TravelCenters of America Inc.

TravelCenters of America Inc.

$86
0 (0%)
NASDAQ Global Select
USD, US
Specialty Retail

TravelCenters of America Inc. (TA) Q2 2014 Earnings Call Transcript

Published at 2014-09-30 17:00:00
Operator
Ladies and gentlemen, thank you for standing by. Welcome to the TravelCenters of America’s Second Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Director of Investor Relations, Ms. Katie Strohacker. Please go ahead.
Katie Strohacker
Thanks very much. 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 turning the call over to Tom for final remarks and opening up the call for questions. 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, September 30, 2014. 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 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. Investors are cautioned not to place undue reliance upon any forward-looking statements. The recording and retransmission of today’s conference call is strictly prohibited without the prior written consent of TA. And with that, I will turn the call over to Tom. Tom O’Brien: Thanks, Katie. Good morning and thank you everyone for joining our call today. I am here to report TA’s second quarter 2014 financial results. Second quarter 2014 EBITDAR was $97 million or 12% increase over the 2013 second quarter. Our EBITDA or EBITDAR after rent expense was $43 million, a 25% increase over the 2013 second quarter. Pre-tax income for the 2014 second quarter increased by $7 million or 45% over the comparable 2013 period, while net income of $14 million reflected the $2 million decrease from the second quarter of 2013 due to the fact that our income tax provision in the current year of $10 million is not comparable to the small income tax provision in the 2013 period. And Andy is going to discuss that further in a moment. While the 2014’s second quarter was quiet on the acquisition front, our team did not pause delivering solid advances both in ramping up results at previously acquired sites as contributions more than doubled in the 2014 second quarter versus the same quarter in 2013 and on internal growth initiatives like Reserve-It Parking, which is a good example of making money from previously non-productive physical assets and our RoadSquadOnSite repair and mobile maintenance initiatives, which are both good examples of further capitalizing on our employees’ vast capabilities regarding truck service and repair. While Andy will rundown the second quarter results in more detail in a moment, I’d like to call attention to a few highlights. One, fuel gross margin for the 2014 second quarter increased by $9 million or 10% over the prior year quarter, fuel gross margin per gallon for the 2014 second quarter increased by $0.02 a gallon or 11% over the prior year quarter. This increase was due to continued discipline in pricing decisions which helps us avoid certain lower margin sales and new marketing programs that I believe effectively dampened the impact felt acutely in the 2013 second quarter of competitor loyalty points programs. We did continue to experience fuel volume declines on the same site basis, I believe largely due to customer fuel efficiency gains combined with the volume impact of the pricing discipline mentioned earlier. Two, non-fuel revenue for the 2014 second quarter was up by $35 million or 9% over the prior year quarter. Three, non-fuel gross margins of the 2014 second quarter increased by $15 million or 7% versus prior year quarter. Four, site level operating expenses increased over the prior year quarter largely due to acquired sites. And on the same site basis the ratio of site level operating expenses to non-fuel revenues was consistent with the prior year quarter and the increase in non-fuel revenue. Five, we have generated contribution of $14 million during 2014 second quarter at the 62 properties we have acquired since the beginning of 2011. For the 12 months period ended June 30, 2014 these properties generated contribution of $41 million, an increase of $27 million over that generated by acquired sites for the 12 months period ended June 30, 2013. While our financial performance in the recent quarters has been very solid, we have not let up on laying groundwork and paying close attention to the one thing that enhances our business most, its customer service. Most of you are probably aware of our internal and external growth initiatives which our team has been executing very well for sometime now. We have acquired over 60 locations, including travel centers and C stores during the past three years or so, partnered with Shell on our LNG initiative, enhanced our offering to drivers in the form of significant site upgrades, new amenities, services and loyalty benefits and we promoted and advanced the acceptance by our fleet customers of the benefits to their own businesses and to their drivers’ experience by fueling at TA and Petro. Successful execution by our team on these initiatives allows us to interact with our customers in ways we could not if we were falling short in the execution of these plans. Taking care of customers has been the key to our string of profitability and growth in the past several years and I expect we can continue that. And now, Andy Rebholz, our Chief Financial Officer will review our second quarter results in more detail. After Andy’s comments, I will make some closing remarks and then we will try to answer questions.
