding July and early August, or is that a little bit more dated?

Tom O'Brien

You know, the comments that we talk about today are really for second quarter. I think that we will get into where July and August are sometime after we complete that quarter. The market, if you look at the underlying market after the second quarter, I would say that while – if you look at oil as a benchmark, it has moderated but to say that my gosh, aren't you glad that oil is now only $113 a barrel, still to me seems like, I don't know what but it doesn't sound natural, if you will, so still high oil prices and diesel prices, but we have seen some abatement in the last couple of weeks.

Jaime Lester – Soundpost Partners

Okay. I guess that's it. Thanks a lot, guys.

Operator

We will go to Eric Gold of StoneCastle.

Eric Gold – StoneCastle

Thank you. A couple of quick questions – forgive me if you answered them as I'd joined the call a bit late. Did you report the total number of diesel gallons sold and gas gallons in the quarter?

Tom O'Brien

Yes, on a same-site basis, that number is 452.5 million diesel –

Eric Gold – StoneCastle

Same-site but just total for what you actually did sell in the quarter.

Tom O'Brien

Yes, 452.5 million and gasoline of 56.5 million gallons.

Eric Gold – StoneCastle

Okay. Then lastly – and again forgive me if it was discussed – site-level OpEx on a per-store basis was up over the first quarter, certainly up over a year ago is to be expected. Any thoughts on your ability to control those site-level expenses and where you think they go to over time as you focus on expenses?

Tom O'Brien

Yes, I'm not sure what you're looking at. If you're looking at same-site, site-level operating expenses are down.

Eric Gold – StoneCastle

I'm just taking a look at the site-level OpEx in the quarter divided by the average number of sites in operation in the second quarter over the first quarter of '08.

Tom O'Brien

Yes, if you look at – I mean the best way to do that is to look at the same-site operating data, and you know, those expenses are down. The biggest part, biggest component of those expenses is labor. We focused on that first. That's down about $5.5 million on a same-site basis. There is obviously other components in there as well, which are up, and those are credit card fees, those are costs of transport. As much as everybody that is out there consumers and businesses alike saying ‘my gosh, the high cost of fuel’, well, that may be not something that you focus on but we face fuel surcharges too for goods to be delivered to us.

Eric Gold – StoneCastle

But isn't that in the cost of goods sold number rather than the OpEx number, for those things like credit card charges (inaudible)?

Tom O'Brien

The credit card charges we've always had in site-level OpEx. You could make the case for either way, but that's where we've had them.

Eric Gold – StoneCastle

All right, perfect. Thank you.

Operator

We will go to Steve Sakwa of Merrill Lynch.

Steve Sakwa – Merrill Lynch

Good morning. Just two questions – in terms of the rent relief that you've structured, I guess what sort of backdrop or environment did you sort of think about – things getting better, getting worse, kind of staying the same? I know you say things won't stay the same, but how did you think about that? I mean, were you sort of bracing for a more difficult environment where things actually get worse? Will this change potentially not have been enough?

Tom O'Brien

Well, I mean, there is always risks of that, and I think that's the focus of – or was the focus of the folks negotiating from the TA side. Certainly, I don't want to speak for them but from the HPT side, the focus may have been the opposite. That is in the nature of the negotiation and I think we met in the middle. Could things change next week or next month such that we will realize either on the one hand, gee, we didn't need this; or, on the other hand, my gosh, it should've been more dramatic? I really don't think, where I'm sitting today, I don't think that's going to be the case. I do think that we've structured it in a way such that it is, as I said, a series of options. And in those options is the flexibility that we may need to be able to deal with changed circumstances going forward, whether they be in the next month or the next year or in the next two years. And so, again, it's a result of a back-and-forth. It's a result of where I see this industry today. And while I didn't – I don't have in mind, Steve, – that for sure the industry is going to be worse than it is today in six months or that it will be better. Those things are things that were obviously have to be taken into account so that the risk of one or the other in coming up with the stance for the beginning of the negotiations. So I hope that answers your question. Again, look, to restate, I just – I don't have in mind further doom, if that's what you're asking. I'm not saying it couldn't happen, but that is not what was foremost in my mind when we put this together.

Steve Sakwa – Merrill Lynch

Well, it sounds like you've negotiated a relief package based on sort of current business conditions. If things were to materially improve, obviously you don't need it. If things were to get materially worse, then what you've negotiated I guess it would be fair to say may not be enough.

