TravelCenters of America's (TA) CEO Tom O'Brien on Q2 2016 Results - Earnings Call Transcript

| About: TravelCenters of (TA)

TravelCenters of America LLC (NYSEMKT:TA)

Q2 2016 Earnings Conference Call

August 08, 2016, 10:00 ET


Katie Strohacker - Senior Director, IR

Tom O’Brien - CEO

Andy Rebholz - CFO


Ben Bienvenu - Stephens Inc.

Bryan Maher - FBR & Co.

Brian Hollenden - Sidoti


Welcome to the TravelCenter of America Second Quarter Financial Results Conference Call and Webcast. [Operator Instructions]. I would now like to turn the conference over to Katie stow hacker. Please go ahead.

Katie Strohacker

Thank you, and good morning, everybody. Thanks for joining us today. I will begin this morning's call with remarks from Chief Executive Officer, Tom O'Brien followed by remarks from TA's Chief Financial Officer, Andy Rebholz before opening up the call for question from analysts. Today's conference call contains forward-looking statements within the meaning of 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 8th, 2016, but forward-looking statements and their implications are not guaranteed to occur and may not occur.

TA undertakes no obligation to revise or publicly release 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 these forward-looking statements. Additional information concerning factors that could cause our forward-looking statements not to occur is contained in our filings with the Securities and Exchange Commission that are available free of charge at the SEC's website or by referring to the Investor Relations Section of TA's website, at Investors are cautioned not to place undue reliance upon any forward-looking statements. The recording and retransmission of today's conference call is prohibited without the prior written consent of TA.

And with that, I'll turn the call over to Tom.

Tom O’Brien

Thank you, Katie. Good morning and thank you for joining our call. In the second quarter of 2016 we continued to execute our integration and ramp-up plans for newly-acquired locations and we improved operations at our existing locations. These efforts produced consolidated results that included increases for the second quarter in fuel volume, up 4.9%, fuel gross margin up 5.9%, and nonfuel gross margin up 10.5%. We continue to make appropriate investments in personnel and marketing efforts in support of our newly acquired businesses and internal growth platforms. We've reported net income of $3.5 million, down 6.7% from the prior year, and adjusted EBITDAR of $98.3 million, a 5.4% increase over the second quarter of 2015. There were particular successes of mid which feels like a slightly softer trucking industry backdrop this quarter that give me confidence that we're effectively managing our existing business to exploit growth opportunities.

We overcame a tough year-over-year comparable fuel margin environment, particularly the favorable purchasing environment that existed in April of 2015. In response to lower demand from freight carriers and competition both nationally and locally, we struck a balance between managing volume and per gallon profitability, resulting in $0.182 per gallon of fuel gross margin or $102 million in total, an increase of 5.9% compared to last year. Looking at our nonfuel business, we drove nonfuel gross margin upward and controlled site level operating expenses on both the consolidated and the same site basis. As I mentioned, overall nonfuel gross margin climbed 10.5%. At site level operating expenses grew at a lower rate of only 9.8%. On a same site basis, our success with these metrics was even more apparent. Nonfuel margin advanced and site level operating costs declined. This quarter it was our store and food service departments that contributed most to our consolidated nonfuel gross margin increase year-over-year. However, notably, our truck service revenues and gross profits finished the quarter strong, generating growth in new tire sales in June as we have responded effectively to increased competition in the tier market and early look at July shows continued progress in this area.

Additional we experienced accelerating demand through the 2016 second quarter for our onsite truck maintenance program that extends the reach of our TA truck service into fleet storage yards. Our second quarter 2016 onsite revenues exceeded $1 million in the quarter for the first time with an average of 42 trucks and service during the period. We expect to have a 100 trucks and service by the end of the year. Our convenient store segment represented 12% of our total fuel volume and 15% of our total non-fuel revenue in the 2016 second quarter compared to 4% and 7% respectively during the same period last year and we continued many of the standalone convenient store integration activities necessary to obtain more fully the benefit of these operations.

Our 58 same site standalone convenient stores generated site level gross margin in excess of site level operating expenses of $3.9 million, a 6.5% increase from the 2015 second quarter. You will no doubt note that our same site TravelCenter diesel fuel sales volume declined by 6.4% in the quarter, they attribute about half of that to truck engine and mileage efficiencies, a soft freight environment and in particular pockets of the country that seem to still be feeling additional facts from reduced energy sector activity also contributed. Despite that soft-ish backdrop, we succeeded in balancing volume considerations in margin per gallon considerations and I believe that's reflected in our results. You will also note that we've continued to make investments in personnel and marketing activities to support both our recent growth by way of acquisition and our opportunities to increase business at all of our locations. The increases in SG&A expenses largely reflect these investments. In total, since our acquisition program began, we've invested some $785 million to purchase and improve TravelCenters, standalone restaurants and standalone convenient store s. These investments have produced gross margin in excess of site level operating expenses of $79.3 million for the 12 months ended June or 14% over the amount generated during the 12 months ended March of $69.5 million, which was essentially flat versus 2015.

