TravelCenters of America's (TA) CEO Tom O'Brien on Q4 2016 Results - Earnings Call Transcript

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TravelCenters of America LLC (NYSEMKT:TA) Q4 2016 Results Earnings Conference Call February 28, 2017 10:00 AM ET

Executives

Katie Strohacker - Senior Director, IR

Tom O’Brien - CEO

Andy Rebholz - CFO

Analysts

Alvin Concepcion - Citi

Bryan Maher - FBR & Company

Ben Brownlow - Raymond James

Brian Hollenden - Sidoti

Operator

Good morning and welcome to the TravelCenters of America Fourth Quarter Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Katie Strohacker, Senior Director of Investor Relations. Please go ahead.

Katie Strohacker

Thank you. Good morning and thank you for joining us. We will begin today’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 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, February 28, 2017, but forward-looking statements and their implications are not guaranteed to occur and they 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, www.sec.gov or by referring to the Investor Relations Section of TA’s website, at www.ta-petro.com. 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, just a reminder.

And now, I’ll turn the call over to Tom.

Tom O’Brien

Thank you, Katie. In the 2016 fourth quarter, we reported a net loss of $6.5 million or $0.17 a share, compared to a net loss of $1.6 million or $0.04 a share for the same period last year. The change in net loss is due primarily to increased depreciation expense, related to new locations and other assets recently placed in service. Generally speaking, our growth strategies outpaced the negative impact on diesel volume of fuel efficiency gains, relatively soft freight environment and increased competition.

In addition, there were a couple of discreet items worth calling out. The $8 million retroactive adjustment for biodiesel fuel tax credits recognized in the 2015 fourth quarter did not recur in 2016 as was expected and previously disclosed. That said, we made up for most of this with our other strategies, not the least of which is related to better bulk purchasing of biodiesel during the year, and these strategies produced an $0.189 per gallon fuel gross margin about in line with the $0.19 per gallon reported last year.

As you may know from reading our SEC filings, we are currently engaged with FleetCor and Comdata which provide truckers with fuel cards to make purchase at our locations. Because that litigation is pending, I have been advised by council, not to answer questions about it. But, I think it is important for you to understand that we believe FleetCor and Comdata have inappropriately declared our merchants agreement with them, which by its terms goes to January 2022 in default, and as of January 1, 2017 they’ve unilaterally increased their fees that they withhold from our transactions by somewhere between $850,000 and $1 million a months, an action we also believe is inappropriate for various reasons.

We’re incurring legal fees another costs associated with this litigation. And during the fourth quarter of 2016, the related expense was about $750,000. While we think we’re going to prevail in this litigation, that doesn’t mean we’re going to prevail. The trial is now scheduled of April but my experience is that trials dates are often postponed, and I can’t really say more about this litigation at this time. We were able to manage through these headwinds during the fourth quarter, in some cases outpacing them in key operating areas.

First, growth in our consumer gasoline business at our convenience stores and our travel centers. Fourth quarter gasoline volume grew 9% on a consolidated basis and 2.9% on a same-store basis. Our travel centers same site gasoline volume increased 4.8% this quarter. We believe this partially reflects our enhanced marketing efforts and targeted offerings to track more auto consumers. Gasoline now comprises 25% of our total fuel volume. Second, growth in our nonfuel business. We grew nonfuel revenue by 5.8% and nonfuel gross margin by 6.5% during the fourth quarter. Third, good operating expense management. Site level operating expenses grew less than nonfuel gross margin, increasing only 2.2% during the 2016 fourth quarter. On a same site basis, we trimmed site level operating expenses by 1.8%.

These factors contributed to consolidated EBITDA of $24.1 million, an increase of 13.9% and we’re encouraged by this result. There was some softness in same-store nonfuel revenue, which grew by 0.2% and same-store fuel volume, which declined due largely to the impact of fuel efficiency we’ve discussed on prior calls.

