TravelCenters of America LLC Management Discusses Q3 2012 Results - Earnings Call Transcript

| About: TravelCenters of (TA)

TravelCenters of America LLC (NYSEMKT:TA)

Q3 2012 Earnings Call

November 06, 2012 10:00 am ET


Timothy A. Bonang - Manager of Investor Relations

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

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


Pamela Kaufman - UBS Investment Bank, Research Division

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

Timoty Fronda - Sidoti & Company, LLC

Jeff Geygan


Good day, and welcome to the TravelCenters of America Third Quarter 2012 Financial Results Conference. This call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to the Vice President of Investor Relations, Tim Bonang. Please go ahead, sir.

Timothy A. Bonang

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

Today's conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and Federal securities laws. These forward-looking statements are based on TA’s present beliefs and expectations as of today, November 6, 2012. TA undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made today other than as required by law. Actual results may differ materially from those implied or included in any forward-looking statements.

Additional information concerning factors that could cause our forward-looking statements not to occur is contained in our filings with the Securities and Exchange Commission. Investors are cautioned not to place undue reliance upon any forward-looking statements. I would note, the recording and retransmission of today’s conference call is strictly prohibited without prior written consent of TA.

Now, I will turn the call over to Tom.

Thomas M. O'Brien

Good morning, and thank you for joining our call today. Our results for the 2012 third quarter continued our string of year-over-year EBITDAR improvements. This is the 11th consecutive quarter in which our EBITDAR exceeded that of the prior year. We generated net income of $19 million, or $0.66 per share for the third quarter of 2012, a decrease of $1.8 million or $0.08 a share from the third quarter of 2011. Our 2012 third quarter EBITDAR was $83.6 million, an increase of $600,000 or 1% of the 2011 third quarter.

For the first 9 months of 2012, we generated net income of $35 million or $1.20 a share, an improvement of about $9 million or 33% of the net income we generated in the first 9 months of 2011. We generated EBITDAR of $227 million for the first 9 months of 2012, an increase of about $17 million or 8% over the first 9 months of 2011.

I attribute our 2012 improvements to the capital investments we've made in existing properties during those 2 years, favorable fuel margins, particularly during the 2012 second quarter and our ongoing improvements in customer service delivery, as well as our continued program to acquire travel centers.

These results have been achieved despite only modest trucking business improvements reported by many of our customers in the U.S. economy that may be best described as uncertain, and certainly not exhibiting strong growth. Our results in the third quarter also has been achieved despite the fact that fuel prices advanced steadily upward during the quarter. NIMEX diesel fuel price increased about 15% during that quarter.

As I've said on many previous calls, our fuel margins tend to be pressured when fuel prices rise. Our fuel sales volume on a same-site basis was down 6.8% versus the prior year quarter. We believe that the 2012 third quarter was difficult for most of our trucking industry customers. But little increase in trucking activity there was in the third quarter did not result in the increased fuel sales volumes because of the combined effects of continued improvements in truck engine efficiency and fuel conservation efforts, our continued avoidance of certain lower margin sales opportunities and the fact that a significant number of our fuel dispensers were out of service at time during the quarter as we continued to install new high-speed diesel and diesel exhaust fluids, or DEF equipment, throughout our network.

On a weighted average basis, about 7% of our diesel fuel dispensers were out of service for replacement and installation of DEF during the third quarter of this year as compared to only 1.4% in the 2011 third quarter. We expect that our new dispenser and DEF improvements projects will be substantially complete nationwide by year end.

For the 2012 third quarter, we realized same-site growth in nonfuel revenue of 1.8%, with the same-site nonfuel gross margin declined by about 0.5%. The margin percentage decline from prior year quarter was largely due to a shift in sales mix towards lower margin items into lower margins in tires.

While nonfuel margin as a percentage of nonfuel revenue declined by about 130 basis points, our site level operating expenses as a percentage of nonfuel revenue was managed downward by about 60 basis points on a same-site basis. We continue to actively monitor and adjust our operating cost to sales volumes and customer traffic.

We expect -- we continue to expect to post net income for the full year of 2012 that will exceed the net income we generated for 2011, and I continue to be excited about these prospects for the future.

This is so, despite the early negative impact in the fourth quarter of Hurricane Sandy, from which we suffered only temporary closures of 9 sites, all of which were reopened by November 1.

The third quarter was not TA's best headline quarter, but I'm pleased with our performance in a rough environment. We have made or are making several investments in our business that we expect to contribute to our continued future earnings growth.