In other words, the second quarter 2016 is a return to our March towards achieving our ramp up goals and I've been pleased by how things came together in these three months. I continue to expect the contribution from these sites to grow as planned improvements both in terms of capital investments and operating and marketing programs are completed and take hold and these locations further stabilize. I remain confident that our continued ramp-up efforts at recently acquired locations, including or second quarter acquisition of Quaker Steak and Lube, will ultimately show our investments have been at attractive multiples of operating results and that our nonfuel revenue enhancements continue to be positive.

Looking ahead, with respect to fuel margins, based on our July numbers and the first few days of August, we believe we'll be able to balance sales volume and gross margin per gallon in order to achieve the total fuel gross margin that is consistent with the third quarter of 2015. However, as you know, fuel margins and volumes can be sensitive to competitive and market factors and maybe materially better or worse than we now expect. With respect to the acquisition market, while seller expectations on price remain high, we continue to review acquisition prospects. If pricing again becomes attractive, we will likely become more active, but in the meantime, I expect our ramp-up efforts and internal growth initiatives will continue to pay off.

And with that, I'll turn the call over to Andy.

Andy Rebholz

Thank you, Tom, and good morning, everybody. Turning first to our consolidated results, we reported net income for the 2016 second quarter, $3.5 million or $0.09 per share. This compares to net income of $3.8 million or $0.10 per share in the second quarter of 2015. This slight decline in net income generally was because the increase in site level profitability from our recently-acquired sites at this relatively early phase of their ramp-up has not yet exceeded the increased cost we incurred in connection with financing and managing these new businesses, such as rent, interest and SG&A expenses.

We reported 2016 second quarter adjusted EBITDAR of $98.3 million, an increase of $5 million or 5% versus adjusted EBITDAR for the 2015 second quarter. The increase in adjusted EBITDAR over the prior year is due primarily to the sites we have acquired during 2015 and 2016. For the 2016 second quarter versus the 2015 second quarter fuel gross margin cents per gallon increased modestly to $0.182 from $0.18. Fuel sales volume and non-fuel revenue increased 5% and 12% respectively each largely as a result of recently acquired sites. Total fuel gross margin for the second quarter of 2016 increased by $5.7 million or 5.9% over the second quarter of 2015. Non-fuel gross margin for the 2016 second quarter increased by $25.8 million or 10.5% over the same quarter of the prior year, this increase reflects the increased level of nonfuel sales but also resulted from an improved nonfuel gross margin percentage in both of our operating segments on a same-site basis.

Our same-site nonfuel gross margin percentage grew 1.4 percentage points to 55.7% for the 2016 second quarter. Our consolidated results show a small decline in nonfuel gross margin percentage that is a direct result of the growing percentage of our total nonfuel sales derived from our extend alone convenient store s which generally have a lower nonfuel gross margin percentage than our TravelCenter operations.

Our site level operating expenses this quarter increased by $21.8 million or 9.8% over the prior year quarter as a result of the sites acquired since the beginning of the 2015 second quarter. On a same site basis, we reduced site level operating expenses by $2.3 million or 1%. Our selling, general and administrative costs increased by $5.9 million compared to the 2015 second quarter. Principally as a result of expenses related to staffing increases that primarily associated with the 198 convenient stores and 51 standalone restaurants we acquired since the beginning of 2015. We also invested greater amounts in our marketing and advertising activities in support of our newly-acquired businesses and brands. We expect our third quarter 2016 selling, general and administrative expense to show less growth over the prior year than was seen 2016 second quarter. Our rent expense increased $11.4 million compared to the 2015 second quarter primarily due to the transactions we completed with HPT in 2015 as well as from sales to HPT since the second quarter of 2015 of improvements to lease sites which combined generated $415 million in net proceeds to us.

As of June 30, 2016 the run-rate of minimum rent to HPT was $67 million per quarter. Our interest expense for the 2016 second quarter increased by approximately $1.7 million as compared to the 2015 second quarter principally as a result of our October 2015 issuance of $100 million of unsecred senior notes due 2030.