In regards to completion, our major chain competitors added more than 90 locations to the networks in 2016, most of them new to the industry. While we continue to believe our offering provides value to customers in ways our competitors cannot match, having new capacity in the market, especially when things like dramatic fuel efficiency gains are weighing in on demand, it’s a challenge that must be overcome.

The fact that we were able to drive revenues and manage site level expenses to the degree that we did in the fourth quarter is an indication that our current strategies are moving us in the right direction.

Before turning to our growth programs, I’d like to provide some color around certain expenses and expenditures that occurred in 2016 that may be helpful to you as you consider our business.

First, as we’ve previously told you, TA’s unit expansion has contributed to growth in its selling general and administrative expenses, which were $139.1 million for the full year of 2016, a $17.3 million or 4.2% (sic) [14.2%] increase over the amount for the full year 2015. We estimate that approximately $10 million of this increase can be attributed to unit growth, including such items as marketing, advertising, regional management personnel and centralized corporate function support costs.

Second, looking at our capital investments. Non-unit growth capital projects in 2016 totaled $174 million compared to lower amounts in 2015 and prior years. We believe 2016 was the right year to make these investments, given both, our reduced emphasis on unit growth and increased focus on growing existing businesses. These projects spanned departments, reflecting our belief that there are opportunities upon which to capitalize within each of them. For example, we invested about $30 million in fuel related equipment, a large portion of which was targeted to allow us to capture benefits of buying bulk biodiesel, and we’ve already felt some of the positive impact from those investments. We invested about $33 million in our stores, principally to broaden the reach of the Minit Mart brand name into 22 additional travel centers, to reimage 102 stores, including 12 reimagings designed to present 4-wheel motors customers with a more familiar retail exterior feel for the offering, and some of the final expansions of our diesel exhaust fluid offering to include 100% of the lands at all but a handful of our locations.

We invested about $21 million in our restaurant offerings, the biggest pieces of which included the addition of 14 quick service restaurants and the rebranding of three full service restaurants, the names like Fuddruckers and Black Bear. We invested about $28 million in truck service, which I think is a very important part of our growth strategy, principally for equipment designed to support our growing mobile maintenance initiative, our expanded service offering and to support our emergency roadside service group.

We also invested about $29 million in energy-efficient building equipment and the LED lighting, which improves not only guest satisfaction and safety but has the added benefit of reducing energy and maintenance costs. Most of the rest of the capital investment was in IT, in support of future efficiency and automation across many parts of our business.

Turning now to growth opportunities for TA, our biggest opportunity in the nearer term remains execution of our unit growth integration and improvement plans. We’re making progress here. Our gross margin in excess of site level operating expense for 2016 at our recently acquired locations increased by 9% over that same measure for the 12 months ended September 30, 2016. The 2016 amount is fully $29 million of the same amount for 2015. Full year 2016 results for this group of sites was about $100 million versus $92 million for the 12 months ended September, 2016, and $71 million for 2015. I feel good about our current growth ramp-up of newly added units and expect further benefits from their continued seasoning.

We’re currently undertaking several internal growth initiatives that we believe have the potential to grow profitability and then are geared toward a combination of one, developing and deploying new products and services to be delivered to existing customers; and two, delivering existing and new products and services to newly acquired customers.

I think the one that is the newest and has the most potential for us over time is the TA Commercial Tire Network, which we announced during the fourth quarter of 2016, and which quite literally is just getting underway. Recent activities include new or replacement contracts with most of the largest commercial tire manufacturers in the United States and assembling staff dedicated to this initiative.