Some examples include: First, we continue to opportunistically take advantage of the distressed market conditions affecting specialized real estate. We bought 5 travel centers for about $22 million during the third quarter. And in October, we entered agreements to buy another 3 travel centers for about $14 million.

During July, we acquired 4 travel centers at interstate highway exits in Indiana for about $16 million. Three of these travel centers were previously operated as Petro Stopping Centers by a former franchisee. Also in July, we invested $6 million to buy a travel center in Deming, New Mexico, off Interstate 10, which we have rebranded as a Petro Stopping Center.

In October, we agreed to acquire 3 travel centers for a total of $14.1 million. We expect to close these purchases in the fourth quarter of 2012 and the first quarter of 2013, but they are subject to conditions and, therefore, the terms could be revised or the purchases may not occur.

Second, we'll continue to invest capital to improve our existing sites. As of the end of October, we had installed on-island both diesel exhaust fluid at 164 of our TA, Petro locations. By the end of 2012, we will have both DEF available on-island at substantially all of our remaining locations.

We are building truck repair and maintenance facilities at sites we acquired last year that did not have them. We completed 1 in September and have begun work on 3 others that we expect to open during the first half of 2013. Thus far in 2012, we've also added 4 Starbucks or Dunkin' Donuts quick service restaurant offerings to our sites.

Third, our program to brand our gasoline offerings with low recognized national brands is continuing. By the end of this year, we expect that only 2 of our gasoline stations will be selling unbranded gasoline, and we expect those 2 sites will be branded during 2013. We believe gasoline branding will continue to increase our gasoline sales volumes and margins.

Fourth, we've continued to identify innovative ways to increase our sales and profitability. For example, during the third quarter, we opened our 42nd authorized Verizon Wireless store in our travel centers. These outlets provide some brand recognition, much as the branded gasoline outlets do, and can generate significant returns relative to a modest capital investment.

Fifth, during October, we rolled out our reserve truck parking reservation product, taking a small number of truck parking spaces at 75 heavy-traffic sites available for advance reservation. Customer feedback has been overwhelmingly positive. Having reserved space can allow the drivers to make reservations to better manage their drive time, while staying within their maximum allowable hours of service.

We are working on these and other initiatives, and we will -- and we expect that it will help us continue to grow our business and our profitability.

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

Andrew J. Rebholz

Thanks, Tom. And good morning, everybody. I will discuss some of our key financial results for the 2012 third quarter. In this discussion, I will sometimes refer to same-site results, which are the results at only those sites that we have continuously operated since July 1, 2011.

In the third quarter of 2012, TA generated net income of $19 million. On a per share basis, we earned net income of $0.66 per share. For the third quarter of 2012, TA also reported EBITDAR of $83.6 million, an increase of $600,000 versus the third quarter of 2011. The modest year-over-year decline in net income, despite the increased EBITDAR, primarily resulted from a $1 million increase in rent expense, a $1.1 million increase in depreciation expense and $100 million increase in acquisition and startup expenses related to the sites we have acquired.

The increased rent expense is attributable to the rent related to improvements we sold to HPT and the percentage rent under the TA lease that became payable in 2012 based on increases in fuel gross margin and nonfuel revenues. The depreciation and acquisition cost increases are primarily due to the travel centers we acquired required during 2012.

On a same-site basis, our fuel sales volume decreased by 6.8% in the 2012 third quarter versus the 2011 third quarter. As Tom noted, we believe this decline is due to the increase in use of newer, more efficient truck engines, the ongoing fuel conservation efforts by our customers and the dispenser upgrades and other construction projects at our sites.

Our nonfuel revenue for the 2012 third quarter increased by 4.2% versus the 2011 third quarter. On a same-site basis, nonfuel revenues grew to a more modest 1.8%. Despite this growth, we believe that factors, such as continually uncertain economy, slowed our nonfuel sales growth rate in the third quarter from where it should be in a normal economic recovery.

Our site level operating expenses increased by 2.9% over the prior year quarter. Reflecting our increased number of sites in operation during the third quarter of 2012 versus the third quarter of 2011. On a same-site basis, our site level operating expenses increased by only 0.5% versus the 2011 third quarter.

However, the ratio of operating expenses to nonfuel revenues on a same-site basis improved, declining by 60 basis points from the 2011 quarter to 49.1% in the 2012 third quarter, underscoring what I believe is our continued careful management of operating expenses.