Looking at our results by segment in the TravelCenter segment, our site level gross margin in excess of site level operating expenses for the 2016 second quarter was $120.7 million, an increase of $1.2 million from the 2015 second quarter. Fuel sales volume declined and non-fuel revenues were essentially flat for reasons previously discussed. The impact of these and the related fuel margin decline were more than offset by increased non-fuel gross margin and our control of site level operating expenses.

Similar metrics were experienced on a same site basis. In our convenient store segment fuel sales volume increased 220% to 66.9 million gallons for the 2016 second quarter over the 2015 second quarter. Non-fuel revenues increased 144% to $77.4 million. Our site level gross margin in excess of site level operating expenses for the 2016 second quarter was $10.6 million which represented growth from the 2015 second quarter of 210% or $7.2 million attributable primarily to acquisitions we completed in the second quarter of 2015 through the second quarter of 2016.

On a same site basis for our convenient store segment, 2016 second quarter fuel sales volume declined 6% and non-fuel revenues declined 2.8%. Despite this our site level gross margin in excess of site level operating expenses on a same site basis for our convenient store segment for the 2016 second quarter improved by 6.5% as we managed our fuel and non-fuel margins as well as site level operating expenses. Our corporate and other site level gross margin in excess of site level operating expenses in the second quarter was $3.1 million, an increase of $2.5 million that principally is attributable to our acquisition of Quaker Steak & Lube in April of this year.

All in all, I think our second quarter numbers are showing the positive impact of our ramp-up and integration activities. I am particularly pleased that the challenges experienced during the quarter seem to have been substantially overcome by this ramp-up program, along with our internal growth initiatives and operating cost controls.

And with that, I'll turn the call over to the Operator for questions.

Question-and-Answer Session


[Operator Instructions]. Our first question comes from Ben Bienvenu of Stephens Inc. Please go ahead.

Ben Bienvenu

Tom, in your prepared comments you noted the strength you've seen quarter-to-date in July around fuel margins, while I know it's early in the quarter, you also made some comments around how you guys are thinking about balancing gallons versus margin, and I'd be curious, we've seen the industry price rationally over the last 10 years or so and seen margins move up. How should we be thinking about over the longer term the baseline fuel margin that you guys think you can achieve and maybe how you guys are thinking about achieving that internally?

Ben Bienvenu

I think that -- we've talked a little bit about fuel margin this quarter differently than perhaps we have in past quarters. And part of the reason for that is that, you know, I've come to sense a -- perhaps an overweighting or an overemphasis on margin per gallon, which is fine, obviously that's important, but it's margin per gallon times volume that puts money in the bank and particularly in this most recent quarter, second quarter, we've had opportunities and challenges that go to balancing the two of them together, right? And there's a ton of variability and variables to consider. Not just local and national competition, which might in certain market circumstances, lead us to conclude that we'll trade volume for margin or in different market circumstances, we'd trade margin per gallon for volume, all in the context of the impact that balance may have on our nonfuel business, right?

And so I'm happy to have what, for the better part of the last year or five quarters, you know, very strong margin results, that's coming out a little odd but I'm happy to have that behind us to the extent that those made comparables tough. Obviously I'd rather have those days than not. We appreciated it when it was going on, but what I'm trying to say with regard to going forward is that within a band and the volume here in the second quarter is down same site vis-à-vis volume, a little over 6%.

Within a band that -- I don't know, think about it as plus or minus 10% of volume, I think if it got outside that range, you know, I would think a little harder about it than we do today, so that's the volume side. And on the margin per gallon side, I think that where we are or have been in the last quarter or two and what we've seen in early July suggest, no significant change in the absolute amount of that and no significant change in direction. That's a long way of answering that question. I think you can probably appreciate why it's so difficult. There are many variables and a lot of futures involved in answering your question, and I hope that gives you some guidance.

To reiterate, what we're saying about what we've seen so far in the third quarter is that I don't have reason to believe, sitting here today, that the mix of volume and fuel gross margin per gallon will be significantly different in the third quarter versus third quarter last year.

Ben Bienvenu

And then shifting gears a little bit to SG&A, Andy, in your comments you noted that 3Q should grow at a slower clip year-over-year than what we saw in 2Q. I'm wondering, maybe asking a little bit differently or thinking about it differently, in the absence of acquisitions, which I realize that's a perfect universe and you guys are typically acquisitive, but in the absence of that, what should we think about underlying SG&A dollar worth to look like year-over-year?

Tom O’Brien

This is Tom. I think maybe the best way to put the SG&A growth in context is to talk about apples and apples or apples to apples. If you look at the measures that we talked about, the same site -- excuse me, the acquired site growth in gross margin over operating expenses, let's look at the last 12 months into June, that's 14% over 2015, right?