Andy Rebholz
Thanks Tom and good morning everybody. I would like to make some more detailed comments about some key financial results for the 2014 second quarter. When I refer to same site results I mean the results at only those sites we have continuously operated since the beginning of the comparable period in 2013. As Tom mentioned we reported EBITDAR of $97 million for the 2014 second quarter, an increase of $10.4 million or 12% versus the second quarter of 2013. In the second quarter 2014 TA generated net income of $13.6 million or $0.36 per share, a $2.4 million decline from the prior year quarter when we had posted net income of $16 million or $0.54 per share. The decline in net income is due to the change in our GAAP income tax accounting results beginning in the 2013 fourth quarter as a result of the reversal of nearly all of the valuation allowance we historically had maintained with respect to our deferred tax assets. Under the circumstances existing in the first three quarters of 2013 amounts that now flow through the income tax provision line simply were recorded as adjustments to the valuation allowance. We expect this lack of comparability between years will continue for the remaining two quarters of 2014. On the same site basis, our 2014 second quarter fuel gross margin increased by $4 million or 4.5% over the comparable 2013 quarter. Our per gallon fuel gross margin increased by 10% on a same site basis, but this was offset somewhat by a decline in our same site fuel sales volume that we believe reflects both continued conservation efforts by our customers as well as our decisions to avoid certain lower margin fuel cells. Our non-fuel revenue on a same site basis during the 2014 second quarter increased by $7.6 million or about 2% versus the 2013 second quarter. We believe that the increase in same site non-fuel sales reflects the impact of our various customer service and expansion initiatives at our existing sites such as diesel exhaust fluid and reserved parking. Our non-fuel gross margin as a percentage of non-fuel sales on a same site basis increased by 20 basis points over the prior year quarter to 54.9% in the 2014 second quarter. We believe that this increase is largely attributable to a modest shift in the mix of our non-fuel products and services sold. Our site level operating expenses on a same site basis for the 2014 second quarter increased by $3.9 million or 2.1% versus the 2013 second quarter. This increase reflects the higher volume of non-fuel sales in the 2014 quarter. The ratio of operating expenses to non-fuel revenues in the 2014 second quarter of 50% was consistent with the 2013 quarter. Importantly, our same site gross margin in excess of site level operating expenses for the 2014 second quarter grew by $5.1 million versus the 2013 second quarter. Our selling, general and administrative costs of $25.1 million for the second quarter of 2014 increased by about $600,000 or 2.5% over the 2013 second quarter. This increase reflects increased personnel costs due to headcount increases and annual salary adjustments as well as increased share-based compensation due to increases in our share price and also reflects reductions in our legal expenses due to bringing our more significant litigation matters to or near final resolutions earlier in 2014. Our real estate rent expense for the 2014 second quarter increased by $1.6 million or 3.1% over the 2013 second quarter due to the rent payable in connection with improvements at sites we leased from HPT that were funded by HPT over the past 5 quarters. Our income tax provision reflects the effective tax rate we expect for the full year of 2014 of 41.8%. And now, I turn the call back over to Tom. Tom O’Brien: Thanks, Andy. One administrative note before we take questions. I look forward to the continued acceleration of our pace filing our periodic financial reports and SEC filings. Our internal initiatives on those matters are proceeding as planned, including our recent addition of the Chief Accounting Officer and various support staff. The filing of our second quarter 2014 10-Q expected later today will bring our SEC filings up-to-date, although it is possible that our third quarter filing may occur after the regulatory deadline in mid-November. I am hopeful that we will be able to file that report in a timely manner. I am pleased with our solid results for the second quarter of 2014. In fact, I haven’t been more excited about our leadership role in our industry and the benefits to which that position can lead us for our shareholders since I have been here. And Andy and I will now take your questions. Operator, do we have any?