Tom O'Brien

I mean, I think you have said it right.

Steve Sakwa – Merrill Lynch

Okay. The other question – I'm just a little confused. Somebody asked a question about the leasehold improvements and maybe what you get reimbursed for versus what HPT gets a return on. There's a footnote on Page 8 I guess of the balance sheet, and it says that they may reimburse you for up to $125 million with no adjustment to the rent. Can you maybe just go back through what, if you spend money on, what they get a rent payment on versus what they just basically pay you for? And effectively that's a liability to them.

Tom O'Brien

Right. The $125 million was set out in the original lease when we were spun off, and that relates to specific properties, all of the TA-branded properties that HPT owns. And the $23 million is the discounted amount of what's left of that $125 million. And so, so long as it's for the right property and the right sort of flavor of improvement – what I mean by that is HPT is a REIT and likes to focus on purchases of things that qualify as real estate and not everything that we do does qualify as real estate. I mean that's basically the idea of how these things are set out in the lease. Those amounts can be sold to HPT up to – as I said, this amount that remains. Beyond that, improvements to HPT-owned properties work much like HPT's other leases generally do. That is to say make an improvement to an HPT property, I can go to HPT and say, you know, I just built a building on your property, and I'd like to sell it to you. Generally speaking, the way that would work is we would budget it, we would talk to HPT beforehand, and then when it was done, HPT could buy it. And in that case, a rent increase would be made. So maybe the easiest way to think about it, Steve, is that the first $23.5 million or so of improvements that, from my perspective, we make to HPT TA properties will sell to HPT under this $125 million allowance. And after that, then we will consider whether or not we want to sell the CapEx or improvements to HPT.

Steve Sakwa – Merrill Lynch

Okay, so basically, from their perspective, there's $23 million that could yield zero return; anything above and beyond that, they would get a return on capital?

Tom O'Brien

That's right. And that zero return part is – has been part of the TA least since its inception.

Steve Sakwa – Merrill Lynch

Okay, thanks a lot.

Operator

We will go next to Steve Rhodes [ph] of KBW.

Steve Rhodes – KBW

I just had a couple of questions on – I guess your SG&A costs versus your site operating expenses. Forgive me. I'm probably a little behind the curve here on your expenses. But is your SG&A, is that – it looks like it's running at around $80 million a year on a run rate. Is that all just sort of corporate overhead expense, or are there property-level expenses that just kind of run through that line as well?

Andy Rebholz

No, it really is the corporate level – excuse me, the –

Steve Rhodes – KBW

Can that come down significantly? It seems – I mean it seems very high relative to the size of your business and I'm wondering what you think is sort of – is that just the run rate it is, or can it come down from there?

Tom O'Brien

I think it's about where the run rate is. You know, we have not let up on focus on those costs. One of the things that you have to keep in mind is, unlike a lot of companies that may be a restaurant company or a C-store company, TA runs multiple businesses. You could think of us as a collection of 236 C-stores next to a collection of 236 full-service restaurants and next to another collection of close to 300 quick-service restaurants. The shop business is 1000 bays. All of these are – while we place them right next to each other, they all require different forms of management and focus and systems and are operated as separate business units, because like I said, although they are in the same location, repairing a truck is not the same as preparing a hamburger. You can't have the same people focused on it and expect them to be successful. So maybe that's some of what you're seeing as you're comparing our G&A levels to companies that are public that may do some of the things that we do.

Andy Rebholz

Just one other thing to just point out, when I say that it's really the corporate overhead, there are aspects of that that are more maybe related to the operations. For example, the field management group that supervises all these managers out of the sites, they are kind of related to operations, but they are included in the SG&A number. You have go the – you know, we talk about our Road Squad service and the on-road repair services for trucks. We've got a large group of people here that work in the dispatch for that service, so from the related operations and as operations get larger, and we talked about the 40% increase in the number of sites – why that would have an effect on SG&A is because of this sort of first-level supervision or whatever of the site operations that's included in SG&A.

