TA's Take on Pilot Flying J

Chain "in tune to potential for fallout," but not "grave dancing" over rival's woes

Greg Lindenberg, Editor, CSP

WESTLAKE, Ohio -- Although TravelCenters of America's first-quarter 2013 net loss of $12.1 million reflected an improvement compared to the net loss of $14.2 million in first-quarter 2012, the real issue on analysts' minds during the company's earnings call earlier this week was TA's reaction to the high-profile federal investigation into its rival, Pilot Flying J.

Once the TA executives announced the numbers and the formalities were out of the way, the questions turned to the scandal over the fuel rebate scheme allegedly perpetrated by Pilot Flying J sales personnel.

Analyst Ben Brownlow of Raymond James asked, "Are you seeing any upticks or opportunity to pick up market share? Or a change in the marketing strategy for the fleet business?"

TA CFO Andrew Rebholz took the high road for the Westlake, Ohio-based travel center chain when he answered, "We haven't changed our strategies. And we remain very willing and able to service our customers as we ever were. I haven't seen much of any change in recent sales or volume with regard to that."

And Bryan Maher of Craig-Hallum Capital Group asked, "Are you, as a sales force, pursuing more aggressively, I should say, than otherwise, going after some of that business that might to be disgruntled or otherwise concerned with the situation at Pilot Flying Jay?"

Perhaps to the disappointment of many in the industry, TA CEO Tom O'Brien said, "TA's a public company; we've got robust compliance in the controlled environments. With do internal audits, we audit internal controls, all the trappings of good governance and being an SEC registrant and a New York Stock Exchange-listed company. We're pretty confident--supremely confident--that we honor all of our pricing commitments. ... That said ... we're in a pretty small industry; we're a big player as a couple of our competitors, including Pilot and Love's. ... And I would say that while we're in tune to the potential for fallout and the dust up associated with those matters, we're not running around grave dancing, either. Because I don't think that's in our interest in the short term or the long term. So it's more of being in tune with what's happening in the marketplace, as opposed to really actively taking a different approach."

The numbers

TA's results for first-quarter 2013 included improvement in fuel gross margin, nonfuel revenues, nonfuel gross margin and earnings before interest, taxes, depreciation, amortization and restructuring or rent costs (EBITDAR) increased by $7.3 million, or 14.6%, over the 2012 first quarter to $57 million.

Despite a 3.3% decline in gallons sold, total gross margin increased $20.5 million, or 8.4%, while site level operating expenses increased only $13.8 million, or 8.1% in the 2013 first quarter as compared to the 2012 first quarter. Approximately 61% of the 3.3% decline in fuel gallons sold was attributable to TA's ceasing to supply fuel on a wholesale basis to certain of its franchisees during 2013. The improvement in fuel gross margin was impacted by the retroactive reinstatement to Jan. 1, 2012, of a biodiesel blender's credit of $3.3 million, which became effective during the first quarter of 2013 as a result of the American Taxpayer Relief Act of 2012, which became law on Jan. 2, 2013.

The improvements in nonfuel revenues and gross margin in first-quarter 2013 resulted, in large part, from the travel centers acquired during 2012 and 2013, increased fuel gross margin per gallon and increased customer spending for nonfuel products and services at TA's travel centers. TA noted that its revenues are usually lowest in the first quarter of the year when movement of freight by truck and motorist travel are typically at their lowest levels of the year. While TA's revenues are modestly seasonal, the quarterly variations in TA's operating results may reflect greater seasonal differences because rent and certain other costs do not vary seasonally.

During the quarter ended March 31, 2013, TA purchased two travel centers (one of which was previously one of TA's franchisee operated travel centers) for an aggregate of $9.4 million and made capital investments of $32.5 million, including $7.5 million to improve travel centers TA purchased during 2011 through 2013. In April and May 2013, TA acquired two travel centers for $9.2 million. TA has an agreement to acquire an additional travel center for $4 million. TA expects to purchase this travel center during the second quarter of 2013, but this purchase is subject to conditions and may not occur.

"During the first quarter of 2013, TA was again able to increase EBITDAR and improve net income per share over the prior year. During the 2013 first quarter, our 17,000 employees overcame the challenges of severe weather, particularly on the east coast during February, one less day in February due to leap year in 2012, and the Easter holiday falling in March 2013 versus in April 2012, all by executing our business plan and, as always, taking care of our customers."

At March 31, 2013, Westlake, Ohio-based TA's business included 244 travel centers in 41 U.S. states and in Canada, including 171 travel centers operating under the TravelCenters of America, TA or related brand names, and 73 travel centers operating under the Petro Stopping Centers or Petro brand.