Operator
(Operator Instructions) And our first question comes from Bryan Maher with Craig-Hallum Capital. Please go ahead.
Bryan Maher
Good morning guys. Tom O’Brien: Hi, Bryan.
Andy Rebholz
Hi, Bryan.
Bryan Maher
Pretty solid quarter. I woke this morning thinking the stock might move a quarter in either direction and here we are with something a little bit more than that, so I am quite a bit surprised. I think that there is maybe some confusion on the street as it relates to the non-fuel margin numbers in aggregate we are maybe 1, 1.2 points below our expectations and site level operating up a little bit which I think is readily explainable by the new acquisition properties where your expenses start immediately, but your revenue and EBITDA ramp over time. I mean you and Andy put out awful lot of numbers there, it was hard to keep up, so can you kind of walk through in layman’s terms the acquisition of new properties and how it unfolds with the renovations, repositionings and then the inevitable ramp in revenue and EBITDA? Tom O’Brien: Yes. That’s a good question and thanks for asking. For those who haven’t been following along for the last few years, when we buy a travel center, typically and I think our average acquisition cost of travel centers in the last three years has been about $5 million. We have put about $4 million or $5 million of improvements into each one of those or I should say on average. Those improvements take time to implement and the – sort of getting that new location into the mix of our customers into the daily or weekly or whatever it is routine of our truck driving customers, it takes some time and in our experience it’s taken about three years. But that’s time well worth to wait. As you can see from – we have broken out for some time now and I think it was your suggestion Bryan way back when the contribution, and when I say contribution I mean gross margin less site level operating expenses of those properties that we have acquired since the beginning of 2011. And those contributions continue to ramp up very, very smartly. And that is consistent with our expectations. And so in sum, when we buy a new property and we have bought – we have purchased a few this year and certainly last year on the travel center side, we operate it and improve it to basically grow the revenue at a time in that – I don’t want to call it an incubation period but that early out period where we are generally fully staffed and ready to go. So it takes a certain amount of volume and achieving that volume takes us certain amount of time. And I think that’s what you are seeing. Now the way I look at our – in particular the site level operating expenses which is one I think you mentioned what we are trying to do is grow gross margin faster and in larger quantities in gross dollars than site level operating expenses. And we have achieved that. Certainly the performance of those measures in the first three months of the year, so the first quarter we are better if you will or more dramatic than those that we have achieved in the three months. But on the same site basis, total gross margin was up $9 million and site level operating expenses were up by $4 million and that’s what we focus on. And I think that’s what folks should focus. That’s why we try to pull those same site numbers together the way we do. And I have got nothing but a favorable view of the numbers that we have posted here.
Bryan Maher
Thanks for that explanation. Was there anything in the quarter similar to the last year where you had that kind of tire cost issue with the rebates and what have you, was there anything in the quarter kind of besides what you explained that might have impacted non-fuel margins or was it just that?
Andy Rebholz
There really wasn’t it was a pretty boring quarter if you want, there is no unusual items in this second quarter. There was last year, we talked about some pricing pressure and that largely dissipated…
Bryan Maher
On the fuel side? Tom O’Brien: On the fuel side, right, because of our – I think we have had some very effective marketing programs this year. The actions that were taken by some of our competitors in the second quarter last year actually repeated, but this time, it wasn’t a surprise to us than we basically diffuse that entire situation. So, I am happy about that too.