Steve Rhodes – KBW

Okay, that's very helpful. Thank you. The other thing I just wanted to ask you – you sort of touched on this at the beginning of your call, but if we look at just the kind of gross margin per gallon that you guys are yielding, then the last four quarters, it looks like it ran at around $0.08 a gallon and moved closer to $0.12 a gallon in the second quarter. So is that something that you think is – it sounds like that's a policy on your part that you're really trying to lock in here by avoiding I guess more discounting. I mean, is that something that you would think is somewhat sustainable going forward, or is it really a function of just the direction of oil costs in the quarter?

Tom O'Brien

Well, there is a lot of pieces to that question. We don't have – you know, it's not something you set by policy. For example, a couple of months ago, a company called Dow Chemical could put out a release that said "All our prices are going up, whatever it was, X percent." We don't have that ability. So it's not so much a policy as it is a philosophy. Maybe that's too strong a word, but if you're going to make $0.10 to sell something for $1, that's a 10% margin, right? You're going to make that same $0.10 when you sell something for $4, that's a $0.025 margin. As Andy said, sort of racing to the bottom and all of that may be good when prices are stable and may be a valid form of conducting a business, but it ignores substantial costs. What you don't see in somebody's P&L is the cost of working capital and the amount of dollars it takes to buy a $4 a gallon fuel, put it in the ground, deliver it and then wait to be paid by your customer. Those are enormous costs. They don't show up in the P&L, but they are real economic costs and I think part of what you've seen. I mean, that's sort of the backdrop.

Now, overlay that with – okay, that's fine to think that but can you do that? Do others in the industry – do our little other factors, whether they be competitive or customer-related, will they allow you to – I mean, you could have the best philosophy in the world and it doesn't matter if you can't implement it. I think some of what you're seeing is the effect of that philosophy and to the extent that it's been understood by customers who see the value we can provide in other ways and embraced by other parties that we have to consider when we are making our pricing decisions is probably the best way to say it. So, it's not a policy. There is a recognition that you can't put volume in the bank. I think accepting that as the reality for what it is, which is reality, is something that perhaps historically our company, whether before January 2007 when we became a public company, it just hadn't been accepted, perhaps because it didn't have to be. At that time, fuel was still going up, but boy, since then, we've seen 150% price increases. So, it's a different world and requires a different way of thinking and a different approach.

Operator

We will go to Dennis Worts [ph] of vFinance Investments.

Dennis Worts – vFinance Investments

Good morning. I'm reading the press release. Did you or did you not dilute the stock by 10% to put up the collateral to pull this deal off with Hospitality?

Andy Rebholz

We did the issue 1.5, or will soon, 1.5 million common shares to HPT as part of the rent deferral agreement. That's about 9.6% of the total outstanding shares after that issuance.

Dennis Worts – vFinance Investments

So you are diluting the stock by roughly 10% then, not 9-something%? Okay. If you had put this plan in place six months ago, you would have saved yourselves six months' times $5 million, that's $30 million. But you burned about $42 million the last six months operationally or, on a net loss basis, you lost $4.10 a share for the last six months. You still have burned about $12.5 million, right? All other things held constant, this plan, $5 million a month times six, still would have left you burning $12 million.

Andy Rebholz

I don't have your numbers in front of me, but I don't dispute them. Do you have a question?

Dennis Worts – vFinance Investments

Well, I guess what I'm asking is what everybody was thinking going forward, I guess you are being more optimistic because this plan would not have kept you from burning as much cash as you did the last six months. So I guess is it just an agreement between the two of you that things had better get better? I'm just – I'm still confused by the numbers here. People are reacting very positively to the news, and I'm confused.

Andy Rebholz

I'm not sure I understand your question, but let me give some comments that maybe will help put things in context. I think there’s a number of things going on, and I said early on in the call that there are two very important things that I wanted to cover and talk about. One is the improvements, quarter over quarter over quarter, in our operating results. So initially, or six months ago to use your time frame, what we undertook to do, for example in March of 2008, was right-size the business – was to seize what opportunities we had to improve our operating results by controlling labor, by focusing on new business opportunities, by canceling the Simons contract, by settling a major antitrust litigation, sort of moving on, opening a new avenue to new customers by accepting that TCH card, by closing certain restaurants overnight, so if you will limiting hours of service in a small part of our business that weren't making much in terms of marginal dollars. All of those operational refinements and enhancements have been brought to bear. It appears, from our second-quarter results, that they are having a major material impact. So that is the first part of – and perhaps will prove to be the most important, the more important part of the two things I was talking about today. The rent deferral arrangement is, as I said, options or a series of options, if you will, to be able to improve our financial flexibility, our working capital cushion in a range of markets, whether they be seasonally good, seasonally bad, whether they change from today or remain the same. And so, I'm not looking at the rent deferral agreement as something that is – I think what you were doing is it sounded like you were doing sort of projecting back –.