Our selling, general and administrative costs of $25.6 million for the third quarter of 2012 were $3.2 million or 14.4% higher than in the 2011 third quarter. This increase is primarily due to expenses related to legal matters. Unfortunately, our industry continues to be plagued by class action litigations and environmental paperwork litigation, particularly in California. The increase is also due to increased personnel to support sales initiatives, such as the parking reservation and the Verizon Wireless business initiatives, Tom described earlier.

And now, I turn the call back to Tom.

Thomas M. O'Brien

Thanks a lot, Andy. As I said earlier, I'm pretty pleased with our performance during the 2012 third quarter and year-to-date. The economy, fuel pricing and the trucking industry really threw a few challenges our way during the quarter, but we rose to those challenges at nearly every turn.

And with that, Andy and I will try to take questions, operator, if we have any.

Question-and-Answer Session


[Operator Instructions] Your first question comes from the line of Michael Lasser, UBS.

Pamela Kaufman - UBS Investment Bank, Research Division

This is actually Pam Kaufman, dialing in for Michael. We were hoping that you could give us a sense for the financial impacts from the centers that were closed due to the hurricane. And also, is there any impact from the gas shortages from the storm?

Thomas M. O'Brien

You came through a little garbled, but I think you're asking me to talk about the impact of the hurricane in the fourth quarter?

Pamela Kaufman - UBS Investment Bank, Research Division


Thomas M. O'Brien

We had a few sites closed temporarily. It is not yet quantified. The impact, I'm not really ready to talk about that, but there were really -- it was really just a few days, and I think the total number of sites impacted was 9 out of 250. So I'm not expecting any huge surprises there. We managed to stay under power for the most part using some emergency equipment we had staged for that. And I think in almost every case, we stayed -- excuse me, we had product, fuel product, both gasoline and diesel, for the duration.

Pamela Kaufman - UBS Investment Bank, Research Division

Okay, great. And also just a question on, could you give us a sense for the benefits that you're seeing from some of the initiatives that you're implementing, like adding Starbucks to your locations or converting sites to branded gas?

Thomas M. O'Brien

Yes. I'll give you a little bit of flavor on that. Some of the sites -- well, I would say, it's not without exception. But on average, the sites were -- we have converted to major brands from unbranded gasoline, particularly Valero and Shell and some others, we've seen volumes rise anywhere from 10% to 25%. And more modest, but still significant for those sites impact on margin per gallon. Now you've got to keep in mind that our gasoline sales are about 10% of our total. So for example, I'd say that the internal improvement that we're making like that and generally speaking have -- is certainly well into the double-digit returns or IRRs. I think that's what I'm prepared to say about that stuff.


The next question is from the line of Ben Brownlow of Raymond James.

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

The fuel margin, obviously, it's just a very difficult cost environment. How did you manage to post such a good margin given that landscape? Was it competitive? Was it pricing strategy? Was it branded? Just a little bit more color on that.

Thomas M. O'Brien

A little bit of all of those things. I think -- I'm trying to carefully select my words here. Certainly, the branding on the gasoline side, that's an easy one but it's probably the least important of the 3. I think strategies associated with retail margins or non-discounted, I should say, sales of diesel are, today, is something I think that we are able to implement much faster, much more efficiently with a lot more built-in follow-up and ability to track near instantaneous compliance at the site level, better than we were able to -- or was necessary, frankly, just 3 or 4 years ago. And so I think it's a little bit of strategy, a little bit of paying much closer attention, and a little bit of systems that allow us -- that we've developed over the last couple of years within the company, that allow us to do things more rapidly and with greater accuracy.

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

Okay, congratulations on that data point, it's very, very encouraging. The fuel comp, can you detail a little bit on the diesel versus gasoline same-store movement? And the DEF installation, that was roughly 7% of the sites that were impacted. I guess, can you quantify, I know it's difficult, but can you quantify a little bit more where you think that -- how much of the impact on fuel volume that was and the number of sites you expect in the fourth quarter for DEF?