Bryan Maher
One last thing and then I will go back in the queue. On the fuel margin side, I mean, those were pretty impressive numbers, $0.192 and that’s coming off of the first quarter where you had really impressive fuel margin numbers as well. And I understand that there was a little bit of an anomaly there, but where do you see that going? I mean, do you see any headwinds in that or is it steady as she goes, wind at your back, you think you could drive those higher? Tom O’Brien: We are always looking for opportunities. I will tell you that the second quarter to my view didn’t have anything peculiar about it. Fuel prices as a proxy use the NYMEX heating oil price traded in a pretty tight band. I want to say it was about $0.20 for the entire quarter, neither up nor down from the beginning to the end of the quarter that compares to last year where there was some volatility and that’s probably a $0.50 band, most of the downward trend there in last year came at the very, very beginning of the year. So, I guess I can’t and I have tried to stay out of the game of predicting where our fuel margins will be in the future, but I can tell you that this quarter we achieved that – that this second quarter we achieved that $0.19 plus, it’s $0.192 in total and $0.193 on a same site basis, without a lot of – there wasn’t anything unusual that helped us get there.
Bryan Maher
Yes, thanks Tom. Tom O’Brien: Thanks, Bryan.
Operator
And our next question comes from Ben Brownlow with Raymond James.
Ben Brownlow
Hi, good morning. Thanks for taking the questions.
Andy Rebholz
Hi, Ben. Tom O’Brien: Hi, Ben.
Ben Brownlow
Just follow-up on an earlier question, the renovation CapEx, can you give a little detail on I guess specifically for the 2013 sites acquired. I think you have spent about $25 million to-date and about $26 million remaining on that renovation CapEx. Can you just discuss broadly kind of the major projects? Is the bulk of that having gone over to the Minit Mart sites and just give us an idea of where that capital is going? Tom O’Brien: Yes. Actually, thanks for your question. Actually, very little of the remaining or what has been spent frankly went to Minit Mart. Those were C stores that were basically ready to go. We have a number of projects. We bought a place in Pioneer, Tennessee, which was previously operated by a franchisee. That place if you will was a truck repair shop only and we are building a travel center around it. So, that’s a big piece of that, which is oddly enough maybe or the opposite of a couple or three other sites that we purchased that did not have shops. And so the big part of that, big part of the renovation for those sites is adding a truck repair facility.
Ben Brownlow
Okay, great. That’s helpful. And then looking at the fuel volume decline, it sounds like the bulk of that is being – is tied to the pricing discipline that you are taking? Is your feeling that when you look at the non-fuel side of the business which continues to comp positive, do you feel that your volume declines would be in that sort of very, very flattish kind of slightly negative range or just I am trying to get a feel for how you are trending when you ex out sort of the changes in pricing that you have taken to lose some of those fleet businesses? Tom O’Brien: Fair question, not one that has a precise answer, but I can give you my feel. That is, in a period with a given level of economic activity, so no change in GDP, trucking activity generally all that. And if we were to exclude movements on pricing and when I say pricing discipline, what I am talking about is looking at customers who let’s just say for example historically have a certain price formula and yet their volume in the current period may not justify that price formula. And it’s is a nice of saying there has been a number of customers where we have raised prices to balance the benefit of volume and pricing. So if that process were not to affect our volume, I would say my sense is fuel efficiency in this industry will drive – will move volume down 2% to 3% a year.
Ben Brownlow
Alright, that’s helpful. I appreciate it and thanks again. Tom O’Brien: Okay. Thanks Ben.
Operator
(Operator Instructions) Your next question comes from Steve Roberts from NorthPointe Capital.
Steve Roberts
Yes. Hi guys. On the tax rate should we look for this 42.7% rate going forward and what was the cash tax rate?
Andy Rebholz
I mean that roughly 42% rate is what our current estimate is of how the year will come out when you take into account all of the different things that go into that from a GAAP perspective, which includes unfortunately a little bit of noise if you will on the treatment of NOLs generated in our Canadian business or the one site we have in Canada which there is still valuation allowance on that. So that creates a little bit of noise. But from a cash tax perspective on the tax return unlike in the GAAP financial statements, where in the GAAP financial statements we are unable due to the uncertain tax position accounting to recognize certain of the benefits that we have in the tax returns, we continued to have essentially at least from a federal perspective zero taxes payable due to the utilization of tax loss carry forwards, tax credit carry forwards those sorts of things.