Previously, we were largely limited to selling installed tires only at our sites and in emergency roadside situations. Now, generally speaking, we sell tires installed or not, nearly everywhere, at our locations through our mobile maintenance and emergency roadside programs or delivered directly to our customer’s locations. In addition to expanding the channels through which we may sell, we’ve also expanded the variety of tires that are available to customers, and achieved product cost savings that in most cases have allowed us to both simplify and lower pricing to customers and maintain a reasonable gross profit margin per tire. We’ve expanded our sales team to include a dozen new sales representatives with a significant amount of experience in direct sales of tires, with both resellers, dealers and with all -- excuse me resellers, dealers and OEMs. Their target customers are both existing, over the road fleet customers as well as fleets that have not historically frequented travel centers like ours.

We believe that being nationwide and having existing relationships for fuel with most of the largest trucking companies in the U.S, puts us in a unique position to compete with smaller regional or local tire resellers. We think that the TA Commercial Tire Network is the largest independent commercial tire dealer in the United States, most certainly by number of locations and yet today, sells only a small percentage of the total commercial tires sold in the United States. Because of the operating leverage inherent in TA’s business, I believe that a small capture of market share can lead to dramatic positive impact on TA’s EBITDA, all other things being equal. It’s very early in this process and one month does not make a trend, but we’ve already seen growth in tire unit sales in January 2017 over January 2016 of almost 10%, following more than a couple of years of decline in that measure.

We also believe that a modest increase in spending for marketing activities and the continued focus on our newest offerings like RoadSquad OnSite and Reserve-It! parking may lead to increased operating results.

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 a net loss for the 2016 fourth quarter of $6.5 million or $0.17 per share; this compares to a net loss of $1.6 million or $0.04 per share in the fourth quarter of 2015. This increase in the net loss generally was due to increases in depreciation and amortization expense, and to expenses related to financing and managing our newly acquired and developed locations.

We reported 2016 fourth quarter EBITDA of $24.1 million, an increase of $2.9 million or 13.9% versus the 2015 fourth quarter. The increase in EBITDA over the prior year can be traced to increases in nonfuel gross margin for both same sites and newly acquired locations, partially offset by increases in site level operating expenses due to newly acquired locations and to decreases in fuel gross margin that were due primarily to declines in fuel volume.

For the 2016 fourth quarter versus the 2015 fourth quarter, fuel gross margin on a cents per gallon basis was $0.189 compared to $0.19. Fuel sales volume decreased 1.6% as a result of same site fuel volume declines, primarily attributed to fuel efficiency gains by our commercial diesel customers, the softer trucking freight environment, and increased competition.

Nonfuel revenues increased 5.8%, with almost all of the $26.2 million increase coming from sites acquired since the beginning of the 2015 fourth quarter.

Total fuel gross margin for the fourth quarter of 2016 decreased by 2.1% from the fourth quarter of 2015 due primarily to declines in fuel volume and the lack of the federal tax credit catch-up adjustment Tom previously mentioned. We employed purchasing and other strategies that allowed us to make up for all but $2.2 million of this.

Nonfuel gross margin for the 2016 fourth quarter increased by $15.7 million or 6.5% over the same quarter of the prior year. This increase 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 80 basis points to 54.2% for the 2016 fourth quarter, reflecting the positive impact of our strategies for purchasing and pricing goods for resale and certain marketing initiatives.

Our site level operating expenses in the fourth quarter increased by $5.1 million or 2.2% over the prior year quarter as a result of the sites acquired since the beginning of the 2015 fourth quarter. On a same site basis, we’ve reduced site level operating expenses by $4.1 million or 1.8%.

Our selling, general and administrative costs increased by $2.9 million compared to the 2015 fourth quarter, principally as a result of increased personnel costs, which resulted from increased field management and corporate staffing required to support the growth of our business as well as planned increased spending on marketing and promotional activities, and the litigation related costs Tom referred to earlier. The activities in support of our newly acquired businesses and brands now are largely staffed.

Our rent expense increased $5.4 million compared to the 2015 fourth quarter, primarily due to the sale leaseback transactions we completed with the HPT in 2015 and 2016 under our transaction agreement as well as from sales to HPT since the beginning of the fourth quarter of 2015 of improvements to leased sites.