If you look at those same measures in SG&A, the growth is about double what we've seen in SG&A over the that longer period of time. And so I think that Andy's comments about the growth in SG&A in the second quarter sort of being higher than the growth we expect in the third quarter, in the context of those other metrics that may give you some guidance.

Ben Bienvenu

And then the last one for me, if I could, you guys publicly responded to an offer to buy the company and to the extent you could talk about it or are willing to talk about it, you know, your rebuff of that offer, I guess, speaks to your confidence in the business going forward given the premium of the offer relative to where the stock is trading at the time of the offer, and I'd just be curious to hear about how you and the Board thought about that in the context of how you think about the business and the opportunity there, that would be helpful. Thanks so much for taking my questions.

Tom O’Brien

Sure. And I don't mean to fence words with you, but we did not receive an offer. We received a letter in December. I think that what we have to say about that is, in our press release that we made in June after an article was published in a national newspaper, and that is that we believe in our business plan. We believe that it's going to create value for shareholders, although recognize that there is a time element to that creation, and I think you're seeing that. We've talked enough about the ramp-up so you can understand what that means, that time element means.

And in that regard, that is, that we've got the plans and we've got the management, we've got the resources to create that value, we believe, in that regard, we agreed with commentary in that letter that we received. But you know, an invitation to talk about things and an offer are very, very different, and between the time of our response to that letter and the time of the press release that we put out in June, we heard absolutely nothing from the author of that letter.

So, it's I guess, an interesting exercise to think about it, but it's not one that, you know, we thought about for the first time in December. We're still very confident in our abilities and look forward to continuing to show those abilities to the marketplace.


Our next question comes from Alvin Concepcion from Citi. Please go ahead.

Unidentified Analyst

This is Joe River [ph] for Alvin. I was just wondering if you could give any color on what you're seeing in the competitive environment, and if you've seen that get more intense in the recent quarter? Thanks.

Tom O’Brien

Well, we've got a few competitive environments, but by far of course the largest is in the truck stop segment, and haven't really seen much change. You know, lots of activity, lots of, if you will, competitiveness, on our account and on the account of others that participate in that market, but stepping back, no significant change on the national basis.

In the convenient store business, you know, that changes every day in different markets and we're in a lot fewer states in the convenient store business. Some of those markets -- and, again, this is convenient stores basis compared to TravelCenters based, it's a lot easier to build a convenient store , for example, and so we've seen a couple of markets where there's been an influx of new competition, and that's caused some strategy changes and, frankly some redoubled efforts in those markets on our part, but by and large, not a trend one way or the other in terms of more or less competition in either of those spaces.


Our next question comes from Bryan Maher from FBR & Co. Please go ahead.

Bryan Maher

Couple of questions¸ so I just want to make sure we're doing the math here right and you guys were helpful with this last quarter but you have the $785 million in purchases and improvement today yielding $79.3 million of profits, of revenue in excess of expenses, so kind of roughly EBITDA. If we were to put a fixed multiple on that, we come up with like 130 million kind of a stabilized number, so about 50 million to go of upside on the acquisitions and improvements to-date. Does that sound about right to you?

Andy Rebholz

Yes it's a 130.8 million, but yes. You know, it's a number that I feel is both achievable and a number that everybody here is focused on. I think that 14% year-over-year -- excuse me, sequential year ended June, if you will, 12-month ended June versus 12-month ended March, is a notable figure after, frankly, flat sequential performance in 2015 versus 12 months ended March. You know, that comparison had some noise in it because of tough comps in fuel margin and relatively higher impact of -- negative impact from energy-affected sectors, but we've wrestled those -- we're past the fuel margin tough comps and the energy sector stuff. We've wrestled with that very well in the second quarter versus the first quarter to the point where you look at the same site stuff, which is kind of where it shows up and we don't say it specifically, but a driving nonfuel margin and reducing expenses is -- that's a reflection of tough work.

So, you know, I think the headline number for me is that 14% growth, and that, frankly, exceeding, you know, the SG&A growth that I mentioned earlier, and it appears to me, from where we're sitting right now, that math that you did that resulted in 131 million, that's a goal, and I think that's achievable.

Bryan Maher

And that kind of segue into my next question on the site margins which again on a same site basis of 55.7, were pretty impressive. Obviously the TravelCenters are 57.3 and then the C-stores kind of drag it down with the 32.3 for the quarter. Kind of two questions here. One, the 57.3 on the TravelCenters, is that kind of hitting the math is what you can do on the same site there, and then on the C-stores, you know, do you have the 32.3% where can that be driven higher to?