Steve Roberts
And how many NOLs you have left?
Andy Rebholz
It’s – the number just changed because we just filed the return. And I honestly don’t have that number.
Steve Roberts
But it’s a pretty big number, isn’t it…? Tom O’Brien: It’s still, I mean at this level of earnings that we are sort of shown half way through this year it’s still probably a couple of years worth of shelter if you will.
Steve Roberts
Okay. And then looking at the third quarter I was trying to determine as far as the seasonality in your business and I had – and I really couldn’t determine anything, can you kind of give us some indications of how – I mean we are at basically last day of the third quarter, how the third quarter went say compared to the second quarter? Tom O’Brien: I can give you a little color Steve, obviously not having filed there is a limit to what I can say. But what I can tell you is I am not expecting any surprises in the third quarter either much like the second quarter. And I don’t have the sense of change in direction.
Andy Rebholz
I mean the one thing I would add to that is from a historical seasonality perspective and there can be a lot of factors that affect it, but generally speaking, historically the third quarter has been the strongest quarter from a financial results perspective, slightly better than the second quarter. And those two quarters are the clear sort of the breadwinners if you will with the fourth quarter and first quarter normally being lower, first quarter being the lowest of the four calendar year quarters. And sometimes that can be masked in the results due to some maybe there is some unusual occurrence with regard to some large expense charge or something significant that happens either competitively like last year’s second quarter or something in the fuel margin, but generally speaking, the order of quarters is sort of third, second, fourth, first.
Steve Roberts
Okay. And then oil prices have trended down during the quarter has that pressured your margins or you have been able to maintain your profitability per gallon? Tom O’Brien: I think that what I can say is that probably the better measure is heating oil.
Steve Roberts
Okay. Tom O’Brien: And generally speaking, a downward trend will be helpful to our gross margin and an upward trend will be not helpful.
Andy Rebholz
That puts the pressure on. Tom O’Brien: Yes.
Steve Roberts
Okay, thank you. And then can you give us any updates on use of natural gas, is that – are you seeing traction there or is that? Tom O’Brien: I would say that we have got the one side open. We have four, five I expect to open before the end of the year or right around there. And so going into the first half of next year, the total of 6 or 8 sites, I would say that the take up of natural gas is little less than maybe we would have expected at this point, but there is still a lot of interest. I think when fleets came down to really implementing it, it’s taking a longer time than perhaps anybody expected two years ago, but the agreement with Shell is alive and well and we are moving forward. As you may know, the capital that is required for those dispensing facilities all comes from Shell. That’s not to say I am indifferent, whether it’s successful or not obviously I want it to be, but it’s something that because of the way the agreement structured we can well afford to wait.
Steve Roberts
Okay. And then as far as like our protein prices, has that impacted the restaurant margins at all? Tom O’Brien: What kind of prices?
Steve Roberts
Beef, pork? Tom O’Brien: Yes, obviously that has an impact on us, but our mission is to keep up with those cost increases with price increases. We don’t have much choice. So, I think that’s the rationale way to approach it. That’s what we are doing.
Operator
Your next question comes from the line of Jeff Geygan from Milwaukee Private Wealth. Please go ahead. Tom O’Brien: Hi, Jeff.
Operator
Jeff, your line is open. Check your mute button. Tom O’Brien: Okay. Maybe we can come back to him.
Operator
We will go to the line of Bryan Maher from Craig-Hallum Capital. Please go ahead. Tom O’Brien: Hey, Bryan. It was a repeat so maybe we answered all his questions too.
Operator
Okay. At this time, there are no further questions then. Tom O’Brien: Okay. Well, thank you everybody for dialing in, for your continued interest in TA and I hope to be back with you mid-November about the third quarter. Thanks a lot. Bye-bye.
Operator
Ladies gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.