Our fourth quarter 2016 depreciation and amortization expense was $27.8 million which jumped a bit from the third quarter of 2016, largely from assets placed in service in the second half of the year that Tom mentioned earlier.

Our net interest expense for the 2016 fourth quarter increased by approximately $1 million as compared to the 2015 fourth quarter, principally as a result of our October 2015 issuance of senior notes.

Looking at our results by segment, in the travel centers segment, our site level gross margin in excess of site level operating expenses for the 2016 fourth quarter was $115.3 million an increase of $2.7 million or 2.4% over the 2015 fourth quarter, resulting primarily from the positive impact of TA’s strategies for pricing, purchasing and marketing initiatives, offset somewhat by a decrease in fuel gross margin, resulting from volume declines in the previously mentioned 2015 tax credit benefit to fuel gross margin in the fourth quarter of 2015 that did not recur in the fourth quarter of 2016.

In our convenience store segment, our site level gross margin in excess of site level operating expenses for the 2016 fourth quarter was $9.5 million, which represented growth from the 2015 fourth quarter of 97% or $4.7 million attributable primarily to acquisitions we completed since the beginning of the fourth quarter of 2015. Our 181 same site standalone convenience stores generated site level gross margin in excess of site level operating expenses of $7.7 million, an increase of $2.9 million or 59% from the 2015 fourth quarter, all of which can be attributed to the continued ramp up of those sites, our success in the nonfuel business and solid operating and expense control.

The site level gross margin in excess of site level operating expenses in the fourth quarter for corporate and other was $3.2 million, an increase of $2.2 million that principally is attributable to our acquisition of the Quaker Steak & Lube restaurant business in April of 2016.

All-in-all, our fourth quarter results are showing good progress from our unit growth integration and ramp up activities and our internal growth programs. Heightened expenses associated with these activities impacted our results as did the unusual items Tom pointed to, but we believe there is significant potential going forward as our investments and strategies continue to mature.

And with that, I’ll turn the call over to the operator for questions?

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Alvin Concepcion with Citi. Please go ahead

Alvin Concepcion

Hi. Good morning and thanks for taking my questions. You walked through some various internal investments made in 2016 to drive some incremental returns. I’m wondering how much more investment is there to come in 2017 and any of that needed for your commercial tire business? That’s the first part of that question. And related to that, would you expect the return on these investments to behave more like when you acquire a convenience store, which I think you start to see stabilized results within a year or is it more a like a travel center, which takes about three years?

Tom O’Brien

Yes. The investments in 2017 are not going to be as high as those in 2016. I felt like, with the acquisition program that had slowed down, and it was a good time to make investments in the businesses that we have. And I think that remained -- and this isn’t mission on my part; we may have been just in time for increases in the level of economic activity generally. That said, we put the pedal to the metal, if you will, in 2016. And I don’t think 2017 will approach that 170 some odd million dollars of investments going forward.

In terms of what’s in there, there is really not a lot associated with the TA Commercial Tire Network, and I think that was part of your question. That network, if you will, uses our existing sites and the process that we’ve undertaken includes -- at least initially included achieving some flexibility in existing contracts with tier manufacturers, adding contracts with new tire manufacturers, then it was identification of and hiring of a direct sales team. That part is done. And now, we’re in the midst of rolling out training to sites. There may be some modest amount of capital associated with it but it’s not very large.

As to when those investments are likely to pay off, I do think that there is some ramp-up period. I don’t expect that it will be as long as what we see in when we buy a truck -- excuse me, a truck stop. That ramp up period for truck stop is pretty long because half of our customers, if you will, by number. Our truck drivers and it takes a while for routes and habits to be changed. So, not as long as three years, but there is a good period of time in there when -- to stabilization and particularly for new restaurants and things like that, call it a year. I think that answers all your question. But if I missed any, let me know.

Alvin Concepcion

It was great. That was it for me. Thank you very much.