Andy Rebholz

With 57.3 is not the highest we've seen. It's a healthy number. I'm trying to answer your question and not let any of my operating folks off the hook here. You know, I don't know that it would be prudent for me to guide that particular percentage higher. That's a healthy number. I think on the convenient store side, as we add food service into more and more sites and, you know, that takes a little time, right? Because in most cases -- well, in many cases we're talking about a potential to add branded food service, I think that number will grow, that's sort of in addition to the stabilization impact which of course, you know, in early going, you've got all of the expenses and you've got to build the business back. I would suspect that growth in that number is, if you will, probably behind in time to growth in that bottom line number in your first question, but I do think there is potential there.

Again, especially in food service as we work through adding those units, something which, frankly, you know, adding food service to convenient stores is very popular thing for convenient store operators these days to talk about, but it's something that we've been doing in the truck stop space for 30 years. We operate almost 800 restaurants, most of which we operate as a franchisee. In fact, we might be the largest multiunit franchisee operator in the country. So I think while there's a lot of good things to come there, where we have the opportunity to add food service, but we'll be likely behind the growth in that bottom line number.

Bryan Maher

And then just lastly, when it comes to kind of how TA is being valued, I think it's frustrating on our side and I would like to know how you think about TA trading pretty consistently six times EBITDA, you know, all baked in with the leases and what-have-you, not the operating capital leases, yet you sit here and look at ST [ph] and TASY [indiscernible] trading at 10 and 15 times EBITDA and what is arguably an easier entry business of C-stores compared to TravelCenters, which are of significantly more capital intense to build and get permitted. How do you think about that he went/EBITDA disconnect between yourselves and those loose comparables?

Tom O’Brien

Well, I don't want to make too much comment on our competitors and their -- or quasi-comparable companies and their trading multiples, but for TA, I believe that the path that we're on is the one that is most likely to allow the marketplace to understand the value that we've created or understand more fully. I think if you look back when we reported first quarter versus that measure that we've been talking about a lot, gross margin oversight operating expenses, was essentially flat over 2015, and I think that with that, it may have been difficult for the market to understand beyond, you know, me expressing confidence in our abilities to ramp up, you know the extent to which that might ultimately be manifested.

I think the second quarter here is a much better, better look, that is, that 14% growth, but I believe that we've got more to show and perhaps the market is waiting for that. I guess maybe think about it in terms of baseball, it's early innings. We got a guy on in one out and we've got to move them forward and then bring them home and that's what we're focused on doing.


[Operator Instructions]. Our next question comes from Brian Hollenden from Sidoti. Please go ahead.

Brian Hollenden

Do you expect site level operating expenses to fall from second quarter levels after all the recent acquisitions are fully integrated?

Tom O’Brien

No I think the best way to think about that integration activity because site level operating expenses includes things like utilities, labor, real estate taxes among others and when a new facility is opened you’ve got to have lights on 100% of the time you’re open, you got to have at least have one employee, 100% of the time you’re open and you got pay real estate tax whether you’re open or not. So that’s what we’re talking about and when we think about the impact of ramp-up -- your expenses are loaded immediately if you will and you’ve got to build the business that -- building process in a short term time sometimes comes with some disruption best example would be construction, significant improvement at the site depends on keep the lights, real estate tax meter is running you need labor you can't -- it's difficult to drive business when you think about in simple terms like volume when you’ve got equipment lying about the site and looks like it's under renovation.

So I hope that answers your question, when we talk about ramp-up we’re not talking about filling that gap that we talked about with Brian just a bit ago, that gap between the $79 million of gross margin and in excess of site level operating expenses and the $131 million or whatever that number is that Brian was talking about. We’re not talking about closing that gap with expense reductions. We're talking about building a business on the gross margin level, revenues first and then gross margin to close that gap.

Brian Hollenden

And then one follow-up, so what's driving your same site nonfuel revenue drop from the C-stores?

Tom O’Brien

In the C-stores, you know, I think that's probably a reflection of the same site volume change, but I think that the thing to remember there is, you know, we haven't messed with the definition of same site, but we've got 220-some odd convenient stores and there's 58 in the same site. On the one hand it's good that nonfuel revenues did not decline as much as same site volume, and also very good that bottom line number increased as a result of our management of things in there, but just like the negative you point out, the positives I'm pointing out probably not fair to sort of extrapolate to the total number of convenient stores in the portfolio today. So I guess what I'm saying is, take the same site convenient store stuff with a grain of salt because that's about a quarter of what we actually manage today.


This concludes the question-and-answer session. I would now like to turn the conference back over to Tom O'Brien for any closing remarks.

Tom O’Brien

Yes. I just want to thank everybody for your continued interest in TA and look forward to talking to you again after the third quarter.


The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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