Thomas M. O'Brien

Yes. Well, let's -- I want to clarify a couple of things. One, our installations of on-island DEF, bulk DEF, when we decided how to undertake that process, we decided also to replace diesel dispensers in a lot of locations with newer high-speed pumps that are produced apparently by -- but basically, you have a few -- a number of areas where our pumps were old enough to have been manufactured by companies that went out of business, right? More and more difficult over time to repair and maintain them, and so that's the project. It's bulk DEF and putting in new high-speed pumps. And the reason I say that is because putting in bulk DEF wouldn't necessarily close down your fueling lanes for any appreciable amount of time. But when you add in the replacement of dispensers, obviously, you need to take pumps out of service. And that's the bigger piece of the impact because when pumps are out of service, even if you only do half and half, so you keep half the pumps open all -- at all times, that has an impact on your volume because it has an impact on the -- sort of the traffic and congestion. It's really, it's very, I would say, difficult -- it may be impossible to seriously attribute or accurately attribute the change in volume to any of the factors and specifically that I mentioned. We certainly will yet to see exactly how much is attributable to the diesel pumps, diesel dispenses out of commission, because they're going to be done the end of this year. And my gut is that a lot of the change in volume has to do with the construction projects, but I can't be more precise or certain about that. I will tell you that the market in the third quarter, demand levels and talking to drivers and companies, those that feel good about the demand is going the right way, their way for their business, are, I would say, it feels like 1/3 to 1/2 of them are seeing modest improvements. The rest are flat or modestly down, so spotty. And when you add in the fuel conservation, all of that stuff is impacting the volume.


And the next question is from the line of Tim Fronda of Sidoti & Company.

Timoty Fronda - Sidoti & Company, LLC

Just one question. With the SG&A and the legal matters involved there, I know it's very hard to tell, but do you have any sense of when those matters might be resolved, or how long that will impact SG&A like this?

Thomas M. O'Brien

Yes. Very, very difficult to predict. And I can't obviously talk about specific cases. But one that we're dealing with that's been going on for 5, 6 years to date, another has been at least 3, and appears to be one that is going to play out in several jurisdictions, maybe simultaneously, but perhaps in series. And so it could be some time before any of those are really brought to a conclusion. There's not a lot of certainty at all when and if they'll end. I will tell you that things do go up and down in terms of activity and in all of those cases. And I think the activity during this year seems to be on the high side. And so in the short term, we're not necessarily seeing -- we're not necessarily looking uphill, say, over the next year. We might be, but that's not a conclusion that I've made. Today, it feels like just as likely to be down a little as up a little.


[Operator Instructions] You have a question from the line of Jeff Geygan of Milwaukee Private Wealth.

Jeff Geygan

Can you please talk a little bit about your anticipated 2013 CapEx as well as rent expense? And secondly, I don't recall you making any comments about your natural gas dispenser initiatives. If there are updates, can you please do so?

Thomas M. O'Brien

Well, we've not talked about 2013 capital expenditures. I think it's safe to say that I don't expect that they'll be wildly different from 2012. Now the dispenser projects are coming to an end and the DEF is coming to an end. But we have a fair amount of improvement and -- to do for acquisitions that we've made in the last 2 years. In fact, probably the biggest project that we've got going on is one for a location that we purchased in 2011, which has, frankly, taken us a while to get the shovels in the ground just to work through some area of issues with the city there. But shovels are in the ground now, and it's proceeding. So on the CapEx stuff, not -- I wouldn't see -- I don't see a picture much different than 2012. On natural gas, all I can really tell you there is that we haven't yet reached agreement, but we're working through, and the memorandum of understanding and the exclusive negotiation period is still in effect.

Jeff Geygan

All right. Back to the acquisition front, you've made several -- it seems to be a continuous initiative on your part. Can you provide any color into 2013 what the gross change in locations may be?

Thomas M. O'Brien

I think in 2011, and Andy can help with these numbers, 2011, 2012 we've acquired a total of...

Andrew J. Rebholz


Thomas M. O'Brien

About 18 sites. That pace seems steady to me. We're not seeing a lot in a way of multiple-site acquisition opportunities. So for example, the 3 that we've acquired -- that we've made agreements to acquire in October, are all single-site opportunities, so from 3 separate owners. And that seems like the pace now. Maybe 10 in a year as the average will repeat again. I couldn't see it being more. But when I say "more," I'm talking about 15-ish. But again, every one of this is a separate deal. Every owner needs to be dealt with separately. And there's going to be -- it can be a little lumpy, even though over the past 7 or 8 quarters here, that what we've actually done, seems to be pretty steady.


And now back to you, Mr. Tom O’Brien. Please go ahead.

Thomas M. O'Brien

I just want to thank everybody for their call -- their questions, and wish you a happy election day. We'll be back at the end of -- after the end of the fourth quarter. Thanks a lot.


Okay, thank you. And that concludes our conference for today. Thank you for your participation and for using AT&T Executive Teleconference service. You may now disconnect.

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