Dennis Worts – vFinance Investments

Right. If you'd had this deal in place in January, I'm just saying that it still would not have been sufficient for you to keep from – you know, you burned 28% of your cash in the last six months, and that's concerning to me.

Tom O'Brien

The rent deferral agreement by itself, applied the way you have, I suspect that the numbers don't –

Dennis Worts – vFinance Investments

It would have still not have been sufficient to keep you from burning your cash. Quarter over quarter, you had an improvement, but at the same time, you lost $4.10 in the last six months. So I'm just asking if this was – was this deal a haircut from what you really were hoping and dying for; you know, because it's still not sufficient to have gotten you out of the hole.

Tom O'Brien

Again, I think what you are doing is not the appropriate way. Maybe I was trying to say it nicely, but you've got to have two elements, and both elements are important. Our operational improvements, our rightsizing the business, all of that that I've gone through is very important to TA and its success, that taken in combination with the rent deferral agreement, that's sort of the package that I'm talking about today. And you just can't, as I think you've tried to do, take one or the other and apply them to different periods. It just doesn't work; it doesn't make any sense. I mean, the numbers – I'm not disputing the numbers. I haven't looked at what you're looking at.

Dennis Worts – vFinance Investments

I just got it off your press release and the 10-Q.

Tom O'Brien

Well, let's assume that your calculation is correct. It's the way that you've ignored one thing and taken on the other that I think is perhaps not the way that I would do it.

Dennis Worts – vFinance Investments

The follow-up question for me was it looks like you go to a $66.8 million increase in payables and other, and your receivables are up $59 million, $59.5 million. Who is the counterparty mostly on your receivables? Trucking companies? And if so, are you having difficulty making those collections?

Tom O'Brien

Largely, the receivables are bank cards, fuel cards. There are certainly some direct customers, and we've had very good experience with collections so far.

Andy Rebholz

Yes, the increases there are much more related to how the fuel price had continued to rise. I mean, you are comparing December 31 essentially or late December with the end of June, and two things – the fuel prices being much higher and also just your level of business the last part of June versus the last part of December is just – you know, there's more volume, both fuel and nonfuel, baked into both of those numbers, both the receivables and the payables. So it's kind of both of those factors.

Tom O'Brien

Okay, we are going to move on to I think our final question.

Operator

We will go to Ari Zweiman of 683 Capital Management.

Ari Zweiman – 683 Capital Management

A question for you – how did you wind up with the 9.6% that HPT took? How was that number arrived at?

Tom O'Brien

There was a negotiated amount between the independent directors of TA and independent trustees of HPT.

Ari Zweiman – 683 Capital Management

Is there a practical limit to the amount of this company that HPT can hold?

Tom O'Brien

HPT is a REIT. We are a big tenant of a REIT. You can't – a REIT generally can't own more than 10% of one of its tenants and still have the rents qualify as good REIT income.

Ari Zweiman – 683 Capital Management

So practically speaking, this is about as much of the company as they could hold under any circumstances?

Tom O'Brien

I think that's right. You know, my REIT knowledge is a couple of years old, but that's the way it used to be.

Ari Zweiman – 683 Capital Management

Okay, that's – and I guess my second question for you is – if this were to continue, do you run into a question where the IRS worries that you are using a taxable device to sort of turn non-REIT income into REIT income?

Tom O'Brien

No. I think in fact that's what the purpose of the REIT law is. And no, I don't have any (inaudible) maybe that's a better question for HPT because I'm not a REIT. But you know; I don't imagine that that's a problem.

Ari Zweiman – 683 Capital Management

Super. Congratulations on the improvements.

Tom O'Brien

That's our last question?

Operator

At this time, I will turn the conference back to Mr. Bonang for any additional remarks.

Tom O'Brien

This is Tom. I want to thank everybody for their participation, and we are looking forward to the next quarter. Thanks a lot.

Operator

That concludes today's conference call. We thank you for your participation. You may disconnect at this time.

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