Operator

The next question comes from Bryan Maher with FBR & Company. Please go ahead.

Bryan Maher

Hi, Tom. I’m not sure if you can answer this or not, because I know you want to kind of stay away from this litigation stuff. But on the periphery, is there the potential to be able to recoup these extra fees that you’re paying as we speak?

Tom O’Brien

I would say that is a possibility. But, like anything in litigation, it’s -- we just don’t know how it’s all going to work out…

Bryan Maher

Can you give us a little color or backstory on how this came about?

Tom O’Brien

I really can’t say much more, Bryan. I would like to, but I can’t.

Bryan Maher

All right. So, I’ll move on to my next question then. I think you guys said in your prepared comments, and correct me if I’m wrong, that 90 competitive sites opened in 2016. Is that right?

Tom O’Brien

Yes.

Bryan Maher

And is that Pilot/Flying J or Love’s or a combination of those two and others?

Tom O’Brien

It’s Pilot/Flying J and Love’s; it’s based on the information that we have from being out in the market, and they’re not public companies. So, they don’t have count up. But I think the way to think about that is 90 sites from our two largest competitors, probably the three of us combined have 1,100 sites. I mean, you can do the math, what does that work out to be 7% or 8%. But, not all of those are near our sites. And it’s important to recognize that -- I think we’ve taken a different growth strategy. Our focus has been on nonfuel and customer service and like. I think, I’m very comfortable with the way that we’ve approached growth. And I think we’re going to have success with it.

Bryan Maher

And then, just lastly on the commercial tire business. How big can that be? I mean, you’re doing X now, kind of end up being 3X or 5X of what you’re doing now as far as tires; can you put some quantification to that?

Tom O’Brien

Yes. I think, and it depends on a lot of things, as you know. There is a lot of ways to count stuff. But, I think that tire units that we sell are around 2, maybe a little bit more percent of the total market in the United States. I think that the one I said small capture of market share can have dramatic impacts, going from let’s say the numbers 2% to 3%. And conceptually that doesn’t seem that difficult. Obviously there’s a lot of work, because that is an enormous amount of tires. But, and I’d say that in hopes of giving you some context of what work is to be done, it is a new thing for us, to be honest with you. I think we’ve got a great team. I think they’ve done very, very good strides with both existing customers and customers that have not historically been ours. I think having nationwide coverage, as we do, gives us some advantages over, as I mentioned, local and regional folks for which customers in lot of cases have to deal with multiple parties depending on which areas of the country those tire dealers, those parties cover. And so, I think we have a lot of advantages.

As to where this can go, I’m not ready to make commitments about that, but I think among all of the analysts, you’re the king of calculating our ramp up potential, right, on the new units. Over time, and I don’t mean next year or the year after that, may be even year after that, the tire business has potential to add something of the magnitude of what we have left in the ramp-up.

Bryan Maher

That’s helpful. And I’m sorry if I missed this, but have you guys ever disclosed how much dollar amount of tire sales you do each year?

Tom O’Brien

We have not.

Bryan Maher

Would you be willing to?

Tom O’Brien

Look, the answer is I would like to because I like everybody to understand better, but I can’t because I don’t want our competitors to understand better. And I think it’s better all around if we don’t.

Operator

The next question comes from Ben Brownlow with Raymond James. Please go ahead.

Ben Brownlow

Good morning, Tom. On the competitive locations that have opened, just following up on the previous question. Can you discuss a little bit more color around kind of the impact to sales, how many sites have been impacted and what you’ve seen over the following few months after that opening, and do you see a slow rebound in that -- in those same-store sales?

Tom O’Brien

Well, it’s a little all over the board. Not every site that has opened is near or sort of an equivalent alternative in terms of location to one of our sites. So, it’s not the entire population. I think that makes sense because you want to -- how I say this? If you’re a competitor in a particular market place, you may not always want to go ahead to head with the most formidable of your competitors, if you follow me.

And depending on the location and visibility and things like that, the impact can be -- also depending on the mix of fuel that we sell between fleet customers and non-fleet customers or independent truckers. The impact can be near immediate or more gradual. Meanwhile, other things like what we do in terms of fuel pricing strategies have an impact on it. So, it’s a very long way to say, there is some impact but it’s all over the board. And I would be kidding you if I told you I could completely quantify it. What we can do is evaluate the strategy that we’ve taken and reevaluate it. And that strategy is as you know, we’ve opened some new units ourselves. So, we’re not planning to finger at anybody really. But, it’s been more limited between development projects and turning what was less than full service truck stops into full service truck stops, might be five over last two years, may be six. But focusing on customer service, nonfuel offering, that’s what I think is the right strategy for us and the one that we’ve evaluated and are going to continue.

Ben Brownlow

That makes sense, and thanks for all the color. And just one, last one for me. On the SG&A, you broke out the $10 million of the 2017 year-over-year increase their related to growth. When you back that and you look at that 6%, near 6% growth rate, can you talk about the drivers there, how much of that was just more of a litigation change year-over-year; I mean how should we think about 2017?

Tom O’Brien

Yes. There is a little bit of that in there. But, most of the sort of the leftovers, what are that, $7.3 million, relates to, what I consider to be a pretty modest increase in marketing and advertising. One of the things that’s part of our strategy of driving a nonfuel revenue is attracting new customers; and those include truck drivers, but we’re not ignoring the consumer as well. That’s a part of what we’re doing in terms of reformatting our -- what we used to call travel stores and are called Minit Marts in the truck stops, appealing to that automotive customer and making expenditures as if we’re marketing a business directly to them as well as what we’ve historically done, which is focus most of those marketing dollars on truck drivers. So, it’s -- that extra, if you will, 7ish million dollars is intended to in itself, you can think of it as part of the growth program.

Operator

The next question comes from Brian Hollenden with Sidoti. Please go ahead.

Brian Hollenden

Sorry, if I missed this, but can you guys tell us what you did to drive down site level operating expenses on a same site basis? And do you see more opportunities to reduce fixed costs?

Tom O’Brien

Well, how do I say this? Some of what’s in that the decline is the efficiencies that we’ve gotten from the investments that I talked about in new equipment and LED lighting. So, in addition to lighting, which we have a lot of lighting, right? The parking lots are lit up 24 hours a day, well, not when the sun’s out but I mean all night, and equipment including energy efficient HVAC projects, things like that. So that’s a piece of it. Another piece of it is simply declined energy costs. But, I would say that by and large, we’re pretty keenly focused on all the operating expenses, whether they be labor ratios or other ratios. And I think we were ready for in particular, the fourth quarter. So, other than those couple of projects that -- couple of items that specific items related to energy and such, it’s just a constant vigilance. That’s what this requires.

Brian Hollenden

Okay, thank you. And then, you mentioned the $254 million in CapEx spent in 2016, $174 million considered to be investment. Can you talk about the long-term rate of return you expect to earn from the investment, assuming a similar operating environment to today?

Tom O’Brien

Sure. I don’t think that those are any different from when we make investments in new unit growth. I mean, they really are strikingly similar.

Brian Hollenden

So, are you kind of referring to kind of mid teen returns…

Tom O’Brien

Yes. I’m sorry. Yes.

Brian Hollenden

Thank you. And just one last question, have you noticed a pickup in the trucking freight environment subsequent to year end? If you can maybe comment on that a little?

Tom O’Brien

Yes. No, I have not noticed that. I think that January and February felt a little bit soft. I mean, there have been some good indicators that typically lead to a pickup. EBITDA to sales ratios and things like that but I’ve not seen anything.

Operator

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

Tom O’Brien

Nothing other than thank you for joining, and we’ll talk to you next quarter.

Operator

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

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